Investing Daily

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:

• The Wealth Expo, Miami, Fla., May 31-June 1, 2008
• The Personal Finance Investment Resource Cruise, Dec. 1-12, 2008

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.