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Play along and go long

Richard Daughty
...the angriest guy in economics
The Mogambo Guru
Provided as a courtesy of Agora Publishing & DailyReckoning.com
Jan 24, 2007

-- A lot of worried people ("I'm worried that gold and silver are not exploding to the upside even as we speak and that I won't be rich soon enough to suit me!") and a lot of angry people ("And I blame it all on you, you Stupid Mogambo Moron (SMM) and now I'm going to kill you!") are asking, in essence, "Why aren't precious metals moving up lately?"

To these, and many others, I hereby take the lazy way out and reprint my pithy reply to a certain Mike S., whose query was along that very line. "Dear Mike", I wrote, "What is happening is that there is a colossal short position in damned near everything, with the promise of more and more at the drop of a hat. Paper money, paper stocks, paper bonds, paper derivatives, paper silver, paper gold, paper soybeans, paper paper paper everything.

"And as long as everyone treats them as a money-equivalent, then how could prices go up if any additional demand was met with more paper silver (or paper soybeans or paper T-bonds or paper anything else) being instantly created and dumped on the market?"

And how long will this situation last? Ahh! That is the Big Important Question (BIQ)! And since you asked, I firstly assume that neither the scumbags who run the exchanges nor the regulators who are supposed to keep this corrupt crap from getting out of hand will, as usual, show any interest whatsoever.

Therefore, you can expect the price to remain artificially low as long as the number of people trying to take physical delivery is less than what can be brought to market without undue losses for the shorts, as then everything falls apart, with bankruptcy, scandal, investigations, media coverage, consumer and investor outrage, and a government that is suddenly a little too interested in what OTHER market scams are out there to suit the slimy insiders who are making all the money and running all the scams, and who are desperate to keep this thing going as long as they can!

This brings us to my Fabulous Mogambo Investment Suggestion (FMIS), which is to "play along and go long", which is kind of poetic, as this whole manipulated mess is giving you a chance to buy more and more and more silver (and all other commodities) at these low, low, low prices! It's like making money on corruption and incompetence!

So be happy! Or, as the saying goes, "Don't look a gift horse in the mouth" because it doesn't matter one way or the other; you're ahead of the game!

-- To give you a taste of "terrified government resorting to stupidity when lying about inflation is no longer enough", and perhaps get a look into our own future, from Yahoo.com we learn that "President Felipe Calderon signed an accord with businesses on Thursday to curb soaring tortilla prices", as the corn tortilla is "the basic staple of the Mexican diet and is especially crucial for the poor."

Why was he doing this, you ask? He says he wants to stop tortilla prices from rising, to "protect Mexico's poor from speculative sellers and a surge in the cost of corn driven by the U.S. ethanol industry."

How did he achieve this miracle? By mandating prices! Hahaha!

The specifics are "The accord limits tortilla prices to 8.50 pesos ($0.78) per kilogram and threatens to use existing laws to achieve prison sentences of up to 10 years for company officials found hoarding corn." Ten years in prison! In the French Revolution, also caused by rising taco prices (although this interesting fact is suppressed by the snotty French), the government did the same thing! And you know how well that turned out!

The article goes on to say "Tortilla prices rose by 14 percent in 2006, more than three times the inflation rate, and they have continued to surge in the first weeks of 2007." Hahaha!

Why is this so important? As always, the important lesson is that poor are always the first victims of the price inflation that necessarily follows a monetary inflation, and the more important lesson is that the poor are many while the rich (including all their little political friends) are few, and that makes the rich and the governments very nervous.

The article explains to us that "The rise is partly due to U.S. ethanol plants gobbling corn supplies and pushing prices as high as $3.40 a bushel, the highest in more than a decade."

What the article did NOT go on to say, to their everlasting shame, is that ethanol plants would not be "gobbling corn supplies" and pushing up prices if it weren't primarily for the damned American banks firstly creating the monetary inflation by creating excess money and credit (which was then followed by the damned Mexican central bank and all the central banks doing the same thing) all these years, that depreciated both currencies so much that it resulted in the terrifying inflation in tortilla prices. THAT'S why tortilla prices are high!

A lot of this could have been avoided if they had listened to Les H., who notes that "We now divert 14% of the corn crop to the ethanol scam", which he terms "The most odious, loathsome scam foisted on this nation since the Creature From Jekyll Island came to life in 1913" which proves he knows his Federal Reserve, at least!

He extrapolates "If all planned ethanol plants are completed by 2009, they will consume 90% of the corn crop. Clearly this will make all food prices soar to the moon." And while he did not mention crunchy, tasty tacos or their delicious tortilla shells specifically, you know what he meant.

-- In last week's very exciting issue of the MoGu, I misquoted Dr. Albert Bartlett, who actually said "The greatest shortcoming of the human race is our inability to understand the exponential function", which I consider cosmically profound.

The most important thing to know, according to Dr. Bartlett, is that the only real, understandable way to illustrate the true nature of exponential growth is by expressing all percentages of growth in a "How long to double?" format, which people can understand. The question thus becomes "At this rate of growth, how long does it take to double?"

And the technique is simple, too; merely divide the percentage growth into the number 72 ("The Rule of 72"), and you will get the time it takes to double.

For example, the statistic that "Government spending is growing at 6% a year" seems so much more benign than "Government spending will double in 12 freaking years and kill you and your whole stupid economy!" Hahaha! He's right! It does impart the real horror of inflation! Yikes! This is scary!

So how about this one for you Mexican Mogambo Junior Rangers (MMJR)? "Inflation in tortilla prices is 14% per year" is now presented as "Prices will double in 5.1 years!" Hahaha! And prices will double again in another 5.1 years, too, at that rate! Hahaha! So that in 10 years, tortillas will be four times more expensive! How do you like THEM inflation apples, Ben Bernanke? Hahahaha!

The lesson is that if you are a Mexican who is getting ready to retire soon, and you are looking out over your upcoming retirement and anticipating heavenly, halcyon days spent like The Mogambo spends his, which is blissfully lounging at the beach, eating tacos, using powerful binoculars to watch the pretty girls walk down the beach, and getting gradually drunker and drunker and drunker until, the next thing you know, it's tomorrow.

So, let me ask you, Mister New Retiree, do you really think you have enough assets to pay higher and higher prices, every year for the next 5.1 years, until you are paying exactly double for everything in 5.1 years? And do you have enough saved up to pay quadruple for everything in 10.2 years? Hahaha! I didn't think so!

Huub de H. was one reader who was also intrigued by the quote about how people do not understand the exponential function, and sent several related references that have appeared in professional journals of psychology, mostly by a guy named Wagenaar, W.A. He summarizes "In short the idea in these articles is that people are incapable of understanding the true increase of an exponential function."

Incapable! Being from another planet like I am, I instantly understand that there was no Darwinian pressure on this planet to develop such curvilinear perceptions, and so humans didn't evolve any. So it is not just that Earth people DON'T understand it, but that they CAN'T understand it! Oh!

Mr. H. says that "They do their best in estimating by using linear functions that are accurate for a few steps but then obviously fall short of the true increase."

Then it struck me! Ben Bernanke, chairman of the Federal Reserve, says that everything will be just peachy as long as "inflation expectations" are low. Now we know that they won't be low, as people get their expectations from the linear slope of two nearby points on the rising exponential function curve! Thus they will always be higher and higher!

And thus their expectations of inflation will rise and rise until they are screaming from the rooftops "The Mogambo and Thomas Jefferson were right; we're freaking doomed"! Hahaha!

This is when all hell breaks loose as interest rates zoom when investors demand a premium to the depreciation of the dollar (inflation), in which most of the world's debts are denominated. And when interest rates zoom, the market value of existing bonds (with their tiny yields) collapses, monumental losses are everywhere, and thus, although I've said it a thousand times before, I'll say it again; "We're freaking doomed!"

-- When I heard one of the talking heads on TV intimate that the new Democrat-controlled Congress would be more combative towards Ben Bernanke, chairman of the Federal Reserve, when he testified before the Banking Committee, I excitedly exclaimed "Oh, goody! At last!"

Detailed clinical records prove that my only fantasy that does not involve beautiful ladies looking, acting and/or sounding deliciously wicked (and usually scandalously underdressed) is the one where I am called as a guest member of the banking committee, and I would get to grill this horrid little man about him, his econometric ilk, and their stupid theories.

After a few hours of me relentlessly pounding him, pounding him, pounding him, relentlessly scoring point after telling point, I would say "I conclude that something needs to be done about this mess that you and your bastard banking buddies have created, and by God, I'm just the guy to do it!"

Encouraged by the shouting ("Go, go, Mogambo!") of the assembled onlookers, I would leap over the dais ("boinnng!"), bound across the floor, reach across the table, grab this Bernanke character by his tie, hauling him up and across the table to where I can get a firm hold of that little pencil-neck geek, and start slapping the living hell out him, whack whack whack, while yelling "What in the hell has the Federal Reserve and your greedy moron co-conspirators running the banks done to us, you filthy, lying, despicable bastard? You and your ridiculous economic theories and your precious computer models have killed us with monetary inflation!"

Maybe you don't want to know about any of my bizarre delusions, but perhaps you won't be so dismissive when you learn that whole teams of court-ordered psychiatrists find it absolutely fascinating.

But even more fascinating is the workings of this important banking committee, as history has consistently shown that all economic and financial calamities (booms that turn inevitably to inflation and busts) are caused by (pause for dramatic effect, accompanied ominously by wolves howling in the distance and the pitiful screams of the damned) The Banks.

It's not for nothing that Thomas Jefferson said "I believe that banking institutions are more dangerous to our liberties than standing armies," and it is further not for nothing that he is being proved horribly, tragically correct.

Alas, the hoped-for glorious spectacle of Bernanke having to answer real questions was not to be. But it was better than it usually is, as none of the panel said anything to actually indicate they were socialist, communist, fascist morons, and indeed a couple of them were mildly contentious (Sanders), but mostly in a good-fellow-well-met kind of collegial way.

So, parading their ignorance and cowardice, nothing was said about the inflation (caused by the banks) that is raging, and has now gotten so bad that the government is raising wages 40% by fiat! Command-and-control communism at its worst!

For example, the latest, deliberately-understated official reading of official annual price inflation went to 2.5%, up from the previous laughably-low 2.0% inflation per year. Real price inflation, which I define as "The kind of inflation that takes more dollars out of my pocket every freaking time I turn around", is actually running a lot higher than that.

Even so, using Dr. Bartlett's suggestion, I now rephrase the statistic from "2.5% inflation" to "Prices will double in 28 years."

According to John Williams at ShadowStats.com, the official numbers are bad enough, in that "Seasonally-adjusted PPI rose 0.9% for the month, following a 2.0% gain in November. Annual PPI inflation rose to 1.1% in December from 0.9% in November. The seasonally-adjusted December CPI gained 0.55% (0.15% unadjusted) after being reported as unchanged in November. Unadjusted, year-to-year December CPI was up 2.54% versus 1.97% in November. The annual average inflation rate for 2006 was 3.23%, slightly lower than the 3.39% in 2004, which was the highest annual inflation rate since 1991."

These numbers are bad enough, but the Real Horror Story (RHS) is revealed when he continues "Net of the methodological gimmicks added to CPI reporting in recent decades, annual inflation for the SGS Alternate Consumer Price Measure was 10.0% in December, up from 9.4% in November. The average alternate inflation rate for all of 2006 was 10.2%, up from 10.1% in 2005, and at its highest level since 1981."

Ten percent inflation! This is insane! This is beyond insane! Prices will double in 7 years!

And no mention was made by the banking committee about the absurdly-low levels of reserves in the banks, which is the root cause of the inflation! In fact, Required Reserves in the banks have dropped to a laughable $39.35 billion.

And what are these reserves for? It tells you, right there in a footnote: They are "Demand for reserves to back deposits"! Hahaha!

Please pardon my laughing right in your face, and in the process I seem to have gotten a little Icky Mogambo Spittle (IMS) on your shirt there, so I am sorry about that, too, but you may perhaps understand my apoplexy when I explain that I am here to tell you, in person, that this is probably the biggest pile of lying crap of the whole stinking mess!

The fact is - according to their own figures! - bank deposits have been generally rising, year after year, as the monetary inflation of the Federal Reserve works its way into loans and then into deposits (all that money has to go somewhere!), but Required Reserves against these deposits are not only nominally lower (in dollars) than at anytime in freaking decades, but as a percentage of deposits these "Required Reserves" (which I put in quotation marks to indicate ridicule and contempt) are at the lowest freaking point in the entire freaking history of banking in the whole freaking history of the whole freaking world! Hahaha!

The aggregate, total Required Reserves in the banks are so miniscule (audience shouts out "How miniscule, Mighty Mogambo Moron (MMM)?") that I answer "$39 billion is less than what the government borrows in a month! $39 billion is a lousy two week's worth of trade deficit! Hell, in 1998, when deposits at the banks were about $3 trillion, Required Reserves were over $45 billion back then! Now deposits are a lot bigger at $4.8 trillion, but, amazingly, Required Reserves are now less! Only $39 billion!"

Oops! I see I got a little more IMS on your shirt, but damn! The Required Reserve requirement against a new dollar of deposits is less than zero! More deposits means, perversely, less reserves! Insane!

But beyond this happy fantasy of being on the banking committee so I could wreak havoc with my relentless persecution of Ben Bernanke and the whole Federal Reserve system, imagine my screams of outrage and disbelief at the real-life arrogance of Bernanke as he actually explained, right to their faces, the hedonic techniques they use to adjust the price changes in the basket of goods and services (like the Consumer Price Index, which is the most popularly known measure of inflation).

To my utter astonishment, I sat dumbfounded when Mr. Bernanke explained that they lie their heads off by saying that if the price of something in the basket of goods and services that they measure goes up in price (which I scream "Which IS inflation, isn't it?"), then they assume that the average consumer will buy less of it!

I am agog! What in the hell the penny-pinching shopping behaviors of a cash-strapped consumer has to do with existing prices is totally, totally beyond me, but it apparently makes some stupid kind of sense to this Bernanke idiot, and apparently also to the Congressional idiots on the banking committee, who sat around stupidly nodding their heads at this outrage, I assume because they are not bright enough to know when their intelligence is being blatantly insulted! Jeez!

Then, he explained to these Congressional halfwits, your average consumer will settle for a basket of goods and services containing less satisfaction (but at the same cost) by not getting what they want, because the price is too high, but happily substituting something else that is cheaper but less desirable, and thus, at the end of the asinine mumbo-jumbo, the consumer did not end up spending more money to buy the aggregate basket of goods and services! So (they figure), no inflation! Hahaha!

As an aside, I am sorry to report that this fabulous "hedonic substitution technique" does not "qualify" under "Minimum Standards for the Care of Dependent Minors" in the state of Florida, which I found out from some very snotty social workers. The crux of my case was that I noticed that real people-food was expensive when converted to dollars per pound, but pig chow was cheap per pound, although the caloric content was similar, especially when you add table scraps to their diets. And the kids are always whining about something, anyway, so let them whine about their food for awhile. It'll be a nice change of pace for everybody!

Well, you can see where I am going with this, and I already told you that it is not legal where I live, so there is not much else to say, except that the appeal went VERY badly, too.

-- Rep Ron Paul of Texas, probably the smartest man in Congress, the only guy in Congress who abides by the Constitution as written, comprehends Austrian Business Cycle Theory, the grim economic mistake of a fiat currency and unlimited fractional-reserve banking, and who is (hopefully) the next President of the United States, is living proof that the people of his district who elected him did so because they were smarter than your average voter, and a lot smarter than everybody in Massachusetts, as far as I can tell.

To prove it, he writes "Most knowledgeable people assume that inflation of the money supply is not only going to continue, but accelerate. This anticipation, plus the fact that many new dollars have been created over the past 15 years that have not yet been fully discounted, guarantees the further depreciation of the dollar in terms of gold. The fact that our money supply is rising significantly cannot be hidden from the markets."

And when this guy gets out on the Presidential campaign trail with this explosive and timelessly true message, gold will soar. And if Americans have somehow gotten enough smarts to elect Ron Paul as President, which I hope they have, gold will soar anew!

-- Commodities guru Kevin Kerr of the Resource Trader Alert newsletter writes that the situation with oil is that while "Demand remains the same, the supply situation is getting worse. There is no substitute for oil."

As if you had to be told, the recent downdraft in the price of oil is a big, big buying opportunity (BBBO), as I daresay that there is not an economic model in the world that could not accurately see that the price of oil, in dollars, will rise from here on out.

And if you want further evidence of the fall of the dollar thus far, then merely go to the Financial Times of January 14, and read "The euro has displaced the US dollar as the world's pre-eminent currency in international bond markets, having outstripped the dollar-denominated market for the second year in a row."

-- Fallstreet.com notes that interest payments on the federal debt "which at $400+ billion annually are currently running at approximately 3.37% of GDP, could increase dramatically if interest rates rise. Other things being equal, a 1% increase in the 10-year Treasury bond yield equals a $86.7 billion increase in annual interest expenses."

That $86.7 billion works out to about $600 per year, per non-government worker in the economy.

And that estimate is good for only up to today. In the future, all the numbers will be horribly, horribly higher. Exponentially higher. As in doubling. Or more.


***Mogambo sez: If you are not getting freaked out as this economic Frankenstein starts dying, then you are not paying attention. But if you are getting freaked out by it all, then good for you!

And if you are getting freaked out, but you are not buying gold and silver in the face of the disaster that is unfolding, then I know that you are not paying attention to the One True Lesson (OTL) of economic history concerning a fiat currency and the excessive creation of money and credit; die a horrible financial death like everyone else or convert to silver and gold, and get rich beyond your dreams.

I love it when the choice is that simple! Don't you?

Jan 23, 2007
Richard Daughty

email: RichardSmithGroup@verizon.net
Daughty Archives
Provided as a courtesy of Agora Publishing and The Daily Reckoning

Richard Daughty is general partner and C.O.O. for Smith Consultant Group, serving the financial and medical communities, and the writer/publisher of the Mogambo Guru economic newsletter, an avocational exercise the better to heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning and other fine publications.

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