Written by Michael Vass

If there was anyone who was not worried about the economy before, there is no way they can be confident now. Bear Stearns was just taken over for an acquisition price of $2 a share by JPMorgan. The trouble this implies is only going to be more extreme.

Obviously the first thought is that this deals with the sub-prime mortgage crisis. And that thought is absolutely correct. As I have previously mentioned, we are not at the end of this crisis, and I expect to hear of continued major losses amid the major financial institutions. Of particular note I expect to see CitiGroup to have a problem.

Now some might say how bad is this. Massively. The Fed guaranteed a 28 day loan on Friday, in the first step to this bail-out. That meant that Bear Sterns was out of cash and could not maintain liquidity. They were bankrupt without using that term.

Of course such an obvious problem could not be fixed with a single loan. And because of the size of Bear Sterns, it could no be allowed to fail. Few companies are in this category, but each of those that are would cause a depression were they allowed to be bankrupt. Thus a deal needed to be made before the U.S. markets opened and a probable rush to cash hit the institution.

The bad loans made were so horrible that the assets of Bear Sterns were set at $2 a share, $55 a share below the close on Friday. The Dow, mutual funds, and investor confidence could never have survived this news. Quite possibly they still won’t.

Already there has been an increase in gold spot prices by $27 from the $1007 price reached during Friday. When you add the fact that the Euro is rising versus the Dollar, and the assured drop in global stock markets, and I expect that the unforeseen events I discussed when setting my 2008 target for gold at $1125 has occurred and surpassed my worst expectation.

I haven’t even mentioned the fact that the Fed, preparing for a massive sell-off, cut rates .25 points as a distraction and band-aid for investors. Not only has Ben Bernanke missed the timing of the problems occurring, he is reacting far too timidly. The fed funds rate now sits at 3.25% with the Fed meeting on Tuesday. There can now be little doubt that another massive cut of .75 basis points to a rate of 2.50% is probable.

Undoubtedly Oil will also rise in the wake of this news as investors and institutions will run from the Dollar and into a more stable security. Like gold, my year ending targets look to be too timid.

After the Fed has announced $400 billion in short-term loans and assurances to financial institutions, the proof that this has been a waste of funds is apparent. Rather than saving the ammunition that will be needed Monday the Fed ahs already shot off most of its firepower. Any moderation of the downturn will be as short-lived as its previous actions have been. If it’s that well received in my opinion.

Already the forward indicators of Monday’s open are being felt. Hong Kong’ Hang Seng index was down 4.4 percent at 21.263.51, the Nikkei 225 stock index plunged 4.2 percent to 11,727, and China, Australia, Indonesia, the Philippines and New Zealand have all been hit as well.

The fact of a recession seems absurd to deny at this time, and the start of a bear market is unstoppable, in my opinion. And a rush to hedge in Gold, Oil, and overseas markets seems apparent. I can only state that I’m happy I’m not still a stockbroker as I feel bad for my associates in the business tomorrow.

An unknown factor is how this may still affect Chinese markets as an example. Already at 8 month lows, the financial sector is getting hard hit. CITIC Securities is one such example. Its earnings were reported up 500%, but a $1 billion deal with Bear Sterns for 6% stake in the company is in limbo. And numerous other lesser deals exposing China and Japan to the sub-prime crisis are yet to be accounted for.

The upcoming 1st quarter results of Merrill, Citigroup, Lehman and several other institutions will detail how bad things actually are. It’s highly likely that at least one more will fall, and I believe that Citi will be the recipient of a helping hand from the Fed.

While I did not expect to hit 11,000 on the head when I first mentioned my expectation of where the market will go in 2008, it may turn out that I was underestimating what could happen. This being an election year, expect another round of stimulus money from the U.S. government, set to improve the political aspirations of the various candidates. Though this may bode worst for the Democratic candidates that just voted to increase tax rates by 3% for those making $31,850 or more last week.

The only thing left now is to see if there will be an emotional fire sale in the markets Monday, and how bad the extent will be once the market breaks the official bear market point of 11,424, a mere 527 point from where the Dow Jones Index closed on Friday.