Government interventions turn investing on its head

Wall Street has pulled off the greatest scam of all-time. I am not talking about the TARP plan, QE 1, 2 and soon 3, or even the transfer of trillions of dollars to the world’s banks through negative real interest rates set by the Fed. Rather, the extraordinary sleight of hand that Wall Street has pulled off is the transfer of risk from virtually all forms of investing to the government.
Nothing is more attractive to Wall Street than risk-free investing. What could be better than keeping all of the upside of an investment without concern that it might decline?
Washington’s deal with Wall Street is to take the risk out of their business. The terms of the deal are as clear as the participants. If the stock market weakens, the Fed will stimulate. If interest rates start to creep up, the Fed will lower them. Should commodity prices slip too far, more cash will be pumped into the system. If taxes are going up, stimulus will be applied.
Swap lines, essentially dollar loans to needy European countries, pile up day after day with no oversight by anyone. Even China can count on us to loosen or tighten our policy to suit their needs. In short, the Federal Reserve and Washington have become the world’s monetary vending machine.
What this all means is that Wall Street, Europe and the world have off-loaded their investment risk to the American taxpayer. It also means that investing has become almost impossible for the average individual. Let’s take a look at some investments.
• Savings accounts and certificates of deposits. With all the new money in the system, you’d expect at least a little inflation to push up rates on cash and equivalent investments. But the Fed has decided it wants rates to be effectively zero for short-term investors.
• Housing. Four years into the housing crisis, one would expect housing prices to have stabilized and started to increase. However, politicians and foreclosures don’t go together well and realized losses do not help shaky banks remain solvent. So housing goes nowhere and housing investors continue to suffer. Wall Street banks, however, can count on being able to pretend and extend for years to come. • Fixed Income. Enjoying the best environment ever, bonds of all types have risen to historic heights. Why? Bonds have rallied for the last four years (almost 30 actually) due to the Federal Reserve’s increasingly Kafkaesque interventions. When Ben Bernanke utters the words, “We are beginning to see signs of inflation,” the bond market will collapse.
• Stocks. Stocks are almost uninvestable due to the difficulty in analyzing any stock on any given day because of the government’s actions, or lack thereof. What will taxes be next year? What new stimulus plan is on the offing? How long will real rates of return be negative?
The Federal Reserve Bank of New York recently completed a study that revealed that 50 percent of all stock market gains since 1994 can be directly attributed to the United States’ Federal Reserve Bank’s extraordinary money-supply growth and low interest rates – conclusively proving our central bank orchestrated the greatest transfer of wealth in history. While I have always opposed the idea that investing is akin to gambling, believing that hard work and patience can reward the careful investor, today, not only is investing like gambling, in this casino, the house always wins because the games are fixed.
We face many challenging years ahead. You can protect yourself by keeping your investments close. Forget the return; it is negative and will be for some time. Worry only about getting access to your money when you need it. Invest in what you know or with trusted friends who have good businesses. Buy hard assets like land, gold and timber. Keep your cash assets in FDIC accounts or a safe.
In the United States, preferred stocks, while still overvalued, are better than bonds. If you must venture in, pick companies that are like countries unto themselves: ExxonMobil, Intel, Apple, Microsoft and others that will survive the next downturn.
The scariest phrase in the English language is, “We’re from the government, and we’re here to help you.” Thank you very much, but you’ve already “helped” enough. •


David F. Brochu is president and CEO of Kleossum Inc.

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