I discontinued my writing since the launch of the fund in order to focus on fund raising and managing the portfolio. Since I’m so disenchanted about the stock market’s response to the Freddie and Fannie bailout I had to write about it.

I’ve decided to tip-toe through some of our theories about today’s financial rally and dollar rally. It is our belief that once the market completely digests what has just taken place there will be a complete reversal.  There is no logical explanation as to why financial stocks would rally after the government takeover of Fannie Mae and Freddie Mac.  The logical thing for investors would be to steer clear of financials because they are failing all around us.  We have had no faith in Freddie and Fannie, the investors have had no faith in them – so what do you do with bad investments?  The answer is to give them to an investor who does not have a choice, the US taxpayer.  So, the government gave the American taxpayer several trillion dollars more in debt, adding to the nearly $10 trillion we’re already in debt.  The crazy thing is not only did financial stocks rally but the DOW was up over 250 points today in the pre-market.  There is also a dollar rally taking place.  Gold, however, lacked luster today, up only $1 at the time of this writing.

Here is what we believe will happen when the fictitious reality meets the actual reality. The DOW will continue its downward trend and the financial stocks will continue to fall, with some bottoming out all the way at $0.  Meanwhile, gold’s value will shine extremely bright and continue to climb beginning in the very near future.  We also expect commodity prices to begin to climb despite the global recession – the reason being that, when the world faces the true reality, the only way for our government to buy these companies is by printing more money.  Likewise, the only way they can make new loans is by printing more money.  Their plan is to sell the new loans as mortgage-backed securities, which would be a great idea save for the fact that nobody in their right mind wants mortgage-backed securities.  As such, the only way to sell them is to make money-backed guarantees to all the buyers of mortgage-backed securities.  Only with an explicit guarantee from the government are these investments attractive for investors to buy.  The problem is there has yet to be a bottom in this market, which means, of course, the value of the collateral will continue to diminish.  This is significant because if the government is forced to buyback the bad loans through the guarantee, the American taxpayer will be taking even more losses from the devalued assets.

I wrote a long time ago that I wasn’t sure if a recession would cause the housing collapse or whether the housing collapse would cause the recession.  And let’s not forget about hyperinflation.  The reason I raise this chicken versus the egg point, is because inflation has already begun and these types of government bailouts are the gasoline on the fire igniting hyperinflation.  To be clear, the bailouts of Freddy and Fannie will do nothing to help those who are already in trouble.  Therefore, on any new loans made, the borrower will be upside down soon after the purchase, kind of like the purchase of a car.  The new homeowner buys a home it can afford – that is, until hyperinflation kicks in and their daily necessities get more expensive, at which point the house they can afford today they are unable to afford tomorrow.  When they inevitably default due to hyperinflation or a layoff – which is to be expected in a recession – the devalued property will belong to the government, in which case the entire process repeats itself.  First, there is a trend, then there is the misconception of the trend and the misconception of the trend fuels the trend and the misconception.