How to Protect Your Purchasing Power from
"The Sub-Prime Lender of Last Resort"

Today’s commentary is by Erika Nolan, Executive Director and Founding Publisher for The Sovereign Society.

Dear A-Letter Reader,

It wasn't front page news. But, often, the most telltale events are hidden in the back pages.

The Fed announced last week that it was going to extend loans to securities firms at the same rates that commercial banks get. Now, technically, securities firms aren't the same quality of borrower. They're not regulated in the same way as the commercial banks are. Not vetted in the same way. That's why the Fed's own Guidelines from 2002 say it should charge non-banks more than the highest rate that commercial banks pay. And yet, these less qualified borrowers are now going to get the lowest rates.

Does that ring a bell?

When banks like Countrywide gave $300,000 low, introductory-rate loans to John Doe (and even John No-Doe) despite the fact John only made $30,000 (and couldn't even document that)...weren't they practicing financing techniques similar to the Fed's new policy?

And when it became clear that Countrywide's aggressive lending policies had left it with more junk debt on its books than it could dump on careless institutional buyers, shares of Countrywide fell faster than you can say "no-down-payment, stated-income, negative-amortization, adjustable-rate mortgage."

Shares of the Fed are suffering the same fate. Its shares, of course, are U.S. dollar.

It’s Only Shameful when It’s Not the Fed

But there's a difference. The media has wagged its Finger of Shame at Countrywide. The lender's practices are now under investigation, and its shareholders have been chastened by the loss of over US$20 billion of personal wealth.

Yet the estimated US$400 billion in free-money the Fed has printed and handed out so far, ultimately comes out of taxpayer's pockets. And the loss of the purchasing power of the dollar comes out of their paychecks. Most importantly, the Fed hasn't been forced to cut back on its aggressive lending policies. It's only stepping them up.

The dollar has fallen so far for so long that it is bound for a rebound. But it will probably only be hitting a landing – not a floor – on the way down yet another bumpy flight of stairs. The Fed, it appears, has decided to sacrifice the dollar to try to save the economy. If you don't want to sacrifice the purchasing power of your cash any further, you may want to consider diversifying outside of the dollar.

Cash is King When the Markets Go Bust

The All-Weather Currency CD our investment editors constructed and recommended in The Sovereign Individual last year rose 16% in the last year, even while the S&P 500 returned about 5%, including dividends. So far this year, the All-Weather Currency CD is up 5.3% – while the stock market is down 9%. And all the while, your cash is even FDIC-insured!

The moral of the story is that when bubbles burst, cash is king. But when the dollar is bursting too, having your cash in currencies other than the dollar is better still.

In addition to the All-Weather Currency CD, you should consider holding some of your "safe money" in Exchange Traded Funds on select foreign currencies. Highly liquid ETF's now exist for the Euro, Pound, Swiss Franc, Australian Dollar, Canadian Dollar, Swedish krona, Mexican Peso and Japanese Yen.

Keep an eye here in the A-Letter for our currency experts, Sean Hyman and Jack Crooks, to monitor the developments in these currencies and their prospects versus the dollar – and each other – going forward. Also check out the World Currency Watch blog to learn more.

Keep in mind that when Big Ben throws money at Wall Street banks and brokers to keep our economy afloat, it's your money he's tossing around. And it's your dollar he's lighting on fire in order to try to keep the lights on.

ERIKA NOLAN, Executive Director

EDITOR’S NOTE: Shield what’s left of your wealth from the “spender of last resort.” Read all about the specific currencies, commodities, offshore bonds, and foreign securities that can protect your wealth from the dropping dollar before the Fed makes another move. Click here for our US$49 solution.

Spender of Last Resort

The Fed is now giving away cheap money to securities firms. And they're playing “chicken” with your life savings. The bet? That they can stabilize financial markets before they devalue your dollars to less-than-worthless.

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SOVEREIGNTY: Are We Really Better Off and
Safer Since this War On Terror Began?

Last Wednesday, President Bush marked the fifth anniversary of the start of the Iraq war with the message: "The world is better, and the U.S. is safer."

In a bullish speech at the Pentagon, Mr. Bush repeatedly linked the conflict in Iraq with the worldwide war against Islamist terror. He also said any rapid drawing down of troops would risk emboldened terrorists launching a "repeat" of the September 11 attacks.

He also claimed that the surge into Iraq, launched last year, had been a success. According to President Bush, this initiative reduced attacks against U.S. troops, restored order, and opened the door to "a major strategic victory in the broader war" on extremism.

Yet the President's optimism over the invasion was in stark contrast to many people in America today. One leading newspaper marked the anniversary with a critical editorial over the way the invasion was carried out. Also, demonstrators clashed with police across the road from the Pentagon.

The President's optimism brought back to my memory an editorial I wrote in The A-Letter on March 7, 2003. I’ve provided an excerpt below, but you can read the full text here.

This morning, from 8,000 miles away, where my oldest son, Ted, lives in Cape Town, came one of his frequent emails, copied to all his siblings and his parents.

What, Teddy wanted to know, "did we all think as Catholics about the Pope's opposition to the pending war with Iraq?" He posed his question in his usual provocative way (perhaps inherited): Do we stand with the Church or with President Bush?

I gave my son Ted a flip email answer, but knew as I pressed "Send" I was avoiding my own conflicted thoughts.

Within an hour my youngest son, Jim, father of two [now three] handsome young boys, and a thorough going political conservative, sent us his response from up in Vermont: "While I do believe Iraq's leader to be a genuine threat, I also believe there are other ways to contain and compel him that do not involve the inevitable collateral civilian damage..."

I agreed with Jim, and so emailed the family my unneeded concurrence. A few minutes later, my youngest daughter, Victoria, in Florida, added her "two cents:" "I do think that at some point war might become inevitable. Who really wants to go to war? I hope no one...hopefully prayer and common sense will prevail and we can avoid war. It's probably a good thing we have put some focus back on our military though, being strong does prevent attack."

My eldest daughter, a hard driving Michigan trial attorney, and mother of a darling daughter [and now a son], was in court, but phoned to say she agreed completely with her brothers and sister.

During World War II, while my brother was flying as a tail gunner with the U.S Army Air Corps in Europe, I used to listen to the short-wave radio of my father (who fought in France in WWI).

Ed Murrow from London was a favorite, so I'll close with a much later quote from him: "Anyone who isn't confused doesn't really understand the situation."

Teddy's trans-Atlantic email provocation ended confusion in our family, if not doubts. So five years later, I must ask…is it really any different today?

BOB BAUMAN, Legal Counsel

Don’t Fight the Fed: It’s Clear They’ll Do Whatever It Takes to Win This Liquidity War

A saying as old as Wall Street itself cautions investors: “Don’t fight the Fed!” Massive central bank intervention has always worked in the past – and will inevitably work this time too – it’s just a matter of time.

Once upon a time, the Federal Reserve’s mandate was two-fold: Maintain price stability (fight inflation) AND full employment (promote economic growth). Not anymore. Now, bailouts like Bear Stearns (or Long Term Capital in the Greenspan era) are the norm.

Globetrotting investor Jim Rogers recently pointed out in a Bloomberg interview that the Fed’s mandate is: “To keep a sound currency, not to prop up Wall Street." The Fed has already “trotted out hundreds of billions of dollars to prop-up their friends on Wall Street.” Meanwhile, as Erika Nolan said above, the U.S. dollar is paying a heavy price, while U.S. taxpayers get stuck with the bailout bill!

But the Fed’s “propping-up” seems to be working its intended magic on Wall Street, at least for now.

Wall Street’s “primary dealers borrowed more than US$13.4 billion a day from the Federal Reserve in the latest week,” according to Reuters. Firms including Bear Stearns, Goldman Sachs, Morgan Stanley and Lehman Brothers tapped into the Fed’s easy money. And why shouldn’t they stock up on cheap cash – especially with the Fed handing out money at 2.5%?

Total “discount window borrowing came to US$19.05 billion a day in the latest week.” WOW!

The key is for all this easy-money to help lower the interest rates that matter most. As I said in last Thursday’s A-Letter: “Keep a sharp eye on 30-year mortgage rates.”

“Once they decline significantly, and for a sustained period, the financial sector will finally get lasting relief. When that happens, certain financial firms could make a killing.”
Homeowners too will get a chance to refinance their way out of adjustable rate loans before rate resets kick in. Stay tuned.

Of course another inevitable consequence of the Fed’s easy-money policy is structural inflation. See my blog right now…to get the full story on how consumer prices will affect your favorite commodity plays.

In my Market Shock Trader service right now, I’m focusing on ways to play the latest Fed moves with well-timed put options. This gives my readers a handy way to hedge their investments – and earn profits in the midst of a sharp sell-off.

At the same time, I’m singling out a few carefully selected call option bets to profit from the rebound rally we’re seeing in other stocks and sectors.

Some investors might call this a “pairs trading” strategy. I’m going long (with call options) and short (with puts) at the same time – sometimes even in the same sector! I look at this as a solid all-weather trading strategy to profit from volatile financial markets.

MIKE BURNICK, Senior Editor & Global Markets Analyst

P.S. On Friday, I sent my Market Shock Trader subscribers all the details on my latest option recommendation. If you would like to see the specifics of my latest pick to profit in volatile markets, take Market Shock Trader for a risk-free test drive now.

Are you prepared for the ‘Worst Financial Crisis in 60 Years’?

Big name institutions are folding. The dollar is shriveling. The stock market is stagnant.

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