Simit Patel

The bailout of Fannie Mae and Freddie Mac has been all the talk of late in the economics and finance communities, and rightly so. The bailout will have massive economic consequences.

What I feel this means for traders:

1. The US government simply cannot afford the bailout that it has agreed to make. This will mean that the US government via the Federal Reserve will likely have to print more money, which will result in dollar devaluation.
2. While markets did react positively to this news in the short-term, the underlying economics have not changed. There is still too much bad debt going around. As such, I would expect paper assets -- i.e. financial instruments -- to continue falling.
3. With financial assets falling and the US dollar falling, smart money will increasingly go to hard assets and commodities.

As such, I would expect more of the same. Meaning:

1. Dollar devaluation, which will result in price inflation
2. A bullish market for commodities
3. A bearish market for US stocks

These are long-term outlooks -- think years. Recently, we've seen the dollar strengthen a good bit, and we've seen gold prices and oil prices fall; I would view these as momentary corrections in what I feel can only be described as a massive economic downturn. Short-term traders should of course base decisions based on price action and other technical factors, though I personally prefer to know whether I am trading with or against the long-term trend.

Below are links to commentary I found to be accurate and insightful regarding the Fannie Mae and Freddie Mac bailout. Given the magnitude of this issue, I recommend traders gather a wide variety of opinions so as to be capable of making their own informed decision.

The Smart Money Tracker: The end of the bear?
Death of Fannie, Freddie Only the Beginning
Gov Bailout of Fannie and Freddie Would Destroy the Dollar
Fannie & Freddie Discussed on InformedTrades

As always, feel free to reply with relevant links, comments, and questions to help us learn.