Fight the Fed

By Nick Hodge | Wednesday, March 27th, 2013

It's the best of times, it's the worst of times.

Jobless claims are at a five-year low. Food stamp and disability payments are at an all-time high.

The Dow is near record territory, up 8% for the year. That might help you pay for the 11% rise in gas prices over the same time.

Consumer spending rose by 0.1% in January. Thanks to the fiscal cliff “deal,” your paycheck is 2% smaller.

U.S. fourth quarter GDP has been revised from contracting 0.1% to growing 0.1%. Average worker pay was only up 0.04% in 2012 — a single penny — from $23.81 to $23.82 per hour.

There's talk of a “Great Rotation” of retail investors back into stocks. American household debt rose to $11.34 trillion in the fourth quarter of 2012, the first increase since the third quarter of 2008.

Domestic stock funds saw net inflows of $18.6 billion in January, the first month of net deposits since 2011. One in four workers are raiding their retirement accounts to pay monthly bills, amounting to $70 billion in annual withdrawals.

So, what gives?

If Americans are taking on more debt, facing higher costs, raiding their retirement funds to pay bills, and enduring stagnant wages... how can the economy recover — and how can stocks keep going up?

Investors know the adage “Don't fight the Fed.”

That's because the Federal Reserve isn't a government agency. Its actions don't have to be approved by the president or anyone else in the executive or legislative branches...

It was designed to serve the interest of private banks.

Nationally chartered banks are even required to hold stock in the Federal Reserve — and are paid a 6% dividend on those shares every year before the Fed transfers its annual profits to the U.S. Treasury.

If you can understand that the Fed is not part of the government and only exists to serve private banks, then you can understand why the stock market is going up while the finances of half the country remain in shambles.

The Fed buys and sells billions of dollars' worth of Treasury securities, which allows it to control interest rates. Since Quantitative Easing began, the Fed has been buying billions of dollars worth of Treasuries every day to keep interest rates low. They say it's so more people can afford to buy things, which is good for the economy.

Of course, that's just a ruse.

In reality, Federal Reserve traders are “buying” around $4 billion worth of Treasuries and mortgage bonds from major trading houses every single day.

I put buying in quotes because the Fed doesn't really pay for this. Instead, it gives the sellers of these bonds (banks) a credit on their Federal Reserve statement, thereby legally giving away money. The banks can then withdraw that credit.

And it's that free money that's been used to buy stocks, sending prices higher.

You aren't getting free money to buy stocks. Banks are.

Statistically, you're taking on more debt, earning less, and paying more for things you need every day.

That's some system, huh?

Here's how Forbes contributor Charles Biderman ties it all together:

... to make this really simple, the Fed creates $4 billion a day and eventually some of that money goes into equities. And that, of course, helps keep stock prices elevated. So it doesn’t matter that we are having major problems with the underlying economy and markets that normally would depress stock prices.

In addition to the Fed providing buying power, some market watchers recently have been writing that the Fed’s money underlies the trillions in derivatives out there. The big banks have hundreds of billions on deposit with the Fed. That’s money created on a computer. Talk about leverage! This is the ultimate leverage. Trillions of dollars in trades on top of hundreds of billions of newly created money.

Why is the Fed doing something that would be a crime if anyone other than the Fed did this? It’s because wealth creation is the only policy action of this government that works. It seems that the Fed is willing to keep stock prices elevated, so the Obama administration can keep spending trillions of dollars that really don’t exist.

How long can this go on? At some point gravity wins out.

Fight the Fed

That's the question investors like you and me have been asking for months: How long can this go on?

Unlike banks that got bailed out with taxpayer funds, actual citizens haven't fared so well...

As USA Today reported last week, “Many stock investors who got burned in the last bear market don't trust stocks, Wall Street, or the 4-year-old bull market.”

According to Pew Research, we don't trust the government either, with data collected this year showing 73% of Americans distrust the Federal Government.

And for the first time, unlike the Occupy and Tea Party movements that had similar ambitions but failed to coalesce, it seems Americans are finally ready to take a stand, both financially and politically.

The Libertarian presidential candidate last November got the highest vote total ever for a Libertarian candidate.

Americans are finally waking up to true stores of wealth. Over 75% of jewelers reported increased silver sales in 2012, with the average sales increase being 19%.

February saw another record amount of Silver Eagle sales by the U.S. Mint — over 3.368 million ounces. That's after setting a record in January.

And gold sales so far this year have totaled 230,500 ounces, the highest pace of any year since 2001. The last time silver and gold sales were this robust, prices quickly rose to $49 and $1,900, respectively.

Trading volume and value is already dramatically rising for the alternative digital currency Bitcoin. The total value of the currency has risen to over $800 million, and it's nearly quadrupled in value against the U.S. dollar so far this year. You could've bought a Bitcoin for $20 in January. Today it'll cost you almost $80.

As I've been telling anyone who'll listen, I'd rather invest in an eventual reality than a current myth.

And I'm doing it by directly investing in silver and the undervalued miners that will come surging back as the myth is continually exposed, gravity pulls stocks back to earth, and the fledgling financial and political awakening that's under way continues to persuade people to take action against misguided federal and fiscal policies.

Call it like you see it,

Nick Hodge

@nickchodge on Twitter

Nick is an editor of Energy & Capital and the Investment Director of the thousands-strong stock advisory,