An Old Villain Emerges

A few weeks ago I said that I felt along with a few trillion in bailouts directly from the government, Fannie and Freddie would began to step up and loosen their lending restrictions. Well, not only have they done that, but they've taken it one step further by initiating a program to purchase toxic mortgage debt. Remember, the $700 Billion is what the public reads about in the news and gives them something to complain about. They still don't understand that their currency (their savings value) is being attacked by multiple villains. The Federal Reserve who now has increased its balance sheet 75% in the past three weeks, and the new face of Fannie and Freddie.

The pain from foreign markets around the world is caused by the fact that they lent us trillions of dollars that we spent on consumer items that we cannot pay back. What is important is understanding what will happen when all this smoke clears. They have solid economies based on production and savings. We have an economy that is based on them lending us money which we spend on cars, homes, and vacations.

As stock markets fall around the world it is presenting tremendous opportunities to purchase foreign stocks at bargain prices because of the forced irrational selling. (Discussed in the next discussion below) The American stock market is only just beginning to feel the true pain. The stock prices today reflect analyst's expectations of earnings from companies next year and the year after that. What they do not realize is that when the foreigners cut off our free money those earnings will not materialize, and our economy will be shown to the world as what it truly is; a house of cards.

You saw an interesting sign of this during last weeks trading. As tremendous money left the stock market, the treasury bond yields did not fall heavily as they have in the past. (Money was not moving back into treasuries as safety) This is an interesting signal of the lack of faith in the credit of the United States and is only a preview of what's to come. The bond market is the last great bubble to pop, and as interest rates finally begin their rise it will be the final nail in the coffin of the US economy.