Each day I wake up more scared
than the day before
...the angriest guy in economics
March 24, 2004
The Fed reversed course, and pumped up $7.4 billion in new Fed
Credit, probably just for a little fun, and to give everybody
up and down the line something to do.
For all the apparently head-fake hoopla about how the Japanese
were supposedly re-thinking their strategy of buying gigantic
mountains of dollars to weaken their own currency and thus make
it possible to keep buying their exports are artificially-cheap
prices, foreign central banks still managed to increase their
Custody holdings at the Fed by another $8.5 billion last week.
So buying of US debt, so we can continue to fund our irresponsible
buying sprees, is coming from somewhere.
Which is good, I guess, because the mortgage markets went bananas
again, and money had to come from somewhere to allow buyers to
line up around the block for the privilege of bidding up the
prices of houses. We Americans have been conditioned not to do
any thinking, or reading, or acquire any real education other
than to learn to
1) trust the government, because
2) the government is the source of all things good and
3) everything will always be fine and everyone will always be
happy if the government is allowed to spend enough money.
Ergo, houses escalate in price, as there are more buyers than
sellers. This is my candidate for the Most Stupid Thing That
People Did During The Bubble Decades. I mean, investing in dot-com
stocks and losing everything is one thing, because you still
had your house, and in a real pinch you could plant a big garden
in the backyard and raise chickens or something, and if things
got really bad then you could eat the dog and sell the children,
and sneak over to the neighbors' houses and try and steal some
food from them, or their money, or their valuables, or their
kids, so that you could trade them for your own kids back, assuming
that you wanted your own kids back, although if your kids are
like mine then maybe you are in the mood for a for a change.
But there the buyers are, lined up around the block somewhere,
jostling each other for the chance to bid up the price of a house
that they cannot afford to buy, at the exact wrong time in history
to make that kind of a long-shot pay off. It is probably the
fabled end-of-the-bubble blow-off, and it is happening right
in front of our eyes. And if it is NOT the fabled end-of-the-bubble
blow-off, then it SHOULD be, because it looks exactly like one!
I am, I am sorry to say, compiling my quarterly report to Zorg,
the Space Quadrant High Commander of this sector of the galaxy,
and I am now going to share with you some of the things that
I am sending to him about this housing mania.
I begin with the standard introduction, "Oh, mighty Zorg,
omniscient and wise ruler before whom the very stars supplicate
themselves, hear my humble report." Then I get into the
meat of the issue:
1) Prices are at historical highs, and are also at the end of
a long series of setting new records.
2) Prices are a record-setting multiple of the buyer's incomes.
3) This is at a time when interest rates are insanely, abnormally,
fraudulently low, manipulated to negative real, inflation-adjusted
rates, and believe me when I say that this is weird, with a capital
"W." How weird? Well, I have run the numbers through
the Mogambo Mega-computer, and after lots of whirring and clicking
and humming and sparks flying and the smell of burning insulation
permeating the air, the answer comes out that the probability
of this interest rate environment lasting far enough into the
future to make this real estate gamble pay off is the exact same,
as in "out to twenty-five decimal places exact same,"
as the chances of me ever looking or acting normal ever again,
assuming that there was a time when I DID act or look normal,
and there are several conflicting reports about that.
For those who are not familiar with The Mogambo, this statistic
probably seems irrelevant, and you should be so lucky. So let
me try another example. This probability is so unlikely (Audience
yells out "How unlikely, Mogambo?") that it is in the
range that is graphically shown as waaaaaaaayyyy out there on
the tippy-tip tail ends of the bell-curve, the kind where the
probability tables in the back of the book have left off, having
surpassed 0.00001 long, long ago.
For you gamblers, my next example uses that popular card game,
poker. In particular, two-handed 5-card draw poker. Imagine your
thrilled excitement as you look at your cards, and your bloodshot
eyes open wide, and your heart is pounding as you peer at the
most beautiful straight flush to the king that you have ever
seen. What are the chances of that one other guy in the game
is holding a straight flush to the ace? THAT is the kind of probability
that we are talking about.
For you value-seeking shoppers out there it is the proverbial
"Can't lose, or double your money-back" guarantee.
I mean, there is no chance, zero chance, zip chance, squat chance,
no-way-in-hell chance that rates in the future will NOT be higher,
and probably LOTS higher, and maybe even lots AND lots higher
that that, because that unspeakable interest-rate horror is the
inescapable result of fostering inflation, as the Fed and the
Congress are working to achieve, even as we speak! They are actually
trying to, and this is the part that my brain refuses to believe,
cause inflation! And it is working, as every indicator of inflation
and pipeline inflation are all pointing up!
I am going to the Homeland Security Department computer and clicking
on the Patriot Act subroutine program-- click! --and accessing
the video surveillance feed-- click! --that the government has
installed to monitor your activities in case you start getting
uppity, to verify that your mouth is hanging open in stunned
stupefaction, and your eyes are fearful and glassy at the revelation.
And yet, these new house buyers are drooling all over themselves
and dragging their knuckles along the ground as they troop into
a mortgage originator and are, after all that, perversely opting
for an adjustable-rate loan? Knowing that interest rates are
going to rise? My answer is a scream of primordial outrage that
seems to have no end, but it eventually does, as my wife finally
yells out "Shut up that damn screaming or I'll give you
something to scream about, you irritating little twit! So don't
make me come up there!"
And then, amazingly enough, you turn right around and ask me,
"Mogambo, why are you so negative on the combined intelligence
and honesty of Americans and their government, which causes you
to cower in your steel-reinforced concrete bunker and cry like
a wussy little baby?" Well, for one thing, I am NOT cowering.
Well, I wouldn't be, if I could get some mortar emplacements
installed around the periphery of my house, but you would not
believe the hassle of trying to get a permit to install this
simple, basic home-defense item! It's like the Building and Zoning
Department never heard of the Second Amendment or something!
Anyway, back to our discussion, which is not really a discussion
but is just me talking and you trying to ignore me and just nervously
sliding my groceries past the scanner and yelling at the bag
boy to hurry up so that I will get the hell out of here, let's
get on with our list of things that house buyers are ignoring.
4) There are record deficits in almost every layer of government
in the country, thus state and local taxes are sure to be raised.
5) Real-inflation-adjusted incomes are still falling after decades
of declining real incomes. And if you also adjust for the increase
in total taxes paid to all the different layers of tax-levying
authorities, the real, net-of-taxes, inflation-adjusted and cost-of-government
adjusted-incomes are hitting the bottom of the barrel.
6) We are at the tail-end end of a long, long series of booms,
most of which have not busted yet.
But now, as I look back on that list, I am sure that when my
report hits the desk of the Supreme Overlord of this galaxy sector,
I am going to be called before the Supreme Inter-Galactic Tribunal
of Planets to explain how it is that Earth people, and American
and British people in particular, are buying houses at incredible
prices, and buying more taxes, and buying more government, and
buying more things, and buying more debt, and borrowing to "invest"
in speculative assets of every stripe. And when the hearings
are all over, and it comes down to the Vote of Infinite Finality,
the one where they decide whether or not to destroy this planet
and all the people on it as an exercise in planetary husbandry
and improving the breeding stock of the cosmos by eliminating
the races of congenital idiots that spring up from time to time
out here in the dark, deserted fringes of the universe,
I am pretty sure that it will
be a unanimous Thumbs Down. And if you are at all familiar with
your television version of Roman history and the whole gladiator
thing, I certainly don't have to explain the significance of
that. - The CPI increased by 0.3% in February, and the news flash
was slipped to me under the door of the Mogambo Bunker, as I
had been dreading the announcement. One of these days we are
going to see not only inflation, but roaring price inflation,
that is guaranteed by all the monetary inflation. The Associated
Press tried to find a little silver lining in the news, and reported
that "The increase in the Consumer Price Index marked a
slowdown from the 0.5 percent jump registered in January."
Ain't dat nice?
Then they all apparently went to lunch and got real drunk and
bought some mind-altering drugs from some guy on the street named
Carl on the way back to their offices, and this allowed them
to continue in Greenspan-speak. I can imagine that they spoke
with slurred voices, swaying unsteadily on their feet, their
pupils alternating between dilated and constricted, as they said
that "Excluding energy and food costs, 'core' consumer prices
rose by just 0.2 percent in February for the second month in
a row. That suggested the prices for many goods and services
were fairly stable." See? If inflation is the same for two
months in a row, no matter how much higher prices are, then prices
are stable? Wow! See how simple this stuff is when you're the
government and you can't be fired for saying something so stupid
that you would slap your kid if they dared insult your intelligence
Of course, they included the obligatory corroboration that "Federal
Reserve Chairman Alan Greenspan and his colleagues said inflation
is not a problem for the economy." What they meant to say
is that Greenspan and his colleagues said that disguising and
lying about inflation is not a problem for the economy, because
it is not a problem for them, and they figure that they ARE the
economy! So, no problem! But you can't pick up a newspaper or
hear the news or listen to one of your irritating neighbors whining
about the high cost of things, or how they'd like their lawnmower
back that I borrowed but have not returned, or something. It's
always something. But yet, almost at the same time, we have this
Greenspan person telling us that prices are not going up! It
makes you crazy at the cognitive dissonance, when supposedly
educated and trustworthy people are telling you that what you
are seeing with your own eyes is not happening right in front
of your own eyes!
On the same day last week, crude oil went over $38 a barrel,
and commodities are zooming in price, gold
is jumping $4.50, so it looks like these are examples of things
that are NOT "stable" in price.
Similarly, the Economist magazine notes that their dollar-based
index of commodities has risen by 28% since January 2003. The
yen-based inflation is right behind it, at 17%, followed by the
sterling index at about 12%, and then by the euro-based index,
at 10%. The lynx-eyed among you will no doubt notice that in
every single instance the inflation in commodities was in double-digits.
Then, and I hope you are sitting down for this and have an IV
inserted into you arm that is dripping some kind of powerful
tranquilizer into your veins by the quart, the long-awaited PPI
came out, and the guy who delivered it to me must have glanced
at the page and noticed that it said that prices were up strongly.
It doesn't take a genius to realize how that kind of news is
going to affect me, so he just tied it to a rock and heaved toward
the Bunker de la Mogambo. It hit the door with a thud and lay
there on the ground. I fired off a few bursts from the Mogambo
Machinegun System (MMS) to suppress any incipient hostile activity,
and I quickly opened the door to the Mogambo Fortress of Solitude
and snatched the report up off the ground and ran back inside.
Quickly slamming the door shut, throwing all the locks and activating
the Mogambo Monitoring and Surveillance System (MM&SS) into
Full-On mode, I gobbled down a few nitroglycerin pills as a wise
precaution, and then leisurely read that prices were up for the
month, and by 0.6%. In March, the Philly Fed's prices paid component
surged 9.7 points to 53.4. The 'prices received' subindex climbed
3.7 points to 22.6. Both are at the highest levels in nine-years.
My immediate reaction was an involuntary tightening of my trigger
finger as I staggered about clutching my heart, and then, according
to expert testimony, was enveloped in a confluence of outrage,
fear, and panic in doses that were, according to sensitive instruments
developed specifically for the purpose, off the charts!
Of course, there was the rush by government wonks and the stupid
class of people in America, which is the class known as "American
economists," who all decided that prices going up did not
mean that prices went up, and even if they did, then it is okay,
and it is nothing to get worried about, and that it actually
meant that this was the perfect time to buy some stocks or bonds
or houses or something.
The next day, in the WSJ column "Ahead of the tape,"
by Aaron Lucchetti, we read that "The big question for bond
investors is whether factories and other 'producers' will eventually
pass on some these small, but growing, price increases to consumers."
Then we are treated to the opinion of an American economist,
namely Michael Ryan of UBS Financial Services, who thinks that
maybe these producers will not be able to pass along those price
increases to consumers. He says that while there is a historical
tendency for consumer prices to rise following producer prices
rising, "It doesn't always transfer."
"Historical tendency." I like that.
Well, I am here to tell you and Mr. Ryan that rising producer
prices rising are always paid by somebody. Either the consumer
pays them, or the stockholders pay them in the form of reduced
profits. Either way, somebody pays, and they take the whack to
Christina Wise of Investors Business Daily wrote a column entitled
"PPI Rose 0.6% in Jan; Prices Up in Pipeline," and
it shows that she is on the same page as the Mogambo, too, as
she writes, "Others see inflation ahead, saying eventually
higher production prices will be passed on to consumers."
David Littmann, chief economist at Comerica Bank, pretty much
agrees with me and Christina's un-referenced 'others", and
says "All commodity prices are up and I think that's a worrisome
sign because these wholesale prices do precede CPI. There's no
nice way of toning it down. It presages a great deal higher inflation
So, will producers be able to pass along the higher prices? I
am here to tell you that there are very few stockholders that
are going to let the executive management staff sit around on
their fat keesters, soaking up gigantic loads of perks and benefits
and stock options, while the income of the stockholders goes
down, all because the company is absorbing higher costs. Those
managers who are still around next year at this time will have
figured out some way, some ingenious way, some desperate way,
to increase the prices that consumers pay. And if you want REAL
"historical precedent," this is it.
Marshall Auerback, one of the really smart guys of the world
whom I would love to see wrestle Alan Greenspan to the ground
and make him squeal like a monkey, has written another of his
stellar articles for the Prudent Bear website. He has entitled
his new screed "Argentina Should Hold Firm (But It Probably
He is referring to Argentina being the primary recipient of IMF
largesse, and how they are telling the IMF, translated into Mogambo-speak,
"We have no intention of paying those filthy capitalist
swine bondholders what we owe them unless they are willing to
take ten cents on the dollar. But if you give us another big
bunch of money, measured in billions of dollars, we will make
token payments on some of our overdue loans, and maybe invite
you over for lunch and say some nice things, all of which are
But Mr. Auerback has taken the bankrupting situation in Argentina
and extrapolated to other countries who are just as big a bunch
of debt-addled dirtbags, namely us. "We have made the point
before, but if ever there was a party in desperate need of a
traditional IMF style makeover, it is the United States of America.
The convenient focus on Argentina helps to distract attention
from the broader issue of American economic policy and its role
in fomenting the kind of financial fragility that has wrought
so much damage to Argentina and the rest of the emerging world."
Mr. Auerback seemingly looks down from Mount Olympus and sees
things as they really are, and has noticed that the supreme economic
ignorance ("We're all Keynesians now!") of the Federal
Reserve system has infected everything it has touched, and lots
of things that it has not touched, all over the globe. "Argentina's
current dispute with its creditors is symptomatic of this broader
problem of an American policy that seeks to deal with credit
bubbles by creating new ones and bailing out the architects of
the old ones (the so-called 'moral hazard' problem). Under the
guidance of Washington, the IMF has organised bailouts, the effects
of which tend to minimise the costs of write-downs to the Western
lenders, whilst extracting huge social costs in the country that
was the original recipient of these loans. Debt amortisations
and interest payments remain high and the emerging market governments
are forced to dig deep into their pockets, forcing taxpayers
to pay up, without receiving any of the corresponding benefits
of foreign investment."
Cutting to the chase, he remarks that "Ironically, the US
has become a foreign capital debt junkie, suffering from virtually
the identical affliction to that of Argentina in the terminal
stages of its illness." "Given the stakes, we have
no doubt that greater pressure will ultimately be brought to
bear on Argentina, and the 'great game' will continue for a while
longer," he says. "But this will prove self-defeating.
Governments and 'neutral' multilateral organisations bent on
sheltering their constituents from the adverse consequences of
their own market actions, such as the IMF, will continue to 'socialise'
the losses of these private market participants. The self-correcting
and self-purging mechanisms of markets will thereby be thwarted
yet again. Risk perceptions will be further skewed as losses
are bailed out at the public trough. In turn, rational economic
agents will re-learn the now predominant lesson to expect more
government bailouts, which will perversely encourage greater
speculative behaviour leading to even more overvalued asset markets,
excess indebtedness and ultimately to greater instability and
In short, it will get worse and worse until it collapses under
the sheer deadweight tonnage of lies, frauds and economic stupidities.
In a disturbingly familiar vein, an essay entitled "Argentina's
Paper Money Mire" by Grant M. Nulle on the Mises.com site
is equally dismal. "For every dollar (or foreign currency
equivalent) worth of defaulted bonds held, Argentina will exchange
it for a new bond with a face value worth approximately a quarter,
bearing a coupon of one to two percent and maturity of 20 to
40 years. Put succinctly, Buenos Aires has demanded a write-down
of approximately 92% of the obligations' net present value. Compensating
lenders beyond these terms would not come at 'the suffering and
hunger of the Argentine people,' according to President Kirchner."
Mr. Nulle then pinpoints the exact source of the misery in Argentina.
"The twin financial scourges of fractional reserve banking
and a central bank-abetted fiat currency pervaded the Argentine
economy, making a boom and bust possible." Plus, he also
identifies, as does Mr. Auerback, the culpability of the IMF.
"The Fund was instrumental in engendering Argentina's present
woes through lax oversight and an implicit bailout guarantee,
which was actualized when Buenos Aires's fiscal fiasco became
In other words, this international organization lends contributions
supplied by governments, especially the US government and its
agent the Fed, whose quotas are met via the involuntary confiscation
of property (taxation), to recipient states in order that the
beneficiaries continue to service public debts to private lenders,
also a nefarious compact that entails violating the property
rights of a third party. This facet of the international financial
architecture is nothing more than systematic pilfering."
Richard Russell, the savant behind the Dow Theory Letters, was
profiled in this week's Barron's, and as usual he displays his
talents for discerning the future and how to make a buck from
the knowledge. He says that we are looking forward to the "one
of the worst bear markets in history." Part of it will be
that he figures that the US dollar will lose about half its value.
Half! So as bad as oil at $38 a barrel seems, we are looking
at a theoretical $76 a barrel when the dollar's purchasing power
is halved. And four bucks a gallon at the pump.
He also looks at gold with a loving eye, as do all thinking
people, and as does all paranoid and fearful people like me,
and proclaims that gold is "cheap as dirt." If you
are so thick-headed that you will not listen to the Mogambo or
Richard Russell, perhaps you will attend to an essay entitled
"Gold Today, Gone Tomorrow" on WorldNetDaily,
by Kevin DeMeritt, president of Lear Financial. He writes "In
the shorter term, Merrill Lynch believes that gold's
rise will top $500 an ounce this year. But Barron's topped Merrill's
prediction: That financial publication recently included a prediction
that gold's rise could exceed $800 an ounce."
Both of these are for gold's
price THIS YEAR! Since you are not anticipating dying this year,
I assume that you are also interested in the future price of
gold, too. In that case, the sky's probably
the limit, although you will go a long time before you see anybody
quoting the Mogambo saying as much.
The megalithic, economy-destroying
cancer of Big Government is the huge flywheel that is keeping
the economy putt-putt-putting along. If it had not been for this
huge inertia effect, the economy would surely have crashed years
and years ago. That is why government is still growing, although
if you had a wart on your face that was growing as large as the
government you would not be so complacent about it.
I read the essay "Everything You Wanted To Know About Interest
Rates" by Craig Harris, of Harris Capital Management, on
the 321gold site. "In spite of the fact that the actual
cure for some of the current economic problems is for the government
and public to save and reduce debt, exactly the opposite incentive
has been introduced for the simple reason that the modern financial
system has evolved to rely on ever increasing levels of debt
and inflation to sustain itself."
And the next time you are in the library, sidle on over to the
Economics section and try and find a book that explains HOW a
financial system based on "increasing levels of debt and
inflation" could possibly work. Or find an example in all
of history where such a thing worked in the past.
And don't try and take the easy way out and call David Tice,
manager of the Prudent Global Income Fund, for his opinion about
that. He says "This is not a run-of-the-mill problem where
the currency corrects 25 percent and then stabilizes. We have
an economy that's very dependent upon ever-increasing amounts
of debt. Given that, we think the dollar can decline substantially
more from here."
And if you don't think that a declining purchasing power of the
dollar is a bad thing, tell me how you like the price of gasoline
these days, which is caused, in great part, by the decline in
Gary North, reports that Reagan gave a speech on October 27,
1964, in which he said "We have $15 billion in gold in our treasury -- we don't own an ounce."
Gary says, "As for the gold, it
may be gone. Nobody outside of the Federal Reserve System knows
for sure. There are indications that it was lent to European
central banks, which in turn lent it to commercial bullion banks,
which in turn sold it and bought government bonds. If so, the
gold isn't coming back.
And that is why the banks are all huffing and puffing and coming
up with new agreements to continue selling gold:
the weenies who leased and then sold the gold
need to have gold falling in price or they go under.
And they will go under owing plenty big bucks to the banks.
I am glad that the United Nations' Oil For Food Program has,
once again, revealed the U.N. for what it is; a snake pit of
horrible, lying, corrupt and contemptible people. And I take
this as my cue to climb on my soapbox and demand that the United
Nations be torn to the ground and those nice comfy chairs be
distributed to the poor unfortunates of this world whose chairs
are not so plush and cushy, namely me. The U.N. was, after all,
where the horrid Madeline Albright, whose contemporaries referred
to her as "Madeline Not-All-That-Bright," did nothing
of note but run her mouth before she was installed at the NYSE
to participate in THAT filthy, corrupt little hole. And we all
know how well THAT worked out.
As a gratuitous insult, how in the hell can we be so stupid as
to let our of computer operating systems and programs be software
based? Obviously Microsoft must be guilty of massive, systemic
corruption, as there is no other way to explain how our computers
are operated by software, which randomly quits working and seizes
up the computer, is prone to constant corruption by outsiders,
and is, in a word, a total failure.
In the old days, the programs and everything was built into the
chip, and therefore incapable of permanent corruption.
The Grandfather Report is one of those sites where you only go
if you are thinking about NOT sticking your head in the gas oven
and want a little push to get you to kill yourself and get it
over with, writes "Total Debt in America is now over $37
Trillion, or $129,513 per man, woman and child." This number
"excludes the huge un-funded contingent liabilities of social
security, government pensions and Medicare."
"2003 debt of $37 trillion was 437% of national income;
the debt ratio in 1957 was 186%. If 2003 debt had been at the
1957 ratio said debt would have been $15.5 trillion, not $37
trillion - - indicating excess debt in America today of $21 trillion.
Stated differently, in 1957 there was $1.86 in debt for each
dollar of national income, but in 2002 there was $4.14 of debt
for each dollar of national income."
He then asks "2 great questions: Can the production of debt
forever replace the production of goods? Can Americans forever
borrow their way to prosperity?" My brain instantly snapped
to full attention, as this is an easy question! Maybe I could
score a couple of points for class participation! But before
I could even raise my hand to answer it, he answers it himself:
"One answer: NO WAY!!"
"Inflation or deflation? How about just 'Flation'?"
ask Alex Wallenstein. He doesn't give you the black-or-white,
yes-or-no answer, but merely says, "What we will end up
with is simply the worst of both worlds."
"Nobody is going to 'win' this deflation vs. inflation debate.
We will all suffer. There will be wide-spread 'flation' all over
the place, and nobody will care whether this 'flation' is of
the 'in' or the 'de' flavor."
"There will be only one way to survive this with your wealth
position more or less intact: having a good amount of real money
stocked up somewhere within reach - and trying whatever you can
to get your family, friends and neighbors to do the same. (Good
luck on that one!)
Richard J. Greene in an editorial at gold-eagle.com entitled
"Fiat Money Systems" was featured on the 321gold site.
"There has been an unprecedented amount of debt and credit
extended, far in excess of anything we have seen in prior fiat
money systems, and the eventual result will be defaults, deflation,
and depression. There will also be an accelerating redistribution
of wealth, most surely to result in social unrest." "Joe
Six-pack, who represents the masses, has been sucked in by the
lure of easy, unearned consumption. He is totally uneducated
in economic matters, trusts his government, and is dangerously
over-exposed financially as is the entire nation." He sounds
as dyspeptic as the Mogambo, but I am hopeful that you will not
hold that against him.
Then he made the big mistake of looking at history, the very
thing that cause me to lose my mind, although it was Father Time
that caused me to lose my good looks. He writes "A brief
perusal of history will show that when a nation went on a gold standard it was the beginning of a very long
period of that nation thriving. When a country went to a fiat
currency there was a period, as long or longer than 30 years,
in which it thrived even more. However, during that period of
prosperity on a fiat currency, excesses began to build. Once
they have built up to extreme levels, it is a very dangerous
time. When levels of debt become too excessive, an increasing
amount of the rewards of production; profits, must go to servicing
debt. When the servicing of debt consumes all of the profits
of production, it finally consumes production itself."
He then sums up his historical travels by saying, "If you
look at history, you will understand which will win, and you
should move to protect yourself as the mountains of credit and
paper money, gravitate to their true value. BUY GOLD AND SILVER!" Note the way that he has used
all capital letters to indicate emphasis, which is a lot classier
than when I grab you by the lapels of your coat and scream in
your face and beg you to do that very thing.
Mark Rostenko, of the Sovereign Strategist, writes "After
a spectacular rise in the S&P 500, signs of a major market
top are rapidly falling into place. While many have heralded
the rally as the emergence of a new bull market, history indicates
that such large reactions are part and parcel of secular bear
He notes that "Nobel Laureate Vernon Smith coined the term
'echo bubble' to describe such typical post-bubble activity.
When a market bubble bursts, it is generally followed by a secondary
bubble, an 'echo bubble' -- during which market psychology matches
the extremes of sentiment displayed in the first bubble. Typically,
markets do not find a genuine bear market bottom until after
the echo bubble pops."
"In major bear markets, counter-trend reactions that retrace
between 1/3 and 2/3 of the preceding decline are common."
In looking at the current situation of the stock market, if Mr.
Smith is right, the counter-reaction must be drawing to a close.
Throwing my stupid two cents into the mix, I note that the index
averages have all penetrated their 90-moving averages to the
downside, and are boring down to the 200-day moving averages.
And as any chartist will tell you, that is a bad sign.
The clever wags at the Daily Reckoning "The Fed's low rates
have underwritten a huge boom in debt all over the globe. Assets
backed by debt, especially real estate, bubbled-up all over again.
House prices, as a percentage of personal incomes, are at the
highest levels ever -- in the U.S., Australia, Ireland, the Netherlands,
Spain and Britain." This disconcerting fact may be behind
the Economist magazine's warning that the real estate market
is heading for a bust, particularly a 20% drop in prices. And
not only in YOUR neighborhood, either, but, and this is the scary
part, all over the place, or, as they put it, "the first
global property bust in history."
And it gets worse, as the DR people noted that "While there
are about $30 trillion worth of stocks in the world, the property
market is estimated at about $50 trillion. Much of it is heavily
mortgaged. And in the UK, for example, rental income often doesn't
even cover mortgage payments, let alone upkeep and other costs."
So while a stock market crash would be catastrophic, the crash
of the housing boom would be, hmmm, I see that I have already
used the word "catastrophic" so I am going to use the
word, cataclysmic, which is similar, which is only fitting, since
they are both grossly overvalued and oversubscribed, and both
owe their very existence to the damnable Federal Reserve.
The Economist magazine breathlessly report that the global economy
has had its most "stable decade in history" according
to two guys, Bill Martin of UBS Global Asset Management and Robert
Rowthorn of Cambridge University, who are two guys who seem to
have a smattering of knowledge about economics and a lot of extra
time on their hands. What these two guys did was measure GDP
according to prices received, and took a look at the volatility
in the changes in GDP aka prices! Hahaha!
Apparently these two witless dudes did not notice that GDP is
now measured in prices that are subject to subsequent adjustment,
via the foul Boskin Commission template of adjusting inflation
so as to not show inflation, and the idea of hedonic measurement
of prices to show growth out of thin air! Where in the hell have
these two guys been? Oh, I forgot: They work for a brokerage
and a university. That explains it for me.
---Mogambo Sez: Each day I wake up more scared than the
March 24, 2004
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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