Fiat Currencies, GSEs & Presidents

November 13, 2024 | Premium Service | With the victory of President Donald Trump on November 5th, a number of our friends and neighbors who supported Vice President Kamala Harris have gone into seclusion. A period of morning has been declared among many people who placed the blue Harris-Waltz signs on their front lawns. Placing the signage on the lawn allowed them to think, for a while, that they were somehow superior to Trump supporters. After all, it was obvious, right? But it was not to be. 

The pro-Harris crowd expected to win because they felt entitled to win. Many of our friends in the Democratic Party would tell us that conservatives should not even be allowed to hold public office. The pro-Trump folks, however, did not need signs on the lawn. They already knew the outcome of the election as we noted in The IRA. We wanted to show compassion. This Friday, when we celebrate at Trump National, we will keep those disappointed Harris-Waltz folks in our prayers. 

Moving from the absurd to the merely ridiculous, we note that the list of aspirational stocks and crypto tokens that are rising at double-digit annual rates is growing.  What does it say when ETFs based loosely upon a moveable fraud called bitcoin, a notional asset that is convertible into nothing at all, rises to near $100,000 fiat legal tender dollars?  It says inflation is still the problem.

Fact is, Americans have grown entitled to capital appreciation, that is inflation, in all manner of assets and tokens. Thus the question: Could President elect Donald Trump be facing a maxi market correction before Inauguration Day? We note in the new edition of “Inflated: Money, Debt & the American Dream” to be released by Wiley Global in 2025 that President Trump and the Republicans face the same dire peril as did President Grover Cleveland 120 year ago:

“President Grover Cleveland led the Democrats to an electoral triumph in the fall of 1892, winning control over both houses of the Congress and the White House for the first time in more than a third of a century. The conservative Cleveland took power just as the U.S. economy was collapsing. Foreign creditors and the country’s citizens were fleeing paper assets and demanding payment in gold. Even as the Democrats savored their victory in the five-month interregnum between the election and the inauguration of the new president in March 1893, the global financial markets began to unravel.”

The financial crisis of 1893 was caused by inflation. Specifically, when the Treasury made purchases of silver, which were being paid for in then convertible greenbacks, Americans promptly exchanged paper for gold. In 1893, money was gold and greenbacks were debt convertible into gold. Today the paper dollar is convertible into nothing, but at least you can pay your rent or buy groceries. Crypto currencies are speculative tokens that must be converted back into fiat paper dollars to be useful.  Does President Trump understand the difference? 

Below we review the constituents of our mortgage finance surveillance group to update our readers on the GSEs and other residential mortgage issuers. Remember, Fannie Mae and Freddie Mac are no different than issuers like PennyMac (PFSI) -- except that they also insure the mortgages and mortgage-backed securities (MBS). Our first live discussion for subscribers to the Premium Service of The Institutional Risk Analyst will occur on Friday, November 15, 2024 at 10:00 ET. Subscribers look for further details via email!

Likewise the crowd of people who expect the GSEs, Fannie Mae and Freddie Mac, to be released from captivity is also growing, but not nearly enough to make it actually happen. In fact, the top-performing mortgage stock in the US over the past year is no longer one of the GSEs, but instead Blend Labs (BLND), up 277% as of the close yesterday. 

After BLND comes Freddie Mac, then Compass Inc (COMP) followed by Fannie Mae. How could BLND and COMP possibly bypass the GSEs in terms of 1-year total returns? The short answer is that BLND and COMP each went public in 2021 at the end of quantitative easing and both stocks got crushed thereafter. 

BLND and COMP both went out above $20 per share and both stocks fell into single digits. The low for COMP, a real estate brokerage firm, was $1.815 in November 2023. The low for BLND, an unprofitable mortgage firm, was $0.55 in May of 2023. As traders who follow the GSE penny stocks and preferred know, it is east to show triple digit equity returns when the stocks start near zero.

The high for Freddie Mac was $74 on 12/21/2004 and basically went to zero after the government takeover in September 2009. The low for Freddie was $0.128 in March of 2011. Following the re-election of President Trump the stock surged from $1.2 to $2.60 at the close yesterday. Does this mean that Freddie Mac is ever going to be a public company ever again? Not likely. 

As we’ve said before, when irrational exuberance takes GSEs stocks “to da moon,” take the money off the table. Let a greater fool speculate on an eventual release. One of the questions we have been asked about the Trump transition and mortgage finance is what must happen before the GSEs can be released. The short answer is that we need legislation to move the mortgage guarantee business from the GSEs to Ginnie Mae. The private GSEs cannot support $8 trillion in residential and multifamily MBS.

Ideally, new housing legislation would spin Ginnie Mae out from HUD as an independent agency so that it may be properly funded and staffed. The only trouble with this scenario is that once the GSEs shed the mortgage guarantee business, there is not much left. Without a sovereign rating and the revenue from the guarantee business, the GSEs are not very attractive as mortgage issuers.

After Fannie Mae in our mortgage equity group, next on the list is Finance of America (FOA), an unprofitable reverse mortgage lender that went public in 2020 over $100 per share and hit a low of $7 this past July. With a market cap measured in the millions of dollars and a spread of 150bp in credit default swaps (CDS), FOA is hardly an industry bellwether.  Yet the stock closed just shy of $20 yesterday. Again, if your stock is left for dead, it is easy to generate triple digit returns given the right nudge. 

After FOA, the next member of the mortgage equity list is Zillow (Z), a long-time public company that peaked at $200 per share in 2021 then basically lost 90% of its value but did not touch the all time low of $15 in 2016. Z jumped following the election of President Trump, but we cannot see how Washington is going to save real estate agents from the trial lawyers. Given the huge push by consumer groups to address the issue of home affordability, we think the NAR settlement from last year is set in stone. Sellers don’t mind paying 3% instead of 6% commission on a home sale.

Bottom line, we think that the mortgage finance sector illustrates a larger problem for investors and also President-elect Trump, namely that the accumulated inflation added to the system during four years of President Joe Biden is still pushing up asset prices even as the economy shows signs of slowing. In our next comment, we'll be looking at some of the payments platforms in our fintech equity group to see what the world of consumer lending tells us about the state of the US economy.

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