Weekend Edition

Let the waste begin. To "save" the country from its debt crisis, Congress proposes to borrow another $825 billion and spend it like a teenaged girl at the mall.

 

Congress wants you to believe we can dig ourselves out of the financial crisis by spending $400 million to research global warming, $650 million to convert analog TVs to digital, $7 billion to "modernize" federal buildings, and $20 billion on food stamps, etc. According to the Wall Street Journal, "only $90 billion out of $825 billion, or about 12 cents of every $1, is for something that can plausibly be considered a growth stimulus."

 

 Remember how many times last summer Fed Chairman Ben Bernanke and former Treasury Secretary Hank Paulson lied to the American people, swearing Fannie and Freddie were "well capitalized"?

 

They said so in front of Congress in July – at least a dozen times. And they kept saying it, right up until the moment they nationalized both firms, completely wiping out shareholders. This week, Fannie asked the Treasury for another $16 billion to cover losses on mortgages. And Freddie needs another $35 billion.

 

Mark my words: By the time this whole thing is over, taxpayers will have spent more than $500 billion bailing out Fannie and Freddie. And this fraud, which makes Madoff look like a piker, will never be investigated because the trail would lead directly to Congress.

 

 BlackRock, the largest publicly traded U.S. money manager, is buying Greek, Italian, and Spanish government bonds. Prices reflect 10% to 20% odds that the euro monetary union will disintegrate. The spread between German 10-year bonds and comparable Greek bonds hit 297 points last week (nearly 3%). The spread between German and Spanish securities widened to 123 points.

 

"You have got to ask yourself at what point this becomes ridiculous," said Scott Thiel, BlackRock's head of European fixed-income. "[The spreads] are too high if you step back and take a deep breath. We've begun to add back exposure."

 

It might be wiser to ask yourself at what point the European monetary union becomes ridiculous. As my friend Doug Casey likes to say, the dollar is an IOU from a bankrupt government. But the euro is an IOU from nothing.

 

 Warren Buffett may soon give the ultimate buy signal. In a New York Times interview, he said he'd consider buying back Berkshire Hathaway stock... "I think if your stock is undervalued, significantly undervalued, management should look at that as an alternative to every other activity," Buffett said. "I'm not opposed to buying back stock."

 

Buffett also said Berkshire's stock has fallen 50% three times – including this most recent fall... "In 1974, it went from $90 to $40. Did I feel badly? No, I loved it! I bought more stock. So I don't judge how Berkshire is doing by its market price, I judge it by how our businesses are doing." Buffett said he'll make a public announcement if he chooses to repurchase any Berkshire stock.

 

Berkshire Hathaway is Dan Ferris' No. 1 place for new money. He believes it's worth around $150,000 a share. It's currently trading for less than $90,000.

 

 From 2007 to 2008, U.S. home prices fell an average 10.6% nationally, the biggest annual drop since 1976 – as far back as we have data. Thirty-four states saw price declines... California led the decline with a 27% drop, followed by Nevada at 23%. The best-performing real estate was in West Virginia, where prices rose 4.2%. The other top gainers were Texas, South Dakota, Montana, Mississippi, Utah, and New Mexico.

 

 So have we seen the bottom yet in real estate? Not a chance. At least half a dozen national homebuilders will go bankrupt this year, judging by their balance sheets and debt-to-asset ratio covenants on their lines of credit. The land they hold will have to be auctioned off – and there's a lot of it.

 

How bad will it be? My bet is prices for raw ground will fall 95% from the peak. Prices for ready-to-build lots will fall 85% from the peak. And the average home price will fall 50% from the peak. Remember, in the Great Depression, a quarter of the entire state of Mississippi was auctioned in one day.

 

 David Einhorn – manager of Greenlight Capital and the man who called the collapse of Lehman – is buying gold for his $5.1 billion hedge fund for the first time. Einhorn is buying because "the size of the Fed's balance sheet is exploding, and the currency is being debased." In addition to buying bullion, Einhorn added call options on gold and the Market Vectors Gold Miners exchange-traded fund.

 

This is the third value investor I know who likes gold (Einhorn, Jean-Marie Eveillard, and Chris Mayer from Agora Financial). I really hate to add to a consensus, but you know I've been advising gold ownership for some time now and I continue to do so.

 

Next month, we'll publish the first-ever gold-related Extreme Value stock recommendation. Click here to get access.

 

Regards,

 

S&A Research

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