So is the financial crisis over? Are the banks fixed? Is the
US
economy back up to speed? Now that we’re supposedly beyond all that, and we’re
all gung ho on growth, is it time to tighten the money supply and “whip
inflation now?”
Did I miss something? That last market and economic plunge
was awfully short. We never got into a real recession, merely slowing growth, a
rate of 0.9 percent, revised upward from an initial estimate of 0.6 percent. When
did we get hyped up again, with businesses going hog wild with expansion plans
and consumers spending ’til they dropped?
You missed it, too? Phew; I thought I must have pulled a Rip
van Winkle or something.
But isn’t the US Federal Reserve Open Market Committee
(FOMC) getting ready to tighten money again? After doing a little slicing and
dicing of the symbolic fed funds rate and the less weighty discount rate, now
the FOMC is readying to hike, hike, hike.
And what about borrowing from the Fed? Member banks have
stepped up borrowing this week, to $19 billion from $15 billion last week. But
the supposedly troubled non-member financials are paying back more than they’re
borrowing, with drawdowns dropping by $3.5 billion this week alone.
If, indeed, banks are borrowing at subsidized rates, what’s
happening in the real world of borrowing? Higher and higher short-term rates,
of course.
That’s the word on the street, as the market is beginning to
price in its own hikes for real world interest rates. And even the Fed’s
admitting that the special financing facilities it established to help banks
and financials caught with their CDOs down haven’t really been tapped much over
the past several weeks and months. Again, borrowers are paying back rather than
face potential additional scrutiny.
What about the member banks? Are they really getting back
together and ready for higher rates?
Anybody that owns commercial bank stocks should be paying
very close attention to quarterly statements and filings. After all, according
to the Federal Deposit Insurance Corp (FDIC), the average profit for member
banks is down for the last quarter by 50 percent from a year ago. In addition,
banks have set aside $37 billion more in reserves to try to cover bad loans, a
figure that’s still scant compared to mounting delinquent loans running over 90
days to local businesses and consumers.
And, after a few years of no bank failures, last year we had
three seizures, and the FDIC is now ramping up staff in anticipation of a heap
more this year and next. Ninety US
banks are on the FDIC’s trouble list, endangered by the fear caused by the
current credit environment. And that’s before considering higher shorter-term
interest rates.
Those higher rates are coming just as our leaders at the Fed
are finally getting around to chit-chatting about comments from Chairman Ben
Bernanke about inflation creeping into the economy. Well, gee whiz, who would’ve
guessed that the guys on C Street
actually look at real-world data?
With a track record of letting inflation creep out of
control in key markets for years and waiting until it’s way too late to
efficiently slow things down without a real issue, we could do better letting
the market take the lead rather than relying on the Fed.
By now statements about the history of too-easy money leading
parts of the US
economy to excess and eventual collapse are becoming trite.
Take your pick: the super easy money and lax regulation
during the real estate bonanza and bust of the 1980s; the buyout of way too many
thrifts thanks to the taxpayer-funded Resolution Trust Corporation (RTC); the
stock market explosion during the ’90s, fed by way-too-cheap money and easy
credit terms for margin loans, that led to a big bust in 2000. How about the
housing and mortgage markets’ bursts?
We now have yet another bubble in the making thanks to the
Fed. Take a gander at commodity prices, not just headline-grabbing crude oil or
refined products. Any real good--corn, wheat, nickel, copper, coking coal,
natural gas--is on a path similar to those of the dot-coms of the ’90s and
houses in the present era.
And as was the case for previous bubbles, the Fed comes in
after things have gotten a bit too frothy and begins to talk about doing
something about it.
So hiking rates is going to solve the world’s commodity
market pricing issues?
How about this scenario: The Fed does some real work--beyond
tweaking the window-dressing fed funds and discount rates--and actually cracks
down again on reserves and really tightens credit in the US. The real-world
interest rates for US dollars will rise, spilling over to the currency markets,
sending the greenback up against a host of currencies. That would curtail
commodity prices, at least in the short term.
US consumers would begin to be priced out of a host of
transactions, including automobile financing and leasing deals, credit cards
and other consumer loans. This would slow the economy down and, in turn, slow
demand for a lot of those hyper-priced commodities.
A little less employment would be a further development if
we really had a Fed that wanted to do the job of stabilizing market prices. And
this would slow the rise of labor costs that’s been spreading around the
nation.
Can we handle this? Or should we just dither around and
complain about how inflation is getting out of whack?
The last time we had a central bank focused on controlling
inflation it was running in the double digits. A draconian Fed then drove
interest rates into double digits and made credit--for everything from mortgages
to auto loans--tight as a drum.
It wasn’t good times for many; unemployment was rampant, the
markets went nowhere and prices kept climbing. But it was a fix after too-cheap
money and too much fiscal stimulus got us too deep into trouble.
What should it be? Let things get worse until it’s the ’70s
all over again? Will we ever learn that we can’t have everything we want at all
times forever--easy money, cheap commodities, full employment--without real
costs?
While we think about that, the dollar is still lagging,
commodities are still rising, inflation is way off modern charts, and we have a
Fed that’s looking to the winds to determine what it should do.
Over in London,
the markets keep pushing things against us. And if the Fed doesn’t tighten
credit, UK
financiers will. The London Interbank Offered Rate (LIBOR) is bumping up after
the British Bankers Association came clean about how it led some member banks
in Europe cook the posted rates that establish
the standard US dollar interest rates.
And in New York,
financiers are moving to ditch the now-questionable LIBOR as the basis of all
sorts of lending--mortgages, car loans, even corporate financing. There’s a
movement to shift to other benchmarks that rely on real-world loans and swaps
to come up a US dollar lending rate. But none of this is coming from the Fed.
We’re going to have higher interest rates one way or
another. Shorter-term rates will rise quickly. If you’ve been looking at the
short end of the yield curve as the parking place for less risk, get ready to
move out and head into the longer-term end. That’s where the real economic slowdown
brought on by tighter money--with or without the Fed--will begin to be
reflected.
Now that I’ve led you down a dark path for the markets, doesn’t
a positive distraction sound enticing? How about a great getaway trip with me
and my Personal Finance colleagues Roger
Conrad and Elliott Gue?
Never taken a cruise? I didn’t, until my first, and all I
thought it would be was wrong. But not all cruises are the same. You need to be
on the right boats, with the right chefs, going to the right locales.
Join a select group of subscribers on a cruise
commencing at the Port of Miami, proceeding through the Caribbean (including one
of my favorite islands, St. Barthelemy), continuing on through the Panama Canal
to Costa Rica.
This is a great opportunity to come to know firsthand
what many subscribers have learned by going along with me on previous cruises:
We enjoy ourselves enough to let go of at least some of the market-driven
agita, and we’ll get some tax benefits to boot.
Click here
for more information.
Dead Guys of the Week
The man who took the lead in some of the most memorable
shows of the classic era for television died at 88 years. I write not of an
actor or actress, but of the guy who got it all going with the theme music.
And for The Andy
Griffith Show (I can hear you whistling from here), The Dick van Dyke Show and countless others, Earl Hagen deserves full
credit for his compositions.
Where would McDonald’s
be without its famed French Fries? Some of you may go for a side salad, but for
Ray Kroc it was always the same favorite meal that I go for: a regular
hamburger, fries and a coffee.
To get the fries to work, Ray needed someone to lead the
way. And this meant freezing cut potatoes on a large scale to ready them for delivery
to stores around the nation and, later, the world. Cue one JR Simplot, who died
at 99 years.
JR was a potato farmer who done good. And with a bit of an
investment in a few freezers, JR became Mr. Spud for McDonald’s.
Speaking Engagements
“The coldest winter I ever spent was a summer in San Francisco,” a saying that’s almost a San Francisco cliche, turns out to be an
invention of unknown origin, the coolest thing Mark Twain never said.
The natural setting is, however, among the most exciting in
the US.
Venture west for the San Francisco Money Show Aug. 7-10, 2008 and conduct your
own field study.
Roger Conrad, Elliott Gue and I will discuss infrastructure,
partnerships, utilities, resources and energy, and tell you what to buy and
what to sell in 2008.
Click here
or call 800-970-4355 and refer to priority code 011363 to attend as our guest.
I’ll also be appearing at the following
events:
If you’re interested in having me or one of
my cohorts address any investment or professional groups, please e-mail me at paymeweekly@kci-com.com with ideas or
suggestions.
Errors/Omissions: I always welcome being
called on facts, figures and commentary from readers and look forward to your
feedback. I can be reached by e-mail at paymeweekly@kci-com.com.
Neil George
Free Tax-Free Bonds Report
