“To Dream – the Impossible Dream”
Has the Federal Reserve, under Ben Bernanke, used their considerable knowledge to save the nation from depression? Every day more and more people are beginning to say “Yes” to that – and I can't blame them. You turn on the TV and hear: “The Dow has hit another multi year high as outstanding profits in the banking sector led a broad rally today...."
I wonder if John Q. Public knows:
- The banks are allowed to keep two sets of books. One set is loaded with enormous losses, debts, derivatives with no value, and the stark realization that "you’re bankrupt" while the other set is loaded with profits – mostly due to ‘loosy-goosy’ accounting allowed by regulators. Banks have been allowed to claim interest on non-performing mortgages until the actual foreclosure takes place (which – on average – takes about 16 months). Per Steve Forbes: “All the phantom interest that is not actually collected is booked as income until the actual act of foreclosure. As a result, many bank financial statements actually look much better than they actually are. At foreclosure all the phantom income comes off the books of the banks. This means that Bank of America, Citigroup, JP Morgan and Wells Fargo, among hundreds of other smaller institutions, can report interest due them, but not paid, on an estimated $1.4 Trillion of face value mortgages on the 7 Million homes that are in the process of being foreclosed.” Now that’s one sweet deal. I get to book profits on payments that I will NEVER receive – AND I get to tell you what a magnificent quarter I had – AND I get to borrow from the FED at 0% - lending back to them at 3%, - AND I get to sell Treasuries to the Fed almost daily for billions – AND I get to sell toxic derivatives to the FED at face value, while they are worth ten cents on the dollar!
On Friday Ben again admitted: “Our policies (QE2) have contributed to a stronger stock market just as they did in March 2009 when we did the first iteration of this program." Contributed is a loose word - because the S&P has gone 10 days without falling below it’s 10 day moving average, and that has NEVER been accomplished in the history of the stock market! So it appears Ben’s main objective is NOT to keep the economy in balance or to keep inflation in check, but rather to push the market higher in the face of every negative influence.
- After spending over $14 trillion dollars in bail-out's, auto takeovers, stimulus programs, toxic asset purchases – we’ve gotten 2.5% growth – the lowest in ‘post recession’ history ⇒ Fed Charter 0, Stock Market 1.
- After 4 separate Government programs to help people keep their homes – according to Reuters – “Banks last year (for the first time) seized more than a million U.S. homes, despite a slowdown in the last few months given questions about foreclosure processing.” ⇒ Fed Charter 0, Stock Market 2.
- What about inflation? Again according to Reuters – “A year end surge in gasoline prices ratcheted up consumer inflation to the highest level in more than two years. The U.N. index of food prices reached the highest level it has ever been, producing food riots around the world. And clothing makers plan to raise prices in 2011 as they struggle to absorb the impact of soaring cotton costs.” ⇒ Fed Charter 0, Stock Market 3.
- What’s the rest of the world think about Bernanke’s plans? A Chinese Rating agency reported that: “The new round of quantitative easing adopted by the Federal Reserve has brought about an obvious trend of depreciation of the U.S. dollar, and the continuation and deepening of the credit crisis in the U.S. The continuation will result in a much larger crisis triggered by the U.S. government's policy to continuously depreciate the U.S. dollar against the will of creditors.” OK the U.S. dollar is doomed and the ultimate bank – China – is going to tell us when the entire loan will be due. ⇒ Fed Charter 0, Stock Market 4.
- And remember, the U.S. Consumer is: (1) upside down on his house (if he has one), (2) getting killed by unemployment, (3) getting crushed by gas prices, food prices, medical costs, education costs – I’ll stop here. ⇒ Fed Charter 0, Stock Market 5.
In fact, the only thing that's working is that they are boosting the stock market. Can it last for ever? No - our bankers (China) will make sure of that.
The Market:
So it's sideways and up and pause then sideways then up then pause – wash, rinse and repeat ☺. Bernanke is making the market go up, so consumers feel better and spend money. Unfortunately, Goldman’s own studies show that 49% of Americans have "no visible way to retire". Unfortunately, Americans did their big spending, and now the trend is lower spending. Is Ben planning on the stock market being the substitute for ‘welfare’ – where Ben puts each Americans allotment of money into the stock market each month, and we can take it out when we need to use it? Rest assured, the moment the Federal Reserve money stops flowing to Wall Street, the market is going to fall – and not by a little – but fall by a lot. My prediction is fairly simple, at some point in the not too distant future, we're going to be able to go short, and like in the year 2008, make a small fortune. Unfortunately we simply don't know the date.
So, what’s the strategy? Use this ‘sideways and up’ time to learn how to go short via buying put options, using direct inverse ETF's, and doing straight short sales. Be patient, because you'll be holding a tool in your investing toolbox that will reward you as much (or even more) than any "long side” investment you've ever made.
Tips:
We still have some of our gold and silver stocks – with our long term holds looking like: SLV at 25.81, NG at 6.825, AAU at 3.02, DNN at 2.71, AVARF at 4.00 and USSIF at 0.61
Lately we continued to lean long but with small positions. We bought some BIDU last week at 101.50, and it’s now 107.7. We also bought some N at 24, which hit 27.7 on Friday.
In terms of what’s looking attractive, the miners are going to begin to look attractive again soon – let’s make sure the selling settles for 3 days before diving back in.
If you’d like to view my actual stock trades - feel free to sign up as a twitter follower – “taylorpamm” is my nickname on Twitter – fyi.
If you’d like to see me in action – teaching people about investing – please feel free to view the TED talk that I gave a 4 months or so ago now:
Remember the Blog:
Until next week – be safe.
R.F. Culbertson
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