Fed Follies

The Daily Reckoning – Weekend Edition
June 24-25, 2006
Baltimore, Maryland
by Kate "Short Fuse" Incontrera

VIEWS FROM THE FUSE: FED FOLLIES

After the Consumer Price Index, released earlier this month, showed more inflationary pressures on the U.S. economy, there is no doubt in anyone’s mind that the Fed will raise rates for the 17th consecutive time at their meeting next week.

The rate-hike campaign has its two-year birthday this month, and this next hike will bring the Fed’s key short-term target to 5.25 percent.

How far will the Fed go in their rate hikes? Some economists fear that if the monthly reports will keep coming in showing inflationary pressures, the Fed will get overzealous, perhaps raising 50 base points in one hike instead of the normal 25, and end up doing more harm than good – forcing the United States into a recession, in other words.

"We don’t really fear inflation, we fear the medicine," said Art Hogan, chief market analyst at Jefferies & Co. "The real fear is that the Fed goes too far and really slows the economy down more than we would like to see. The medicine, if you take too much of it, can cause a recession."

While some economists worry that the Fed has already pushed past the "neutral zone" – where fed funds will have no adverse effect on the growth of the economy – in setting short term rates, others argue that higher interest rates won’t make a difference with the factors that feed inflation.

CNN Money reports: "Some economists say rising energy prices are bleeding through to affect the broader economy. Others point to the rise in housing prices during the recent real estate boom. Some even say that due to a quirk in how the government measures housing prices, a weaker real estate market can actually make inflation seem higher."

So, it would seem that economists and analysts are sending quite the mixed message here. We’ve got one group saying that the Fed could drive our country straight into a recession with their rate hikes, and another saying that higher interest rates won’t be able to curb inflation. No wonder Bernanke seems so confused most of the time.

Our prognosis? We may not know as much as these highly trained economists, but we have been watching the price of gold. This correction has surely scared some of the speculators off, and it’s time to get your hands on the yellow metal. Take advantage of this low price before investors start taking these inflation concerns seriously, and flock to gold as a hedge.

Short Fuse
The Daily Reckoning

P.S. Confused by all the different views and information coming in from government economists and analysts? We don’t blame you – it’s hard to know what to believe and which group has their own agenda to push, and so on.

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— Daily Reckoning Book Of The Week —

Debt and Delusion: Central Bank Follies That Threaten Economic Disaster
by Peter Warburton

A note from the author:

Debt and Delusion exposes serious flaws in the development of the global financial system starting in the early 1990s, singling out the world’s largest central banks for special criticism. Their negligent oversight has permitted an explosion of corporate and household credit that has fueled a succession of false markets in stocks, bonds, and property. Alarmed by the monster so created, the U.S. Federal Reserve has spent much of the past five years staving off the evil day when foolish lending turns into bad debt.

Far from being the architects of economic stability and low inflation, the world’s central bankers have ushered in a new era of financial fragility and latent instability. Innovations in the use of derivatives, structured products, and other complex financial instruments have been applauded by the central banks on narrow technical criteria. But these supposed bastions of conservatism have failed to comprehend the wider implications for financial stability.

From poorly documented home loans to sub-prime auto loans to subordinated corporate debt and junk bonds, permanently easy access to credit has compromised economic management in the U.S., U.K., and other English-speaking nations and has fostered an illusion of prosperity and well being.

Lamentably, this staggering collective flight from reason has been endorsed by the economics establishment.

The failure of many of the finest economic minds to engage with the rapid evolution of our financial structures and institutions has led to a superficial assessment of this unprecedented credit experiment. Only now, as various credit markets face the inevitable tests of higher interest rates and the realistic pricing of credit risks, is the threat of a pandemic of debt-related distress beginning to be taken seriously. Government budgets, already strained by the weight of social support, have limited scope to respond.

In short, tougher economic times lie ahead, when personal debts will hang more onerously than for 75 years. Debt and Delusion recommends a hasty! reappraisal of the debt requirements of corporations and households alike.

THIS WEEK in THE DAILY RECKONING: The Peak Oil debate continues this week, with Outstanding Investment’s Justice Litle wondering how much this phenomenon will effect the United States in the near future. You can read his essay in Wednesday’s issue, "Does Peak Oil Really Matter?".

Buck Naked    06/23/06
by Bill Bonner

"Mr. Greenspan’s desktop motto has another sort of punch line hidden in it, though. More dollars came to birth while he was the nation’s top banker than under all the other fed chiefs combined."

Beyond Fear and Greed    06/22/06
by Dan Denning

"Economics is not physics. It does not obey the laws of physics. In truth, economics is not even a science – not yet, anyway. This is why Adam Smith was the chair of moral philosophy at Glasgow University and not, say, an actuary."

Does Peak Oil Really Matter?    06/21/06
by Justice Litle

"The long-term energy bull market we are in is more of a demand-driven infrastructure arbitrage, playing out over a period of many years, than a Peak Oil phenomenon."
Immigration, Demographics, and Your Livelihood, Part II    06/20/06
by Harry Dent and Rodney Johnson

"Though the U.S. has had some ethnic tensions due to the high immigration rates of recent decades, our problems are minor compared to those of our contemporaries in Europe."

Bond Buying and Pill Popping    06/19/06
by The Mogambo Guru

"This is the ultimate in fiscal fraud and they all should all go to prison for it. And if the American government was not filled with stupid, ignorant, untrustworthy, lying, corrupt, cheating jerks, that’s where they would go."

FLOTSAM AND JETSAM: Who doesn’t love traveling via airplane? The long lines, the excitement of a security check, screaming children in the seat behind you…the fun never ends. James Kunstler shares his latest excursion across our fair country…

Flying the Friendly Skies
by James Howard Kunstler

Forgive me for starting at the end (of my West Coast excursion), but it’s the most amusing part. So, they load us on United 302 (Chicago to Albany) and we push back from the jetway, and about ten minutes later I notice that we are taxiing past the "C" Concourse again, that is, we’ve circled around the whole airport. Okay, well, O’Hare is a weird operation.

So I sink back into the newsprint fog of the fifth newspaper I’ve read that day and after another ten minutes I notice we’re rolling past the "C" Concourse yet again. It’s also real hot in the plane because it’s 90 degrees outside and the AC isn’t running too well. The other passengers are getting grousy.

So, we finally stop driving around the airport and apparently get on line for takeoff. Only it looks like a staggeringly long line, going forward and around the corner and up the tarmac, forever. "Kcccchhhhhhh," static over the PA as the pilot gets on the microphone. "Uh, folks…." (Whenever they start with that patronizing salutation, you know you’re in for the business.) "Uh, folks, it seems to be rush hour out here. They’ve got us at about, oh, twenty-five or thirty for takeoff…" Groans up and down the aisle. "…and we’ll give you an update as soon as we have more information, Kccchhhhhhhhh."

Okay, we’re already a half an hour late for takeoff, and everybody’s roasting in the cabin. I’m thinking, the pilot said, "It’s rush hour out here." Wait a minute. I don’t get it. Rush hour? Like a whole bunch of planes just showed up at O’Hare unscheduled? Coming and going? Nobody was informed about it ahead of time? They’re all…surprised? Like there’s some kind of airplane freeway ramp out there feeding onto O’Hare, and for some reason a whole lot of planes just appeared? And now the runways are clogged with planes that nobody expected or knew about…?

I mention this because this is the kind of mendacious bull that Americans are subjected to constantly. No wonder we can’t think about public affairs anymore.

Okay, so I spent nine days on the West Coast, starting in Los Angeles, Pasadena, actually. Let’s just say that part of the United States is absolutely hopeless. It consists largely of a roadway hierarchy and whatever’s left is apportioned to valet parking. It has no future. The poor oblivious denizens of the place don’t question their predicament. The whole sordid scene is, well, tragic, and I’m sorry, but let’s pass over it for now.

So, eventually I got up to Seattle, which is trying to be a city, like a real twentieth century city — did I say twentieth? Well, there’s the problem, right there. They’re lining the avenues with condo skyscrapers. Big mistake. Skyscrapers are not going to be cool in the twenty-first century as we run into problems with the electricity supply. Oh, well. The other problem with Seattle is this: the topography is really demoralizing. The hills are so steep that I got shin splints from walking around the place for one day. Now, if the people who lived there and run place had any sense, they would have cable cars or some damn thing traversing the hills every ten blocks. Then, you could walk the contours comfortably and get up the elevations okay.

But they don’t do that. They probably had them ninety years ago (and, in fact, I saw framed photos of Seattle’s cable cars in the Town Hall auditorium lobby where I gave a blab, so I know for a fact they did). But apparently they forgot how to do that. So now, obviously, everybody brings their car downtown because it’s impossible to walk around comfortably, even if you’re in shape, and Seattle has become one of the worst cities for traffic in the nation.

Eventually I got up to Vancouver on Amtrak – a very comfortable ride along the shore of Puget Sound past flocks of eagles and all kinds of natural beauty – and when I went through customs at the Vancouver central station, I was pulled aside and directed into a grim little room with a female interrogation officer. I had a New York DWAI traffic conviction dating from 1997, and did I know that this made me undesirable for entry into that fortress of rectitude, Canada? Well, gosh, no… Then the lady officer said – I swear she did – that she could prevent me from entering if she had been in a bad mood. But instead, she gave me printed instructions for how to apply to the Canadian consulate back home for a document proving I had been rehabilitated (from a misdemeanor). It was interesting to note that Canadian border policy depends on the particular mood of individual customs officers.

Vancouver is a very appealing site for a city, but it is in the process of being utterly pranged (as they like to say) by massive hyper-mega-overdevelopment. And anyway, circumstances had me more-or-less house-sitting an old college friend’s home way up in the hills of suburban West Vancouver, where it required fifty dollars in cab fares to get something to eat. Enough said.

I took a spectacular ferry ride, on an extravagantly comfortable (and cheap: $8.50Ca) vessel over to little Victoria, the capital of British Columbia, on the big island out in the Pacific. Victoria, too, was on its way toward a good self-pranging, but there is a visible residue of the pre-pranged city that is scaled comfortably and possesses great natural beauty. I met a lot of nice people there, and they didn’t seem disturbed that nine years ago I had incurred a misdemeanor conviction for DWAI.

The rest was that torturous return journey home via O’Hare, which I already told you about. One final note, however, to the hotel chains of North America: please lose those twenty-pound duvets you’re putting on all the beds. They’re too heavy. They’re too hot, even with the AC on. I hardly slept the whole time I was away. No wonder I’m cranky.