Tomorrow Comes Today.

Dear Readers,

Market watchers know about the massive, multi hundred point drops in the U.S. Capital Markets.

In the world of Economics, there is a concept known as the Classical Dichotomy. Part of the theory tells us that there are two time periods, short and long term.

Until two days ago, the short term prognosis for the U.S. economy was all peaches and cream. The stock market could do no wrong.

However, as readers of this blog know, our long term financial position looks pretty damn scary.

There is a point in time, ladies and gents, when the short run morphs into the long, and it can come suddenly, and without warning.

I've been watching the market downturn with interest over the last few days, and while I don't think the world is going to end just yet, I do see very ugly storm clouds gathering.

Consider this entry from SeekingAlpha.com:

Tate Dwinnell submits: You won't ever hear that the LBO boom is over or that the depreciation in housing is reaching levels not seen since the Great Depression from the Fed, or any government official for that matter.

Telling the truth might be seen as irresponsible, sending markets tumbling across the world. So, the Fed has been carefully spoonfeeding us the truth by transitioning from telling us that the subprime / housing issue was contained to finally acknowledging that the subprime and housing issue has deteriorated and is worse than expected. So Bernanke told us last week. Yesterday, the sugar coating was removed as PIMCO's Bill Gross and Countrywide Financial CEO Angelo Mozilo told us how they really feel.

From Bill Gross:

Both borrowers and lenders may have bitten off more than they can chew, and even those that swallow their hot dogs whole - Nathan's Famous Coney Island style - are having a serious bout of indigestion.

That growing lack of confidence - more so than the defaults of two Bear Stearns hedge funds and the threat of more to come - has frozen future lending and backed up the market for high yield new issues such that it resembles a constipated owl: absolutely nothing is moving.

The tide appears to be going out for levered equity financiers and in for the passive owl money managers of the debt market.

No longer therefore will stocks be supported so effortlessly by the double-barreled impact of LBOs and company buybacks. The U.S. economy in turn will not benefit from this tidal shift and increasing cost of financing. The Fed tightens credit by raising short-term rates but rarely, if ever, have they raised yields by 150 basis points in a month and a half's time as has occurred in the high yield market.

Bill Gross' entire August outlook is a good read, check it out.

. . . and from Mr. Doom, Countrywide CEO:

During the quarter, softening home prices continued to affect many areas of the country and delinquencies and defaults continued to rise across all mortgage product categories as a result. Due to these adverse conditions, the Company incurred increased credit-related costs in the quarter, primarily related to its investments in prime home equity loans.

Perhaps we can no longer call this just a subprime issue!

We are experiencing home price depreciation almost like never before, with the exception of the Great Depression.

Did he say the Great Depression? Perhaps a poor choice of words that may have spooked the markets a bit more than need be, but you get the idea . . . the housing market isn't recovering anytime soon.

What this means for you, dear reader, is that the mortgage market, which is the ultimate prop for our economy, and the ultimate savings plan for the number one driver of said economy, the American consumer, is going to hell in a handbasket.

It's kind of like boiling a frog in hot water so slowly, that the poor victim doesn't realize he is being cooked until it's too late.

No housing, no home equity loans, no mortgage backed securities, no consumer spending, no massive company quarterly profits, so forth and so on...

You get the idea.

Take a look at this:

Michael Panzner submits: When the housing bubble burst, the optimists were quick to call for a bottom -- again and again.

Later, when the fallout from that still unfolding meltdown helped trigger a category five hurricane in the subprime mortgage sector, the rose-colored glasses types kept saying the situation would remain "contained."

Then, when the reverberations from that snowballing disaster caused credit spreads to start shooting higher and losses to pile up at a growing number of financial operators, the Pollyannas said it wouldn't affect "liquidity" -- the life blood that has kept the LBO game of musical chairs alive and the stock market floating on nothing but air.

And now, the Mr. Magoos -- and no small number of "smart money" investors who've been piling into the shares -- appear to be saying that all of these various shockwaves are unlikely to have much impact on what many consider to be the poster children of ponzi finance, the publicly-traded government-sponsored mortgage lenders.

Unfortunately, as a recent report from BusinessWeek seems to indicate, "Why Fannie And Freddie Are Fidgety," the delusionists are about to be proved wrong once more.

The financial giants are loaded down with dicey loans as defaults increase

Fannie Mae (FNM) and Freddie Mac (FRE) have been cast as saviors in the housing drama that's roiling the financial markets. After they stepped in to snap up billions of dollars in subprime loans earlier this year, some politicos declared the duo a point of strength: "Freddie and Fannie aren't the problem. [They] are the good part," Representative Barney Frank (D-Mass.) said in a recent hearing.

But that doesn't mean they're immune to the pain. Like the big private- sector players, these government- sponsored companies, which own or guarantee 45% of all residential mortgages, have taken on more risk in recent years. Now they hold a sizable piece of subprime and other potentially toxic debt--securities and largely illiquid loans that could take a hit after the recent fire sale prompted by two Bear Stearns hedge funds. And given the state of the broader housing market, more trouble may lie ahead. That would be bad news for shareholders and investors who own their mortgage-backed securities. "We don't know how much trash is on their balance sheet," says Josh Rosner of researcher Graham Fisher & Co. "It seems they've shot themselves in the foot." Fannie declined to comment. Says a Freddie spokeswoman: "We are well positioned to withstand even a severe and enduring period of heightened credit risk."

Driven by market competition and regulatory mandates, the two have become big buyers of adjustable-rate mortgages, or ARMs, and MBSS that include them. Those items accounted for 18% of Freddie's volume in 2006 and 22% for Fannie in 2005, the latest data available. That's up from virtually nothing in 2001. A large chunk comes in the most exotic flavors, such as payment-option ARMs and interest-only loans.

With home prices falling, ARMs, both prime and subprime, are especially scary. Some $300 billion in ARMs guaranteed by the agencies will automatically reset through 2011, according to Banc of America Securities. The unknown is just how many homeowners will default. By Fannie's own estimates, 18% of the subprime ARMs industrywide that reset in the first three months of 2007 have gone south.

It goes without saying that massive losses at these two pillars of the mortgage market would be absolutely fatal for our economic system.

Speaking of government, a fascinating connection is the following comment:

There are just four people who control all of the U.S. markets through their use of dangerous and explosive DERIVATIVES. They are risking the assets and retirement funds of all Americans. Because of their manipulations, especially since 2001, U.S. financial markets are now based on the gambling whims of a special fraternity of Federal Government DERIVATIVE dealers.

This group is known among Wall Street as the Plunge Protection Team (PPT). Their "official" role was to prevent another 1987 "Black Monday". They have the entire U.S. Treasury at their disposal to manipulate the markets through DERIVATIVES (futures options). In other words, they are using the assets behind the U.S. Treasury to rig the prices of commodites (gold, currencies, etc.) and stocks.

This fraternity comprises of Fed Chairman, the Secretary of the Treasury, and the heads of the SEC and the Commodity Futures Trading Association. It works closely with all the U.S. exchanges and Wall Street banks, including the largest DERIVATIVE risk holders Citibank and JP Morgan Chase.

Few people are aware of Executive Order 12631 signed by Ronald Reagan on March 18, 1988. In a nut shell, this is the "authority" behind the four dictators and the [sic] "laws" and "regulations" that have backed their casino-style DERIVATIVE gambling spree since 2001. Here are some highlights of this Executive Order to ponder:

Executive Order 12631 - Working Group on Financial Markets - Mar. 18, 1988; 53 FR 9421, 3 CFR, 1988 Comp., p. 559.

"By virtue of the authority vested in me as President by the Constitution and laws of the United States of America, and in order to establish a Working Group on Financial Markets, it is hereby ordered as follows:

Section 1. Establishment. (a) There is hereby established a Working Group on Financial Markets (Working Group). The Working Group shall be composed of:
(1) the Secretary of the Treasury, or his designee; (2) the Chairman of the Board of Governors of the Federal Reserve System, or his designee; (3) the Chairman of the Securities and Exchange Commission, or his designee; and (4) the Chairman of the Commodity Futures Trading Commission, or her designee.

Section 2. Purposes and Functions. (a) Recognizing the goals of enhancing the integrity, efficiency, orderliness, and competitiveness of our Nation's financial markets and maintaining investor confidence, the Working Group shall identify and consider:

(2) the actions, including governmental actions under existing laws and regulations (such as policy coordination and contingency planning), that are appropriate to carry out these recommendations.
(b) The Working Group shall consult, as appropriate, with representatives of the various exchanges, clearinghouses, self-regulatory bodies, and with major market participants to determine private sector solutions wherever possible.
Section 3. Administration. (c) To the extent permitted by law and subject to the availability of funds therefore, the Department of the Treasury shall provide the Working Group with such administrative and support services as may be necessary for the performance of its functions."

Get out of the markets before the inflated DERIVATIVE bubble bursts

The pre-911 U.S. markets showed an astounding - yet confounding and puzzling - rise for the 4 months proceeding 911. The U.S. media dubbed it a "patriotic rally". The European Press called it a "PPT [Plunge Protection Team] rally". Obviously, the U.S. markets were manipulated and rigged to an inflated value in advance of the 911 disaster. Was this a coordinated measure in anticipation of what was to come? Only The Powers That Be can answer that question directly.

Since honesty is the best policy, I will tell you that I have never heard of this "plunge protection group" until today. More research is needed on my part before I pass judgement on this shadowy government body. For right now, take it, along with everything you see or hear, with a grain of salt.

I will say this though: On this blog alone, there is ample evidence to assert that the government is misleading the public at large concerning the health of our economic system. It would not be too far-fetched if this PPT group pulls major strings behind the scenes. Extensions of our notorious Money Men to be sure.

So in summary:

Don't believe the hype. The world isn't going to end just yet, but at the same time, the time for extreme caution has arrived. This might just be a stock market correction, but maybe this is the time when the short term becomes long.

Investors worldwide are waking up from their champaign dreams, and woe to the person who needs to exit the market suddenly when the stampede hits in earnest. Be safe, talk to your financial advisors (as your advisor knows your personal situation much better than I), read the press, and stay informed.

Tomorrow becomes today, and the end can come like a thief in the night.

Don't sleep.

Kumo.