But as long as the credit keeps expanding, which you can measure by total debt, then that means that people are still borrowing and spending money, and as it winds through the system there will be money flowing into everything, and that includes the stock market and the bond market and the housing market. So far so good.
In a related note, Total Fed Credit, which is the ultimate measure of "money out of thin air," went down by a whopping, and surprising, $11 billion last week. I am not sure what this means, but it is unusual, after all these years and years of the damnable Federal Reserve creating more and more money and credit, day and night. But if it continues long enough, then the money supply will start contracting. And while I am again not sure exactly what THAT means, either, the steel-trap mind of The Mogambo (STMOTM) notices that there are no economic theories that start out with "To get economic growth, first you need a shrinking money supply." Hahahaha!
That new lack of borrowing is why the chance of Congress authorizing the use of Social Security contributions to be invested in private accounts is almost sure to pass. And if it does NOT pass, then I will have this really surprised look on my face and people will say "Is something wrong with The Mogambo? I mean, look at his face!" and somebody else will say "Yes, by golly! It DOES look like something is ailing him. I wonder what we can do to help him?" and I tell them that giving me twenty bucks would go a long way towards making me feel better. But then they just stare at me and get all huffy and make some rude comment, and I never get the twenty bucks, which shows you just how deep their compassion runs, the little bastards.
But the subject was not my problems with things surprising me, and how I never get the twenty bucks, dammit. No, the subject was that if you really want to see the beginning of the Great Bear Market Which Signaled The End Of The World, then pay attention to how much debt is being created, because if credit is going up, then that means, as I never seem to tire of saying, that people are borrowing and spending. But when it starts going down, then people are not spending, and economic and financial things will start going down, too.
In the meantime, perhaps we can take some solace from Bob Wood of Kaizen Managed Assets, who explained to me over lunch that everyone apparently believes that the whole "economics thing" is apparently of divine origin, and is so complex that our puny human minds cannot comprehend it, and so economics must be taken on faith, particularly faith in the Federal Reserve. It is, we decided, sort of an Intelligent-Design, Neo-Keynesian, Supply-Side Economics, and thus we expect that all books of economics will, in the future, have affixed to their covers a sticker that reads "Intelligent-Design Neo-Keynesian Supply-Side Economics is a fact, and not a theory" thus effectively proving it.
- There is a plan afoot to let American corporations who have substantial assets sitting in foreign countries bring the money "home to America" by allowing them to repatriate those monies by paying a special, one-time, ultra-low tax rate. This is supposed to be some wonderful news. But it will not be such hot news for those countries that are currently harboring those monies when they see it flow out of their countries, and out of their assets, and out of their markets, and out of the control of their governments.
- As a little change of pace, let's take a little trip to Technical Analysis Country, and visit Chris DeHaemer, courtesy of the DailyReckoning.com site. Suppose that you want to make a little short-term money by predicting market action. How do you do that? Easy! As Mr. DeHaemer explains, look at volatility, as revealed by the VIX. "Simply put, when volatility spikes during bearish action, buy. That flood of panicked sellers is a contrarian indication that the market has bottomed. When volatility continues to drop during a time of high bullish action, sell." See? Nothing to it!
- Edmund M. McCarthy, the President and CEO of Financial Risk Management Advisors Company, is one of those guys who goes around looking at things in financial reports, while The Mogambo goes around peeking through the windows of Madame Lulu's Cavalcade of Girls, Girls, Girls, and he writes "Looking at a 10Q of a quite revered bank recently, we saw an 100% expansion in that footnote to credit quality entitled 'Over 90 days past due but not non-performing.' The dollar amount would be significant to most analyses. There was no further explanation. We will be paying particular attention to this area going forward as it was an early warning sign in previous cyclical changes."
Part of the problem may be explained by Rosalind Wells, who is the chief economist for the National Retail Federation, who notes that consumer spending appears to be dropping precipitously. Ms. Wells says, in an article in my local paper, the St. Petersburg Times, entitled "Stores Facing Closed Wallets," that "Consumer spending is about to downshift. This may be a tough year because the consumer may be tapped out." While not forecasting the imminent destruction of the globe and flesh-eating zombies rising from the grave, like the stupid Mogambo who is always either in a panic or close to one, she says that consumer spending will probably settle down to a 3.5% gain this year, down from 6.7% in 2004. I love this next part in the article: "Virtually all of the gain would be consumed by inflation. Her downbeat assessment brought general agreement from other experts and industry leaders" at some convention that they were all attending, a convention to which The Mogambo was not invited, probably due to a mere oversight or as part of a coordinated plan to destroy me, I'm not sure which, but I'll bet you know what I suspect.
Now this 6.7% increase in retail sales for 2004 is very interesting to me, because according to the AFP, consumers spent a hell of a lot of money last year. "Total sales of 4.06 trillion dollars in 2004 were up 8.0 percent from 2003, the biggest annual increase since 1999," they say. This is the first time in history that the consumers of one country spent more than four trillion dollars in one freaking year, roughly 12% of the GDP of the entire world.
And all of THAT may help explain why Consumer Installment Credit contracted by $9 billion in November, which was a big surprise to everyone, including The Mogambo, who is usually only surprise that armed and armored agents of the government haven't hauled me off by this time, hopefully to give me the therapy I so desperately need.
- According to XFN, "China is beginning to have an impact on US technology industries formerly thought to have been insulated from low-wage overseas competition, according to a report prepared by a US Congress-mandated commission. China's exports of electronics, computers, and communications equipmentare growing much faster than its exports of low-value, labor-intensive items." Hey! I know what you are thinking! This isn't fair! As I understood it, the deal was that those Chinese guys would remain content with their peasant status, work like slaves for pennies a day in horrible working conditions, and then we Americans, for our part, would sit around in our air-conditioned offices, waiting until the boss isn't looking, then go online to go shopping to buy those cheap Chinese products, and download entertaining pornography to pass the time while we wait for delivery! And use money borrowed from the Chinese to pay for it all! Isn't that the way you understood the arrangement? Me, too! This proves that you can't trust the damned Chinese!
Chinese economic growth has been averaging 9.7% a year from 1990 to 2003. Partly as a result, the People's Bank of China said that China's foreign exchange reserves rose 51% last year to $610 billion, a new record. (But as John Mauldin reports, suddenly, the overwhelming bulk of that increase in reserves was NOT in dollars!) And China's M2 money supply growth expanded 14.6 percent from a year earlier. M2 in China is now up to 25.3 trillion yuan, which apparently works out to $3.06 trillion, which is, for comparison, roughly equal to half of our M2 money supply. So, like the budding little capitalist swine that they are, and we are, and we all are, the nefarious Chinese now want to invest in producing high-value items, taking the bread out of our mouths! As one of the bright dudes at the Daily Reckoning website notes, also looking at the trade deficit, "Over the last 12 months, exports of 'high tech products' actually FELL 21%." How much longer before they start producing some nuclear weapons, like us? And then they can strut around the world, randomly kicking butt, like us! And won't that be nice?
But life is not all eggs rolls and Geisha girls who are all giggly and happy until they find out I have no money, and the inflationary impact of such unrestrained money/ credit/ production excesses is showing up as higher and higher consumer prices, which is why the Chinese are trying to cool off their economy, even though the official Chinese consumer price inflation is only 2.8%. On the other hand, America's official inflation rate is higher at 3.5%, and instead of trying to cool the economy in the face of such high inflation, the Bush idiots are trying to stoke inflation even higher! And then people wonder why The Mogambo has locked himself in the Mogambo Fortress Of Solitude (MFOS) and is writing terse, incomprehensible letters to George W. Bush (e.g. "Dear Butthead President: Arrrggghhhh! Signed, Angry in Florida (AIF)").
And speaking of China, one of the most Profound Moments In History According To The Mogambo (PMIHATTM) is that Mises.org reports that the Taiwanese have published, in Chinese, a reprint of Murray Rothbard's famous book "What Has Government Done to Our Money?" This miraculous little book (62 pages), which is actually more of a booklet, contains all you need to know about money, credit and economies, and the disastrous results of fiat currencies, fractional banking, government deficits and all the rest of the stuff that keeps The Mogambo screaming long into the night until the police come and make me shut the hell up by putting handcuffs on my wrists and tape over my mouth, which tastes like crap, in case you were wondering, and then the rest of the night all I can muster is muffled cries of rage ("Mmmffhhh mmmummfffmmmm!").
And now that the book is translated into Chinese, that singular effort will doom us if they take it to heart and base their money on gold. Our only hope is that the politicians of China are as corrupt and stupid as our own, and opt to go with a profligate central bank creating and un-backed paper currency in a banking system rife with fractional banking excesses, too.
- Let's not count the Russians out! Agent 007 ("The name is Bond. James Bond") has had his share of run-ins with those guys, now their central bank reports that their foreign currency and gold reserves rose to a record of $124.6 billion. Note that they are including gold in their report, which we do not, and they are accumulating gold, which we do not, either, mostly because our government and central bank figure that Americans are too stupid to know the significance of that. The only good news is that Rothbard's book has not been translated into Russian, as far as I know, although the fact that they are accumulating gold shows that it probably has. Now we have the Russians AND the Chinese to worry about! Fabulous. Just freaking fabulous.
People often ask, "Mogambo, how come you never amounted to anything and are, according to recent data, actually a big failure in everything?" Well, to be fair, they usually only ask me that question one time, and then forever after they carry bad memories and/or actual scars to remind them not to ask me THAT damn question again!
But they are wrong when they say I have failed at everything, because you can ask anybody who works at the supermarket about monetary policy and they ALL know all about how the dollar is being destroyed by the Federal Reserve, and how they are literally creating this tsunami of credit and money, which is going to rise up destroy our money by lowering its buying power to, rounding off to three decimal places, squat. And if you have never actually tried to exist on money that has buying power that registers in the "squat" range, then gather up some attractive pebbles from the roadside and try and use those "pretty rocks" as money when you go to the store. If you try that silly crap around here, as soon as you use the phrase "pretty rocks" the manager will probably run off, tearing out his hair and screaming, "Noooooo!! Not the damned Mogambo and his damned 'pretty rocks' and his damned loud monetary policy lectures! Death, where is thy sting?"
But Hans Sennholz takes the calm, philosophical approach, as he demonstrates with his essay "The Dollar's Questionable Future." He writes, "If the love of money is the root of all evil, the depreciation of money must be the mainspring of all shams and frauds. It works silently and covertly, impoverishes many while it enriches a few, and thereby inflicts great harm on social cooperation and international relations."
And what do you get when you, as he says, inflict "great harm on social cooperation and international relations"? You get strikes and riots, something like the recent outbreak in Moscow when they tried to trim a little off their bankrupting welfare payments, and countries like the USA operating as terrorist nations that routinely invade other countries and kills whole swaths of people. Oops! But then again, nobody ever said that the downside of a fiat currency was pretty.
- The U.S. trade deficit reached $60.3 billion in November. Peter Schiff, of Euro Pacific Capital, makes the telling statement that "The reality is that a falling dollar, by itself, only exacerbates the trade deficit, by increasing the cost of imports." How much, you ask? Before I could shrug my shoulders and admit I had no idea because I am just a big, brainless idiot with a big, fat mouth, Mr. Schiff saves me from that embarrassment by interrupting to say, "Including energy, import prices rose 6.9% for the year." And yet I cannot pick up a newspaper or listen to some clueless market tout on TV telling me how there is no inflation in prices! Hahahahaha!
And it gets worse than that, because if the dollar continues falling in value, then imports will continue to go up in price! Bummer!
And don't be mollified by the teensy-weensy. 0.7% drop in producer prices last month. The index still posted a 4.1% gain on the year. And why do producer prices matter? Because there is a lag between higher wholesale prices and rising consumer prices down the road, since somebody has to eventually pay the higher producer prices. And if you are at all familiar with how business actually works, let me tell you. Somebody owns a company, and they hire a manager to run it so that the owners can make a profit without actually working. The profit comes between the cost of inputs (producer prices) and the price they get for selling the firm's output (goods and services). And when that profit goes down because producer prices are up and the manager did not find a way to increase prices, then the owners come into the manager's office and the next thing you know (insert video footage of Donald Trump looking into the camera and saying "You're fired!") two beefy guys from Security have me under the arms and I am being hustled towards the door and tossed into the cold street, and all the pretty secretaries are looking out the window at me, including the adorable Teresa, with whom I had thought we had shared the bond that unites two tortured souls, but who is also standing there yelling "Get lost, ya big weirdo! " and laughing at me, which is a sting that really hurts the most.
Continuing on, Ron Peebles of the PrudentBear.com site writes that The Mogambo is right on the money (although he doesn't actually mention me by name, but he did crinkle up his nose as if he had smelled something bad, which is practically the same thing) about this inflation thing when he says, "For the record, prices for intermediate goods, excluding food and energy, were up 8.3% in 2004, with crude goods soaring 20.1%."
Then he went on to talk about other, more prosaic things, such as housing prices. Chugging another shot of cheap tequila to help us forget for a moment that we are buying each other's houses for what is elsewhere known as "a king's ransom," he says, "Oh sure, having your house increase in value is a great thing if you're planning to sell in California to buy in North Dakota. But if you're going to stick around long enough to get some use of those granite countertops, the penalty for such pleasure is higher property taxes. According to CNN, state and local property tax collections in Q4 spiked 9% year-over-year." So high-priced houses mean high-priced taxes. It just doesn't get worse than that!
- Alfred Tella of the Washington Times has taken a look a the Fed minutes and notes that "Some members worried that low interest rates 'might be contributing to excessive risk-taking in financial markets.' " No kidding! Hahahaha! That is the whole point of it, isn't it? Everybody is running around taking on more risk to hopefully (please please please!) get higher returns, right? And now that the Fed is provably intent, in their desperation, on permanently lowering the cost of borrowed money to less than the rate of inflation, they figure that people are NOT going to be taking on more risk? I was right; the Federal Reserve IS a bunch of idiots!
- Richard Russell, of the Dow Letter, wryly notes that the idea (Mogambo says "Not just an idea, but a Really, Really Stupid (RRSI) idea!") underlying the Bush scheme of putting part of your Social Security money in stocks is that they figure that "the long-term rise in stocks will make up for any possible inflation, and SS would then be a boon instead of a boondoggle." Hahahaha! This proves that Bush is an idiot, because if he was NOT an idiot, then he would have died on the spot for saying something so ridiculous! For one thing, we are not having, nor are we going to have, "possible inflation." It is beyond "possible." Price inflation, and ruinous inflation at that, is a dead-bang certainty. And if you care to examine the evidence, financial assets do not usually prosper for long when inflation is roaring.
To further bury that idea, Mr. Russell reports that Stanley Hogue, a defense industry analyst and MIT graduate, put money into SS over his 45 year career, and then decided to go back and check his own records to answer the burning question "Would he have done better investing his money than the bureaucrats at SS?" Mr. Russell notes his method: "He recorded all the payroll taxes, tracked down the return the SS Trust Fund earned for each of the 45 years, and then compared result with what he would have received had been able to invest the same amount of payroll tax money over the same period of time in the D-J Industrials (including dividends)." So what was the result? "To his surprise, the SS investment won out: $261,372 vs. $255,499, a difference in favor of SS of $5873." He didn't mention the tax bite, I notice, but perhaps it was implied.
And this all assumes that private pensions will always be a good deal. Not so! For example, Paul Krugman comments on an article in the magazine American Prospect, which illustrates the dismal failure of the British experiment in privatizing pensions. Britain's Pensions Commission warns that at least 75 percent, which is a big chunk of the population, of those with private investment accounts will not have enough savings to provide "adequate pensions." Of course, those are just the stupid British, who can't be very smart, or else Tony Blair would not be Prime Minister.
- The LeMetropoleCafe.com site attempts to answer the perennial question, "What in the hell is going on in the gold market?" They reply "The motives of The gold Cartel are as plain as day: The gold Cartel and US financial market power structure know the dollar must fall. However, they are concerned a dollar rout could cause some sort of financial market instability or panic. To prevent such an occurrence, they are following Paul Volker's insight and what he had to say regarding the rise in the gold price in 1980: '...Joint intervention in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake.' "
Note that Mr. Volker was only referring to a STEEP rise in price, which took gold to $850 the ounce. Regardless of what the gold Cartel and Mr. Volker want, the price of gold will rise, thanks to the dollar's problems.
- Warren Pollock, of The Macroeconomic Newsletter, is as pessimistic as I when he writes, "We are right on top of multiple inflection points. Will it be a dollar rout with a rising stock market, or a dollar rise with a stock market crash? My answer to this question is that we will experience both! We are going to have a declining-grinding stock market and a stealthy devaluation of the dollar." Ugh.
**** The Mogambo Sez: To start the new year, I am responding
to all those who have written and complained that the MoGu is
too long, and by the simple expedient of shortening it. You got
what you wanted. You are welcome. Now send me twenty bucks, you
cheap bastards, because that is what I want. It's a win-win situation!