Empower the Fed? Details of Obama’s New Plan, Inflation Forecast, Gold Advice and More!

by Addison Wiggin & Ian Mathias

  • The biggest financial reform of our generation… The 5 dives headfirst into Obama’s new plan
  • Stock market sell-off pauses… Wayne Burritt with the next short-term technical target
  • Dollar dips on new government reform… Chris Mayer on the near certainty of inflation
  • Paul Van Eden packs some sober advice on gold
  • Plus, feeling frustrated by the Fed’s free reign? A cause worth supporting, below

  Are we reading this right? The new president wants to give the Federal Reserve… more power?

The very body that’s easy credit policies over the past 15 years helped fulminate the largest speculative bubble in history… could soon oversee nearly every major company in the U.S.?

  In a surprisingly brief (for Washington standards) 88-page plan released yesterday, President Obama revealed the first steps toward the biggest financial overhaul since post-Depression reform. We could fill the next five minutes with juicy bits from the plan, but here are just the ones that made us choke on our morning brew:

  • The Fed — already the controller of money supply and interest rates — will be given “authority and accountability for consolidated supervision and regulation of Tier 1 FHCs.” And what the hell is a Tier 1 FHC? Glad you asked… it’s ANY company “whose failure could pose a threat to financial stability due to their combination of size, leverage, and interconnectedness.” In simple terms, the Fed will become the master of all things “too big to fail”

We’re with you, Ben… scares us too

  • The FDIC (and maybe the Treasury) could have a third option for failing companies. Not content with just the “big bailout” or “let ’em fail” options, the plan proposes to allow federal regulators to overtake failed companies and sell their assets to investors, much like the FDIC already does with dead banks
  • The private sector gets the regulations you’d expect… higher capital requirements at banks, tighter borrowing standards at mortgage lenders, lots of restrictions on complex derivatives and so on… typical reactionary reform. But one notably absent smackdown: rating agencies will be untouched
  • The Office of Thrift Supervision is the fall guy. The OTS will be abolished under the plan, thus taking the blame for nefarious companies it oversaw like AIG and WaMu. Years of free money interest rates from the Fed, all the blundering bailouts at the Treasury and the total inadequacy of the SEC will go unnoted. In fact, all three of those agencies are getting more money and responsibility. Par for the course in 2009… the bigger your failure, the greater your reward.

  And just one more… we can’t resist. A whole new bureaucratic arm will be created: the Consumer Financial Protection Agency. You see, it’s not our own fault that millions of Americans signed up for liar loans, high-interest credit cards and no-money-down adjustable-rate mortgages. It’s those damn predatory lenders! Thus, this new office will be tasked with saving us from ourselves. Best of luck.

  We’re premature in passing judgment on this reform. After all, it’s yet to pass through the slimy halls of Congress. When Hank Paulson proposed the three-page, carte blanche TARP, it came out of the Senate 448 pages heavier, with such memorable additions as the “exemption from excise tax for certain wooden arrows designed for use by children.” We’ll let you know how they manage to “improve” this proposal.

For more, and how you can voice your opinion on this matter, check out the reader mail at the end of today’s issue.

  Oy… even Larry Kudlow gets it.

  The stock market gave lukewarm approval to the new array of reform. Its announcement pulled markets from a loss to a flat close yesterday. And this morning, Tim Geithner’s explanation of the various regulations before Congress is helping pull indexes up to about a 1% gain.

Still, for the week, the S&P 500 is down 2.5%.

  “No market goes straight up,” says one of our options traders, Wayne Burritt. “That’s why pullbacks like the one we’ve experienced over the last few days are not only natural, but welcome.

“When markets take a break, they give new traders and investors a chance to jump in at lower prices. That provides new buying pressure for a new bull run down the road. Plus, they give traders a chance to bank some cash, another positive for sure.

“The S&P 500 has had quite a challenge getting and staying above the important 944 level. That level — which the market first failed to eclipse on Jan. 6 — has proved to be a stubborn resistance level. In fact, if you take a good look at the market’s action prior to the recent pullback, you can clearly see that 944 continues to be a sticking point.

“But here’s the key: While we’d love to see the market blow through 944, the fact that it continues to take shots at that level is a positive: Repeated attempts — even if they haven’t yet succeeded — are a clear sign that U.S. stocks aren’t about to give up. And that means it’s only a matter of time before 944 is history. And once that happens, hold onto your hats . The charge higher could be spectacular.”

If you’d like to be prepared for another leg up, Wayne’s Easy Money Options would be a great place to start. It’s an affordable, simple guide to the complicated options trade. Details here.

  Traders understandably sold the dollar yesterday. Right as President Obama announced his financial reform, the dollar index plunged half a point, to just above 80, where it remains today.

  “The dollar lost over 95% of its purchasing power in the 20th century,” notes Chris Mayer. “And arguably, that was during a century when it was harder to debase the currency than it is now, as the gold standard — or some variation of it — served to check government spending at different points along the way. It seems hard to do worse in the 21st century, but I think we will manage it.

“Inflation — rising prices, or a drop in the purchasing power of the dollar — will soon rise to the very top of economic concerns. I can’t understand why there are pundits who insist we can’t have inflation while the economy is weak. There are plenty of examples of weak economies with high inflation. After all, I don’t think they are hitting on all cylinders in Zimbabwe, where inflation is thousands of percent.

“As an investor, the way to bet is for the dollar to lose value as it has for a century. A couple of places that look to hold their value in the face of a dollar decline: agricultural goods and energy assets.”

You can find lots of those assets in Chris’s Special Situations portfolio… currently available for just one dollar.

  But just because the dollar is down today doesn’t mean the euro is sitting pretty. The euro is bogged down at $1.39, nowhere near its recent highs, thanks mostly to this:

  Banks in the eurozone could face another $283 billion in write-downs this year, warned an European Central Bank report this week. It’s latest “Financial Stability Review” found, well, anything but financial stability in the region. The ECB said “uncertainty prevails” over the whole system… hundreds of billions in losses could still be around the bend.

“Some news sources are reporting that the eurobanks’ toxic exposure liabilities are at $5.3 trillion,” adds our currency man Bill Jenkins. “Now, my figures, based on other research, were considerably higher, but if we take the more conservative stance, that $5.3 trillion is greater than the GDP of Germany, the eurozone’s largest economy, and fully 25% of the whole ball of wax.

“And folks still feel they will fare well in a race against the dollar? I’m thinking I might leave my $2 on Uncle Sam’s entry. Of course, I’m not a big U.S. dollar fan, but we’re in this to make money. And pulling bets off a horse with a bum leg is a dumb move if you put your money on a horse with two bum legs!”

  This part we don’t get: Give the Fed — the world’s most prominent debaser of the U.S. dollar — extra power and gold doesn’t budge? Alas, that’s the case today… the spot price has been bouncing between $930-940 for the last few days.

  “My fair value of gold for 2008 was $763 an ounce,” Paul van Eden wrote in The Daily Reckoning. “Using the average of 2008 and 2009’s inflation rates for the U.S. dollar, and gold’s inflation rate for 2008, I come up with an approximate average value for gold of $815 for 2009. Please note that this is an estimate of the average value for the year, and not a year-end estimate.

“Clearly, the gold price is well above $815 an ounce, and has been so for quite some time. The macroeconomic environment has probably never been so obviously in favor of gold, and it is my belief that the market has already priced much of this into the gold price. While I fully recognize gold’s lure at these times, and the probability that the gold price could still increase quite substantially, I remain cautious about gold. Recall that investors who bought gold when it was grossly overpriced during 1979 and 1980 and then forgot to sell suffered severe losses.

“I would personally prefer gold to sell down to around $800 an ounce, where I know it represents good value, than buy gold at overvalued prices and hope that it keeps going up.”

You can count on the same sober, well-reasoned advice from Paul at this year’s Investment Symposium, where he’ll be one of many esteemed speakers. Seats to our July shindig are filling up fast… reserve yours, here.

  Other commodities are struggling to forge ahead today. Oil’s stuck at yesterday’s price, $71 a barrel. Ditto with more industrial commodities like copper, lead and aluminum… all at a near-standstill.

  Standstill is the name of the game in economic data today too. The only A-list release, jobless claims, remained almost exactly at last week’s levels. Initial claims for unemployment benefits rose just a bit, to 608,000. The Labor Department said continuing claims fell a skosh, to 6.68 million.

That would technically end the remarkable 19-week streak of record-high claims for unemployment… but we’re not taking the bait so easy. The Labor Department pulled the same move two weeks ago, only to later revise their number and keep the streak alive. We’ll keep an eye out for changes next week.

  “Obama’s plan,” a reader writes, “to give the Federal Reserve Bank the power to regulate the entire financial sector is completely outrageous. This is the classic ‘fox guarding the henhouse.’ I do not want a bunch of greedy private bankers getting any more power than they already have, I am talking about the private Federal Reserve, for those out there who don’t know that the Fed is a private institution. Alan Greenspan admits on CNN’s Larry King Live that the Fed is above the law. This is why Ron Paul’s bill to audit the Federal Reserve is so important. Its books have never been opened to anyone outside the Fed.”

The 5: We’re with you… support his bill, HR 1207, right here.

Thanks for reading,

Ian Mathias

The 5 Min. Forecast

P.S. This is your last chance to save 50% on Resource Trader Alert. At midnight tonight, our offer is off the table. Don’t miss this deal on one of our finest high-end services… click here.  

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