U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke are planning a new federal entity that will “move” troubled assets from the balance sheets of American financial companies to this new federal toxic waste dump. The operative word here is “move”. It’s not as if these assets will get priced by some bureaucratic mental midget and taken off their balance sheets at par value. Hardly. They will be sold to the feds much like the alcoholic going to the pawn shop to hock his watch for some booze money. Once in the dump, this stuff will sit there and rot like an elk carcass along the roadside waiting for scavengers to come and pick off something of value. Any future losses are of course ultimately saddled onto the American taxpayer and their grandchildren. A simple fact that seems lost in all these federal bailouts that have been occurring…Bear Stearns, Fannie and Freddie, AIG and now of course the greatest idea of all . . . A new Federal Toxic Waste Dump for securities that are hardly worth the millions of pages of paper they are printed on.

So the real question here is “where are these institutions marking this toxic waste?” Well, the answer will come as they sell this junk to the Fed and take the hit themselves. Granted, this may well work out for many shops that will then have a cleaner balance sheet and again be able to make markets and conduct some business moving forward that can generate profits. The end of 2008 is coming and you can rest assured that there will be more losses to come as everyone will want to put this problem into the past by cleansing their balance sheets. The issue is, what damage awaits these fragile companies from the markdowns that are sure to come. The stock market may believe that the treasury and the fed have pulled another rabbit out of the hat here, at least temporarily, but consider these other factors.

Americans are still in big trouble with mortgages that are underwater and more going into foreclosure every day. They have credit card debts and too many expensive vehicles that love gasoline. Unemployment is rising and the need for cash will continue to be their nemesis. The way to raise cash is to sell some stuff; cars, stocks, IRAs, 401ks, . . . whatever is necessary to keep going. Time to tighten the belt a few notches and get more liquid at the same time.

This will lead to the biggest garage sale in the world, including the garages, to come in the USA. Confidence in the stock market has to be shaken badly when companies with book values of $80 or more can go bankrupt overnight. This will drive more and more investing into commodities; gold, silver, platinum, copper, oil, corn, soybeans, wheat and the rest. If the last year doesn’t convince investors that they need to have at least 10% of their money in commodities, then they just aren’t watching.

The Fed’s latest move will no doubt help as the credit markets had all but seized up in recent weeks. But underlying all of this is the fact that the paradigm has shifted . . . money will be lent the old fashioned way . . . you will actually have to be able to pay it back to get it in the first place. Wall Street firms (at least those that remain) have had their business models broken . . . they won’t be able to borrow all the money they could ever imagine to then go out and risk that cash on highly leveraged trading activities to generate exceptional returns. Banks will come under increasing scrutiny by regulators who will demand larger reserves and more transparent balance sheets. Investors will become far more conservative.

The new mantra for investing will be 30% stocks, 30% bonds, 10% commodities, and 30% cash equivalents, perhaps diversified in a few currencies.