The New Sheriffs, Reconsidered

by Addison Wiggin

• How the “New Sheriffs of Wall Street” are taking cues from Barney Fife

• Fearless “consumer watchdog” becomes a Fed lapdog: How to profit from a looming regulatory debacle

• Uh-oh… the White House sees “make-or-break event” for the dollar in 16 days

• “Inflation becomes a self-fulfilling prophecy”… the wackiest TIPS auction ever

• “Acceleration Alley” slams on the brakes, and other signs of a faltering recovery

You’d think after The Committee became the butt of cocktail jokes during the Panic of ‘08… they’d have shied away from anointing the “New Sheriffs.” Alas, there it was, this spring, in feminine form.

This time around, the joke is becoming apparent much faster: The “new sheriffs” are bought and paid for.

First, if you don’t mind, we’ll introduce them, left to right…

• Elizabeth Warren, who’s organizing the new Consumer Financial Protection Bureau

• Mary Schapiro, chairman of the SEC

• Sheila Bair, chairman of the FDIC

Now… let’s take a peek at how effective these new sheriffs are at laying down the law. In reverse order:

Bair’s FDIC is now so confident about the health of the banks that it’s canceling their scheduled increase in deposit insurance payments — you know, the money the banks pay to the fund that “insures” your deposits.

The fund is already $20.7 billion in the red.

“We are not even close to a point where our financial institutions are truly sound,” says Bruce Krasting, a former hedge fund manager who’s taken to the blogosphere. “[Bair] folded to the big banks on this one.”

And when Bank of America took over a failing Merrill Lynch in 2008? It didn’t bother informing its shareholders about the scope of Merrill’s considerable losses… or bonuses. Schapiro’s SEC sued BoA in August 2009… and settled the case the same day for the whopping sum of $33 million.

The judge overseeing the case took the extraordinary step of rejecting this sweetheart deal, saying it “does not comport with the most elementary notions of justice and morality.”

In the end, he reluctantly agreed to a $150 million fine several months later. Chock another up for the tamers of the Wild West!

What of Elizabeth Warren and her brainchild, the Consumer Financial Protection Bureau?

“The CFPB,” explains our stock market vigilante Dan Amoss, “is a new federal bureaucracy created when the president signed the Dodd/Frank bill into law three months ago.”

As a Harvard law professor, Warren pushed Congress hard to create the agency — much to the chagrin of the bankers. But since joining the administration six weeks ago, she’s met with the heads of the 14 biggest banks.

No more talk about “blood and teeth left on the floor” — her words to The Huffington Post last March. Now it’s all about the government and the banks working together for the common good.

“The thing that probably has surprised me most is how surprised they were by the conversation,” Warren said last week, reflecting on her recent meetings. “They were very glad to be invited, and they had some very thoughtful insights.”

Still, knowing what we know about the new sheriffs, should we be surprised? The CFPB’s funding comes from the Federal Reserve.

Still, a crusading Ivy League academic has to do something to create the illusion of looking out for the little guy. So where to hunt for crooks?

“Consumer finance companies,” Mr. Amoss says, will be the first target of Warren’s wrath, “including payday lenders and other lenders whose complex loans get their customers into a dangerous cycle of debt accumulation.”

Of course, consumer finance companies don’t fund the Fed, and they’re only slightly more popular than the operators of puppy mills. So they make an easy target. Likewise there are several ripe for Dan’s Strategic Short Report readers to take gains on.

“A business model,” intuits Dan, “that involves rolling customers from one loan to the next is going to be at the top of the CFPB’s target list.” One firm in particular already employs accounting practices he generously calls “an exercise in creativity.”

“We don’t need an extreme scenario to play out to make money,” Dan says of this play. “All we need is a bit more fear from complacent shareholders.” Move on this now, and it could mean 150% gains by next spring. We’ll make it even easier for you with a hefty discount on a membership to Strategic Short Report.

The dollar is up today… so true to form with events of recent weeks, everything else is down. The key numbers…

• The dollar index is up 0.5%, to 77.5

• Gold is down $11, to $1,330 an ounce

• Oil has dipped below $82 a barrel

• The Dow and the S&P are each down about 0.4%.

At least for today, Washington’s dollar debasement plan isn’t working. But hope springs eternal…

President Obama will chair a summit of G-20 heads of state next month. The administration apparently sees the meeting as a “make-or-break” event for the dollar, according to the foreign policy insider website Swoop.

That is, it’s the last chance to reach an “agreement on efforts to ‘rebalance’ the world economy between countries like China, Germany and Japan with high current account surpluses and those like the U.S. with substantial deficits.”

Heh. We’re not holding our breath.

“Should agreement falter,” The Swoop intones ominously, “the U.S. will, we are told, take unilateral action to force down the value of the dollar and adopt a generally more protectionist approach on trade.”

The move will likely get Republican support even if they take power back in the House next week. And that cannot be a good thing for consumers or investors. Which is exactly why we’re bringing all our analysts and editors to Baltimore this week to hold our own “Emergency Summit.”

We’re going to convene in the Richebacher Library to discuss three looming events…

• The midterm elections a week from today

• The Fed’s possible announcement of more “quantitative easing” a week from tomorrow

• The G-20 summit starting in 16 days.

And then pose a simple question to each: What are your two best plays for our readers to navigate these choppy waters? Stay tuned for their responses… Thursday promises to be entertaining at the very least.

For their part, bond investors appear confident the Fed will attempt to put a stake in the heart of deflation when they meet next week: An auction on Treasury Inflation-Protected Securities yesterday drew a negative yield — a first.

Treasury sold $10 billion of 5-year TIPS at negative 0.55%. That’s a huge bet on the consumer price index heating up — otherwise, the people who bought these bonds will end up paying for the privilege of lending to Uncle Sam.

“Here’s what jumps out at me” writes Ian Mathias about the TIPS auction. “Inflation is becoming a self-fulfilling prophecy. When the Fed started hinting at another round of quantitative easing last month, they made it clearer than ever that they would not tolerate deflation. Essentially, they say they’re willing to print as much money and buy as many Treasuries as it takes to keep us from becoming Japan.

“So the market is front-running The Fed’s trade. There’s no other reason to buy TIPS so aggressively.

“But now the Fed’s inflationary hand will be forced. Traders are making these deals only because they expect the Fed to follow through with its QE2 threats.

“I don’t think this TIPS auction is a sign of the economy’s natural turn from deflation to inflation, but more like Wall Street daring the Fed to not follow through on another inflationary campaign.

“Instead of piling on top of a crowded trade, where bond buyers are paying a premium to par value, I’d sooner take ownership stakes in stable companies that would hang tough in an inflationary or deflationary landscape… consumer staples like Johnson & Johnson or Clorox. They will offer yield (which those TIPS won’t, ironically) and a better long-term chance for capital appreciation.”

For a well-chosen package of dividend paying stocks, you can’t top Lifetime Income Report — in which the average open position is up 29.7%, including dividends. Learn more here.

As we anticipated yesterday, the Case/Shiller Home Price Index turned in a weak performance this morning. The August index was 1.7% higher compared to August 2009 — the smallest year-over-year gain since February. The Street was counting on a 2.1% increase.

At best, the hangover from the expiration of the homebuyer tax credit has yet to wear off.

At worst, the dreaded “double dip” in housing is already under way.

We wonder what our friend James Howard Kunstler would say about this…

In 2006, Kunstler described NASCAR as a salve for “a nation of outsourced blue-collar jobs, shrinking incomes, vanishing medical insurance, rising fuel and heating costs and net-zero personal savings.”

Now, after 14 years, the Daytona International Speedway is closing its “Daytona 500 Experience” attraction, along with its IMAX theater. Among other things, that means no more “Acceleration Alley,” where you and your fellow guests can race each other in simulated stock cars.

If the economy is recovering, don’t tell the working-class folks who make up much of NASCAR’s following: Empty seats have abounded at nearly all of this year’s top-level Sprint Cup races.

“I am curious,” writes a curious reader, “why you do not print the names of the banks closed each week. Considering I have accounts in Florida and Georgia, it was a little disturbing to read [yesterday] of closures in both states. If you can’t list the names of all the banks each week, then why mention them at all? If there is a site we can refer to each week, then be so kind as to advise me of it or list it each week for all your patrons.

The 5: The FDIC posts the closures on its home page every Friday night, and it’s prominently displayed at all times. Good luck.

After a reader observed yesterday that China’s squeeze on rare earth exports amounts to behavior that would “put any company manager in jail in the U.S.,” another reader replies:

“Seems like selective outrage to me. The United States government undertakes innumerable actions that would put a company manager in jail or worse: start wars, torture people, support dictatorial regimes, etc. And on the economic front, our ‘leaders’ bully practically the entire planet on a daily basis. Let’s focus on the log out of our own eye before jumping to point out the iota in China’s eye, aye?

“Furthermore, it is absurd, not to mention a wholly inapt analogy, to accuse China of ‘unfair pricing’ intended to send ‘competitors bankrupt’ when two-thirds of known rare earth deposits exist OUTSIDE of China and can be developed at any time. China hasn’t a monopoly here, and if the rest of the holders of rare earths have been complacent, well, the market has a solution – incarceration will not be necessary.

“Whatever happened to the respect for ye olde law of supply and demand, whereby as the price of some good goes up, or that good becomes scarce, opportunities open up for the entrepreneurially inclined to devise or develop new supplies to bring the price back down and render those goods more readily available?

“America has become a land of toddlers — forever whining about how dreadfully unfair other countries are. Let’s hope it doesn’t get to the tantrums stage.”

“We ruled the world for a century,” concurs another reader. “The delusional think we still do. A lot of them are ex-military. They fail to realize that beggars cannot be choosers. When you are broke, you don’t dictate the rent to the landlord.

“There is going to be a change in this country that will be unbelievable to most, but in a perverse way. I can’t wait.”

The 5: What’s the old saying… “Be careful what you wish for”…?

Cheers,

Addison Wiggin

The 5 Min. Forecast

P.S.: In timely fashion, Byron King is in Washington, D.C., attending and speaking at a conference on rare earths… the very substances that’ve dominated The 5 for better part of the last week.

It was Byron who first brought rare earths to our attention in early 2008 — long before they made the front pages last week when China closed the spigot on exports to the United States.

“Well, that’s the headline, anyhow,” says Byron. The truth is far more complex.

“China is dominant in the world rare earths business because the West allowed it to happen. That is, much of the manufacturing process for rare earths is dirty, dangerous and environmentally problematic. Hence, it’s no surprise that the developed West has closed down its mining and refining operations and exported the whole industry to a developing country like China.”

“Except now that the West wants to pursue things like advanced electronics and ‘clean energy’ systems, there’s the realization that we no longer control a critical part of the supply chain. Whoops. The Chinese control the important resources at the start of the industrial chain.

“So right off the bat, the West is at a disadvantage in the race to pursue the next generations of energy systems and advanced technology.

“Indeed, the West has painted itself exactly into the wrong corner.”

“So what to do? Well, have a conference in Washington, D.C., for starters.”

“Actually, the conference is quite all right. I’m in the room with some of the smartest people in the country on this issue. The information is flowing. Well, maybe it’s more like taking a drink out of a fire hydrant.”

A couple of Byron’s rare earth recommendations in Energy & Scarcity Investor have doubled in the last three months. “ESI” is where Byron picks small-cap energy and resource players on the move… like this one.