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The Writing on the Wall

Richard Daughty
The Mogambo Guru
February 6, 2004 (01/29/04)
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The biggest news in the monetary arena last week was that foreigners buying up US debt not only hit another huge record, but the $22 billion one-week increase in custody holdings at the Fed was also, as far as I can tell from memory because you know I am not going to do any research or real work, a new record, too!

Apparently I am not the only one who is taking an interest in this, as the big-brained dudes at Capital Insight estimate that the Japanese have created so much damn money in the last nine quarters, which I figure was probably all created to buy up US dollars to keep the yen from getting stronger, that they have produced a mountain of money that exceeds all the money produced in the previous, so they report, fifty quarters, "stretching back to when the late-80's bubble was at its height." Now that's a lot of money, and roughly equal to what I spend on pornography and Cheez-Doodles in a whole month! This has also produced the odd occurrence that Japanese banks are now so awash in money that they are trying to get rid of the damn stuff by loaning it to each other in the overnight market, at negative interest rates! Literally paying people to borrow money from you! To which I say "Hey, dudes! Pay ME to hold onto your money!"

This is beyond unbelievable to me, but then again I am the sort that sees an airplane weighing several tons fly through the air, and I have a hard time believing that, too. Perhaps it is part of the secret deals that the White House are rumored to be making, as Cheney and other administration hotshots are careening around the globe, apparently bribing foreign governments to do things that no sane government would do, of which this is probably only one minor example. And in return, we are either giving them money outright, or promising to help them when the Chinese juggernaut rises to its feet and starts terrorizing the globe. Or both. Probably both, and other things besides. Things that would probably make me plotz if I only knew.

Today, January 27, is Mozart's birthday. But this newsletter will not be published until some later date, and so by the time you are reading this, it is too late to schedule any festivities. And now I can almost hear you slapping yourself on the forehead and saying to yourself "Idiot! How could you fail to celebrate the birthday of the greatest composer the world has ever known, a man so gifted that all others are eclipsed? What the hell is wrong with me?"

Well, I don't know what is wrong with you, but as regards Mozart's birthday, there is nothing wrong with the Mogambo, who is taking Mrs. Mogambo out for German food in celebration, and be forewarned that there is an unsuspecting wienerschnitzel out there whose rope is about to run out.

And in case you didn't make the connection, Mozart beings with a "Mo" and Mogambo begins with a "Mo," too, a highly significant happenstance that I never noticed until the paragraph above, when I saw them both printed out. But now I am actually overcome with the cosmic ramifications of that, and all of a sudden I am strutting around like I am hot stuff. Go Mo!

The Leading, Coincident and Lagging Indicators came out. A big fanfare is being trumpeted about the Leading Indicator, and about how it is up, and how this is all wonderful news, and how this means you ought to buy some more stocks, and start slapping your friends on the back in your merry excitement, and exclaiming how things will be great from now on because you will soon be able to buy Viagra by the truckload. But notice by 1) the ominous, dark and foreboding music in the soundtrack and 2) the way I am leaning up close to your ear to whisper in some dark, conspiratorial way, that nobody mentions the Coincident and Lagging Indicators.

Let me broadly define what these three indicators are. The Leading Indicator is, once you congeal the constituent items into a gooey, uniform blob, future profits. The Coincident Indicator is, again summarizing, current conditions. And the Lagging Indicator is essentially costs and inventory burden.

Now, with that handy definition under our belt, let's put down that comic book where Archie is about to hit on Veronica again, and take a fresh look at the Leading Indicator, and we notice that the future profits indicator, and I am tempted to substitute the phrase The Big Enchilada for the bland term "future profits," was up by a measly 0.1. Whoopee. Big deal. From 114.2 to 114.3. I yawn with excitement. Now I personally have no idea how the literal number 114.2 or 114.3 was generated, but I am pretty sure that an increase of 0.1 is not very much at all.

Moving along smartly, we next concentrate on the Coincident Indicator, now known as current conditions, and we note with alarm that it was down 0.6, from 116.3 to 115.7. Oops. That nasty old Current Indicator seems to be signaling something adverse in The Here And Now.

The Lagging Indicator, AKA costs, was, and I am just going to blurt it out because you are strong enough to take it, up 1.9 points, from 97.0 to 98.9. Wow! So the biggest increase in the indicators was costs! And, if I remember Finance 101, which I don't because it seems so long, long ago, but it seems to me that there was a series of equations that proved that higher costs (HC) have a nasty habit of turning into higher prices (HP), because if higher costs (HC) instead turned into lower profits (LP), then the manager's job (MG) turned into days filled with lingering unemployment and career death (LU&CD), and that somebody new (SN) has the old manager's job (OMJ), and this new person (NP) with the old manager's job (OMJ) will work like hell (24-7) to get some higher profits (HP), and the fastest way (FW) to do that is to increase prices (IP) as soon as possible (PDQ). And higher prices (HP) is the very definition of price inflation (PI) which the Federal Reserve (FR) says does not exist, so somebody has their head stuck up their fat wazoo (FW).

So the next guy who tells you that inflation is tame, and that it will remain tame for the rest of your life and the lives of your children and grandchildren, is a liar, like one of those boneheads from the Federal Reserve, who are so fond of intoning those very sentiments in a soothing, hypnotic way, like an Indian fakir trying to entrance a cobra by playing some weird kind of clarinet or something, all designed to prevent you from noticing that every waking moment of your pathetic life you are seeing prices going up and up.

Now I gotta correct an error. The news in the last MoGu about the government defaulting on a lot of bonds turned out to be not true, and so I passed on some bad information and outright lies, and so I'm sorry. But I had seen a reference to it on the news channel, as it sped across that little ticker at the bottom of the screen, and I was shocked to see it, and waited and waited for it to come back around, or the on-screen talking-head to refer to it, but nothing ever happened, and so I figured that I had made a mistake. Then, the next day, I read the same news from an on-line source, and so I naturally figured it was true. And to tell you the truth, the idea of the government of the United States acting irresponsibly is not that much of a news tip to me, and so defaulting on a bunch of ratty bonds and screwing over a bunch of people is nothing totally unexpected. But the guy who was mostly instrumental in spreading that bit of misinformation, and whose face is as red as a beet, and I feel sorry for him because he accidentally slipped up, and now he feels terrible about getting suckered, also issued a retraction. And so now I am doing it, too, although I feel no guilt whatsoever, and I am printing a retraction only to prove that I can learn from my mistakes, even though I did not make any mistake, and haven't learned anything, so this whole thing is actually just a gigantic waste of time, which also describes my whole pathetic life, but let's not get into that right now.

In my defense, I rise to my feet and, doing my best imitation of a Southern lawyer and curling my thumbs under my suspenders, I face the jury and begin my summation. "Ladies and gentlemen of the jury - and may I add that I have never seen such a good-looking and intelligent jury in all my days before the bar? - I ask you: would you ask a dog to wash your car? Of course not! And likewise," and here I pause and with a smile on my lips, and wink at the jury to let them in on the joke, "anybody who relies on the Mogambo to do fact-checking, perform due-diligence or work of any kind, get his facts straight, act like a decent human being, bathe regularly, not grunt while eating, or even give a damn about what you think and don't think, is making a huuuuuuugggge mistake, roughly on a par with my wife marrying me." To which I say, under my breath, "Chumps!"

It is budget season here in Florida, and we are having as much fun as anybody. The new state budget is a cool $55.4 billion dollars, which is up 2.6% over last year, attended by a lot of borrowing from here and there. The idea that inflation is tame is again put to rest, as government spending rising like this is pure inflation in government spending.

This $55.4 billion is the amount being spent on behalf of the paltry 16 million people who live here, and that comes to, and wait a minute while I try and divide one number by the other, $3,462.50 per man, woman and child in the state. So for a family of four, which is you, your spouse, and those two adorable children of yours who are each adorable enough to star in a Gerber commercial on TV, that comes to a hefty, and let me multiply this on my calculator, and you will notice my intense concentration is causing beads of sweat to glisten on my manly brow as I punch in the numbers and operators, $13,850. A year.

Now, I realize that to a real big shot like you, $13,850 a year is chump change in your family's budget, and you probably spend more than that much per month on maintenance on your matching, color-coordinated Ferrari convertibles. But to a loser like me, and my loser family, and our loser income, and all our loser friends and neighbors, all of us standing by the side of the road waving our "Will work for food" signs at you as you speed by, happily yammering on your cell phone to your other big-shot friends, that's a nice piece of change.

And that brings up two important questions. 1) where does the state get that money, and 2) can we get some of that money, too? The second question is very easy to answer; "no." But the first question is almost as easy, only more involved. If it were the federal government running this abomination, then they could print it up. Now that's easy!

But the states are not allowed to do that! They have to actually get it from somebody. Who? The state has to get it from the wallets of the aforementioned "every man, woman and child," in one form or another. They can either 1) tax these people directly, or they can 2) tax businesses, and then the businesses will simply recoup the money by charging higher prices, with the effect that, again, the man, woman and two children are paying the tax when they go shopping. At the end of the day, the 16 million men, women and children each pay $3,462.50 to the state per year.

The third option of the state getting money, namely sending masked intruders to crash down the door to your house and robbing you blind, is not far away. But as of yet, they still aren't allowed to do it. Although I would not be surprised to discover that those exact powers are embedded somewhere in the Patriot Act. Not surprised at all.

Because, and correct me if I am wrong, but I am not, that the final consumer pays the cost of everything. And by everything I mean the labor and raw materials and capital and, of course, the taxes that the producers pay. And the men ("me"), women ("my wife"), and children ("Never saw any of them before in my life, Officer") of the state ARE the final consumers we are referring to. And they, or we, or us, will pay every damn dime, in one way or the other, and in cash. Always in cash. And always more and more cash, too.

The President of the United States had his State of the Union address, and he is urging Congress to "act to address rapidly rising health care costs," as if there is anything that they can do, except to make health care costs higher and more onerous. What they can do, of course, is try and change who pays for the health care.

And, as another Big Wonderful Plan, Bush wants to spend big federal dollars on educational re-training of America's workers? Which will, theoretically give them the skills they need to compete in this modern world? Huh? Like what? I want a list of those valuable skills, as I cannot fathom what in the hell those jobs could be, in the aggregate. In my personal case, of course, perhaps a little training on how to use a fork or spoon, instead of just cramming handfuls of food into my mouth, might ultimately increase my employability. But other than addressing my woeful lack of basic social skills, name something, anything, that you can learn to do that can't be done cheaper by some worker in India, or China, or Mexico, or, or, or, and here is where the Mogambo shows remarkable productivity, the kind that makes Alan Greenspan so deliriously happy: Instead of reciting the whole list of all the countries in the world who have laborers who will work for less than Americans demand, I will concisely summarize with the short phrase, "Damn near every country on the globe."

So that brings me back to the original question, which is; what is this magical education and re-training that is supposed to alleviate our plight? Nobody ever says. Even Alan Greenspan is sure that jobs will be created in the future, but he can't think of what they could be.

Well, most of you came here today to hear what I have to say about the Bush plan to allow you to get a tax credit for health insurance. My initial response: Wow! It is the kind of irresponsible two-fisted giveaway that I laughingly suggested, in a previous MoGu, that they do. I never actually thought they would do it!

Under the old plan, which is the current plan, you get to deduct your health insurance premiums from income. As an aside, it looks like the premiums are 100% deductible this year, which means you don't pay tax on the money you spent. You still pay the damn premiums, of course, it is just that you don't pay income tax on it, too. Example; if you pay six grand year for health insurance, you do not pay tax on the money. Total out-of-pocket: $6,000. Last year, for you historians out there, you got to deduct only half the premiums from income, and you paid income tax on the rest. Total out-of-pocket last year; the $6,000 in premiums, and, at a 25% tax rate, another $750 in income taxes on the other $3,000, for a total of $6,750.

The new plan, the Bush plan, the tax credit plan, is better yet. The new example works like this: if you pay six grand a year for health insurance, you get back the money (currently estimated to be a maximum of $3,000) by claiming a tax credit! This tax credit section is at the end of the 1040 Income Tax Return, not the beginning! This is a big difference! So, the credit comes AFTER you have figured out how much tax you owe, and you deduct your premiums from that figure! Wow!

So, the example is now; total premiums are $6,000 per year. Total-out-of-pocket: $3,000, thanks to a $3,000 tax credit. Of course, this assumes that you have $3,000 of taxes due. If you don't, then you are a piece of trash, and you don't get the full deduction, and why should I care about you, you pathetic loser?

And as the benefit gradually escalates through the coming years, because dispensing higher and higher government benefits is what the government sees at its duty nowadays, ("Working for America by bankrupting us all through the wonders of communism and re-distribution of income!") it will surely go to a 100% credit, which is, at the bottom line, free health insurance! You pay the premiums, and when you file your taxes, you get it all back!

So perhaps this answers my original question: What are these jobs that we are supposed to re-train to do? Health care workers and income tax form filler-outers.

John Mauldin is familiar to anybody who reads economic commentary, and he has written another fine essay entitled, "The Supercycle of Debt- America's Growing Burden." "Debt and the dollar," he says, "employment and interest rates, the U.S. economy and world trade, money supply and inflation/deflation, taxes, deficits, commodity prices, politics, war, regulation plus a host of other variables. They are all related in a very complex and dynamic fashion. Changing one of them may change each of the others in often unpredictable ways, which in turn affect all the others."

Which is exactly right. And he could have gone on to say "And then every minute, of every hour, of every day, they are all interacting in the new, strange, unpredictable ways, and each is affecting all the others all over again, and being affected themselves, and it all goes round and round and round, until the Mogambo is quite dizzy and has to sit down until the nausea has passed. And then you gotta ask yourself, 'Am I so stupid that I will give any credence whatsoever to somebody who says he is forecasting things five years out?' "

A peal of scornful laughter rings out, and the audience turns and looks to see who had uttered such an unearthly laughter, and they immediately gasp in recognition of my cape, and sword, and my mask made of the shirt of my dear, dead brother. I laugh again - hahaha! - and say "I, and remember that I am the Mogambo, say no! Not only no, but hell no!"

Then I turn, and with the point of my sword scratch an "M" into the wall, leap through the open window, and ride out of sight, into the night, with a hearty "Hi, ho, Mogambo!" And the next time somebody says that they are forecasting economics five years out, I want you to look at the "M" scratched into the wall, and remember that scornful laughter of the Mogambo.

Edward Chancellor is guy who wrote a book called "Devil Take the Hindmost: A History of Financial Speculation," which I did not read and, I admit, never even heard of, but I can tell you that the gist of it is that it ended in tears and suffering for a lot of people. And I'll even go so far as to bet that you even figured that part out from the title, because when the Devil is involved, things almost never have a happy ending. Anyway, he who wrote an interesting article on Prudent Bear entitled "Inefficient Market: The Stock Market's Yin and Yang," which I did read.

He says, "The function of the bear market should be to reverse the forces that became excessive in the preceding bull market. This requires that the overvaluation of shares should give way to fair value or even undervaluation. After a great stock market bubble, the cult of stock market investment is normally followed by revulsion of stocks." Didja get that part about the "cult?"

To illustrate the yin-yang thing, he goes on to say, "The appetite for debt, whether corporate or consumer, which accompanies every bull market, is normally replaced by debt aversion. Optimism and confidence about the future are followed by pessimism and uncertainty. During the bull market, leading businessmen are treated with great reverence and acquire vast fortunes, often at the expense of others. In the bear market, the senior executive becomes merely a drab apparatchik, his compensation shrinking along with the pretensions of office. The rectitude and prudence of the bear market are the mirror image of the corruption and profligacy that are evident in the bull market."

To which I say, the fact that we haven't seen any of that means that we have not entered into a bear market yet, even though if I had waited a lousy minute I would have realized that he was going to say the exact same thing, but I never even gave him the chance.

"Although the recent bear market lasted many months, it failed to perform even its primary function, that of driving equity valuations back to fair value. According to Andrew Smithers, the US stock market remains between 60 and 80 per cent overvalued, as measured on the basis of both replacement costs and cyclically adjusted earnings." I figure much more than that, as the replacement cost of an entire US factory, but using Chinese labor and material and real estate, is probably less than fifty bucks, according to popular wisdom.

He quotes Jeremy Grantham, he of Grantham Mayo Van Otterloo, who says that the stock market today is "...the greatest sucker's rally in history. He argues that a bear market rally has four typical characteristics. First, it starts from a position where values are not particularly low. Secondly, leadership of the market reverts back to the favoured stocks of the prior bull market. Thirdly, the rally is sharp and has a speculative flavour. Fourthly, investors are over-confident because their hearts have not been completely broken by the previous market low. In Grantham's view, the stock market rally that commenced last March meets all of these conditions." In short, you ain't seen nothing yet, as regards the stock market hitting new lows.

But people are buying stocks like they never heard any of this stuff before. Perhaps part of this can be explained by James Montier, a strategist at Dresdner Kleinwort Wasserstein, who suggests that perhaps 30% of the companies in the S&P 500 are currently manipulating their reported earnings.

The Mogambo snarls, suggesting in a non-verbal manner that 100% of the companies in the S&P 500 are manipulating their earnings, because I cannot believe that any one of them would pass up such a golden opportunity to make themselves look good, and thus make their stock prices rise. And especially considering that costs are rising, in some cases at double-digit rates, and expenses are rising, often a double-digit rates, but incomes and sales are not, but are sometimes falling, often at double-digit rates, which all implies a charming symmetry, although the ramifications are ugly. And yet, and this is the part where I violently shake my head in disbelief, like a Golden Retriever after he has emerged from the water, and my ears are likewise going "flappa flappa flappa," these companies are all "hitting their numbers" with each release of an earnings report! Something sure as hell is happening, and, as usual, I have no idea what it is.

Saw a blurb on CNN that "The average manufacturer's suggested retail price of cars and light trucks bought last month was $30,481, up 2 percent from the average sticker price in November and 4.6 percent higher than a year earlier." The prices actually paid were less, net of negotiations and rebates and dealer incentives and all the rest of that stuff, as they always are.

But note that sticker prices are up 4.6% y/y. So how it is that cars can be up 4.6% in one year, and yet the Fed yahoos can wipe the spittle from their lips and say, in that stupefied monotone that is highly indicative of their depth of understanding of economics, that there is no inflation?

Speaking of cars, I pass along the advice recently given to me by the service manager of a car dealership, when he advised me to emulate his actions, which is to trade in the car for a new one as soon as it reaches about 30,00 miles. The reason? It costs so damn much to repair one that you are better off getting rid of it before it needs repairs!

We had gotten into that edifying conversation when I went to complain that I had to have another front end on my car, at $1,400, when only a year and a half ago I had to have the same thing done. So I was somewhat upset that he is, in effect, telling me that I will have to pony up a cool thousand dollars a year from now on, just on that one item.

But it makes you wonder how it is that none of this shows up in the Consumer Price Index. Oh, yeah! Now I remember! Because the Consumer Price Index is compiled by a bunch of clueless, lying weenies!

Sean Corrigan, one of the main guys at Capital Insight, a consultancy, wrote an interesting piece he called "Currency Wars." He writes, "Where Greenspan is wrong - foolishly, hubristically, perilously wrong - is in his assumption that the hegemony exercised today in the US by big government, legal vulturism, organized labor, corporatist militarism, and Marxist miseducation over entrepreneurship has left the economy with enough of this essential flexibility. The US may someday find itself unable to cope with the frictions and stresses of rapidly changing circumstances with which it inevitably will be confronted."

In short, the government is going to have to get us into a war to distract us drooling proletariat boobs from our own tragic circumstances, and to appeal to us to put our personal miseries aside and bear these burdens in the name of patriotism. Just like always.

A recent headline of LA Times was "Low-Pay Sectors Dominate U.S. and State Job Growth." Although I did not go there and read the article itself, as they required me to register and divulge information about myself, and you know how I feel about that, I think that the headline says it all.

And the jobs in the low-pay sectors are being filled by, more and more, illegal aliens.

There was an interesting tidbit in the Wall Street Journal about mortgage rates, and it seems that the banks are actively pushing Adjustable Rate Mortgages, and more than 25% of home buyers are opting for this type of mortgage. Suckers! What makes it so interesting is that this is at the same time as interest rates are at the bottom of the range of mortgage rates for the last few thousand years, and therefore there is almost no chance that rates will do anything other than go up. The banks clearly see the writing on the wall, and borrowers don't.

There was also the interesting fact that according to a senior economist at Merrill Lynch, Americans saved $27 billion last year in lower mortgage payments. Most of the money, according to some facts I can't recite by some guy whose name I can't remember in an article that I can't recall on a date that escapes my recollection, a lot of that money went into the stock market, propelling the markets higher and back into the range of "preposterously overvalued."

And then we sit back in our chairs and wonder why the rest of the world has such a low opinion of us.

Doug Noland writes that "We remain in the heart of a major disintermediation out of low-yielding money fund deposits and into securities." This is the witty encapsulation of people taking their money out of the bank, buying an overpriced house, which causes other people to notice and want to get in on the action and who then go out and buy an overpriced house, which makes the original house go up in value, and which allows the owner to go down to the bank to take out a home equity loan to buy overpriced stocks.

If these were isolated guys, then no damage would be done. But when an entire country is involved in it, then it is more than an amusing observation. It is a crisis in the making.

And it isn't even confined to these idiots. The mindless spiral of housing prices causes the perceived value of all the surrounding houses to go up, which makes their property taxes go up. And so the people living in those houses find that they end the year with less disposable income from the higher taxes.

Lou Dobbs, talking head commentator who was brought back out of retirement because he has that warm and avuncular way about him, has decided that we need tariffs on imports. Why? Many people, it seems, would like to "buy American," but can't find things made in America. This is, according to this Dobbs guy who ought to put his tail between his legs and slink back into retirement, horrible.

And why can't people find things "made in America" to buy? Because of price. Things made in America are too damned expensive, what with crushing regulatory burdens of government, bankrupting levels of liability insurance occasioned by the out-of-control legal system where people are actually suing, and winning, because they are not happy with the downside of acting like irresponsible brain-dead morons. And probably many other things to, but they all come down to, and you might want to write this down, because of the money. Everything nowadays is about the money. It's always about the money.

So therefore foreign companies can undercut American producers, with one hand behind their backs. And the result of the fight in the arena of business warfare is that the American companies are beaten to death, and that is why nothing is made in America anymore.

So what to do? Well, to the Leftist Losers and their fellow-traveler commie buddies, the solution is tariffs. The idea is simplicity itself; If you can make foreign imports expensive, then American businesses can compete on a "level playing field." And you know what? It will work! It will work great! Suddenly, you will see lots and lots of American companies, employing American workers, making extremely expensive things to sell, the same things that used to be sold by foreigners at much cheaper prices!

I can see a wave of hands as each and every one of you has their hand up in the air, all competing for my attention, hoping that I will call on you to explain what is so horribly, horribly wrong with this stupid idea I even turn around and write on the blackboard, "What is wrong with this stupid idea?"

The correct answer is "Because it leads, as it is designed to do, to higher prices. And no theory of economics has ever postulated that economic vitality can be achieved by having prices go higher. Bad things happen when prices go higher! It is called inflation!"

Well, up until a couple of years ago, this was correct. It was only until the arrival of Ben Bernanke, an insane, horrible little man sent from Hell, well maybe not Hell literally, but you know what I mean, that anyone dared to advance a theory that inflation was good, and that we ought to actually try and reach some target of inflation! By printing money! Trying to create price inflation through the time-honored tradition of printing money! This is insane!

But we were talking about inflation. I walk over to the video equipment and rewind back to where I abruptly changed the subject, and then I relive that whole moment, and I am instantly galvanized. " Yes!" I scream. "Wake up people! You will not like inflation! Nobody likes inflation! It means that unless your income also rises as fast as prices, and I laugh like a demented hyena - owwwwww, ow ow owwwwwwww wow wow wow wow! - at the idea, as the aggregate 'you' in America is NOT going to have wages rise as fast as prices. And forgive me for my brutal honesty here, but I can state with some conviction that the majority of you are already so overpaid that the idea of paying you more is absolutely ludicrous. So if that sounds like you, then don't be making plans for a higher income to offset the higher prices."

Especially now that so damn many people rely on government checks every month. They are soon going to be screeching, and their lobbyists are going to be screeching, and their relatives are going to be screeching, and editorials in the newspaper are going to be screeching, and all the Leftists are going to be screeching, and all the people who are going to be hit up for money by these people are going to be screeching, about how they are, pause for dramatic effect, suffering. Suffering! And you know what? They WILL be suffering! And why are they suffering? Because, and watch my lips, people, because their incomes will NOT be increasing as fast prices, and they will suffer a falling standard of living!

And they do not want a falling standard of living! Nobody wants a falling standard of living! And why are they suffering a falling standard of living? Because prices went up, and they can only afford to buy less stuff, because their incomes didn't go up as fast and they simply RUN OUT OF MONEY!

So, tariffs make things cost more. I call this the TMTCM Principle. And here is the Lou Dobbs, looking you right in the eye and telling you that your retired parents, and the sick, and the infirm, and everybody else in America who depends on a government check, and most everybody else, too, is going to suffer a fall in their standard of living. And every month all of us will still spend all of our money, but we will be able to buy less and less stuff. And this horrid little twerp is all for it, and recommends that exact course of action.

To hell with Lou Dobbs.

He can count on the support of Charles Schumer, Leftist Loser Democrat in Congress, who is from New York, is reported to be pushing for a 27.5% tariff on Chinese imports. I shake my head in weary resignation. I have made my feelings plain about the execrable Charles Schumer many times in the past, and about the New York jackasses who elected this laughable clown to Congress, so I will not expand on that theme. But it is not surprising to hear that this Schumer character is proposing such a stupid and horrible idea, as he is, like I said, a Democrat, and Democrats have nothing but stupid and horrible ideas, because all their ideas are the same idea, namely for the government to do more things, which always turn out to be, to continue a theme, stupid and horrible.

And now we have reached the end game of the stupid and the horrible, and you will notice how the phrase "stupid and horrible" keeps popping up, so you know it must be true, as we have Congress and the Federal Reserve and the media and White House all trying to force prices higher while holding incomes low, which is the exact OPPOSITE of what government should want for the people! The exact, one hundred and eighty-degree opposite! Stupid and horrible.

Saw Gregory Mankiw, the chairman of the economic think tank inside the White House, when he appeared on TV, and I can now tell you, without any doubt whatsoever, that we are doomed. Lotsa happy talk, lotsa evading direct questions by changing the subject, and all the rest of it. He also reiterated the standard evasive reply that he doesn't discuss the dollar, which is really rich, and that only the Treasury department is allowed to discuss the dollar, and in the whole Treasury Department only John Snow, the Secretary of the Treasury, is allowed to discuss the dollar, which he does not do, except to explain that he likes the dollar, and some of his best friends are dollars, and which is only one of the many, many reasons why government officials in general deserve no respect whatsoever, and this guy Mankiw in particular deserves even less.

And then, within a matter of days, Bush comes out with a whole raft of new tax credit proposals. In other words, the government just giving money to people. If this is the level of genius we can expect from Mankiw and his pals, then it proves that what I said was true: we are doomed.

The San Francisco Chronicle had an interesting article by Kenneth Harney entitled "New Loan Program With No Down Payments," and it went over this latest and greatest idea of the White House, and if you have been keeping up with the caliber of ideas from the Bush White House, then you are well aware that when I say "latest and greatest" that I was trying to be funny, if laughing through your tears is ever funny. He writes, "What do you say to zero down on your first home purchase? And how about rolling your closing fees into the mortgage itself, giving you a home loan that costs you nothing out of pocket up front? That intriguing offer could become a standard, government-backed option for an estimated 150,000 or more first-time home buyers if Congress approves a new zero-down program to be proposed in President Bush's federal budget. No-down-payment mortgages could go as high as $290,000 in high-cost markets on the East and West coasts. The new program would essentially allow home buyers to come to the table with no cash whatsoever."

Let me get this straight: The price of houses is so damn high, thanks to the Fed creating a bubble in houses, that people can't afford them. So one would think, and of course I am just throwing out some ideas here, that the first order of business would be to bring down the demand for houses, right? Wrong! The new idea, the Bush idea, the Congressional idea, is to bankroll poor people so that they can buy houses that they cannot afford, so as to keep the price of houses up! And not only up, but climbing! And then everybody gets to borrow this increased equity, and use the money to buy stocks! Which keeps the stock market up!

But don't stop reading now, because it gets better and better! "Besides low- and zero-down-payment options, the FHA allows applicants to have higher household debt ratios: monthly housing payments can go to 29 percent of monthly household income, and total monthly debt can go to 41 percent of monthly household income."

So poor people are encouraged to be house-rich and food-poor, as about half of what they bring in per month will go toward paying for the house, up until they default, as they will, because this is just the kind of idiocy that cannot last. That is why we had the lower allowable debt ratios in the first place, jerks! They were set at those lower ratios to keep poor people from going into default on their mortgages, which they always do, because all their income is being spent on the house, and any financial upset results in bankruptcy! But now, NOW, in 2004, in the same year as the Presidential election, now we are increasing them? I scream - agggghhhhhhhh! - in my anguish!

Perhaps you are wondering why in the hell any elected yahoo would ever stumble in their stupor up to a microphone and utter a few incoherent syllables about favoring such a plan, and I really like that "stumble in their stupor" thing. To shed a little light on that, Dan Denning, the big poobah at Strategic Investment, wrote an interesting little essay entitled, "Fear and the Mortgage Bubble." In it he writes, well, not actually, and I am doing a little reading between the lines, that it is about the money. Because all things are always about the money. "According the most recent data, defined benefit private pension plans have $1.5 trillion in assets." So the whole size of the defined benefit retirement plan universe, which is only those plans that are funded by big, big companies like Ford and General Motors, is $1.5 trillion. "Agency securities (the bonds issued by Fannie Mae and Freddie Mac) make up 11% of those assets held outright ($186 billion agency bonds). Agency securities are the third-largest single asset type held by private pension funds with defined benefit plans. Corporate and foreign bonds are next at $232 billion. And corporate equities come in first at $681 billion, or nearly 42% of total assets."

Now take a recent essay from those incandescently brilliant guys over at Capital-Insight. They posted the witty blurb entitled "Too Stupid to Die Broke." The crux of the matter is that, by their calculations which involves subtracting the fixed investment in their homes from their mortgage balances, the $334 billion that American homeowners have withdrawn out of their equity in the last few years is more money than the equity accumulated in the previous 46 years of people paying down their mortgages!

So overpriced houses, and overpriced bonds, and overpriced shares comprise what is humorously known as "a retirement plan!" Hahahaha! And equity withdrawals has been so profligate that there has been no net repayment of mortgages for 46 years? Hahahaha! No wonder the government and the Fed are acting so bizarre, as regards these new ideas about house buying! Hahahaha! Look what they have allowed to happen on their watch! Hahahaha! This is preposterous! Hahahahaha!

Mr. Denning is not amused by my burst of levity, and continues "What is NOT disclosed in these numbers is the dollar value of agency assets held by publicly traded corporations - which make corporate bonds and equities vulnerable to the direction of the mortgage market. And so the bottom line is, pension exposure to mortgage debt is undoubtedly larger than what you see here." Now it all becomes a little clearer why the government is doing what they are doing, eh?

Marshall Auerback is one of those brainy-types that are scattered here and there in the landscape of economics, and has penned something that should be required reading for the members of the Federal Reserve, since that group of august weenies has apparently never heard that debt can be stultifying. Mr. Auerback writes, "The expansion of credit is an increase in debt. When debt levels are low, a credit expansion which increases debt does not leave a legacy which later suffocates demand, since the resulting still low level of debt is not yet a problem." I stick my big fat nose in here to note that this explains why an expansion in credit, to foster and increase in debt loads, can be a good thing. But existing debt levels have to be low to start with. Obviously peeved that I have interrupted, he goes on, "But when debt levels are very high, the increases in debt created by credit expansion soon act as a burden on demand." Ignoring the glare from Mr. Auerback at interrupting again, I want to show how he has made it obvious that high levels of debt are, as he said, a "burden on demand." If I already owe a large sum of money, am I more, or less, likely to borrow MORE damn money to buy some other shiny doodad or gimcrack? Getting back on track, he goes on to say "It follows from the above that, as the level of debt relative to income rises, it should take larger expansions of credit to achieve any given percentage increase in demand, since the now high and climbing debt burden acts as a countervailing force to depress demand."

And the higher the debt burden is, the higher the depressing of demand. And that is, which I gather from looking out the window, where we are today. Ugh.

---Mogambo Sez: To show you that there are poets amongst us, as we slop around in the fetid swamp of economics and are always disgusted at how it makes our feet stink, Barb at 321gold sent me a little present last week, and the poetry was how she wrapped it. Her cryptic note was "The wrapping paper is real U.S currency - just practicing!" Fabulous! How clever!

Anybody who recognizes that the currency is being debased to the point where it is worthless enough to wrap presents with, and then actually does exactly that as a symbolic gesture, ought to be honored for her charming wit. To show you that I am just the kind of guy to do that, I bow deeply from the waist and chant "We're not worthy! We're not worthy!"

Richard Daughty
January 29, 2004

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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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