We are now in the midst of the largest market intervention in history. Why? They must "save the Hill", Capitol Hill. Until the November elections, those in control of the purse strings will throw everything at the market to maintain "status quo". Remember last year when we were told there were no issues with Bear Stearns? Then suddenly, they vanished. Recessions are only reported by the government after the fact, never during the recession. It’s all about perception. They depend on public sentiment to keep the wheels on the financial wagon. Why? There is nothing else supporting the value of the U.S. dollar.
What will be the effect of this massive intervention? Inflation, possibly hyper-inflation. Prices of tangible assets will rise. Oil, gas, gold, and silver will all respond. When? After the election if the market intervention works. Notice how the Dow Jones Industrials Index continues to stay in a narrow band between 11,000 and 12,000. The macroeconomic picture would suggest the 8,000-9,000 range. Gold and silver have been targeted since they represent the "canary in the mine". Silver is selling at 10.80 in the financial markets but you cannot buy the physical metal and receive immediate delivery. Most delivery quotes are 2 months out due to supply constraints. The markets are broken. Former U.S. Fed Chairman Paul Volcker agrees: http://www.bloomberg.com/apps/news?pid=20601087&sid=auKCKTSSU7yE
Over the weekend, U.S. Treasury Secretary Henry Paulson led the effort to "nationalize" Fannie Mae and Freddie Mac. Who were the winners and losers?
Winners:
Bondholders of Fannie Mae & Freddie Mac. Bill Gross of PIMCO just happened to dramatically change his portfolio to take advantage of the bailout. The result? $1.7 Billion payout. I guess he’s just lucky. See http://www.ft.com/cms/s/0/838d3cb4-7e96-11dd-b1af-000077b07658.html?nclick_check=1
Former CEO’s of Fannie Mae & Freddie Mac. Maybe temporary. The (ESOP) retirement fund may sue them. They were paid millions of dollars to bring about this mess.
Derivatives holders (for now)
Losers:
Common Stockholders of Fannie Mae & Freddie Mac. They were sacrificed by Paulson. I’m sure he didn’t own any stock in his 9 digit portfolio.
U.S. Taxpayers, their children, grandchildren, etc. No matter how you spin it, the government added $5.4 Trillion to the liabilities side of the balance sheet. The asset entry is questionable and declining daily with the decrease in housing values.
Productive Government Programs. The expected losses will force curtailment of spending programs. Some local highway projects were put on hold last week due to an abrupt halt of federal funding.
The price of oil has been declining in the midst of an overall decline in production of oil. This is temporary. I would not go buy an SUV. One of my favorite gold stocks, Minefinders (MFN), has been hit hard by short sellers. Thank you. I will continue buying more of this stock at these depressed prices. The fundamentals of gold and silver stocks suggest higher prices in the future. Overall gold production is down and not expected to rise. Don’t let the short sellers scare you out of your positions which is their intent. That is how they make money. They use fear to exploit shareholders. If you are convince of the long term fundamentals for gold, you simply hold on during this severe correction. Never leverage your investments unless you have sufficient cash to cover them.