I would like to state for the record that what’s happening to the U.S. economy is freaking me out. And I think that if you’re not scared, you’re not paying attention.
That said, there are positive steps you can take to protect yourself and your portfolio — and I’ll get to three of those steps in a minute. But just because I’m worried doesn’t mean things can’t end well. With some luck, maybe President Obama’s economic team can stabilize things.
Then again, maybe not.
The Latest Madness
Out of Washington …
The Fed will probably let hedge funds borrow from its new, Term Asset-backed Lending Facility (TALF) — a program that is expanding to as much as $1 trillion!
The idea is that securities that have no buyers will be sold to hedge funds for about 5 cents to 20 cents on the dollar. The loans the Fed will make to hedge funds are non-recourse loans. This means that if the fund defaults, its collateral is the securities bought with the borrowed money — securities that will likely be worth nothing.
If you think this scheme sounds like another slick way for hedge funds to get a shot at the roulette wheel with our money … you’re probably right.
My question is: If the Fed thinks that some securities are worth just five cents on the dollar, why aren’t they forcing the big banks that currently hold these securities to write them off at that price?
Most worrying to me: Considering that hedge funds use tremendous leverage, does that mean we could see $1 trillion worth of securities sucked into this financial meat grinder? $2 trillion? $4 trillion?
Again, U.S. taxpayers — you and me — will be stuck with the bill.
So, my confidence in whether the new administration can free us from financial quicksand is rapidly deteriorating.
However, if it’s any consolation, things seem to be a lot worse in Europe, where much of the bad U.S. mortgage paper ended up. And the governments there seem to be taking a “Grit your teeth and buckle down” approach to the credit crisis.
Historically, the yellow metal has moved with the euro and opposite to the U.S. dollar. This relationship has reversed in recent months. Now, gold is closely tracking the U.S. dollar.
This shows that when Europeans get scared about their currency, they run for the safety of the two other global currencies — the U.S. dollar and gold.
And it’s not just Europe. In January gold rose significantly against all major world currencies. In most currencies except in the U.S. dollar and the Japanese yen — the other “safety currency” — gold actually made an all-time-high.
Why are European investors so scared? Their currency is in serious trouble.
That fear crystallized in comments by mega-investor George Soros at the recent meeting of the world’s movers and shakers in Davos, Switzerland. In an interview with Austria’s Der Standard newspaper, Soros said that the euro may not survive unless the European Union presses for an international agreement on dealing with soured assets.
I’ve told you why Europeans should be scared about their currency. Now, let’s look at …
