Bailouts Revisited

By Dr. Russell McDougal

Wow! What a year we’ve seen on the financial and economic front. Chaos has reined supreme, especially behind the scenes. Bernanke has cut his teeth on some massive problems and solved them. Or has he?

It’s time, once again, to assess the cozy relationship between the Fed Franchise and their buddy banks. The following words came from Part 8 of my “Oh, Say Can You Still See?” series several months back:

You must always be mindful that the Fed is the lender of last resort in the United States.  They will steal … excuse me, I mean print … themselves and their friends out of any jam.  The U.S. Congress has granted this private corporation a license to monetize whatever is deemed necessary.  They can turn cow chips or empty paint buckets into Federal Reserve notes if they like.  There are no limitations as to how much funny money can be created.

My premise is that we are now in an age of bailouts, the likes of which the globe has never seen.  This is anything but business as usual. 

There are three main players in this tragedy:

1. The Fed (and other central banks)

2. Those closely associated with the Fed

3. Jane and Joe and their global counterparts

Bailouts typically are designed to come to the rescue of Fed cronies.  Insider rescue packages typically rape Jane and Joe.  You will want to watch closely in the coming months and years to see exactly how the coming bailouts play out.

Here we are a few months later. The word on the Street is that the Fed has come to the rescue and put out the fire of what is commonly called the “sub-prime mortgage crisis”. That is a cruel joke. The problems run much deeper than just the lower quality mortgages.

Real estate is still spiraling downward. Bonds tied to real estate are leveraged and held in massive quantities by banks and other financial institutions. Nothing has been solved.

Let’s look at recent banking bailouts. The Fed is accepting (monetizing) toxic financial products with little true value. In exchange the buddy banks receive “high quality” US Treasuries. Cheers abound as the cesspool remains operational.

A lot of money is involved in this process. Hundreds of billions just for starters.

The debate rages as to whether the Fed is helping the banks with “liquidity” or “solvency”. Most believe the funds help only with liquidity (sufficient funds with which to operate). If these are just “loans” then that opinion makes sense. Loans don’t alter the overall profit/loss balance sheet (solvency).

My opinion? First of all, the entire system is hopelessly corrupted. These guys are like Enron on bennies, pun intended. Those who issued the mortgage fraud should be allowed to choke on their own greed. That never happens with those too well connected to fail.

Do the Fed actions only help bank liquidity? No, a thousand times no! These are pure bailouts. The Fed intends to keep the banks and financial institutions solvent. That is what the Mussolini fascist business model is all about. Admittedly, I am exceedingly jaded. It has served me well over time.

Here’s an appropriate analogy for you. Let’s say your personal business has hit the skids and you have neither sufficient working capital nor assets worth anywhere near your liabilities. Things look hopeless.

Along comes Sir Loansalot and offers you as much money as you need to keep your business functioning. That’s beyond cool because you now get at least a continued monthly expense account. Breathing room. Thank you, Sir!

Here’s the clincher. This loan is endlessly revolving. It comes due every month or every 12 months but your benefactor keeps renewing it. Voila! Liquidity becomes solvency. It’s a long term gift.

Oh, by the way, here’s a recent look at overall bank reserves per the Fed:

This chart clearly demonstrates that the banks, in aggregate, have exceedingly negative “nonborrowed” bank reserves. That means their reserves, in sum, are borrowed. The Fed is keeping them on life support.

Do you believe these are loans or gifts? Do you know who pays for any gifts? You will want to continue watching closely to see how this plays out.
Maybe you need an Uncle Fed. Check your blue bloodlines.          

Invest Resourcefully,

Rusty

P.S. To let me know what you thought of today's article, send an e-mail to: feedback@investorsdailyedge.com.

[Ed. Note: Dr. Russell McDougal has dedicated years of study and investing in the natural resources exploration sector. During that time he has closed out DOZENS of gains of 500%... 1,000%... 2,000% and more! Currently he is sitting on multiple thousand percent winners, including one stock that is up a whopping +5,000%. And for a select group of investors, Rusty has agreed to share his secrets of success... and his top stock recommendations. Click here to learn more... ]

Market Watch

Time to Fade the Dollar

By Charles Delvalle

A few weeks ago in my blog, I wrote about how the dollar was destined to rally. As I expected, the dollar went on to rally two and a half cents (pretty good in the FOREX world). But will the dollar keep its rally going?

It’s doubtful.

You see, the dollar began rallying because traders expected the Federal Reserve to signal a stop to interest rate cuts. But once traders got the signal they wanted, what do they focus on next? The fundamentals.

We’ve just undergone our second straight quarter of sub-one percent growth. In an economy like the U.S., we might as well be shrinking.

Then you have an expected budget deficit of over $400 billion this year, a trade deficit that is completely out of control, and what could be the worst financial storm since the great depression. Does that sound like a bullish scenario to you?

When you look at the charts, you’ll notice that the US Dollar Index ($USD) recently found resistance at its 100-day moving average. This average has been resistance since April of 2006. Unless the Federal Reserve signals interest rate increases, it’s hard to see the dollar moving above this resistance.

With that said, it’s time to fade the dollar and get into the PowerShares DB US Index Bearish Fund (UDN) which goes up in value as the dollar drops.

Good trading,

Charles

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