Sunday, September 7, 2008

Best of the Net - Weekend Edition September 5-7, 2008

The expected nationalization of the US housing markets took another step forward Sunday morning, as Fannie Mae and Freddie Mac have been officially placed under conservatorship of the US Government, and that the Federal Reserve and the FDIC would be "working with" some banks who own preferred stock as large portions of their reserves. Investors owning common stock have been essentially wiped out. Preferred stock holders appear to be next on the totem pole, while investors in debt - like foreign central banks - will attempt to be made whole.

The details are somewhat convoluted. And whenever an event like this happens the early hours are filled with rumour and hype. A reasonable consensus on the exact nature of the bailout and it's immediate consequences will become clearer on Monday. Market reaction to this will be something that should be watched very carefully. Previous reactions have been positive, but as I mentioned a few days ago, the market will eventually begin viewing these events as a negative.

(Update: Mike Shedlock had this to say on the plan: Paulson Rolls Dice at Taxpayer Expense, Yves Smith posted his interpretation and initial thoughts, and "Calculated Risk" said bluntly "Expect more bank failures.")

Additionally, Tim Iacono had some good questions about the percieved inverse relationsip between the US Dollar and commodities that the market treats as gospel. Tim argues the same things I did in Gold: What Have You Done For Me Lately? I.e., a falling dollar is not a necessarry condition for gold or other commodities to rise - that they will do so based on their own individual supply & demand situations.

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