Geithner Plans to Give the Federal Reserve Even More Powers

Treasury Secretary Timothy Geithner put on his best salesman suit today as he faced a Senate Banking Committee that proved largely sceptical to his plans to reform the banking and financial system.

If you read his prepared testimony you come away feeling that this whole financial mess was due to 'gaps' in the current system that nobody had authority to supervise. Geithner failed to mention how the Federal Reserve and the SEC were actively complicit in this catastrophe, instead the Fed is being rewarded with additional powers!

This will have the conspiracists jumping up with joy with another example of "create the problem, create the solution". The Fed will have control of the whole financial system, not just banking. It will have the task of "supervising the largest, most complex and interconnected institutions." Geithner claims, "You don't convene a committee to put out a fire." No, you employ the Federal Reserve, which is governed by... a committee. But as we know, the Fed is not really run by a committee but rather a consortium of private banks.

The Banking Committee is typically circumspect in its criticisms as all the fine details will be hammered out later, but having sat through a large part of the hearing the one near-unanimous voice of disapproval was the expanded role of the Fed. Under the gaze of the world's TV cameras these hearings are largely for show, so that Senators can appear to be human beings to their voters. However, the Federal Reserve Banks seem one small step away from a process started some 100 years ago to completely emasculate US government control of the country's money.

Under the proposed plans the Fed will keep its responsibility for monetary policy (something that should legitimately be with the Treasury - what does the Treasury actually do these days?) plus be the lender of last resort to any financial institution whose latest scam has back-fired but is "too big to fail."

Mercifully, the Fed's role in protecting the consumer will be taken away and a new Consumer Financial Protection Agency created. You could be forgiven for thinking that the Fed had no interest in the lowly consumer anyway, so I very much doubt they'd miss that onerous task.

There will also be a new Financial Services Oversight Council to bring together the heads of all of the major federal financial regulatory agencies to look into those financial gaps that have been so skilfully manipulated by the Fed. Nothing like building a gate after the horse has bolted, especially after all the hay has gone too.

But just in case you feel this is a purely American problem, Geithner has the consoling words that, "I see no conflict ... You see these [other] countries now moving in the other direction to give their central bank more power." Yes, I know, create the crisis, create the solution. Those few countries left that have not sold away their resources to 'independent' external central bankers just also happen to be those countries that are at war or are 'pariah states'.

Avoid the News, Find an Investment Strategy

The long-running Dalbar Financial Services study shows that funds routinely deliver bigger returns than investors actually get, because individuals only buy after a rise or sell after a decline. (MarketWatch)

What would also make an interesting study is to see how these decisions are correlated with the financial press headlines. True financial journalism is rare with most mainstream news happy to pump the market up and wish for better times when it dives. There is rarely any real analysis, especially on TV - you have to look online to find that.

All of this is in the context of the current market rally. Is this time to get back in? The simple answer is that, if you haven't done so already, then don't do it now! The S&P 500 is now sandwiched between its 200-day and 50-day moving averages. As the two indicators move towards each other there will come a crunch point. Is this a sucker's rally or the real thing? That will be the time to tell. Don't add to Dalbar's statistics. This is perhaps a good time to sit down and think of a real investment strategy. There are many strategies that work, you just have to find the one that's right for you, your level of assets and your time commitments. The worst strategy is to follow the news!

Gold Bugs Beat Bullish Drum

In recent years the gold bugs have beaten a bullish drum, especially during the dips in the rollercoaster ride. Having touched $1,000 again it has since drifted to $875. The uptrend support line is around the $750 level so no time to panic as yet.

But as Peter Brimelow says,"There is disturbingly universal expectation among gold-watchers that Federal Reserve monetary expansion must blow off into inflation." My concern too is that all this creation of dollars is actually masking the fact that so much dollar wealth has also been destroyed. If this is indeed the case then inflation will not necessarily take hold.

Gold markets are particularly prone to noise. Unlike stocks and bonds, gold yields no interest, and unlike crude oil gold is only marginally used as an industrial product. This means that profits of the buy-and-hold variety are only forthcoming in an uptrend. The other option is to just follow the charts and buy and sell accordingly. There are many large forces in this market that do not show their hand by writing newsletters. Look at the numbers, not the noise.

Ruff Rides the Rally with Caution

Ruff Times, edited by veteran Howard Ruff, is up 20.4% over the year to date through March, according to the Hulbert Financial Digest's count, compared to a negative 10.56% for the dividend-reinvested Dow Jones Wilshire 5000.

Ruff wrote recently: "The stock market has made a dead-cat bounce, even though the returns are spectacular for short-term investors, which I am not. The long-term problem with the stock market is two-fold: 1) its earnings will decline as business sags deeper and deeper into this recession which will depress stock-market prices; and 2) the price/earnings ratio (PE) is still way above the typical PE at the bottom of bear markets. The stock market will have its ups and downs and literally suck Wall Street investors into short-term rallies as they try to pick 'the bottom.'" (MarketWatch)

Ruff's conclusion: "Sell into these rallies. The stock market is toxic and will be for several years."

Well there's confidence for you! And this from a guy who's made 20% during the last year.

SEC Revisits Uptick Rules

The SEC is sheepishly back-peddling on the so-called uptick rule. Controversially, this rule was axed in 2007 after 70 years on the books. Unfortunately, the axing of this rule to mitigate short selling was also the cue for the worst bear market since the Depression. The uptick rule has nothing to do with disastrous corporate earnings, so I suspect this is another straw man held up as a scapegoat. However, red faces all around the SEC.

But is the uptick rule such a good idea? Just to muddy the whole argument the SEC has put up five different proposals for a 60-day consultation period. Whatever the outcome, any rule that tips the balance of supply and demand in one direction is not part of a free and fair market. If the idea is to increase stability and decrease volatility then perhaps having both an uptick and downtick rule would make sense. But looks like we're heading back to the days when pumping up stocks for no good reason is a great idea! The nightmare scenario for US stock markets is that they start to resemble their Japanese counterparts.

There are other ways to short stocks, such as using options. The real problem is from naked short selling, where someone sells a stock they don't actually own, as this effectively increases the apparent number of shares being traded. The SEC has proved itself completely useless at being a financial watchdog. Until wholesale changes are made, expect nothing more.