Give The Fed Its Due… By Investing In Banks
The Dynamic Wealth Report
October 7, 2010
by Jay Chernoff, Editor
I feel bad for the Federal Reserve.
Yes, I realize how that sounds… but I really do feel bad for the Fed. I
think the Fed gets loudly criticized when it makes mistakes but receives
no praise for its accomplishments.
Don’t get me wrong, the Fed deserves much of the criticism it’s been
getting. The U.S. central bank – perhaps the most powerful economic
force on the planet – did nothing to prevent the ridiculous housing
bubble a few years back. And they clearly failed to regulate American
banks… who spent most of the last decade getting away with murder.
It’s easy to jump all over the Fed for those high profile mistakes.
You don’t have to look very far to find rampant Fed bashing. But how
about all the things the Fed did right? When’s the last time you heard
anyone praising the Fed?
You know what’s amazing…
I have yet to see an article congratulating the Fed for preventing the
next Great Depression. And that’s exactly what they did. Seriously.
If not for the Fed, right now we all might be standing in food lines. Or
maybe we’d be opening up the morning paper to see unemployment at 25%.
And don’t forget money hoarding… people might be stuffing their
mattresses full of dollars instead of using bank accounts.
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The last time the government didn’t step in to save failing banks, the
U.S. experienced the worst economic downturn in its history. The scar
from the Great Depression has never fully healed. And there are plenty
of people around who still remember that horrific period.
History taught the Fed a vital lesson. They aren’t about to repeat the
same mistakes as their forefathers.
Take a look at this list…
Lehman Brothers, Bear Stearns, Washington Mutual, Wachovia, Merrill
Lynch, Countrywide, AIG (AIG), Citigroup (C). That’s a meaningful list
of companies.
Each of these companies was in a state of crisis during the financial
disaster of 2008. But only two (Lehman Brothers and Bear Stearns) truly
went out of business.
You can thank the Fed.
The Fed arranged for the rest of these companies to either be purchased
or given a huge cash infusion. And that doesn’t account for the dozens
of other major financial institutions who received aid in one way or
another. Even steadfast Morgan Stanley (MS) and
Goldman Sachs (GS)
needed Fed help to avoid serious issues.
And that’s not all… the Fed is making money!
You may not realize it, but the Fed’s collecting interest on all the
cash it lent out. Not to mention, most of those funds will be repaid in
full. In fact, the central bank’s loans and investments are actually
helping to control the growing deficit problem.
You see, the Fed’s profits get paid directly to the U.S. Treasury. In
other words, paying down government debt. And this isn’t pocket change
we’re talking about it. The Fed is expected to pay the Treasury about
$75 billion this year. Not a bad year’s worth of income.
So how does all this benefit your portfolio?
Simple. Invest in the banking sector.
Right now, banks are floating in cash from the Fed. And that means
bigger profits for the banks. While most banks aren’t loaning out a ton
of money, there are other ways this cash glut can help you.
First off, many financial companies suspended or reduced their dividends
during the financial crisis. But with cash overflowing from the vaults,
banks could decide to once again issue or even increase dividends. Loans
can be risky, but dividends can always be cut. And shareholders never
complain about bigger dividends.
Share repurchases are another possible use for the banks’ excess cash. Buying back shares is usually a good thing for the share price. And it’s
an indirect way of rewarding existing shareholders.
Finally, with so much cash on hand, banks make very safe investments. The Fed is basically guaranteeing large banks won’t run out of money… or
fail. We all saw what the Lehman Brothers failure did to the global
financial markets… and you can be very sure the Fed won’t let it happen
again.
Here’s the bottom line…
The Fed is doing everything in its power to make sure we don’t see
another Great Depression. That means excess liquidity is being pumped
through the banking sector. Cheap money means big profits. And one major
side effect is huge stockpiles of cash for banks.
You might not feel obligated to thank the Fed for saving us from another
depression. But if you want to profit from the Fed’s current monetary
policy, consider taking a closer look at the banking sector.
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