The Outsider Club: Collapse Courtesy of the Fed

By Nick Hodge | Wednesday, April 3rd, 2013

I know you don't want to buy stocks right now. I don't, either.

Despite the Dow heading pretty much straight up since the new year began, all the investors I talk to say they want no part of stocks.

A CNBC poll last week showed stocks are actually third on the list when it comes to the current investment preferences of Americans. Stocks (21%) lost out to gold (35%) and real estate (27%).

And it's not hard to understand why...

For starters, investors are still feeling burned from the Great Recession. On top of that, most people don't have a lot of money to invest: New data shows 57% of American households have less than $25,000 in savings.

In my opinion, the only investors buying equities right now are banks. And that's because they've been getting $85 billion per month in free money from the Fed.

Investors like us don't get free capital to play with. If we did, maybe we'd be interested in buying stocks.

But with free capital tight for a lot of folks — and everyday expenses rising — I must say I find it prudent to use this time of artificial market euphoria to take a good hard look at your entire financial scenario and the necessary steps to get your house in order.

That means:

· Paying down revolving and consumer debt

· Establishing an emergency fund (six months of expenses, highly liquid)

· Putting savings on autopilot (maxing out retirement contributions, maxing out health insurance contributions, direct depositing a portion of your income into savings/brokerage accounts)

· Securing appropriate life/disability insurance

· Implementing appropriate tax strategies

· Setting financial goals

· Picking over the market for good value and income

All of this is important, because there's something sinister underlaying the facade of this “record-breaking” market.

Here's what's happened to the value of your dollars since control of the currency was handed over to a private central banking system in 1913:

And as that same central bank has ramped up money printing over the past few years, the value of the currency is dropping even more precipitously.

Not only that, but the Federal Reserve Open Market Committee (FOMC) explicitly stated last year its goal is to devalue the dollar by another 33% over the next 20 years.

It's not as bold as the proposed move in Cyprus, but it's still the equivalent of stealing because it purposely decreases the value of your savings.

In this environment of hidden inflation, more dollars are required to buy the same goods. Look at the increase in commodity prices since 1960...

And the increase in price of other selected goods since 2008:

As I chronicled last week:

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?

As this money gets circulated, it's the people who get to use the money first (banks) that benefit. The people who use it last (us) suffer the consequence of the higher prices.

You need only look at the Personal Savings Rate and the Real Disposable Income Per Capita to see the result (click charts to enlarge)...

As these these trends continue for the foreseeable future, banks are using the free money to leverage up once again. JPMorgan has $1.8 trillion in assets, but is exposed to over $69 trillion worth of derivatives. It doesn't look any better for Citi, Bank of America, or Goldman Sachs.

That data comes from Michael Snyder, in a December 2012 article entitled, "The Coming Derivatives Panic That Will Destroy Global Financial Markets,” which continued:

Based on Federal government data, four very large U.S. banks represent 93% of the total banking notional amounts of 81% of industry net current credit exposure.

These four banks have an overwhelming share of the derivatives market in the United States. You might not be very fond of "the too big to fail banks", but keep in mind that if a derivatives crisis were to cause them to crash and burn it would almost certainly cause the entire U.S. economy to crash and burn. Just remember what we saw back in 2008. What is coming is going to be even worse.

It would have been really nice if we had not allowed these banks to get so large and if we had not allowed them to make trillions of dollars of reckless bets. But we stood aside and let it happen. Now these banks are so important to our economic system that their destruction would also destroy the U.S. economy. It is kind of like when cancer becomes so advanced that killing the cancer would also kill the patient. That is essentially the situation that we are facing with these banks.

When the casino finally goes "bust", you will know who to blame.

Without a doubt, a derivatives panic is coming. It will cause the financial markets to crash. Several of the "too big to fail" banks will likely crash and burn and require bailouts.

As a result of all this, credit markets will become paralyzed by fear and freeze up.

Once again, we will see the U.S. economy go into cardiac arrest, only this time it will not be so easy to fix.

Like I said above, take these next few months to tie up all your financial loose ends.

That includes adding to your safe haven positions while gold and silver are at their lowest prices of the year. We've found a way for you to do that on the cheap with $1 "Silver Strikes." (More on that here.)

Call it like you see it,

Nick Hodge

Nick is an editor of Energy & Capital and the Investment Director of the thousands-strong stock advisory, Early Advantage. Co-author of the best-selling book Investing in Renewable Energy: Making Money on Green Chip Stocks, his insights have been shared on news programs and in magazines and newspapers around the world.

Outside the Numbers