While Washington’s all-powerful ego may have our leaders believe they still control our fiscal fate, they lost that power long ago. Now, the Fed and the Treasury may dictate who gets what, but China decides how much and when.

That’s scary.

After yesterday’s unnerving trade-deficit report, Americans are waking up to Beijing’s power and its dangerous shenanigans. If it continues unabated, this nation’s role as a supreme power is over.

It is absolutely no coincidence China unveiled new banking reserve requirements on the very same day the Commerce Department reveals the largest trade gap in ten months. With a seriously undervalued currency working to its advantage, China needs to appear like it cares about America’s financial future.

In reality, we know the truth. China doesn’t care. It already owns us.

All across the globe, calls for yuan (China’s currency) appreciation are growing louder by the day. Of course, you won’t hear much from the Obama administration. After all, it’s hard to talk when an important appendage is getting squeezed in a vice.

But France’s Nicolas Sarkozy has the, um, guts to say what needs to be said. He doesn’t have a $400 billion trade imbalance to worry about. Flat out, he tells the world “The monetary disorder has became unacceptable.”

But as American voters have learned. Talk is cheap. It won’t get you anywhere, especially with China.

If America is not willing to politically attack Beijing’s manipulation, it will have to do it by good old-fashioned belt tightening. Stop asking China for so much of its goods and free cash and the country’s ears will quickly bend our way.

Obama has his chance to stand up for you and me next month. But will he do it? Has he ever?

The political and financial pundits will be all over the president in February as he reveals his latest budget proposal. If he does what is best for this country, this will be a watershed event for the world markets.

But if Obama falls to the pressure of ever-political Pelosi and the constituents that elected him, it will be a non-event that proves we are enslaved to Asia.

As for me, I’m hoping Obama does what he’s promised (for a change) and cuts the nation’s spending by at least 5% next year. That would show China that we’re not ready to lie down just yet. Even better, it would slow down our government’s massive growth.

You and I know Obama is not about to cut tens of billions of dollars without slipping an equal amount through some sort of accounting loophole, especially when the Peace Prize winner is about to ask for another $33 billion on top of an already record-shattering defense budget.

If all goes as planned, Obama will allocate close to $750 billion in Defense Department spending next year.  Who will be lending us that money? You guessed it, China.

But don’t expect that to be a line item on Obama’s upcoming budget. If Bush managed to hide defense spending, you know this “ultra-transparent” administration will find an even better way.

We are in the midst of a critical year for this country’s fiscal fitness. By my calculation, we have not fallen of the cliff yet, but the ground beneath us is crumbling. If we don’t swallow our pride and jump to safety now, we will likely never get another chance.

China has open arms, awaiting our fall.

*** As investors, this is heavy stuff. If the value of the dollar falls, so does our wealth. If national security weakens, so does our wealth. And if our taxes rise, we lose even more wealth.

The future is scary. But inaction will make it even worse.

For many investors, gold is the fallback. But I don’t buy it. If America fails, Washington will either steal your gold or unload its own onto the market.

Diversification is the key. If you are holding a portfolio filled with domestic stocks, you are sitting on a time bomb. You don’t want to own American companies when the Chinese are increasing their share of the global market. You want Chinese companies.

And you want Indian firms. And you want Japanese companies. And you most certainly want exposure to Australia’s vast natural resources.

You don’t need any more exposure to the land of broken promises and empty rhetoric. Talk is cheap and Obama’s only making it cheaper.

Nothing talks in Washington any louder than money. Today, the big spenders are betting against the land of the free and the home of the brave. But of course, if you’ve been paying attention, the action is no surprise.

If you invested in United States treasuries over the last year, you bought into the worst performing sovereign debt across the globe. Thanks to the Obama administration’s unending yearning to artificially pull the nation’s GDP into positive territory, investors are quickly raising their nose to the country’s ever-growing pile of debt.

In all of 2009, the Treasury Department received loans of $2.1 trillion from the world’s investors. It was an extraordinary year of borrowing that took the nation’s debt liability from $5.80 trillion to $7.17 trillion at the end of November.

Of course, with unemployment likely to show yet another rise later this week and some 45,000 businesses tossing in the towel over the last twelve months, Obama is not done spending yet.

Many experts believe 2010 will mirror the borrowing habits of 2009, when Geithner and the Treasury hit the auction market 79 times.

As we are seeing today, excessive borrowing can lead to strong market opportunities for well-positioned investors.

As long as Uncle Sam is spending more than he is pulling from the pockets of hard-working Americans, the value of the dollar will be at risk.

After a very strong December, the greenback is showing weakness today. It now trades at $1.4436 against the euro, a dip of more than a penny below the 2009 closing figure. A penny may not sound like much to the uninitiated, but a quick look at anything dollar-denominated tells a different story.

Oil is up, gold is up and the equities market is soaring. A turnaround in the dollar is just what we needed to get the pendulum swinging once again.

As I have said many times before, a falling dollar is good, but it can only drop so far before it turns out to be an utter disaster. Once the markets believe the bottom is going to fall out, it is all over for the security of the world’s top currency.

But that’s a problem we won’t have to deal with until the Fed pulls out of the game. Unfortunately, Bernanke’s likely to put the fiscal rejuvenation machine into reverse in the not-so-distant weeks ahead.

For now, however, it is time to make money while you can.

Any good contrarian investor loves the gold markets lately. I love it because we are raking in the gains over at TFN Strategic Trader thanks to recent swings in the precious metals market.

For nearly all of December, I took flak because of my gold-market pessimism. But folks that followed my advice saved themselves some big money as the shiny metal lost nearly 10% of its value.

But in the final week of the year, you may recall, I noticed the market was ready to change direction. On Thursday morning, with just a couple of trading hours left in the year, I made my move. I wrote my subscribers about a strategic option contract.

The move paid off. Thanks to gold prices surging by more than $26 per ounce today, the contract has soared by 44%. I am sure plenty of members are taking the one-day gains, but I’m holding out for more.

2010 will be the year of all years for currency and hard-asset traders. We are already proving it.

*** Here’s a question that will help you get the New Year off to a profitable start.

What do Medifast (NYSE:MED), Green Mountain Coffee Roasters (NASDAQ:GMCR) and Hansen Natural (NASDAQ:HANS) have in common?

The answer: They all make food or drinks designed to make you feel good. Even better, they comprise the three best performing stocks of the last decade.

Medifast, with its popular weight-loss diets, soared over 16,000% over the past ten years. Green Mountain, and its diverse coffee lineup, led investors to gains of 9,210%. And Hansen, the maker of a variety of popular drinks, is up by 7,022%.

Not bad figures for a time that most pundits are eager to call a lost decade. It is not surprising to see a decade that was so focused on consumer spending and short-term happiness to produce these kinds of figures.

Looking forward, however, into a decade when unemployment is creeping higher, discretionary spending is down and it is becoming hip to be frugal (finally, my time to shine), the three stocks listed above may give back plenty of their recent gains unless they reposition their product portfolio.

In ten years, it won’t be “fun” food we will be talking about. With the nation’s population growing by leaps and bounds, it will be staples like corn, wheat and water that dominate the headlines.

Don’t worry. We’ve got plenty of time to figure it out.

Baltimore — (TFN): Well, look at that. There are consequences for our actions. Even in this day and age when it is virtually illegal to step on your neighbor’s toes or wish the corner beggar a Merry Christmas, we are still held responsible for our wrongdoings.

Just ask Balloon Boy’s old man. The trickster just got sentenced to ninety days in jail, with two thirds of the time allocated to a work release program. But even better than his time defending himself from shivs and bathroom sneak attacks is the four-year time span in which it is illegal for him to profit from his eye-popping stunt.

So long book deal. In four years, it will be Balloon Boy? Who?

I wish there was similar legislation for the folks in Washington, some sort of law that banned rule makers and regulators from profiting from their own outrageous stunts.

Chances are folks like Pelosi, Reid, Geithner and Bernanke would be out of a job.

After last week’s close-call confirmation vote in the Senate, many pundits are saying Bernanke should be out of a job regardless of the law.

I have a feeling the position is shared by Oliver Garrett, the CEO of Casey Research.

Read what he just sent me and you be the judge:

Ben Bernanke is a dubious choice to be named “Person of the Year” by Time magazine.  While Time’s Managing Editor Richard Stengel credits him with recognizing early and reacting appropriately to the ongoing financial crisis, in reality, he was wrong time and again with both his predictions and his remedies.

Just remember these gems:

•    On July 1, 2005, Bernanke stated without hesitation that we were not experiencing a housing bubble: “I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit.”

•    November 2005, on derivatives: “With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly.” And “the Federal Reserve’s responsibility is to make sure that the institutions it regulates have good systems and good procedures for ensuring that their derivatives portfolios are well managed and do not create excessive risk in their institutions.”

•    February 15, 2006: “Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.”

•    February 2008: “I expect there will be some failures of smaller banks” (Bear Stearns collapsed a couple of weeks later).

•    But then again, I guess in regards to his nomination we are talking about achievements in 2009. That was the year Bernanke said, “Currently, we don’t think [the unemployment rate] will get to 10 percent.”

This is the same chairman of the Federal Reserve who told us that Fannie and Freddie were “adequately capitalized” and “in no danger of failing.”

Unfortunately, he has not just been wrong about housing, unemployment, banking, and derivatives — his policies have directly contributed to all of the problems we now face.

High unemployment and the weak dollar threaten to further undermine our economy, yet his policy is to just keep borrowing.

The massive debt his policies have foisted on the American taxpayer is weakening the U.S.’s position as global economic leader and hurting already tenuous relations with foreign governments.

Bernanke has supported the policies of Greenspan and our current and previous administrations – the very policies that got us into this mess.  He has supported the leveraging of the American economy to rescue companies long past saving and the borrowing of billions from foreign governments to line the pockets of corrupt investment bankers.

I could recommend a few alternative names for runner-up, if Time’s criteria are really as dubious as they appear:

•    Lloyd Blankfein from Goldman Sachs for robbing taxpayers legally

•    Rick Wagoner of GM for taking the world’s largest car maker to bankruptcy in a quarter-century

•    Tim Geithner for ensuring that all of our bankers prospered during the worst financial crisis since the ‘30s

•    Tiger Woods for providing the nation with great dinner conversations and helping to spur tabloid sales.

Bernanke is insistent on using inflation to make our personal debts seem small, all the while setting the country up for a much larger disaster long term. Bernanke is borrowing from Peter to pay Paul… and robbing taxpayers to pay Peter.

As you may have noticed, the government will not save you from the reverberations of a declining U.S. economy. You’ll have to take matters into your own hands… and no one is better at pointing the way than the editors of The Casey Report.

No matter how dire the economic trend, double- or triple-digit gains within 12 to 24 months are easy if you discover the right opportunities to profit. Find out more by clicking here.

*** That’s it for this week. The TFN offices are closed tomorrow and Friday for the holidays and I’ll be spending the days with friends and family.

Even if you are not a fan of Christmas and all it stands for, my wish for you is to at least share in some of the pleasantries and delights of the season. There are far too many folks that won’t be able to this year.

Chuck Butler (The Daily Reckoning):

Front and center on the currencies this morning, we have the fears of a default in Dubai, fading, and that brings the risk takers back out… So, we had one day of bloodletting on Friday, and come Monday, the tourniquet had been applied, and things are back on track. The Big Dog, euro (EUR) is off the porch, chasing the dollar down the street once again, and is trading at 1.5050, as I begin to write this morning.

I had a long time customer send me a note on Friday, asking me about the selling going on in the currencies and commodities because of the news that Dubai World was asking for help with their loans… I replied that the research I had read led me to believe that this would fade, in that the ruling families of Dubai and Abu Dhabi have bloodlines, and even though they had feuded in the past, blood would run thick, and the country would step in to help with the loans, which would mean a return to dollar selling once it all got straightened out… WOW!

This morning, there is news that the UAE will back the banks and the loans, so… It’s a “risk on” day once again!

After the Treasury auctions of last week, and a supposed “good covering,” the end result is that we have this pile of debt, and Treasury yields very reminiscent of something right out of the time warp of Eisenhower! But! Here’s the thing that US Treasury Secretary Geithner is hanging is hat on… These low yields reduce the interest expense for the US. Yes, Timothy, that my be true… But when you are issuing the amount of debt that’s on your plate to issue, then the “net” reduction to interest expense is a fallacy. Go ahead, do the math, Timothy… I dare you!

Can you believe that tomorrow is December 1st? WOW! Let the Holidays begin! But what comes to us on December 1st? That’s right, it’s the Reserve Bank of Australia (RBA) meeting. I’ve pinned my colors to the mast of another rate hike by the RBA tomorrow, and by the looks of it, Traders are beginning to pin their colors to that same mast! The reason I say that is the performance of the Aussie dollar (AUD) overnight. The Aussie dollar has a 91-cent handle this morning, which is far better than that 0.8998 figure that Mike reported on Friday morning!

Before I headed home on Wednesday last week, gold had pushed to a $25 gain in one day! WOW! I thought, “Can’t wait to see what the price looks like on Monday when I return!” But the Dubai loan problems took the wind out of gold’s sails, and the shiny metal lost $25 on Friday! UGH! Oh well, it gives buyers the opportunity to buy more at a cheaper level, I thought to myself… Then I thought… You should go check out what your good friend Addison Wiggin has to say about gold… So I did!

Click here for the rest of Mr. Butler’s article at The Daily Reckoning.

Earlier today, the Treasury auctioned off yet another chunk of American debt. This time it offered seven-year bonds to the tune of $32 billion. In all, the nation will go in hock for yet another $118 billion this week.

It may sound like a lot, but it’s just another busy week of financing Washington for Geithner and his crew.

While so many of us in the financial punditry business are worried about a lack of foreign borrowers, it is far from the case today. Yesterday’s $42 billion five-year auction came with a bid-to-cover ratio of 2.81 (alarmingly high) and today’s auction boasted a ratio of 2.76, proving there are still plenty of buyers willing to “enable” Uncle Sam’s spending addiction.

If you are a bullish investor, this is not good news.

Let me repeat… this is not good news!

Here’s the deal, plain and simple. When hundreds of billions of dollars are flowing to Washington, they are not flowing to Wall Street. When Geithner passes his hat, there is that much less money to boost up share prices.

Fine, you say. I invested in gold. With low interest rates and a weak dollar, my gold position will soar.

Wrong!

Why are most gold speculators buying? Because they think countries like China and India are dumping the dollar and pouring into gold.

Well, according to the folks that walked out of the Treasury empty handed this afternoon, their precious metal buying may be less robust than many thought. That certainly is not good news for gold bugs. Gold is a purely speculative bet right now.

If you own any, sell it.

I know that is a sore subject with many readers, so we’ll deal with the topic on Friday.

Just about the only thing Washington’s ever-increasing debt is good for is propping up the housing market. As mortgage rates drop to all-time lows once again (thanks to dwindling bond yields), potential buyers still have a significant incentive on their side.

While Uncle Sam may stash $6,500 in a buyer’s pocket, a 30-year fixed rate of 4.99% will ultimately put much, much more cash in their accounts.

A young friend asked me this morning, “I’ve got sixty grand in a savings account. Should I max out my IRA or buy a house?”
Buy the house!

The markets are setting a trap. And it’s a darn good one. Most investors have no clue it’s there. But if you pay attention, the trip wire is obvious. We’ve got stagnant, if not falling, interest rates, soaring national debt, all the workings of a gold bubble and, guess what, your taxes are going up.

If you think the Dow will hit 14,000 anytime soon, you had better think again. Somebody is about to hit the reset button and it’s not Hillary.

*** Before I go any further, let me tell you that my wife has one of those cushy union jobs. She pays about half a nickel in monthly insurance premiums, she gets a raise in January and her job is as secure as it gets these days.

With that off my chest, let me tell you this.

I hate unions!

They are the reason I have to call India to fix my laptop and why I drive past empty factor after empty factor on my 55-mile commute to work.

But like anything well played, even a union can make a savvy investor money.

Here’s a bit of what I wrote for the TFN site this morning:

“For Harley Davidson, unions have been an unreachable thorn in its side. The problems are almost mirror images of the woes in Detroit: not enough flexibility, high wages, top-notch benefits and a constant threat of a strike.

“This economic downturn is just what the motorcycle maker was prayer for. It gave the company all the leverage to say shut up or get out. More specifically, Harley told the union shut up or we’ll get out.

“The company’s largest manufacturing facility is located in York, Pennsylvania. The union’s current labor contract is set to expire early next year. Knowing the company had a major battle brewing, executives went proactive.

“They started a search for a replacement factory, one with better technology and, more importantly, a cheaper workforce.

“It’s basically a reverse strike. Sign the contract or the factory walks.

“While nothing has been signed just yet, there is a very good chance York’s union will vote in favor of ratification on December 2. When it does, Harley shareholders will be in a good spot.

“I got a peak at the contract last week. It gives the company just what it needs… flexibility.

“While pay is an issue, Harley has no problem paying top dollar if it means high-quality workers. But Harley can’t afford to pay some gray-bearded grump to sit in the break room. That’s why the new contract cuts the labor groups to a mere fraction of previous levels.

“No longer can a worker claim, “I’m a welder. I don’t touch a wrench.” Now, if he’s working, he’s doing what the boss says. It will allow Harley to cut the factory’s headcount nearly in half, saving massive annual labor expenses.

“The new contract also calls for Harley to put about $90 million into modernizing the current facility. While it will be an added line on the expense sheet, you can bet executives are counting on a quick payback.

“I wish I could claim to be the only investor watching the action unfold, but I’m not. Over the last few days, shares of Harley have climbed steadily, sending shares to new 52-week highs.

“Over at TFN Strategic Trader, we took full advantage of the action. Last Friday, we entered a set of the company’s December call options. And yesterday, we sold them for quick-and-easy gains of 60%.

“For once, I have a reason to be thankful for unions. They made us money.”

Can’t complain about that. Keep reading here.

*** Before I go, let me remind you to take time to give thanks for what you’ve got. It’s more important to count our blessing now than ever before. We may not have them tomorrow.

Here’s just a glimpse of what I’m thankful for…

A lovely wife, a baby on the way, a roof over my head, a freezer stuffed with food, friends that would kill their prized pig for me, a steady job, family, the freedom to say I don’t like our government, anything with peanut butter in it and of course, a loyal group of readers that are not afraid to let me know their thoughts.

It’s the same way for politicians. Give them some cash and they’ll have it spent in no time flat, even if they can’t find anything worth buying.

Take, for example, the infamous Troubled Asset Relief Program, TARP in informal nomenclature. Passing the $700 billion program was a matter of financial and economic life and death according to Washington.

They gave us the same panicky “must-have” arguments as a six-year-old in the toy aisle.

But once they got what they wanted, their “toy” sits unused in the corner. As I write, TARP has over $140 billion in uncommitted funds and $300 billion that has yet to be spent.

Yep, they really need that money, didn’t they?

But the story gets even better. Fully expecting a miraculous recovery by the end of this year, our policymakers set TARP to expire on the final day of the 2009. They figured Obama would certainly prop all 300 million of us on his shoulders and carry us to safety by year’s end.

Now that the economic situation is not nearly as rosy as Obama promised a year ago, Washington is crying once again how badly it needs the money. It’s just how little Johnnie cries and moans when little Janie plays with the toy truck he hasn’t touched in months.

Geithner and his team have hundreds of billions of borrowed money up their sleeves with few viable ways of spending it. But now that we are asking for the money back, they say they need it… at least through next October (definitely not through November elections).

Do we ever grow up? It’s like a bunch of kids playing with very expensive toys in Washington.

*** Have you noticed a lot of Washington’s “economic recovery” programs are up for renewal these days?

TARP, the housing stimulus and all sorts of unemployment benefits have been or will be extended. I’m surprised we haven’t seen the resurgence in Cash for Clunkers.

There’s even a bill that would tax Wall Street to the tune of $150 billion annually to help create new jobs. It’s called, get this, “Let Wall Street Pay for the Restoration of Main Street Act of 2009.”

All these extensions and new programs are a surefire signal that all is not grand in the economic world and Washington had absolutely no idea what it was getting itself into as it spent nearly three trillion dollars to supposedly prop up the nation’s economy.

With Congress continuing its reach into the chest of the domestic economy, its no wonder gold prices are hitting new records day after day. By the time Washington is done, nothing “American” will have any intrinsic value left.

But just as I said yesterday about investing in the dollar’s downturn, be cautious of jumping on the golden bandwagon. It could be trouble.

So far this year, gold’s Street value has increased by 32%. It’s a strong gain when compared to historic moves, and it beat’s the S&P 500’s year-to-date climb of 22%, but how far will the bulls take it before they say enough is enough and the bottom falls out once again.

After all, gold really isn’t worth a lick.

You can’t eat it. It won’t fuel your truck. It won’t give you shelter and it won’t protect your house (unless you’ve got a good arm). When the dung really hits the fan, gold’s only strongpoint is it’s more valuable than a fancy certificate that says you own 1,000 shares of XYZ.

But even then, it’s only valuable because we say it is.

Let’s be flat-out honest with each other here. What are the chances of full-on economic calamity? I mean the kind of situation where you will dig your gold out from beneath the old oak tree and take it to the grocery store to buy a slab of bacon.

In other words, what are the chances you will actually use gold for its “emergency” purpose?

Slim to none, and I’m more pessimistic about this economy than any Roubini-following perma-bear.

Gold’s a trap, especially for the folks buying at today’s prices and actually paying to store the rare metal in some vault.

If you absolutely have to own gold, keep your ownership to a minimum, a few grand worth of coins or so. Nothing more.

Better yet, take advantage of the gold rush of ’09 and invest in the world’s gold miners. They are the ones fleecing the bandwagon riders and creating the ultimate market-beating profit potential.

In this market it is more important than ever to not be a clueless sheep merely following the herd.

Be the shepherd and lead the lambs to slaughter.

*** As options investors we love to lead the pack. That’s why over at TFN Strategic Trader, we are all smiles today. After locking in gains of 400% last week, we sold another set of call options for quick-and-easy gains of 60%.

On Friday I sent out a buy alert. This morning I said sell. Traders that followed my advice locked in three-day gains of 60%. Way better than gold.

Wait…scratch that…make it negative 2.9%.

Somebody must have slipped a few Rude pages to the honchos over at The World Bank. It seems the Washington-based lender is hedging its bets. A 2.9% contraction in the global economy this year is a far cry from its March estimate of 1.7%. But growth will be back to 2% next year, the bank assures us, slightly down from the 2.3% they originally expected.

What went wrong during the springtime, we wonder? Didn’t unprecedented levels of stimulus flow from government taps around the world? Weren’t Bernanke and Geithner manning the pumps? Didn’t the global media confirm sightings of green shoots? Or were they recovery saplings? Your editors were too busy “calling B.S.” to keep up with all those flowery euphemisms for delusion. Still, shouldn’t we be smelling the turnaround tulips by now, on our way back towards bull market springs?

Not just yet, says the bank of the world. The following adjustments must be made to the March forecast:

• Output in the U.S. will drop by 3%…not 2.4%,
• Japan’s gross domestic product will shrink 6.8%…not 5.3%.
• The Eurozone will have it a bit tougher too, contracting 4.5%…not 2.7%.
• And the globe as a whole? Uh…eh…it won’t decline 6.1%, as predicted. Better expect closer to 9.7%.

The lender also called for “bold” actions to hasten a rebound (an urgency upgrade from “tough” actions) and said the prospects for securing aid for the poorest countries were “bleak” (adjective upgraded from “slim”).

Does that mean the “delude-a-bulls” are spent? Is the sucker’s rally over? Insiders seem to reckon so. Bloomberg reports that, “Executives at U.S. companies are taking advantage of the biggest stock-market rally in 71 years to sell their shares at the fastest pace since credit markets started to seize up two years ago.”

Worldwide markets did enjoy a pretty nice rally over the past couple of months. Perhaps that’s the end of the first suckers’ rally. Maybe last week’s 3% mini-selloff on Wall Street was only a harbinger of things to come.

Personally, we wouldn’t expect any hope of a sustainable turnaround until The World Bank downgrades its forecast from “bleak” to at least “apocalyptic.”

Joel’s Note: Our annual Agora Financial Investment Symposium in Vancouver, British Columbia is rapidly approaching…and this year marks the 10th anniversary of The Daily Reckoning. So, this July, the Symposium will be focused around a “Decade of Reckoning”…four days that will help you to gain greater insight on how to turn investment ideas into the profit opportunities of the next decade.

So, will we be seeing you there? This event is already 70% sold out, so you’ll want to be nimble. Click below for all the info:

The Agora Financial Investment Symposium: July 21-24

Source: World Bank: Whoops!

The outcome could well determine how quickly and completely this country’s financial system rebounds from the ongoing crisis. And that outcome will also likely determine whether or not we’ll ever have to face something as dangerous and damaging as this again.

By unveiling its proposals for revamping the U.S. regulatory architecture that houses the agencies and watchdogs responsible for safeguarding the financial system that supports our way of life, President Obama is touching off a bruising battle – but one that probably has an unfortunate, and predictable, outcome. Unlike the more-aggressive overhaul proposals Money Morning previously outlined for both the regulatory system and the U.S. banking system, the reality here is that the current set of regulators will survive.

The $64 trillion dollar question was whether or not the existing limp and dysfunctional alphabet soup of regulators that were supposed to be the watchdogs of our way of life will actually be reconstituted into a new stew with the same ingredients – or whether a new kitchen crew would be empowered to stop Wall Street from force-feeding the public its same old toxic menu.

Thanks to details that have already been leaked to the public, the answer is already clear.

Front running its own public offering of a regulatory makeover, the Obama administration has been systematically leaking the guts of the “white paper” it plans to deliver tomorrow. The reason for the soft opening is that President Obama wanted to avoid a knee-jerk reaction in the financial markets. Plus, there’s a history of political backlash and negative public opinion when it comes to any balancing act regulating the powerful cabal of bankers and brokers.

The crazy patchwork quilt of regulators overseeing our banks, bankers, brokers, investment products and markets is an inventory of acronyms that includes:

• The Federal Reserve Board (FRB).
• The Office of the Comptroller of the Currency (OCC).
• The Office of Thrift Supervision (OTS).
• The Federal Deposit Insurance Corporation (FDIC).
• The National Credit Union Administration (NCUA).
• And the U.S. Securities and Exchange Commission (SEC).

But that’s not the end of it. Operating under the SEC are certain “self regulatory organizations” (SROs), including the Financial Industry Regulatory Authority (FINRA) and the Municipal Securities Rulemaking Board (MSRB), which police their own registered and licensed persons, the products they sell and trade and the public who they deal with.

Then there’s also the Commodity Futures Trading Commission (CFTC), and a slew of state regulators who also act to ensure the integrity of financial intermediaries, products, and markets.

The question on everyone’s mind is this: “Where were any of these kitchen hands when all the burners on the financial stove were turned all the way up and every pot on the stove was boiling over?”

Citing the myriad signals and obvious cracks that regulators missed or egregiously overlooked would easily fill a few volumes. And while it is instructive and incumbent upon us to not forget our history – lest we repeat it – there is enough still fresh in our minds to avoid dwelling on the past in favor of taking steps to make sure something this potentially ruinous never happen again.

With such a mindset, it’s natural to conclude that our failed regulatory architecture needs a serious overhaul.

In his inaugural speech, President Obama directly addressed the need for more effective and protective regulation of Wall Street. Echoing the president’s public position, Treasury Secretary Geithner recently said to the Independent Community Bankers of America (ICBA) trade group, “I think the president believes we need to have a much more simplified, consolidated oversight structure.”

But sadly, true to the inviolate nature of politics and the power of entrenched and vested money interests, this once-in-a-lifetime opportunity to actually tear down the failed structures that guarantee another economic collapse and to replace them once and for all with a substantive regulatory structure that can stave off future financial tsunamis isn’t likely to happen.

It seems that the Obama administration’s sensitivity to potentially jeopardizing what some are pointing to as signs of recovery by not calling for radical regulatory surgery has resulted in signals that the approach will instead be to empower existing regulators with more patches and some needles and thread. In a clear about-face, the administration is quietly soft-selling its upcoming agenda for regulatory reform by making the case that the overlap of multiple agencies actually prevents any one agency from being subjected to undue political or commercial interests or influence.

What the administration is billing as a “sweeping reorganization” of financial supervision actually results in few major changes – and does nothing to address the turf wars and political power of the congressional fiefdoms that serve the greater interests of their lobbying masters.

To say this is unfortunate is an understatement with no rivals.

There is nothing in the offering plate that addresses the failed doctrine of “Too Big to Fail.” While there are proposals to rein in leverage and to toughen capital and liquidity standards there are no proposed limits on curbing the monster machines of finance that will only get larger and larger and will eventually figure out how to break out of any paper cage they’re put in, meaning at some point they’ll be at large and able to threaten the world again.

There is nothing that directly reins in over-the-counter derivative products, or the sales and trading of these highly speculative (make that “gambling”) devices. Lately, we’ve been joined in our concerns by George Soros – king of speculators in his own right – calling for the complete abolishment of certain derivatives. But that’s not going to happen, because too many banks make too much money off these “instruments” of economic destruction.

As we’ve noted previously, there is nothing to stop clever players from shopping the regulatory smorgasbord of supervision servicers to find a friendly hall monitor who will accept their made-up class cutting and test-avoidance excuses.

There is nothing to rein in the U.S. Federal Reserve’s independent power as omnipotent God wagging the tail of the U.S. Treasury Department as it sees fit. In fact, the Fed will be offered more power and more control over the nation’s largest financial institutions. That makes the too-big-to-be-controlled Fed a vested partner in the drive to make the system too big to do anything but fail.

There is nothing to address who really will have the newly proposed power to unwind institutions deemed to be a systemic threat. The idea is to empower a “council” to determine just who those systemic threats actually are. Will the council’s power be absolute, or will that power go to the Fed, the Treasury, the FDIC, or all three to fight about? Although it’s unlikely that special interests would ever try to lean on any of the competing supervisors charged with threatening the life of a major corporation making many insiders very rich, it conceivably could happen. Let’s be honest – it already has.

What’s supposedly new is the idea of a consumer-protection regulator. But here’s the problem: Weren’t all the regulators supposed to be consumer advocates all along?

The inclination to retain the failed patchwork of a regulatory-quilt-in-tatters would be a major victory for Wall Street. Unless the American public wants to subject itself to more and deeper financial catastrophes, it must weigh in on the battle against the Wall Street machine.

The opportunity to recreate the walls and bridges that once were in place and have been dismantled – and to build a new and better fortification to protect the country from the greed and avarice of a few too many – is right in front of us.

And we may not have this opportunity again.

To that end, we should not be lulled into a sense of false security by believing that the existing regulatory architecture can be fixed. What’s being rolled out tomorrow is more about rolling over and pretending everything is now okay than it is about engineering real, substantive change.

It is now or never.

By electing President Obama, the majority of Americans voted for change. Whether or not we actually get that change is now largely up to each of us, and promises to be a function of whether or not we actually demand that change loudly enough.

[Editor's Note: Is it a new bull market, or just a bear-market rally that's going to separate investors from the last of their cash? For the shrewdest investors, it may not matter. A new offerfrom Money Morning is a two-way win for investors: Noted commentator Peter D. Schiff's new book - "The Little Book of Bull Moves in Bear Markets" - shows investors how to profit no matter which way the market moves, while our monthly newsletter, The Money Map Report, provides ongoing analysis of the global financial markets and some of the best profit plays you'll find anywhere - including such markets as Taiwan and China. To find out how to get both, check out our newest offer.

To read a related story on how the long-term dismantling of U.S. banking regulations set the stage for the U.S. financial crisis, please click here. That story, which appears elsewhere in today's issue of Money Morning, is available free of charge.]

Source: Wall Street vs. Main Street: The Regulatory Battle Begins Tomorrow

Top financial officials from the Group of Eight (G8) industrialized nations on Friday issued an upbeat evaluation of the global financial crisis, describing signs that markets were stabilizing around the world and warning that it was necessary to devise “exit strategies” to disengage from stimulus programs that have been put in place.

The G8 met for two days in Lecce, Italy. Eight world finance ministers – including U.S. Treasury Secretary Timothy F. Geithner, and his global counterparts from Britain, Canada, France, Germany, Italy, Japan and Russia – also agreed to create “a set of common principles and standards governing the conduct of international business and finance,”The Washington Post reported.

In a communiqué called “the Lecce Framework” – which described the strategy for obtaining those goals – the finance ministers called on government leaders to fill in the regulatory gaps that led to the global financial crisis, including breakdowns caused by financial firms that operated in multiple economies.

Strikingly more rigorous initiatives already are being adopted in Europe, where new measures aimed at creating more-rigorous oversight of the credit-rating agencies – especially those involved with creating securitized securities, whose U.S. breakdowns have been identified as a key contributor to the credit crisis. The United States will offer its own broad proposals for “more conservative standards” when it unveils a much-anticipated reform plan to overhaul domestic financial regulation later this week, Geithner said in an interview after the meeting.

The U.S. will include tougher proposed capital standards and oversight for banks, better coordinated oversight of global financial institutions, and improve monitoring and transparency in global derivatives markets,The Post reported.

“Because risk does not respect borders, we will put forward several international proposals in our reform package to help raise standards globally,” Geithner told journalists after the meeting.

With recent rebound in stock markets and a flurry of upbeat economic reports, finance ministers said they were cautiously optimistic about the state of the world economy.

Market Matters

Despite some last minute drama at U.S. Supreme Court, Chrysler LLC closed on its deal with Fiat SpA (OTC ADR: FIATY) and effectively moved beyond bankruptcy.  While Supreme Court Justice Ruth Bader Ginsburg gave the would-be deal-breakers (Indiana pension funds) some false hope, the Supreme Court ultimately disallowed their objections andlet the transaction proceed.

General Motors Corp. (OTC: GMGMQ) announced the hiring of a formerAT&T Inc. (NYSE: T) exec to guide its rebirth and moved closer to selling its Saab unit as it “speeds” through its own restructuring.

In a “sign of financial repair,” the U.S. Treasury Department has granted its blessing to 10 major banks to repay $68 billion in Troubled Asset Relief Program (TARP) loans; JPMorgan Chase & Co. (NYSE: JPM) ($25 bln), Morgan Stanley (NYSE: MS)($10 bln), and American Express(NYSE: AXP) ($3.4 bln) expect to take the plunge in the next few days.

And in a sign of renewed economic strength, Texas Instruments Inc. (NYSE: TXN) raised its outlook for the second quarter amid growing demand for semiconductors.  Meanwhile, Bank of America Corp. (NYSE: BAC) and U.S. Federal Reserve officials took a grilling from (grandstanding) politicos as the “he said/he said” controversy over theMerrill Lynch (NYSE: SAR) acquisition continued.  The Obama administration ended its plan to limit compensation within financials and also is reevaluating prior proposals about consolidating regulatory bodies.

In transactional news, BlackRock Inc. (NYSE: BLK) acquired ETF-giantBarclays Global Investors to form the largest global asset manager.

Energy prices continued the upward trek as an International Energy Agency suggested that global demand for 2009 would be stronger than previously predicted.  On the supply side, a BP PLC (NYSE ADR: BP)report showed that global reserves fell in 2008, the first such decline in 10-years.  Crude surged past $72 a barrel for the first time this year as traders analyzed the supply/demand issues in conjunction with the ongoing prospects for an economic recovery.  Likewise, gas prices rose again (for 42 straight days) to above $2.60 per gallon nationally and consumers began to feel the pinch at the pumps as summer travel season arrives.  Inflation anyone?

Economically Speaking

Economists are at it again.  With little substantive data on the calendar,The Wall Street Journal announced results of its latest forecasting survey and a majority of respondents expect the recession to end by late summer (though the subsequent recovery may not be as swift as many had hoped).  About half even believe the Fed will be inclined to raise the benchmark Federal Funds rate (from virtually 0% today) by the middle of 2010.  Despite the potential for an economic rebound, the labor market is expected to remain weak as unemployment is projected to climb just below 10% by the end of the year.

On the inflation front, the rapid rise in oil prices does not seem to be worrying most economists surveyed (or they simply have not been paying attention), as they pegged the price of crude at $72 a barrel by December 2010, very close to today’s level.

Retail sales rose in May for the first time in three months, though much of the increase reflected rising gasoline prices which is bad news for a consumer-driven economy. Discretionary spending seems to be going to the gas pumps rather than for household or luxury items.  Still, consumer sentiment is improving as the latest Reuters/University of Michigan confidence index rose to its highest level in nine months.

The trade deficit jumped for the second month in a row as oil imports climbed, also the result of higher crude prices.  Home foreclosures actually declined in May, a positive sign for housing, though its elevated level was still the third highest ever reported.  The Fed “Beige Book“ was released during the week and the messages were mixed, at best.  While certain regions of the country have begun to experience resurgence in economic activity (or, at least, less contraction), others remained quite weak and ongoing challenges in the labor markets threaten to hinder any sustained recovery.  Despite the recent increase in interest rates, many Fed watchers do not expect the policymakers to commit to additional Treasury and mortgage-related securities purchases at the next open market committee meeting.

Weekly Economic Calendar

Source: G8 Finance Chiefs Express Cautious Optimism About the State of the World Economy

Joel Bowman, reporting from Taipei, Taiwan…

Everybody is busy counting…but nothing’s adding up the way they want.

The Chinese are counting on the American’s not to clip their coins; Americans are counting on the Chinese to keep accepting them. The Chinese count on the Americans to buy their widgets; Americans count on the Chinese to loan them the money to pay for them.

The Chinese ask the Americans for some numbers, “some arithmetic.” The Americans squeeze and mold, cram the equations through their models and computers, but still the numbers come out the same: with a negative sign in front of them.

But sometimes bad numbers can be good, or so the market is trying to tell us. What would once have been terrible numbers are now reason for celebration and sighs of relief. Anything under half a million, for example, is apparently a wonderful number of jobs to lose in a month. Maybe we should get some of these newly laid-off people around for a party, to join in the celebration. They must be positively stoked to be part of such a “less-bad” statistic.

“The world’s largest economy has lost 6 million jobs since the recession began in December 2007,” Bloomberg reports, “exacerbating the biggest drop in any post-World War II economic downturn.”

Hmmm…Good number or bad number?

The report continues:

“Including those that have stopped looking for work because they are discouraged by employment prospects and those working only part-time who prefer a full-time job, the jobless rate would have jumped to 16.4 percent in May, the highest level since comparable records began in 1994, from 15.8 percent the prior month.”

Good numbers or bad numbers?

Well, the markets seem to like them, whatever that means. The Dow is back to where it started the year and the S&P is actually up a few percent. Measures from Dubai to Tokyo are racing ahead (though the former collapsed almost 4% today…proving our next point.) Stock markets, by their very nature, suffer from a very severe type of multiple-personality disorder. They are the collection of millions of peoples’ very own hopes, fears and delusions…all wrapped-up neatly in a daily print. And, because of those millions of clashing opinions, markets have a tendency to overshoot themselves.

The higher this rally goes, in other words, the harder we can expect it to fall when the next jolt hits.

Markets across the Eurasia region traded mixed overnight.

European markets were mostly down, last we checked. London’s FTSE dropped over 1% shortly after the open as was down about 1.2% a few minutes ago. France’s CAC 40 was also off the pace, as was Germany’s DAX. Both were down 1.5%.

Here in Asia, Hong Kong’s Hang Seng kicked off the week with a 2.3% loss while Japan’s Nikkei 225 managed to gain 1% even. Down Under, the Aussies took the day off to celebrate the queen’s birthday. How embarrassing.

Over in the commodity pits, oil is down slightly at $67.70 per barrel while gold fell to $950 an ounce on dollar strength.

We’ll be back again tomorrow.

Source: Geithner’s Shoddy Abacus

]]> http://www.contrarianprofits.com/articles/geithner%e2%80%99s-shoddy-abacus/17626/feed 0