Is Ron Paul Right?

It's the first day of the second quarter, and also April Fool's day, so be on your guard. The first day of the month has been an overwhelmingly bullish day ever since the stock market bottomed in March 2009. And the first day of a new quarter has also been bullish, as new money gets put to work by mutual funds.

Today we also have a strong non-farm payroll number to propel stocks higher.

The economy added 216,000 new jobs in March. This is a net number that includes job losses at the government level. Private hiring has now topped 200,000 jobs for two months running, for the first time since 2006.

The government published unemployment rate fell to 8.8%. And while that's still unacceptably high, it's an improvement.

Whether or not we can give the Fed any credit for helping the jobs market with QE2, today's jobs number increases the odds that the Fed will stand down in June, and not move directly into another round of stimulus QE3.

And while we've discussed the end of QE2 as a potentially bearish catalyst for stocks, it could also be considered a sign of confidence in the U.S. economy. I know that might seem like a stretch, and I still expect there to be some kind of correction ahead of June (sell in May?).

*****After being sued by Bloomberg, the Fed released its data on which banks tapped its emergency overnight lending program during the financial crisis. As you may know, the Fed has resisted releasing this information because it thought it might increase fear that certain banks were on the verge of failing.

But of course, the banks that were going to fail have already done so, like Washington Mutual, the former WAMU.

The data, released yesterday, shows that foreign banks and financial firms were very active in taking loans from the Fed. In fact, Wachovia was the only U.S. bank that ranked in the top 5 of borrowing at the peak of the crisis. Wachovia was eventually bought out by Wells Fargo WFC.

Banks in Europe, China and even the Middle East were actively borrowing from the Fed. But let's not forget, companies such as MacDonald's MCD even took loans from the Fed under other emergency lending programs.

*****In reaction to the Fed's lending, Bloomberg quotes Fed nemesis Rep. Ron Paul as saying:

"The American people are going to be outraged when they understand what has been going on...What in the world are we doing thinking we can pass out tens of billions of dollars to banks that are overseas? We have problems here at home with people not being able to pay their mortgages, and they're losing their homes."

I respect Rep. Paul a great deal. But I think he's dead wrong here. The Fed should be credited with averting a full on economic disaster by opening lending to foreign banks. The U.S., in general, and the Fed specifically, are always in a unique position to influence the course of global events.

Let's never forget just how terrifying those days were. Nobody knew how deep the crisis ran, and nobody knew how many banks could potentially fail. Remember that the very foundation of capitalism was being called into question.

It might sound well and good to ignore what goes on beyond the U.S. borders, but to pretend that we'd be unaffected by banking meltdowns in Europe or China or the Middle East is very naïve.

And besides there's been no indication that any of this lending hasn't been repaid.

I would also point out to Rep. Paul that it is not within the Fed's power to start lending to individuals so they could make their house payments. If anything, the Fed's lending programs have helped banks become healthy enough to deal with the prolonged housing problems in more constructive ways.

And if you want to put some of the blame for the housing mess on the Fed, which is totally appropriate, you have to go back to Alan Greenspan and his endorsement of "exotic" home loans and derivatives to spread the risk (they spread the risk, all right.). And still further back to Fannie and Freddie securitizing risky debt to be sold as derivatives at the insistence of certain of Rep. Paul's Democratic colleagues in government.

Finally, to Mr. Paul I would say that the U.S. is a global leader, and we led. Maybe Mr. Paul would prefer the U.S. to go back into its pre-WW II shell, where we simply ignore global matters.

Not me.

And the next time China or Russia starts grumbling about the U.S. dollar being the world's reserve currency, I'd politely remind them how that reserve currency saved their bacon in 2008. And ask them if they'd like to pony up their currency as the world's reserve currency.

*****One final note, I'm starting to hear some rumblings that China's economy may be emerging from its inflation scare. The Chinese government has raised interest rates three times since October. It also raised reserve requirements nine times last year.

Bank lending is down 25% from last year, and profits are still strong. That's a sign that Chinese economy is experiencing strong demand above and beyond credit and lending.

Chinese stocks are extremely cheap. And a few accounting scandals have made them about as hated as any group of stocks out there. I'm not jumping (back) on the China stock bandwagon just yet, but it may be time for contrarians to start nibbling again.

Have a great weekend,

Ian Wyatt
Editor
Daily Profit

P.S.: Taking bail out money in 2008 and 2009 was so common it was easier to come up with a short list of those that didn't than those that did. I kid you not; according to ProPublica, a non-profit, no partisan investigative journalism organization, 924 banks, credit unions, insurance companies, and other financial firms took bail out funds to the tune of $563 billion. I've added one bank to my High Yield Wealth portfolio that took NO bail out money and it's not on ProPublica's list. And it's paying 8.2%. It's the kind of bank everyone should have.

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