Isn’t that a scary thought?

Just a couple of days after Obama touched down in Washington, China makes a very American decree. It’s telling its banks it had better shore up their capital situations or face strong sanctions from the government.

They say imitation is the sincerest form of flattery. America did it first, now the communists are following.

In case you missed the news over the past year or so, China’s economy is flat-out soaring ahead. While no figure that disseminates from Beijing is ever trusted, most analysts believe the country’s GDP is growing by a rate of 7% or so. Some even say it has eclipsed the 10% mark.

Just like here in the States, very little of that growth is organic. China’s government is just as fond of manipulating natural market forces as our friends inside the beltway.

And, of course, anytime the government gets involved, some unnatural and unexpected economic reverberations will be felt.

Just as their American brethren did over the past decade, China’s banks are taking advantage of a fixed currency and an optimal lending environment by sending all the money they can dig from the couch cushions into the streets of China.

As the economy grows, the leverage on their books multiplies. Like we learned just 13 months ago, the situation will eventually collapse under its own weight.

That’s why Beijing has stepped in and told the banks that they had better save some money for their backup coffers… or else.

This is bad, bad news for a country surviving on borrowed money (no, not us… this time). China’s economy has been artificially inflated by the government’s cash infusions. But now the leadership is starting to pull back, realizing enough is enough.

Continuing with Friday’s lead, this proves natural market forces are still alive and well. Better yet, it proves China is in for some bumpy traveling.

If you would have asked me early last week about China’s economic health, I would have told you I like what I see. But then something odd happened.

Obama visited. And it’s been downhill ever since.

*** I love it when the markets make a mistake. After some positive economic data from the consumer front this morning, the equities market put in quite a showing today. In fact, even the ultra-bearish natural gas sector followed the crowd of bulls today.

It has created another fantastic buying opportunity. Natural gas prices climbed by less than one percent, but much of the sector is up by two or even three times that figure. Investors mistakenly got caught up in the rally.

Over the next few days they are going to pay for it.

Late last week, we locked in gains of 400% thanks to the natural gas market’s recent selloff. Thanks to today’s action, investors that make their move now have yet another shot at triple-digit gains.

To find out how, read my updated report.

This is going to be a fun week for the energy markets.

*** Let’s face it, the dollar is in trouble. But so is the sun at the center of our solar system. The big question is which will implode first. Now that the dollar has slowed its decline, the race may be tighter than you think.

The dollar will eventually be tossed aside, but will it happen in the next million years?

Here’s a bit of what I told Contrarian Profit readers this afternoon:

“Is the drop in the dollar worth watching? Just like the sun will eventually shine its last ray of light, the mighty dollar will someday buy its last barrel of oil or its final container of Chinese imports.

“We all know it is going to happen, so why bother discussing it. Right?

“There is no doubt the world’s currency of choice has more pressure stacked against it than ever before. But even with $12 trillion in debt and nearly a trillion of annual interest payments due within the next decade, the greenback is still stronger than it was just sixteen months ago.

“While so many of us are betting against the dollar and calling for its demise, plenty more investors are using it as a security net, buying American treasuries to protect themselves in case the bottom really falls out.

“With the sun someday going to fade, I could sit in my basement and wait for the big day to come, or I could live my life without worry.

“It’s the same thing with the dollar. We could bet against the greenback and profit as it drops, or we could forget about the minimal return potential and keep our eyes looking forward, where the real money is at.

“Here’s the scoop. The dollar is likely to fade, at most, six percent below today’s value against the Euro. That’s major erosion for such a massively distributed currency, but six percent over a few years doesn’t stack up to a hill of beans in the grand scheme of things.

“I can list a couple of dozen stocks that are up by twice that figure today alone.

“No doubt, you should pay attention to the dollar, as a six-percent decay in the value of the world’s most important currency will change all sorts of valuations. But don’t invest in the cause, invest in the effect.” Keep reading here.

The dollar is going to fall, but you and I may not live long enough to get rich off the move. The smart money is looking somewhere else. I say we follow.

We all know it is going to happen, so why bother discussing it. Right?

There is no doubt the world’s currency of choice has more pressure stacked against it than ever before. But even with $12 trillion in debt and nearly a trillion of annual interest payments due within the next decade, the greenback is still stronger than it was just sixteen months ago.

While so many of us are betting against the dollar and calling for its demise, plenty more investors are using it as a security net, buying American treasuries to protect themselves in case the bottom really falls out.

With the sun someday going to fade, I could sit in my basement and wait for the big day to come, or I could live my life without worry.

It’s the same thing with the dollar. We could bet against the greenback and profit as it drops, or we could forget about the minimal return potential and keep our eyes looking forward, where the real money is at.

No more Chicken Little

Here’s the scoop. The dollar is likely to fade, at most, six percent below today’s value against the Euro. That’s major erosion for such a massively distributed currency, but six percent over a few years doesn’t stack up to a hill of beans in the grand scheme of things.

I can list a couple of dozen stocks that are up by twice that figure today alone.

No doubt, you should pay attention to the dollar, as a six-percent decay in the value of the world’s most important currency will change all sorts of valuations. But don’t invest in the cause, invest in the effect.

The devaluing of the dollar is no surprise. Even a fifth grader can see what’s ahead over the next decade. That’s why there is so little investment potential directly in the currency. Yet, our stubbornness and human greed will not let our eyes focus on anything but taking advantage of the move.

Let that stuff up to the emotional investors.

While they are focusing on gold and the dollar, investments that will provide double-digit returns at best over the next few years, rational investors need to focus on the many other powerful market forces are at work.

The domestic equities market is a wonderful place to be right now, especially if the dollar is collapsing as fast as we believe it to be.

First, anybody exporting goods will see strong top-line growth as the dollar drops. A six percent fall from our currency equals an automatic six percent surge in revenue growth, without the need for any company to do a thing.

Next, if you are a follower of the green-energy craze, you had better be hoping for a weak dollar. The only thing that will ever wean this country from its dangerous addiction to oil is if crude becomes too expensive relative to our alternatives.

With a dollar that is still in demand across the world, dollar-denominated currencies like crude remain fairly inexpensive. But as Uncle Sam’s reserves dwindle in value, crude prices will move inversely. That is good news for all you folks that took Obama’s advice and invested in the “green” sector.

Finally, the markets run on a risk/reward relationship. The higher the risk, the higher the reward. The lower the risk, the lower the reward. Simple stuff.

If we all know the dollar should weaken, where’s the reward potential? But don’t even begin to think there is no risk in the play.

With Washington in charge, especially the current group of legislators, anything is bound to happen. And now that Obama has is political eye set on “saving the dollar,” the road that lies ahead could be very foggy.

My advice? Watch the dollar. Take note of its moves. But invest in anything but the currency. There is better return potential, with much less risk, elsewhere.

Now, I don’t care who makes what. That’s between bosses and their worker bees. But I do get a little peeved when Uncle Sam tries to tell some worker he can’t get paid per his contract.

Before you go shouting about how Washington saved Wall Street and therefore we, as taxpayers, get a say over pay, let me ask you this. Does your mortgage company tell you what color to paint little Johnnie’s room? Does your car loan provider tell you how fast to drive? Does your health insurance provider tell control your diet?

Didn’t think so.

If some congressman came barging in this office right now, demanding I slash my pay, his goons would have to hold me back as I try to kick the lunatic’s shins. But if the owner of the company came with the same request, I’d have no choice but to open my wallet (and possibly refresh my resume).

But that’s the way business works. The guys that own the joint make the decisions, not the banks and certainly not government. If the workers don’t like it, they leave. It’s supply and demand and nothing else.

As taxpayers, if we want to be angry about anything, we should be angry that our government used our money to cover somebody else’s dangerous bets.

But now that Goldman shareholders are asking the company’s top brass to reduce the size of the corporate bonus pool and pass the money onto shareholders, the company had better act. If not, the free markets are going to take charge.

Shareholders are going to hit the sell button. Prices will drop. Capital will be reduced. And Goldman executives will be in pinch once again.

That’s the way the business world really works, no matter what Nancy Pelosi and Barney Frank want.

When Obama was knocking on the door, Goldman said go away. But now that Mr. Common Shareholder is on the line, next Friday’s paychecks will have a few less zeroes.

Doesn’t that make you feel good? Capitalism is still alive.

***I have my eye on China and its quickly growing, yet fragile, economy.

Earlier today, I wrote a piece for TodaysFinancialNews.com that helps illustrate the potential of the Chinese markets. Instead of nervously awaiting every bit of economic data to hit the Street, savvy international investors are racking up big gains.

Here’s a bit of what I wrote:

You could say it is the tale of two economies. The best of times in Asia, the worst of times here in the States.

While domestic investors wonder when some rogue piece of data will kick out the wobbly legs supporting the top-heavy equities market, savvy Chinese investors are raking in gains from an economy soaring ahead a 7% per year clip.

Where would you rather have your money?

A look at two of today’s winning stocks will help you decide.

Zumiez is a sports-related retailer based in Everett, Washington. With 343 stores in over 30 states, its operations are as exposed to the nation’s economy as it gets. A look at the company’s third-quarter results prove how low our expectations have gotten.

Over the past three months, the $375 million company racked up profits of $5.1 million, down from last year’s corresponding figure of $6.8 million. The earnings-per-share figure of $0.17 beat expectations of $0.15, which helps explain why shares are up by over 10% so far today.

But that’s the only reason investors have to celebrate.

The company’s fourth-quarter expectations leave little room for joy. After booking revenues of $113 million last quarter, the company expects sales of just $122 million to $126 million over the next three months, which include the critical holiday shopping period. Last year’s Q4 was worth sales of $125.

Analysts, which were expecting a figure closer to $131 million, have plenty of reasons to feel disappointed with the news.

Of course, Zumiez is not the only retailer worried about a slower-than-expected fourth quarter. Keep reading here.

*** Finally, I cannot help but smile when I see the Associated Press reporting that gas prices have fallen by more than 15% so far this month. Here’s a hot tip for their reporters: It ain’t over yet!

As you probably know, over at TFN Strategic Trader, we’ve been all over this story. In fact, just yesterday we took profits on one of our four gas-related plays. But we didn’t dump it all. Instead, we sold half of our position, locking in gains of 400%.

Now we’re playing with the house’s money.

Want to know the move that led to these massive gains? Easy… read all about it here.

It is becoming more and more apparent that today’s breed of politicians is good at only one thing, getting elected.

As folks that have never run a business, never had to tell an employee to clean off his desk or risk any of their own money, our lawmakers should quit pretending like they know what they are doing and let the hard stuff up to the professionals.

Let ‘em outsource the legislation, I say.

Don’t get me wrong, I love my home state of Pennsylvania, but it is run by a gang of numbskulls. By mid-November they have run out of important things to do and are now searching for ways to keep busy.

The state’s auditor general, Jack Wagner, has decided he no longer wants school districts or local municipalities to have the right to hedge their books.

He calls the notion of entering swaps, “…gambling with public money.”

The so-called financial expert backs up his statement with the fact that a local school district had to spend $12 million in “excessive fees and other charges” to unravel swap contracts it had with Morgan Stanley and JP Morgan.

Wagner failed to mention the many, many times the same contracts saved school districts millions of dollars.

If you’re not familiar with the world of swaps, it is a pretty simple concept that allows you to trade something like variable interest rates for fixed rates. Or, in the case of my graduate finance tests, orange juice futures for pork belly futures.

Ask any finance professional worth his salt and he will tell you he’ll take a fixed interest rate over a variable rate any day. A fixed rate is predictable and can be planned for. A variable rate, on the other hand, can do just about anything.

But when school districts or local municipalities offer bonds, they often have to issue them with variable rates, especially when rates are low.

To protect themselves in case interest rates make a drastic turn in the wrong direction, they call in swap dealers like Morgan Stanley or JP Morgan. With a few strokes of a pen, they can lock in a fixed rate.

Unfortunately, as has been the case across the world, swap contracts that made sense in an environment with climbing interest rates no longer make sense now that investors have access to darn-near-free money.

The schools and towns that were acting responsibly by entering basic swaps are now forced to make larger payouts because their hedges went the wrong way.

And what’s a better way for a wannabe politician to get some votes? Make it look like he’s saving poor, old taxpayers from evil Wall Street financiers.

Idiots.

It is this kind of action that forces CFOs to enter the world of creative accounting. Outside of the commodities industry, I dare you to dig through any company’s 10-K and find the word hedge, swap or derivative.

You’ll be hard-pressed to find it, yet any big firm is most certainly using swaps for protection.

But don’t tell their shareholders. If just one contract goes against them, shareholders tend to revolt, telling executives to stop “gambling” with their money.

Knowing that swaps, futures and option contracts are fantastic way to create predictability and price limits, CFOs continue to enter agreements. They simply call them something else.

Ever seen that line on the balance sheet that says “other”?

That’s your swap.

If a politician, elected or appointed, thinks forcing schools and municipalities out of swap contracts will save taxpayers any money, they are either ignorant fools or lying to you.

*** Speaking of ignorant, Alaska’s Department of Revenue is ready to make a blunder of its own. The organization has an unfunded pension balance of $7.5 billion, a common problem these days.

What’s the 49th state’s solution? It wants to issue a $2 billion bond and invest the proceeds in the equities market. If things go its way and the state earns the market average of 8% annual gains on its equities, it could rake in an extra $40 million annually.

But talk about a gamble.

Right now, the state’s bonds are selling with rates just above 6%. But the department says it won’t consider a bond issue unless the rates are below 5.5%. I sure hope not.

Imagine if you or I walked into a bank these days and said give me ten grand. I’ll pay you back with my stock-market gains.

Unless you got out of a $100,000 car and live in a $2 million mansion, you’d be laughed out of the joint.

Now, it’s easy to argue Alaska has more than enough collateral to back up the bonds. I mean it’s not going bankrupt anytime soon. But the chances of a loss on this “intrastate carry trade” are far too high.

Trying to time this top-heavy market is nearly impossible, especially when it will take nearly two months to get the bond sale lined up.

How’s this for the ultimate proof this is a horrific idea? If the state had made the move lawmakers first approved it just months before last fall’s market collapse, it would have lost hundreds of millions of dollars and would have remained on the hook for a couple of billion bucks.

With investing logic like this, it’s no wonder tax rates are soaring across the country. When it comes to investing, our leaders are clueless.

I’d rather let Madoff invest my money. At least he’d have fun with it.

After last night, I’m ready to get out the 00 buckshot, myself.

I’ve got my eye out for good intentions, gone bad after spending the last three editions of Notes discussing the idea of financial regulatory reform.

During 52-mile commute home yesterday, they were all over the place, anything from idiotic signs to a couple of state cops setting a trap and writing tickets for not moving to the left lane when passing a stopped emergency vehicle.

The gung-ho troopers had rush-hour traffic slowed for over a mile.

But my mind really started spinning when I passed an out-of-state big rig. I could not help but notice the federal and state ID numbers stenciled onto his door followed by a host of annual registration decals from a cornucopia of states. Between the tolls, the permitting fees and the growing list of regulations, it’s no wonder the trucking industry’s bottom line collapsed.

Once I finally crossed the creek and pulled into my driveway, I was ready to sit down and relax by turning on the local news. Let’s just say it’s a good thing the guns are locked up. That TV would still be smoking.

Here’s what the local news “personalities” had lined up to tell us.

They started with a lead story about Harley Davidson’s plans to abandon its largest manufacturing plant at the heart of our local community. Unless it gets strong union concessions in the next few weeks, the company plans to pick up and move to Shelbyville, Kentucky.

Can’t say I really blame the company. The local union tends to form a picket line every other year.

After a short break to show off the latest products from GM (a commercial you and I paid for), the news was back on. This time they were discussing how a local homeless shelter had reached full capacity and is now forced to turn dozens of needy folks away each day.

The bright side of Harley leaving is the county will have all the space it needs. Most of the abandoned Caterpillar factory remains empty as well, just a couple of miles down the street.

Next up was the neighboring city’s news of layoffs and a tax increase. With revenues down and the state battling a budget crisis of its own, the mayor is writing up pink slips and preparing new tax calculations.

He’s even interested in sending local churches a tax bill, noting a third of local property owners don’t pay a penny.

After that cheery bit of news was another story of layoffs. This time it is the state of Pennsylvania cutting 319 jobs, taking the total reduction for the year to 769, plus 2,000 unfilled positions.

But don’t worry. The state’s lawmakers have decided to forego their annual cost-of-living raise. Their pay will stay at $78,000 this year.

I finally gave up on watching the newscast after the “investigative team” revealed we need to keep a close eye on those lobbyists hanging out with our lawmakers.

There’s a news flash.

The state’s two top lobbyists, natural gas drillers and the tobacco industry, appear to be better represented in the state’s capital than any of its constituents.

After missing a legally imposed budget deadline by well over 100 days, the state was hit with a bevy of new taxes and program cuts. The only two groups that came out ahead were, you guessed it, gas drillers and tobacco producers.

The smokeless tobacco industry kept its ultra-low retail tax and another 30,000 acres of Penn’s woods are now open to Marcellus Shale drilling.

With that much lobbying taking place, one would naturally think us tax-paying folks would be able to find out who was the grand recipient. But politicians are sneaky.

Because they write the legislation, they know the best way around it.

It turns out, no state lawmaker has surpassed the public-disclosure thresholds for lobbying gifts and contributions. Go figure.

I have to get a permit to nail a shed up in the back yard, but they can rob us blind and its 100% legal.

After that bit of news, there was twelve minutes remaining in the newscast but I couldn’t take any more. I went down to the garage and cleaned my gun.

*** It is good news for TFN Strategic Trader members. As natural gas prices plunged by close to 7% today, our recent play against the trend is paying off big time. All four of my recent picks are up by double-digit proportions, with one big winner now worth gains of a whopping 385% as the underlying position sunk to record low territory.

There is word spreading across commodity trading pits that the nation will continue to inject natural gas into its reserves throughout November, the month when withdrawals typically occur. I said this would happen months ago.

To see what will happen next, read this report.

*** Gold prices keep soaring. And investors keep wondering when they’re going to bump into the ceiling.

Some blame the weakening U.S. dollar for gold’s rise. Contrarian maven Bill Bonner extended that to the weakness of all “fiat” currencies — not just the dollar. My colleague Christoph Amberger over at TFN was a tad less general. He pointed out today that gold actually traded at $200 less per ounce in 2008… when the dollar’s exchange rate against the euro was even lower than today, at $1.63.

He thinks the main factor behind the dollar’s relative decline to gold is the fact that it doesn’t pay to own dollars any more: “Zero-point-seven-five percent APR on a CD? That’s just marginally better than the lint in your pockets! Now, gold is an asset notorious for not generating returns other than speculative gains. It doesn’t pay interest or dividends. But at this point, neither does the U.S. dollar. Or the yen. Or the euro, pound sterling, Icelandic krona: “The comparative opportunity cost of holding gold has been eliminated! Plus, the cash flows out of the dollar have created an asset bubble that will keep inflating!”
How long will this last?

As long as the Federal Reserve keep punishing dollar savers with non-existing interest rates! That may be at least another year: “Not because the world is abandoning “fiat currencies”… but because holding dollars is a losing game now — engineered and maintained by the U.S. government!”
So far, the team over at TFN’s Hot Stock Confidential has been rubbing their contrarian hands as gold went up: Bullion may be up twenty percent for the year. But HSC’s silver stocks are beating that yield by multiples! Just today, the team took 32% gains in just over a month on Silvercorp.  Amberger points out that this was double-digit gainer #70 for HSC members so far this year.

But they’re not abandoning precious metals. Not at all! Here’s what they’re up to: “Our next Hot Stock Pick is coming out this Thursday. With gold futures at record highs of US$1,151 an ounce today, we’re going to stick with a precious metals pick: At today’s levels, the gold reserves of this junior Canadian gold miner are worth a whopping $460.4 million!

“Let’s put that into the fuzzy math of financial newsletter marketers: With 333.42 million shares outstanding, $1.70 currently buys you 1.38 ounces or $1,589 worth of that gold! As gold prices keep moving up in the great game we call the Commodities Carry Trade, this U.S.-traded stock could snag you a cool 30% gain before New Year’s.”

Hot Stock Confidential members will be receiving this Hot Stock Pick of the week tomorrow before noon. You might want to be one of them. Join up right here.

Baltimore – (TFN): All eyes and ears are on the Fed this week. With Bernanke in New York discussing potential new bubbles and the New York Fed getting heat for overpaying AIG’s many creditors, investors are having a tough time knowing exactly who to follow.

For those of you who hold up the “Fire the Fed” signs, move over. I am thinking about joining your camp.

First, the real bad stuff. According to Neil Barofsky, TARP’s special inspector general, New York’s Fed (under the leadership of Tim Geithner) failed to use its leverage as the top-banking regulator to tell AIG’s lenders to take less than they were owed.

Instead of taking an across-the-board “haircut” as Obama and Pelosi told us we all should, finance giants like Goldman Sachs, Merrill Lynch and Societe Generale said they want 100% of what they were owed.

The only holdout, UBS, said it would be willing to take 98%. But after tough looks from the guys from across the table, that offer was quickly rescinded.

According to Barofsky, the move cost the country billions of dollars and much, much more in confidence for the nation’s banking cops.

Thanks, Tim!

With that bit of news in today’s headlines, it is tough to find the confidence in some of the Fed’s latest plans to help pull the country from financial failure.

As the nation slowly recovers from last fall’s economic collapse, Bernanke and his troops at the Fed are now facing the difficult task of unwinding massive expansionary policies.

One trick discussed today is shortening the length of emergency loans from 90 days to just 24 days starting in January. It’s a pretty mundane move that will have little tangible effect on the markets.

But what could have a much larger impact, with much less transparency, is Bernanke’s recent discussion of paying interest on the reserves banks place with the Fed.

A popular move with many overseas central banks, the interest rates paid on reserves helps to establish a rate floor that regulators can gradually increase without raising overall interest rates.

Essentially, the move is a way of mopping up excessive liquidity without draining or lowering the water in a much larger pool of lending capital.

Like many things, the idea sounds great on paper, but so did letting the Fed negotiate with AIG’s trading partners and we now know how much that cost us.

Let’s face it. The markets like transparency and predictability. Anything less gives us what Friedrich Hayek called “malinvestment.”

As the Fed gets more and more creative in its efforts to boost the economy without creating deadly bubbles, transparency will go out the window.

Toss in growing political pressure from the folks from Washington and one thing is certain.

Anything the Fed does will cost you and I more money.

In the days following Obama’s inauguration, Washington quickly passed a wide set of tax reforms. Part of the legislation included a $400 tax break for the country’s working class and increased healthcare funding for the country’s poor, unhealthy children thanks to increased taxes on the tobacco industry.

It is no surprise neither measure has worked out as planned.

According to reports today, more than 15 million of us will have to pay back the $400 we saved in taxes over the last few months due to an error on Washington’s end.

I hope Uncle Sam doesn’t expect interest on his loan come April.

The news out of the tobacco industry helps us continue our discussion on regulations. The good and the bad.

Winston Churchill once said, “If you have ten thousand regulations, you destroy all respect for the law.”

The great orator hit the notion perfectly. With Congress working on reform after reform, the American people eventually became deaf to the noise from Washington.

Worse yet, we became savvier at circumnavigating weak legislation. Just ask the tobacco industry.

In an effort to fund children’s healthcare, the Obama administration levied a massive 2,000% tax hike on the nation’s roll-your-own cigarette industry. Taxes for the tobacco used to roll a custom smoke rose from $1.10 per pound to $24.78 per pound.

Washington figured the massive increase would deter smoking and create well-needed revenue care of the folks that refuse to kick the habit.

As you can likely deduce, it didn’t work.

What happened was manufacturers ripped off one label and slapped on other. Roll-your-own tobacco production plunged while pipe tobacco production, with its $2.83 per pound tax, soared.

Before the tax, pipe tobacco demand was just 270,000 pounds per month. Just a few weeks later, it hit 1.7 million pounds.

Turns out Washington had no idea pipe tobacco was so similar to the roll-your-own stuff that it could be considered a direct replacement.

The mistake is now costing the government some $384 million annually in lost tax revenues.

Once again, it proves the markets are always a step or two ahead of new regulations.

Barney Frank may think he can write a law that tells Wall Street to behave, but in reality all he’s doing is pushing the action from one unlit corner to the next.

I can’t wait to see what they come up with next.

The response from the “real world” is almost always ingenious, like a classic Tom and Jerry cartoon.

*** I sure hope the Fed knows what it is doing. With Big Ben stubbornly clinging to record-low overnight rates, the top inflation cop needs another trick to keep market forces at bay while still enticing a skittish economy to come out of its shell.

His latest trick? Paying interest on banking reserves left with the Fed. It is a trick used at other central banks to create a “corridor” that keeps rates from sinking too low or rising too high.

But many pundits don’t think the Fed is ready for such management “tricks”, especially as it sits on a massively inflated balance sheet.

I am one of them.

I am against the measure not because I feel it won’t work. It most certainly will work and has in the past.

I am against it because who in the world wants to give anybody in Washington any more power?

The Fed already owns the banking industry and now it wants to create even more opacity.

Over the last three days, we have seen more than enough examples of how increased government power fails. The more we mess with the markets, the harder they are to control and predict.

For all of you that constantly shout, “Fire the Fed,” here’s a tip of my hat. I’m starting to see the light.

Well, it turns out my ultra-liberal, straight-ticket voting, French-guy marrying sister has a verifiable case of the pig flu. And guess who I had dinner with on Thursday night? You betcha, big sis.

There we have it: cause and effect.

Fortunately, my head case was short-lived. By the time my venison sausage and eggs were off the front burner on Saturday morning, I was back to my old self, almost knocking my O.J. off the table stomping my fist over a local political battle.

In Friday’s edition of notes, I quoted the following paragraph from Callum Robert’s book The Unnatural History of the Sea:

If any trawling ground be over-fished, the trawlers themselves will be the first persons to feel the evil effect of their own acts. Fish will become scarcer, and the produce of a day’s work will diminish until it is no longer remunerative. When this takes place (and it will take place long before the extinction of the fish) trawling in this locality will cease, and the fish will be undisturbed…

I used it to show that unregulated free markets often fail to self-police until it is too late.

More importantly, I promised to discuss how regulations are equal failures when it comes to the subject of protection from ignorant and greedy market forces.

I can list dozens of examples, but I will stick to the aquatic motif.

Recently, the federal government enacted an emergency ban on sea bass fishing here on the East Coast. From Cape Hatteras to all points north, the staple of the recreational fishing industry is off limits.

“Big whoop,” you say. “There’s other fish in the sea.”

That’s the problem. There are other fish in the sea, like tautog.

You see, NOAA tried to remedy the effect, not the cause.

The cause of the problem is there are too many greedy fishermen. But no government entity would ever want to anger somebody by telling them to put their $50k boat on blocks, so they simply close a specific fishery.

Meanwhile, the fleet, with its limitless supply of greed, moves a couple of miles and targets another species. Along the mid-Atlantic, the next species is tautog, a slow-growing habitat sensitive species.

Thanks to NOAA’s short-sightedness and must-act-now mentality, tautog are witnessing fishing pressure like never before. It is unsustainable, no matter how you measure it.

I have already given up hope on catching the species next year. Like I said on Friday, given the chance, fisherman will catch the very last of a species and then start asking, “now what?”

If you paid attention to last fall’s meltdown, you know much of the problem stemmed from the derivatives market.

The market for credit default swaps, mortgage-backed securities and a host of other credit-based derivatives went largely unregulated without notice until the weight of massive credit collapsed the shoulders of the market.

Now that hundreds of billions of dollars in wealth have disappeared, folks like Nancy Pelosi and Barney Frank want to regulate the market.

I say don’t bother wasting the ink.

The markets have already caught the last fish and will simply move onto something else. It always does.

Unless Congress bans all investing or the amounts we can stick in the market, bubbles are going to inflate and bubbles are going to pop.

The more the government tries to regulate the natural forces of the market, fear and greed, the bigger the bubbles will get and the harder they will fall.

Get used to it. It’s the way things work.

*** In Friday’s edition, I asked for comments on the notion of regulations. Wow. Ask and you shall receive!

Oddly enough, except for the guy that called me a commie (jokingly, of course), the response was quite bi-partisan. Overall, as was expected, the tone was overly anti-regulation.

By now, those of us that have paid any attention have learned regulations just won’t cut it. Now, if somebody would let Congress now.

Here’s a few of the most telling emails I received. Keep them coming.

“The problem is deeper than regulation as you know. Structurally it has been skewed and morphed into a large horse racing parlor where we place bets on the horses. Marx postulated that ‘man had become disassociated with his work’ and I believe the investors no longer invest, but  place bets on companies. They are no longer ‘investing in the company’. This was not what was intended when the word was ‘investing’.

“Another issue is the legal system we use has shifted from a ‘Constitutional’ based law to a ‘case’ based law. This helps make the system overly complex and contingent on the specific words and phrases used, and judges interpretation of this wording.

“Complexity leads to failure and we have ‘vested’ interests in keeping complex.  More regulation will not help.” –  Dave E.

“Get the wolves out of the sheep pen!

“Those who caused the meltdown should be fired or jailed, not running the institutions, agencies, and departments responsible for what we are facing for the next decade (or more). Legislators should not be permitted to legislate this problem away, they should be empowered only to assemble a committee of real experts to debate and recommend a course of action.

“Maybe in this way our representatives will be unable to do things like repeal Glass Steagall, enable Barney Frank to overextend loaning money to home buyers who can’t afford to pay rent, etc., etc.,etc.” — Bill S.

“The key to the dilemma is this.  Stop trying to find an ‘ism’ to subscribe to.  Life is a lot less crazy-making if a person isn’t trying to make sense of a situation by looking to ideologies such as liberalism or conservatism for explanation or guidance.” Kirk W.

“Unfettered free markets always devolve into feudalism. Excessive regulation always leads to collectivism. These are the two extremes in distribution of wealth. History has demonstrated that every society is on a watershed which tends to move slowly toward one or the other.” – Peter A.

More on the subject tomorrow. For now, keep the comments coming.

The distortions from reality are mind-boggling, yet all of us depend on the status of the simple fiat for our financial wellbeing.

The person with the most skin in the dollar game is, no doubt, President Obama. The nation’s economy hinges on the fate of the greenback and the White House knows it. That is why it is doing anything it can to slow the slide.

Even if it is entirely psychological.

Today, reports are flowing from Washington that show Obama may have plans to use up to $210 billion in TARP money to lower the nation’s ever-increasing deficit.

It is creative accounting at best and a $210 billion bribe at worst.

While the average Oprah-watching, Crocs-wearing American won’t take a second out of their do-nothing day to read below the feel-good headline, there is a handful of us that are actually paying attention.

With this idea of “paying down our debts,” it is vital to remember the Treasury didn’t pull the $700 billion in TARP funds out of some cavernous account.

We borrowed that cash. And now Obama wants to use the borrowed money to pay back our debts, minus a year’s worth of interest of course. It’s like taking out a loan to pay off your mortgage.

The timing of these rumors is more than suspicious.

Just yesterday, China slapped the currency markets in the rear by once again raising the notion of dumping the dollar and making a sudden change in its exchange-rate policy.

Ironically enough, less than 24 hours later, Obama has a $210 billion check in his hand ready to “repay” our debt.

It is money from one hand, around the back, and into the other.

But it gets better.

Obama is not the only one trying to mask Uncle Sam’s debt problems. Just about every exporting country in the world is desperate to keep the dollar strong.

They have to. Their economies depend on it.

Rumor has it countries like Russia and South Korea have been buying dollars on the open market over the past few weeks, in an effort to keep the greenback’s slide from gaining even more momentum.

The governments would rather risk devaluing their reserves than allow their economies to suffer from the effects of a weak dollar.

Looking forward, the question is how long can the manipulation last? How long can the dollar remain artificially inflated? And how long until the markets naturally take care of the situation?

While we may not know the exact answer to any of those questions, it does not take an economics scholar to realize the outcome will be horrific, at least for those of us with dollars in our pockets.

*** The solution? Buy gold. According to the top dog at Canada’s behemoth gold miner, Barrick, we have every reason to believe we surpassed “peak gold.”

That means all the easy gold has already been stripped from the ground and supplies are only going to shrink from here.

According to the CEO, Aaron Regent, global gold production peaked in 2000 and is expected to continue declining into the foreseeable future. So far, mine production is down by nearly 10%.

The news of increasing supply constraints comes at a time when demand is already surging. For those of you that were under the bleachers during Econ 101, it means prices will continue to rise.

There has been a lot of discussion about a sudden collapse in gold prices as many investors believe the current boom is merely a fear-induced bubble. Two or three months ago, I would have bought the story. But not now.

The dollar is simply too weak and foreign reserves are accumulating gold too quickly for prices to fall sharply.

China’s immense buying alone is enough to limit near-term fallout. The country has already doubled its gold reserves and Beijing continues to be a major buyer.

Just one more reason for bulls to send prices higher.

*** Just so you can’t say I don’t let you in on anything for free, I’m going to toss a freebie your way.

With gold prices reaching into record territory, it is a perfect week for Van Eck to release its Market Vectors Junior Gold Miners ETF (NYSE:GDXJ). The freshly created fund gives investors a stake in 38 small- to mid-sized gold miners.

For investors looking for a simple way to take advantage of the gold bull with some additional leverage, this is the ETF to do it.

Thanks to the speculative nature of junior miners, expect shares to beat the market when gold prices are surging and underperform when the bears return. For now, there is plenty of upside potential.

In the woods, you have to dry off fast or risk any number of calamities. Living in temperate rainforest, an emergency fire was a challenge. But thanks to duct tape’s inherent desire to burn, I was re-warmed in no time.

But my mundane story has got nothing on the bush pilot that returned to his Piper Cub (the plane, not one of Palin’s kids) to find a pissed off grizzly had utterly destroyed the craft’s ability to fly as the hungry beast searched for the scraps of meat hidden inside.

Just like any savvy outdoorsmen, the pilot’s first thought after seeing the calamity was duct tape.

He used his radio to call for two new tires, two rolls of cellophane and three cases of duct tape.

After some masterful repairs and one nerve-wracking takeoff, the bold pilot was on his way home. True story…

What does this have to do with investing? Think about it.

When the bears come and eat your lifeline, nobody is going to come rescue your plane, especially when it’s a 1958 jalopy. You have to get innovative and do it yourself.

Financially speaking, it is time to get out the duct tape.

Let’s face it. If you subscribe to this newsletter, you go against the crowd. Or at the very least, it’s a notion you are contemplating.

While the Wall Street herd is overpaying for assets that are riskier now –with unemployment over 10% and the dollar losing its worth – than they were twelve months ago, you are looking for the nearest exit.

An investment in Ford, General Electric or even a chunk of gold is not going to cut it. That’s mainstream stuff and the current is going in the wrong direction.

Every day, right around lunchtime, I log onto my screener and search out the day’s biggest movers. Without fail, the majority of the top ten (usually at least eight or nine) winners are from the small- or micro-cap sector.

Stocks with share price of fifty cents, five cents or ninety-five cents – penny stocks – are up by 15%, 60% or even doubling in value, while most of their bigger, “stronger” brethren are moving in lockstep with the overall markets, locked in as dangerous dependent variables to much stronger forces like the value of the dollar or Washington’s latest vote on how to rule the minions.

While penny stocks are not for everybody (thankfully), I am willing to bet they deserve a role in your portfolio. After all, you have already shown tendencies of being an active, intelligent investor just by subscribing to this newsletter.

Here is what is great about penny stock investing these days.

For the nation’s up-and-coming companies, the ones with revolutionary products or breakthrough technology, it does not matter that unemployment is at 10.2%. It does not matter if the dollar is weak against the euro and the yuan. And it most certainly does not matter what Obama, Pelosi and the gang are doing in Washington.

What matters is many of these companies are the duct tape that can rebuild almost any portfolio or, even better, build a brand new one.

It doesn’t matter what the bears did to your plane. All you have to do is call in a few penny-stock winners and you will be soaring once again.

Over at TodaysFinancialNews.com, we have been noticing the disconnect between penny stocks and the overall market ever since things began to collapse last fall. But we had no way of letting our readers in on the situation.

Our sites are so popular that if we even hint at our bullishness for a thinly traded penny stock, share price would soar and very few of our readers would be able to get in on the action.

But we just figured out a way to eliminate that pesky little problem. Chances are, you have already heard about Penny Stock Confidential, our newest, most innovative membership opportunity.

If not, here’s a sneak peak.

If you are as wary of Wall Street as I am, you will do anything to get your portfolio the protection it deserves.

Gold won’t work. The dollar certainly won’t get the job done. And CDs are the equivalent of burning your cash.

Penny stocks, on the other hand, especially the tiny over-the-counter trades, get rid of greedy Wall Street analysts. They get rid of political pay caps and sneaky executives. And best of all, they get rid of all that distracting noise that has filled the investing world of late.

If you want to invest in something tangible, something that you know represents an actual asset, the penny stock market is the place to be.

It is the duct tape that will save your day.

*** And so it begins. Whatever was left of the Fed’s autonomy has been eradicated overnight.

Yesterday, I wrote about Chris Dodd’s latest proposed law that greatly changes the way the nation’s banking system is regulated.

The legislation slams the Fed’s authoritative power. Obviously, it is not something Ben Bernanke wants to deal with. His team is quite comfortable in their current positions, ruling the world’s money and its banks.

In Washington, there is only one way to get what you want. Go political. If Bernanke wants to keep his job, he and his team are going to have to play dirty.

Going political is not new territory for Bernanke.

After all, the politician of politicians, Barney Frank, recently applauded Bernanke’s political prowess. But now the Fed chief gets a chance to do it overtly.

Instead of thinking independently about the nation’s economic path and whether interest rates are optimally tuned, Bernanke will be thinking about guys like Frank and Dodd, two men that would be my absolute last choice to be in control of the country’s economic future.

Washington has always been political. But this is a whole new level. Pretty soon, you won’t need guys like me to help shed light on favorable investments. Barney Frank will make your selections for you.

He’ll  say it helps spread the wealth.