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Richard Daughty
...the angriest guy in economics
The Mogambo Guru
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February 8, 2006

-- We start off this week the same way we always do; take a handful of various tranquilizers, get strapped into a straightjacket, put on a crash helmet and get tied into my chair. Then I am, at last, ready to take a look at the increase in Total Fed Credit at the Federal Reserve, as this is the measure of how much more money the horrid Federal Reserve is creating out of thin air, which is, in turn, a measure of how much those arrogant, pinheaded bastards are destroying the dollar by creating so many of them. But this week I was "all dressed up but going nowhere" as the Fed only increased credit by $2.4 billion, which is still bad, but not as bad as it COULD have been, and usually is.

To show you why this is important, we turn to Jay Taylor, of Taylor Hard Money Advisors, who talks about "cascading cross defaults (i.e., deflationary collapse). "Because," he writes, "this is not self-liquidating debt, there is never enough cash flow to service the debt, because interest is added to the debt. The real trouble begins when interest charges exceed debt growth, because at that point, debtors at the margin are unable to service their debt. Debt has to grow faster than interest charges or else the system ultimately collapses in cascading defaults", which is when I can't pay some guy, and he can't pay that guy, and that guy can't pay these guys, and these guys can't pay those guys, and those guys cover their losses by cutting staff levels and firing The Mogambo, which makes me angry and desperate, and everybody dreads what an armed and desperate paranoid lunatic will do. And THAT is only ONE reason why the changes in Total Fed Credit, which is a measure of total debt growth, are so damned important.

So this week not much money was created, but Securities Bought Outright went up by $2.7 billion, which is another of my pet outrages that make me scream in my sleep; the Fed and the banks are not only creating more money out of thin freaking air (which is bad enough to warrant rioting in the streets, as Americans of every color and creed march to Washington, D.C. en masse, chanting "The Mogambo was right! We're freaking doomed", and tear down the Federal Reserve building, brick by brick), but the banks are using this money that they just invented to buy government debt! The supreme fraud and outrage!

But the lack of money being loaned is perhaps explained by the drop in the stock and bond markets, as who in the hell is stupid enough to buy stocks and bonds, with borrowed money, in THIS economic climate? Hahaha! I laugh to think that there ARE people who think that stocks will go up based on fundamentals! Look! I'm still laughing!

The thing that really, really, really makes my eyes bug out in disbelief is the bond market, and that people are still buying Treasury debt. Unbelievably, debt is yielding as low as the Fed Funds rate! Or lower! Lower than the damned Discount Rate, which is the rate that the banks themselves have to pay to borrow money from the freaking Fed! Why are they doing this insanity, especially when they are being told, point-blank, by the Federal Reserve that they intend to keep raising interest rates? And probably at least two more times? Don't these bond-buying morons comprehend that when interest rates rise, bond prices fall? And when bond prices fall, these bondholders are going to lose money? What in the hell are they thinking?

None of these bond-buying halfwits work for me, because if anybody DARED to come into my office and suggest that I stop embezzling the employee retirement fund and instead put that money into bonds, the last thing they would hear before I leapt over my desk, grabbed them by the neck and threw them out of the window is the Mogambo laugh of scorn and derision (MLOSAD) ringing in their presumptuous ears.

And the reason why all of this excessive creation of money and credit (monetary inflation) is so bad is because it has to, and always does, lead to price inflation. For example, the price of oil. With that, we seamlessly segue to Doug Casey, of The Casey Energy Speculator, who, considering the price of oil, says "Few analysts have noted that expensive crude might not be a function of supply and demand, but rather a simple function of inflation. Since the younger Bush took office, the U.S. has been frantically printing money to stave off recession and keep the bloated American economy from collapsing. With the modern equivalent of printing presses going flat-out, the world supply of money has almost doubled since 2000, from less than $2.5 trillion to just below $4.5 trillion."

I am busy scribbling notes, figuring that this will be on the final exam, so I almost missed the important part. He went on to produce a chart showing that, since 1945, money growth and the price of oil have moved together. Since the central banks of the world are intent on destroying our money by constantly growing the money supply, what does one do? Mr. Casey suggests that "The only intelligent thing to do is to rig for stormy weather by laying in a portfolio full of high quality precious metals and energy stocks."

Well, okay then, let's look at gold. From the GoldForecaster.com we learn that Exchange Traded Funds (ETFs) are "Still growing in leaps and bounds. January saw another 90 tonnes of gold added to the E.T.F.s, with 17 tonnes alone going into them last Friday. Tuesday this week saw another 6 tonnes of buying. All of this is new demand. Place that buying next to the 1.7 tonnes sold in the first three weeks of January and one can see the demand is heavy, sitting on top of the normal demand and supply factors."

Then they go into a lot of other things, like gold and money and oil and currencies and politics, and you end up with the impression that we are really, really, really screwed. They finally finish by reminding us that what is happening, and the many more ugly things that WILL happen, are because some idiot central banker (hint: Alan Greenspan) created all the money necessary to burden the country, and everyone in the country, with crushing levels of debt, all of which was done to drive prices up, but then they got so high that they have to fall. This is insane! It's so insane (audience shouts out "How insane, Mogambo?) that I am shooting an AK-47 assault rifle out the window, expending magazine after magazine, going blam blam blam, desperately trying trying trying to get people's attention at the inflationary/deflationary horror that is looming! And yet when the police come roaring up in response, like they should, all they want to talk about is how I should come out with my hands up, like it is ME that is dangerous or something! But before I grudgingly surrender, I always make them promise to arrest Alan Greenspan and charge him with the murder of the dollar and the American economy, and they always promise that they will, but they never do, the lying bastards.

But the Gold Forecaster newsletter takes a rather more wimpy approach, and merely says, poetically, "Greenspan and the governments of the last 20 years sowed the wind and Mr. Bernanke will have to cope with the whirlwind." If I was writing that, I would change the word "whirlwind" to "big freaking tornado that is going to rip you, your house, your family and your entire financial world into tiny, itty-bitty, teensy-weensy pieces, and scatter them for ten miles around the empty, gaping hole in the ground that is left" which adds that subtle Mogambo touch of piquancy (SMTOP).

In this same, very enlightening vein, we have Paul Hornig (thanks, Richard P!) writing at The Daily Resource, who has run a few numbers concerning the Exchange Traded Funds that are buying all this gold, and determined that "A year ago the ETF's owned an aggregate of 170 tonnes which would have ranked them as the 25th largest official holder at that time. As of the end of last week, the ETF's held 414 tonnes of bullion, which ranks them as the world's 13th largest official holder, and puts them within striking distance of Mainland China, currently ranked 10th with a reported 600 tonnes."

And how popular are these Exchange Traded Funds in gold around the world? I have no idea, but Mr. Hornig jumps up to say that he is NOT too ignorant, too stupid, or too lazy to find out, which I figure is his oh-so-clever way of telling me he is siding with my wife about these very points, and says "ETF's now trade in the U.S., Australia, South Africa, London, and France. SEBI in India has announced enabling rules that will allow gold ETF's, and there is also a rumor of a Hong Kong listing. Bottom line: These significant increases are taking gold out of the system and will clearly counter further official sector sales."

Quickly grabbing the microphone away from this backstabber, I rhetorically ask "And what is this 'system' that is having its gold taken out? The supply and demand system! And what happens when demand rises? The price goes up!"

And it is not just ETFs that are popular, as alert reader Darin G sent news that "Vanguard Group closed two of its most-popular mutual funds today without any advance warning. The company shuttered Vanguard Explorer, a small-cap growth fund, and Vanguard Precious Metals and Mining. Both had experienced huge cash inflows in January."

Gigantic cash inflows into gold and precious metals? So much money that that they are swamped with all that cash? Wow! Remember what I said about what happens to the price when demand goes up?

"But" I can hear you thinking, "what about supply, you big stupid moron? If supply increases enough to match demand, then the price won't go up! Did you ever think about THAT, jerk?"

I am gritting my teeth as I fixate on the particular emphasis you put on the word "jerk", and so will coldly answer you by throwing in your face the weighty 56-page report by Cheuvreux (the equity brokerage house of the French bank Credit Agricole) entitled "Remonetization of Gold: Start Hoarding", and published in Metals And Mining. The report was written by Paul Mylchreest, who is Cheuvreux's mining sector analyst in London, and he says that "Covert selling (via central bank lending) of gold has artificially depressed the price for about a decade, but Bank for International Settlements' data on gold derivatives suggests its impact is on the wane."

The report, by the way, clearly supports the charges made by the Gold Anti-Trust Action Committee people, who go by the acronym GATA, who have been yelling loud and long about this very thing, for which we owe them a debt of thanks.

So how much gold have the central banks leased/sold? The report estimates that while the central banks claim that they have 31,000 tonnes, actually "Central banks have 10­15k tonnes of gold less than their officially reported reserves." Wow! Off by about half! The discrepancy is caused by the International Monetary Fund (another loathsome bastion of fascist/socialist/communist idiots who think that they can command the global economy), which issued a rule that lets central banks lease out their gold to speculators (who subsequently sold it), but still show it on the books of the banks as still being in the basement, all safe and sound! Hahahaha!

Hugo Salinas Price, who is the president of the Asociación Cívica Mexicana Pro Plata, writes "Today, there is not enough gold offered for sale to satisfy demand for gold at $550 dollars an ounce. Gigantic quantities of paper money and magnetic money all over the world are seeking a safe haven in all sorts of tangible and valuable goods, a place where the purchasing power of this money will be protected against the depreciation of fiat.

"The public and big investors in the Western World are hardly aware of what is going on in the gold market. When a handful of investors with a few billions of dollars in spendable funds take notice - which may happen any day now - then gold will have to rise to prices we can hardly imagine today. The scam of fiat money we have lived in since the 30's will soon be clear for all to see. In terms of fiat money, any number for a price of gold is imaginable."

In case you want to test your imagination, Sprott Asset Management says that they can easily imagine $80,000 per ounce. And now I am imagining it, and having pleasant little daydreams about it, too.

-- Jim Willie CB of the Hat Trick newsletter writes, using all-capital letters to indicate emphasis, "ALERT!!! ALERT!!! ALERT!!! THE US ECONOMY DECLINED BY AT LEAST 3% IN THE 4TH QUARTER" Quickly scanning the essay, we see that he says that the GDP deflator has understated CPI inflation for 9.5% over the last four years! This explains the three exclamation points after each "ALERT"!

So how does Mr. Willie explain his reasoning behind this surprising announcement? Immediately, I jump up and run to the podium. I turn to the assembled reporters and ask "Hold up your hands if you do NOT understand what Mr. Willie said." All their hands went up. Gritting my teeth and being polite as I could possibly manage, I said "Then you're morons! It all has to do with inflation, you stupid media chumps! For example, when Mogambo Exploitative Sweatshop Industries, Inc. (You probably remember us from our advertising slogan, 'Low quality and low wages every day! Now get back to work!' which some people confuse with our company's motto, which is 'More work! Less pay! Get back to work!') sells one widget last year for ten bucks (making zero profit due to my managerial incompetence), and this year again sells one widget for a hundred dollars (again making zero profit, thanks mostly to the damned increase in the price of materials, labor and taxes, and the rest due to my managerial incompetence) did the economy of Mogambo Exploitative Sweatshop Industries, Inc really improve? No! We still only sold one stupid widget both years! But our GDP went up, thanks to GDP being measured in prices!

I was ready to explain it to the board of directors. I had these nifty little charts, emulating the government's way of estimating these things, proving that if you ignore the inflation in the prices of our costs, namely the aforementioned materials, labor and taxes, then we made ten times as much money! They were, unfortunately, not impressed. Now the sales director and The Mogambo (who hired him) are now on the street looking for a job.

"But", I protested as the security guards were hustling me out of the building "that is how the government estimates Gross Domestic Product! They lie about inflation in prices!" Seeing that security guards were cold to my loud protestations, I referred them to Mr. Willie, who says "My view is that price inflation is rising at 6% to 10% annually." Thus, when you deflate nominal GDP by the blistering real price inflation, you understand where Mr. Willie arrives at GDP being down by 3%! The guards were singularly unimpressed by Mr. Willie, too, but I notice that I was the only one thrown out into the street.

-- The Labor Department said that last year, productivity rose by only 2.7 percent last year while labor costs jumped by 2.4 percent. Oops! Additionally, they also said that The Mogambo was not only the laziest and most overpaid stupid bastard on the face of the planet, but increasingly so. Well, they didn't actually say that in so many words, but you can tell that is what they were insinuating when they said "For just the final three months of the year, productivity actually fell by 0.6 percent, the first decline since early 2001, and labor costs rose by 2.4 percent." Productivity down and costs up? And you STILL want to buy stocks? Hahaha! You make me laugh when you make a face like that!

-- The inflation in the price of commodities is world-wide, which is what you would expect when inflation in excess money and credit is being created world-wide. For proof, we turn to Enrico Orlandini, in Pisco, Peru, who says "The cotton and grape farmers talk about how they've sold next year's crop, not yet in the ground, to Asia. That fits right in with what the harbor master says, i.e., every single boat in the port is of Asian registry. In my opinion," he says, "what is happening right here and now with cotton can be summed up in two words - quiet accumulation. I believe that cotton will trade at 62.00/bale by June of this year and work its way up to US $70.00/bale by the year's end."

So where is all of this demand coming from? Well, perhaps Gary Dorsch of SirChartsAlot can shed a little light on that when he writes that "Chinese demand for imports has soared by 330%, from roughly $15.5 billion per month in early 2002, to a record $64.4 billion in December 2005." So how did the Chinese pay for all that? With inflation, of course! I know that you don't believe me, just like when you didn't believe me when I told you that malevolent space aliens had taken over the American government.

Instead of screaming at you about how you are wrong wrong wrong, perhaps you'll listen to Mr. Dorsch as he says "The People's Bank of China increased its M2 money supply by 18.3% last year, issuing more yuan to soak up foreign currency earned through foreign trade and direct investment into Chinese factories from abroad. Explosive money supply growth, in turn, boosted domestic retail sales by 13% last year, and industrial production was 16.6% higher in November from a year earlier." That is why consumer price inflation in China is running at about 10%.

Those schooled in the delicate arts of the Mogambo School of Economics are, as you might imagine, completely freaked out by this, and you think "Surely the Chinese ruling elite realize their error in expanding their money supply so much, and they will be trying to cool things down!" To that, I laugh the mirthless laugh of The Mogambo (MLOTM) hahahaha!

Obviously the idiotic Chinese overlords, like our idiotic American overlords, want economic growth at any price, and don't give a rat's fat butt about the roaring inflation in prices which bedevils their people. In fact, Mr. Dorsch reports "China's central bank raised its M2 money supply target to 17% in the third quarter from 15% earlier, to offset stronger demand for the yuan, and maintain the peg at 8.11 per US dollar."

Additionally, he notes that "the Bank of Japan lowered its overnight loan rate to zero percent, and adopted quantitative easing. The central bank prints about 1.2 trillion yen ($10 billion) per month to purchase Japanese government bonds, inflating the amount of yen circulating around global money markets." Actually, in the bigger scheme of things, we idiot Americans let the Federal Reserve print $50 billion per month! And more!

I raise my hand to ask Mr. Dorsch a question, because it is price inflation that makes me so crazy, and I thought this whole lecture of his was going to be about inflation, but all he wants to do is yammer yammer yammer about how much stupid money some stupid bankers are creating. The class is suddenly dead quiet. He stares at me with that look of disgust, like something icky is hanging out of my nose again. Finally, he says "More Japanese yen yielding zero percent, chasing fewer natural resources in turn, leads to sharply higher global commodity prices." Of course! Now I look like an idiot, and everybody laughs at me, and yet they wonder why I hate them so much.

But sitting and sulking over this latest embarrassment, my keen Mogambo sense for profit potential (KMSFPP), honed to a razor's edge, pounced on the phrase "sharply higher global commodity prices." My plan is now to make a fortune speculating on these rising prices, and then use the money for my revenge! I feel better already!

-- The housing market is, of course, not rising any longer, as we gather from reading the Whiskey & Gunpowder newsletter. They write "Many economic experts are predicting that mortgage delinquencies will rise up to 15% in 2006 among homeowners with higher-cost or 'subprime' loans. About 19% of all U.S. home loans are now subprime, in contrast to just 5% 10 years ago."

As if to prove the W&G newsletter correct, The Star Telegram newspaper reports that "Home foreclosures continue to climb. The number of homes slated for foreclosure continues to rise in Tarrant County, with 1,101 headed to auction next month. That is a 17-year high, according to Foreclosure Listing Service. That total is up 27.6 percent from a year ago. "

Then we go to Dallas, where we read, in the Dallas News, about a "Housing Divide", meaning that smaller mortgages are falling into foreclosures, even as sales of high-end houses continue to "climb." All in all, they conclude; "In a healthy local housing market, a sign of trouble has appeared: More people are losing their homes to foreclosure than at any time since the Texas real estate bust of the 1980s. Residential foreclosures jumped 30 percent from a year ago in North Texas."

As Dallas is in Texas, and Texas is where George Bush comes from, I am feeling scared and paranoid, and hastily beat it over to NewsZap, which is reporting a six-fold increase in sheriff's sales in Delaware. They report "When Kent County Sheriff James A. Higdon took office 11 years ago, the usual number of sheriff sales was five or six a month. And now it's not unusual to have over 30."

The mere mention of a sheriff being involved has me moving again, this time across the damned ocean. But things are no better there, according to a story on the BBC about the Department of Trade and Industry (DTI) reporting that "Nearly 70,000 people became insolvent in 2005, the highest since records began."

There were also "a record 20,461 insolvencies in England & Wales during the final quarter of 2005, a 57% annual rise." Fifty-seven percent! More than half again!

In the UK housing market, the BBC reports "The figures show the total number of homeowners being taken to court during the final three months of 2005 by lenders pursuing mortgage debt rose 50% year on year to 31,018." Again that 50% thing! I'm getting scared here, too!

They also said "The number of companies going bust is also on the rise. In the third quarter of this year 3,187 firms in England & Wales went into liquidation", which "was 8.5% more than during the same period last year." My God! This is terrible news! Not only are people losing their houses, but their jobs, too!

I am standing there holding my head in my hands, moaning at the horror of it all, when up walks Ned Schmidt of The Value View Gold Report, who increases my pain by saying "The real estate bubble around the world is starting to show some serious signs of strain. First from Shanghai, the epicenter of the Chinese economic miracle and now the home of the upside-down mortgage, once one of the hottest markets in the world, sales of homes have virtually halted in some areas of Shanghai, prompting developers to slash prices and real estate brokerages to shutter thousands of offices."

Horrified, I jump on an airplane and fly to Las Vegas, thinking that having scads of scantily-clad beautiful women parading around might take my mind off of this incipient housing collapse. But before I can borrow some money to make, you know, an obscene proposition to any of them and really get into this delicious yet salacious Mogambo distraction technique (DYSMDT), I hear Lisa M report that she heard that in Las Vegas "58% of the investor-owned condos on the market are empty, and 45% of the houses on the market are also empty."

"For the first time," she writes "homeowners here are learning what it means to have an upside-down mortgage - when the value of a home falls below the amount of debt on the property."

For those that think that a housing market collapse signals deflation and lower prices, think again, as we quote Gary North, of Reality Check newsletter, who writes about Japan's recession, which they have suffered since 1992. The popular theory is that the Japanese suffered a deflation because "Real estate collapsed; the stock market collapsed", which means, of course, that prices of those things went down. The interesting part is when he continues "but consumer prices remained flat. We hear about the great Japanese deflation. There was none."

-- Bill Murphy of LeMetropoleCafe.com writes that things are starting to fall apart for the guys who have been manipulating the gold market, too. "We know the gold shorts are experiencing their own Commercial Signal Failure and a number of them have begun to become panic buyers. It is very likely we are now seeing the same drill in silver." He concludes with the aside, "Makes my day!" But it is also going to make his fortune, as I assume that he has been steadily buying gold at these current giveaway prices, thanks to the manipulation of the gold market. And then maybe he'll be so rich that he'll loan me some money next time just to get rid of me, instead of having me thrown out of his office!

Peter Schiff, of Euro Pacific Capital, figures that if Mr. Murphy is getting rid of me, then perhaps it is a good time to also write a "good riddance" paean to Alan Greenspan, noting "blowing more air into every bubble he encountered, Greenspan succeeded largely by giving himself enough time to get out of Dodge before things got dicey. His long overdue departure would be an event worth celebrating, were it not for the fact that he is being succeeded by someone who may well be even more incompetent. While the Greenspan Fed was certainly good for bankers and politicians, it was a disaster for the rest of America. In his wake, the long term solvency of America's economy, its financial institutions, and most importantly, the integrity of its currency, all teeter on the brink. Rather than being a maestro, think of Greenspan as the Pied Piper, who led Americans down a path to financial ruin."

With all due respect for Mr. Schiff, I prefer to think of Alan Greenspan not as a Pied Piper, but as a Komodo Dragon, a nasty giant lizard whose saliva is so unbelievably foul and septic that it hunts by biting its prey and then following it around until it dies, horribly, of massive infections.

But we are not here to talk about how, or even why, my breath smells like a Komodo Dragon and what this says about my deficient personal hygiene habits, but about how Greenspan, creating all that monstrously excessive money and credit, is going to destroy America. Suddenly self-conscious about my breath, I numbly direct your attention to Patrick Buchanan, of the American Conservative magazine, who writes "And just as the easy-money Fed policies of the Coolidge-Hoover era led to the crash of '29, a day of reckoning is ahead."

-- I am sorry to report that my email was destroyed again, only this time by me, accidentally, and with all the king's horses and all the king's men and all the Verizon technical assistance people (and I have been through a lot of them) can't retrieve a lot of your unread mail. But to the 99% of you who write to me, the answer to your question is "Yes, I actually DO know that I am an idiot."

-- Phil S sends news that "A carton of cigarettes typically sells in Ontario for about 67 dollars", which is, actually, lower than the average price in Canada. He included a Broadcast News quote from Conservative Leader John Tory, who said, "History shows the more you raise prices, the more you create a problem with contraband and smuggling. It's the fourth increase in tobacco levies since the Liberals were elected in 2003." But at least smuggling puts people to work, so maybe there is a method to their madness!

And while he correctly identified the childish Leftist pinheads as the morons who keep putting more and more taxes on things, you no doubt noticed that he neglected to say that the rest of the economy must suffer because of high taxes. Smokers, in this example, have that much less money to spend every month on other stuff, as all their spare cash now goes towards cigarettes, instead of cigarettes AND the latest issue of Lewd Lumberjack Ladies magazine. The rule is: Taxes drive up the price of the things that are taxed. And prices being driven up is always, always, always bad news. Trust me on this one.

Ugh.

***Mogambo sez: Tuesday's dramatic drop in the price of precious metals and oil is Lady Fate being very, very nice to you, and offering you a chance to load up at bargain prices. Lucky you!

February 7, 2006
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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