Financials in a Funk

If you've followed the markets even in passing the last few months, this is already given data. Even with the Fed's $200 Billion "Booster Shot" today, Bear Stearns, Citigroup, Lehman Brothers and Merrill Lynch have all taken battleship-sized hits to their respective stock price over the past year.

That's because they listened to the Wall Street Whiz Kids, and invested in exotic (and stupid) bundled sub-prime and Alt-A mortgages. The only problem was enough of the toxic loans were mixed in with the good ones; and not even the sharpest accountant could tell what the true value of these bundled investments were (or are today).

Consequently, the financial firms have lost a lot of money on these toxic investments, and had to borrow from Sovereign Wealth Funds to shore up their cash positions. To folks on CNBC and Fox Business, it may not be a big deal. But to a former accountant like me, it's a VERY big deal.

When your company has to borrow billions of dollars from foreign investors, that's not a good thing. Firms have gotten away with it over the past few decades because the US Dollar was the world's reserve currency, credit was easy, and life was good. But today the USD has declined over 40% in world currency markets the past 7 years; lending standards across the board have tightened up considerably; and we're in danger of having these SWFs taking over some of our country's biggest banks and brokerage houses.

This isn't a good situation for our country. While government officials seem to be more concerned about Islamofascists halfway across the world, we're in an economic struggle here at home that's not going well. The Fed and Bush Administration look like the Keystone Cops grasping at straws to try to 'make things better.'

And like I've said before, what the government should do is what they won't do. And what they should do is to raise interest rates to defend the dollar on world markets; and forget implementing these stupid stumulus packages, which will have little to no effect on the economy... except maybe prolonging the financial agony even further.

I'll give 'em credit in this regard - the prolonged 'echo boom' in real estate and credit lasted longer than I thought it would. I was concerned during the 2004 and 2006 elections that we'd see a downturn then. But we can't avoid it in 2008. The government's stats say that technically we're not in a recession, and inflation is "contained," but John Williams of ShadowStats.com says different.

The Fed stopped reporting M3 money supply back in March 2006. That's important because M3 is the broadest (and most accurate measure) of monetary inflation. The Federal Reserve doesn't fight or 'maintain' inflation, it creates it through increasing the money supply. You have more dollars available to buy the same amount of goods; that's why you're seeing higher prices for food, energy and just about everything.

Not to mention tightening supplies of wheat and corn from America's ethanol insanity. All these factors come together for a toxic economic mix that won't bode well for the US in the next several years. These formerly 'blue-chip' financial firms look pretty tarnished right now. The only way I'd invest in them is to buy put options, sell them short (but only if you're an experienced trader and know what you're doing), or just sell the stock.

These financial companies (and our country's) financial statements look pretty bad. The only fix for them will be time, a commodity-based currency, and increased savings and investment. No more credit binges, excess borrowing or spending. It's tough medicine, but will have to be taken by Americans - and our government - sooner or later.