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My anti-idiocy pills don't seem to be working

Richard Daughty
...the angriest guy in economics
The Mogambo Guru
Archives
April 20, 2005

- The CBOE Volatility Index (the famous VIX) had a sharp spike last week, producing the biggest volatility since August of last year. The yield curve also flattened, and the breadth (advancers shares minus decliners on the NYSE) continued to plummet. Somebody is, so it seems, losing confidence.

These things could be just a coincidence, but a lot of people have suddenly decided that something ugly is in the wind. One of them is Alan Abelson, in his Up and Down Wall Street column in Barron's, is also noticing the outbreak of the heebie-jeebies, and notes a "peculiar disquiet" among both some economists and everybody else. A "particular disquiet" is such wonderful phrase that it probably reflects the kind of genteel crowd he hangs with, all educated and refined, but who can't be bothered with the likes of me and my hoodlum friends, like it would kill them to give us a couple of bucks, or offer to give us a ride in their fancy cars, or maybe spring for a pizza, or even a lousy can of deodorant, which is something that I obviously need very desperately. Perhaps this is because The Mogambo and his little crowd of "disquieted people" went waaaayyyyy past "disquiet" at ninety miles an hour about three state lines ago, and am now out there on the hysterical fringe with a "Repent! The end is near!" sign around my neck, standing at various four-way stops, yelling to the cars how Alan Greenspan has murdered our money and (as a lesson in how things have far-reaching effects), has also murdered the USA, and, extending that important lesson, their cozy little debt-addled little lifestyles are soon to be toast, too.

After ignoring The Mogambo holding out his little tin cup, he follows this up with a review of a speech that Paul Volcker, the last great Federal Reserve chairman we had, gave, wherein he opines that our problems as "intractable," and that we have to do something about, and hold onto your hats, the budget deficits and the trade deficits! Hahahaha! Like that's going to happen! Hahahaha! We are not going to consume until out little tummies burst? And the Congress is not going to create more entitlements and increase spending and create more programs and spend spend spend? Hahahaha!

Mr. Volcker could have stopped after he told us that our problems were intractable, as they are. There is nothing that can be done, because if there WAS something that could be done, someone would have done it, and nobody in all of recorded history has ever come close. Of course, this does not mean that the Fed and the Congress will not TRY to do something, like all the rest of the brain-dead bozos in history have tried when their asinine spending excesses got to this point. And what will they try? It will be, as if you had to be told, more of the same thing that got us into this mess! Hahahaha! More money and credit and deficit-spending! Hahahaha! What idiots! And we elected them! Hahahaha! So WE'RE the idiots! Hahahaha!

And the mention of idiocy reminds me that it is time to take one of my anti-idiocy pills that don't seem to be working, and that, for reasons that highly-trained psychiatrists don't even want to address, reminds me of a comment by John St. George while he was interviewing me last Friday for the Free Market Network News show. He commented that people around the world do not seem to have as much respect for our money, and I had to laugh (and if you listen to it you will hear me go "Hahaha!" and my wife yelling "Shut up that stupid laughing! I'm watching TV!"). Foreigners are going to respect the money of people who are so blindingly stupid as to get into the humongous mess we are in? Especially when our own vaunted Constitution literally precludes acting this way? Hahahaha! Hell, I'm from this damn country, and I don't have any respect for our money, either! And then to think that (and if you could see me now you would notice that my eyes have this blank look of stupefaction at the very thought), that MORE creation of money and credit and debt and MORE deficit-spending is the freaking CURE for the resultant miseries? Hahahaha! Look! I'm laughing again! Perhaps they think that the productivity miracle of replacing laboriously slow mechanical printing presses to create money with a button that electronically increases credit balances in the banks, so that they can loan it out and create more debt, is our salvation and that makes our money so wonderful. Again the laugh of The Mogambo echoes "Hahahaha!"

But we had started out talking about how there were suddenly a lot of guys who were saying that something significant has changed. Another one is Doug Noland who wrote in his Credit Bubble Bulletin at PrudentBear.com that "In short, Risk markets are under increasing stress, the goliath leveraged speculating community is not making money ­ at best ­ and the derivative players must now be studying their risk exposure and questioning their risk assumptions and models. The Speculative Bubble in Risk has been pierced."

If you want another example, then here is Richard Russell, he of the Dow Theory Letter, who says "There's something BIG coming up in the markets and in the US economy during the months ahead. If you look at the market action, if you listen to 'the language of the market,' you can almost taste it."

Even Paul Krugman, a Leftist Loser with whom I seldom agree, is also growing alarmed. He writes, "What few seem to have noticed, however, is that a mild form of stagflation -rising inflation in an economy still well short of full employment - has already arrived. I shouldn't overstate the case: we're not back to the economic misery of the 1970's. But the fact that we're already experiencing mild stagflation means that there will be no good options if something else goes wrong." If something goes wrong? Hahahaha! See? I told you he was a loser! What in the hell could possibly go right? Name another stagflation episode, anywhere in the world and anytime in history, where things "went right."

He even alludes to the fact that our economic mess is, as he again quotes Paul Volcker, who seems to get a lot of mileage out of his every utterance, whereas all I ever get is people shouting "Shut up! Shut up! Shut up!', that our problems are "intractable." Mr. Krugman says, making a joke of it, "How do we get out of this bind? As the old joke goes, I wouldn't start from here." And so, for once, I DO agree with Mr. Krugman, which just goes to show you how weird things are getting to be! Since there is no escape from our economic problems, the time to "get out of this bind" was a long, long time ago, before it started.

And finally we have Joe Granville's OBV (On-Balance Volume), who says that his charts have suddenly broken down so badly that his various OBV statistics bear an eerie resemblance to 1929 just before the crash.

- "The Money of Capitalism" by Anthony Harris, who writes at strike-the-root.com has written something that I did not know, which is that "When Congress mandated that U.S. bonds, instead of
gold, be used as bank reserves, Congress centralized credit into the hands of the U.S. Treasury."

For one thing, I never heard of this before, and I am not exactly sure that it is true, since he may have heard it from a guy who heard it from a guy who says he thinks that he overheard a guy telling another guy that his brother heard that The Mogambo said it in one of his stupid newsletters, and now I have to spend time being questioned by reporters, who rudely thrust microphones in my face and ask, "Did you say that, Mister Mogambo? Huh? Did ya?" and I will say, being as dignified and respectful and as adorable as I can, "Hell, no, I never said such a thing, you ignorant little miserable little piece of dog poop! Mostly because I never even heard of it myself!" And then the reporter will say "Why should we believe you? Isn't it true that your own business card actually reads 'Dirty Lying Bastard' as your job title?" and I will admit "Yes, that is true, and that is only because my whole title would not fit on the card. Would you, overanxious cub reporter, out to get the Big Scoop, like to know my entire job title?", and then the reporter will say "Yes" and then I will give him a little taste of the Full Mogambo Blast(FMB), which is essentially screaming a string of foul obscenities, at high decibels, containing, by volume, vague death threats, insults about your parents, your grandparents, your spouse, your children, your grandchildren (if any, and if not, then additional comments about the likelihood of those hapless little bastards being as worthless as you) and then he will hopefully say "Ow! Ow! Stop it! That hurts! You win! The Mogambo is right! The Mogambo is always right!" Well, to be truthful, they never actually do say that, but they usually either say "Here's a dollar. Go away" and I say "Okay," or they start dialing the cops, and then I go away. But without a dollar, which makes it all worse.

But this is not about whether this is true or not, or whether the Congress did the right thing or not, or who hit who in the bazoo after who threw used kitty-litter at who. I am already convinced that the government is corrupt and that they would easily and happily stoop to something like using Treasury bonds as the basis of money in banks, so you are preaching to the choir there, dude.

No, it is the next part of his essay that caught my eye. "This was done 15 years after the publication of The Communist Manifesto, in which it was explained that one of the conditions required to destroy private property in a country was the 'centralization of credit in the hands of the state by means of a national bank with State capital and an exclusive monopoly' to issue bank notes." When I read that, something stirred deep down in the dark depths of in my brain, way down there under all those layers of cerebral matter connected into a mighty Mogambo matrix (MMM) around the one all-American axiom, "You can shoot your way out, or buy your way out, of anything." Way down there in the primal brainstem where those survival-related autonomic reflexes rule supreme, a lone neuron has fired, initiating a cascading neural response, as the body immediately gears up for desperate fight-or-flight, which involves, among other things, blood rushing to the interior of the body, pupil dilation, accelerated heartbeat, heightened reflexes, and a lot of chemicals and hormones and stuff being squirted into the blood by various bodily organs, which causes other reactions, including involuntary defecation, which explains 1) why I am wearing an adult-sized disposable brief, 2) why I don't get invited to parties much, although it doesn't explain why people hang up on me when they find out who I am, and then I can never get through to them at all anymore, although their answering machine is oh, so polite, all sweetness and light, when I am asked, in those honeyed, dulcet tones that make you want to just reach out and slap their damn stupid faces, to please leave my name and number and they will be happy (Ha!) to call me back "as soon as they can," but they never do, the bastards.

But this is not a lesson in biology, nor another testimonial to how everybody hates me, and they are all out to get me (As if I needed any more proof of THAT!). No, this is about alarm bells ringing in my brain, ringing, ringing ringing, all day and night, ringing, ringing, ringing, making me crazy with the ringing, ringing, ringing, until I am insane with the ringing, ringing, ringing, and now this whole Communist Manifesto thing is just the icing on that damn cake!

It galls me- GALLS me! -that I gotta give grudging admiration for a couple of stinking commies: Marx and Engles. I know this because I just got up off of my fat butt and looked up "Communist Manifesto." And when I looked it up, I read something which makes me even MORE insane with outrage, because I learned that these two jerks wrote their crummy commie pamphlet in 1848! For those who need that date translated into Mogambo-ese, it is "18-freaking-48." And that was, in case you are brain-damaged, a long time ago. And now you want to know, "How long ago, Mogambo?" Well, I patiently explain, simply subtract 1848 from 2005, and you will get a big freaking number that indicates that it was a long, long time ago. And why are you bothering me with these pointless damn questions? You want me to come down there and teach you a lesson in how wasting my precious didactic Mogambo time (PDMT), and then you can spend the next few hours equating that with lumps appearing on your noggin? Is that what you want? Well, is it, punk?"

Letting go of his shirt collar with my one hand, and releasing my grip around his scrawny little throat with the other, he collapses back into his stupid chair, gasping for breath and threatening to sue the hell out of me (Ha! Get in line, jerk! Like HE'S the only guy I ever met who needed having some sense choked into his damned hard head!).

Everybody else in the class has apparently learned a valuable lesson from all this, as I note with satisfaction that there are no more questions. So I will now summon up Hidden Mogambo Reserves Of Inner Strength (HMROIS) and heroically try to overcome my still-boiling rage, which I call Mogambo Righteous Rage (MRR), which I use as a jumping-off place to prove that I have the right and the obligation to slap the hell out of stupid people. If you will excuse how my fists are clenched in rage and how there is steam coming out of my ears, we will get back to today's thrilling lecture, which is centered around the theme that these two dumb-ass commie bastards knew, in 1848, that this governmental central bank and fiat money scheme was a guaranteed loser!

And they didn't think of it themselves! Hell, everybody, all over the world, through all of time, has always known that a government printing money, or a central bank controlled by the government and given the power to print fiat currency, was a big, big, big, colossally big, monumentally big mistake, because all they had to do was look back into their own miserable histories to get a very, very real example, and the hyper-inflationary collapse of Weimar Germany comes instantly to mind, and then, of course, speaking about Germany makes bratwurst comes to mind, and then that makes me think how a bratwurst and a beer would really hit the spot right now, and if you can't get a bratwurst, then a couple of beers would be okay, too. Make it a six-pack and a pack of smokes.

So Marx and Engles, who are probably having a nice pizza right now, sitting somewhere with gooey cheese on their chins and laughing at The Plight Of Mogambo (TPOTM), are sitting smug and satisfied that they were exactly right when they correctly stated that any country that has a central bank, with the right to create as much money as it wanted, will destroy a country and its government, as it has always done exactly that, 100 freaking percent of the time. And whenever any idiot government tried to get away with that crap (because governments always do what government do; they spend too much and try to pay for it by printing too much money), then prices rise, people get grumpy, and regimes change. And if there is one thing that politicians do not want, it is rising prices and grumpy people and regime changes, because there is always the possibility that The Mogambo could actually accede to power, and with that whole Mogambo Righteous Rage (MRR) thing, where I have the right and the obligation to slap the hell out of stupid people, they know that they are in for some SERIOUS face slapping!

- It may be a sign of the times, but more and more people are creating pure-
silver coins, which I always hope is because they are trying to get real money re-introduced into America as that would eliminate all our problems, like the American Liberty Dollar is trying to do. The latest addition is from an outfit that calls itself Alternative Investment Strategies of Virginia, which has minted a coin called "The SHEN" (short for "Shenandoah Valley Free Money") as an example of "an alternative currency for the Shenandoah Valley of Virginia." They note that the people buying the coins are not using them as money, but are buying them as an "investment."

- I'm in a particularly bad mood here lately, as I have (I hope) injured my left pectoral muscle, probably by doing something stupid, like not properly warming-up before lifting somebody up by their lapels so that I can more easily scream into their face about how America is being destroyed by the Federal Reserve. Naturally, fearing the worst, I think that, alternatively, it may be that I am having another heart attack. Now I can't decide whether to go to the doctor, (who will give me a lecture about how I am acting like an idiot, insinuating that me keeling over dead, right now, would suit her just fine, and how her snooty little nurses don't like being referred to as "Yo! How's about hustling a few tranquilizers and a sponge bath over here, babe?"), or dying quietly at home (and thus save the few zillions of dollars that an office visit will cost), surrounded by my loving wife and family who keep wanting to know if I am dead yet because they are bored with the Mogambo Death Watch (MDW).

But, while I could go on for hours and hours about me, me, me and my health problems (the polite term is "valetudinarian," as I learned from watching an old Sherlock Holmes mystery on TV) and how my aches and pains are all the result of the government, or my wife, or a neighbor, or extra-terrestrial alien beings putting poison in my food and/or shooting rays into my brain from outer space, or both. But we have, unfortunately, no time for that now, as it's income-tax time. I have something to say about that to those of you who think that having large mortgage interest deductions, captured on Schedule A of your tax return, is such a hotshot idea, and a lot of people do.

In truth, (assuming no other deductions on the schedule) you have to pay out $9,700 just to start benefiting, as everyone gets that much of a deduction. Some just take it via the Standard Deduction, and some laboriously fill out the Schedule A. Now, imagine the guy who owns his house, has no mortgage, and thus pays no interest. He has, right off the bat, the whole $9,700 in cash, whereas the mortgage holder has spent $9,700 on interest payments and the money is gone, gone, gone. Already this sounds kind of juicy to me, as I compare having $9,700 versus having paid $9,700 to some hypocrite banker who was all smiles and patting me on the back like we were old pals when I was taking out the loan, but who is now decidedly icy and rude when I ask for another lousy extension on my payment.

Additionally, the guy with no mortgage gets to deduct that whole $9,700 amount from his taxable income, saving him another (at the 25% bracket), $2,425, which is the income taxes which he does not now have to pay, which our homeowner can put into his pocket without alerting the spouse, and then we can go out and buy ourselves something nice as a way of saying "Thanks for doing the taxes, honey!"

So far, the paid-off homeowner has $12,125 in cash. And the homeowner, anticipating this, can have put the money away at some nominal rate of interest, say, oh, 3 percent. Then he would have taken home, after tax, another $278.81. And now, the moment we have all been waiting for! (Insert stock footage of somebody hitting the "total" button on a calculator) The grand total! $12,403.81. All because he paid off his house and takes the Standard Deduction!

So if you are buying a big expensive house and claiming a mortgage-interest deduction on your Schedule A, then that damn house of yours had better appreciate a lot before you match the $12,403.81 in cash that the no-mortgage homeowner will get, year after year after year. And don't get me started on the "miracle of compounding" of this twelve-grand per year annuity, which is so astonishingly profitable over the long-term that Isaac Newton himself, one of the greatest scientists and biggest brains in the history of people with brains, is the one who actually coined the phrase "miracle of compounding." Suffice it to say that it is a hell of a lot of money.

-
Gold was down last week, and down a lot, and I feel bad for those of you who have followed the advice of The Mogambo and bought gold and silver, and are standing outside of my house, clamoring for your money back, as per my Famous Mogambo Guarantee (FMG), which promises TWICE your money back if my advice is bad. Unfortunately, you neglected to read the disclaimer in footnote 123, in the back, in small print, where you would have read, in Latin, "This whole Mogambo thing is a big scam, and you ain't gonna get your money back. The Famous Mogambo Guarantee (FMG) that you are buying is worthless, and this Prospectus is less than worthless, in that several trees died to provide the paper to print this bogus crap on it."

But, although you are angry and disappointed, and we are both getting really irritated by my wife laughing at you and screeching, "I told you so! I told you not to trust him, but would you listen to me? No! Now get off my lawn! Take your flaming torches and wait down the street until he goes to the store later, probably for a donut, or a pizza, or a pizza made with donuts, I dunno. But you can mob his car and beat the hell out of him then!" But, and I cannot stress this enough, 1) do NOT wait down the street, 2) do NOT mob my car, 3) do NOT beat the hell out of me, and 4) keep buying
gold, because if gold does NOT soon start moving up and turning profits like a glorious gushing well that is spewing dollars all over the place, then it will be the first time in all of 5,000 years of history when it did NOT so respond when a misshapen, mal-invested, over-leveraged and highly-indebted Big Government economy got to this egregious point in its headlong drive towards national bankruptcy. And trust me when I say that they ALL got to this point, to one degree or another, because governments are always eventually filled with corrupt buttheads, and especially so after long, credit-fueled booms. And when they all saw that they couldn't, or shouldn't, raise taxes, they all typically decided to invade a neighboring country and steal THEIR money, or confiscate the money of the Jews, or just print the damn money they needed, which was the worst option, as it increased the money supply, which had to eventually find its way into the prices of things, because there is nowhere else for money to go, except into things, which makes the original problem worse. Just like we are doing now, and although we are creating money and credit with both hands, we only invade other countries to steal their oil.

So, and this is the Mogambo Investment Tip Of The Day (MITOTD), these pullbacks in the price of
gold and silver are golden (pun intended) or silveren (if you get my drift) buying opportunities, because half of a very famous investment strategy is to "buy low." One day, the other half of that phrase, "sell high," will make you want to name your children and grandchildren "Mogambo" out of sheer dumb-ass gratitude for giving you such good advice, and you will fly me up to the kid's christening or the bar-mitzvah or bris something, thinking that I will give the kid a present of some cash, but I won't.

And
gold is low-priced by a long shot, and silver is so grossly under-priced that I would call silver "the buy of the century."

- Richard S. sent me a nice forward entitled "Taylor On US Markets &
Gold, Roach, Hoye and Russell All Point Toward Deflationary Pressures" which the rest of the article expanded upon by providing some of these guys' thinking, which I distill, because I know how important and busy you are, into this pithy Mogambo Executive Summary (MES) which is "Doom for assets."

Unfortunately, this does not mean that consumer prices are doomed, as I am finding just the opposite, having done the grocery shopping this morning, and then coming back to the office and reading that the New York Times has figured that food prices have risen by 20-30% in the last year or so. Naturally, I insult the Leftist NYT with things like "No kidding? And where in the hell have you been for the last couple of years that this is only NOW coming to your stupid attention, you Leftist-trash buttheads?" In fact, consumer prices are zooming, to which I will readily attest, having, as I said, done the grocery shopping this morning, and my eyes are still having trouble focusing from where my brain blew a fuse at the cost. It haunts me.

And why does this haunt me? Well, if you will stop throwing pretzels at me for one damn minute, I will tell you. It is for two distinct and separate reasons. Firstly, when my check bounces, the store manager is going to be very grumpy with me again, and the next time I go into his store we are going to get into a real tussle where I am valiantly struggling to break free from the clutches of the security personnel (Bob and Wheezer) while simultaneously trying to explain to him that I am willing to settle for 70% of the amount owed, which I figure is fair, because I am paying him with dollars that were earned two years ago, and thus they are more valuable than ordinary dollars earned today, because in that two-year period the dollar has lost 30% of its value, all thanks to the damnable Federal Reserve creating so damn much money and credit, which turns into new, lower-value dollars when somebody borrows them, and the Fed has been doing this day after day, week after week, month after month, year after year, decade after decade, until my heads hurts from thinking about the effect this is going to have on rising prices as all this money winds its way around and around the world, buying things, and then, because he is stupid or because he is smart enough to see through my transparent ruse, he will say "no."

And the second reason I will reveal by asking a question. Do you think that the French Revolution happened because prices for consumer staples deflated after their government printed up all that money? Hahaha! You think that the misery of Weimar Germany was caused by food being cheaper after the government printed up all that money? Again, I say, or chortle mirthlessly, as you knew I would, "Hahaha!"

And food prices are going to get worse, as Michael W. Hodges of the Grandfather Economic Report has a little bad news about that when he notes "Not only is the technology product sector in deficit, but the U.S. Department of Agriculture Economic Research Service estimates 2005 will be the first year in nearly 50 that America will not turn an agricultural trade surplus."

So we have to now import food, and with a falling dollar? Yow! Stock up on food now, because this means that grocery prices will just keep getting higher and higher as the dollar falls lower and lower, which it will, because the boneheads in Washington are actually trying to devalue the dollar!

- An Asia Times article entitled "China's fury doesn't wash, but why the froth?" by Marc Erikson is about how the Chinese are supposedly expressing their fury and anger by demonstrating in the streets, all because Japan has new school textbooks that downplay the fact that Japan acted in a murderous, despicably barbaric way during WWII, especially when they were in China killing Chinese people, young, old, children, and babies, by the score.

Fortunately, the Chinese are not as upset about how America does not emphasize in our school textbooks our horrific record of invading countries, bombing countries, shooting rockets at countries, arming the enemies of countries, assassinating leaders of countries, killing hundreds of thousands of people, and all the other arrogant bully stuff we have done and, apparently, are getting away with. Whew! Dodged that bullet! Or, if they ARE demonstrating in the street about the USA, this Erikson guy doesn't mention it.

But Mr. Erikson is not sure that the Chinese people are actually angry at anything, but that this may be something much more sinister. "The obvious question is," he asks, "why was all this cooked up, for what purpose, and why now? One thing, though, is quite certain: the Chinese claim that Japan is to blame for the unrest is absurd.

"But after seeing what I saw in Shenzhen, I know that the Chinese government and/or Communist Party got this thing going and kept it going. Students might do this sort of thing on their own. But in Shenzhen there are no students. It's a special economic zone chock full of contract workers from all over China."

As to what this may mean, you do not have to wait for The Mogambo to sober up and tell you. In fact, Mr. Erikson does that for us, giving us time to order another round of drinks with those cute little umbrellas in them. As we sip and fence ("Thrust! Parry! Riposte!") with those little plastic swords, he stays on the job and writes, "To be systematic about it, there seem to be three possibilities: 1) the government wants to divert attention from pressing domestic problems; 2) Communist Party factional issues are fought out in a strange arena; 3) Beijing wants leverage to stoke up nationalist fervor for international gain. Neither 1) nor 2) can be entirely ruled out."

A government trying to divert attention from domestic problems by rabble-rousing? I thought that was an American invention!

- John Mauldin, writing for the Daily Reckoning, says "Now let's be clear that nobody really knows how high oil prices will go in the rest of this decade. Personally I think that a rise to $70 oil would start to negatively impact the American economy, and increase the likelihood of a recession." Sounds about right to me. But every now and then I accidentally take my medicines in the wrong dosages or something, and then I do things that I cannot later explain. One of those days is today, as he extrapolates from "The U.S. recession will affect the rest of the world negatively," which nobody can disagree with, to "and thus we should see a drop in the price of oil." Huh? This means that the dollar will not drop in value? The Mogambo don't freaking think so (TMDFTS).

Then, almost as soon as it arrives, the feeling passes, and we are both again in agreement when he says "The Cassandras who predict that the world will run out of energy simply don't get it. Yes, we will eventually see oil production peak and then begin to fall. But it will not be a calamitous over-the- waterfalls type of event. It will simply be a gradual lessening of production." And gradually higher prices, too, the result of increasing demand and decreasing supply. And it is these higher prices that will unleash the famous entrepreneurial juices, as he acknowledges when he says "That need for energy will be replaced by other energy sources. Such a change will be disruptive, but then most change usually is. That change will, of course, increase the number of potential opportunities for investors." This is probably some of the best advice you will get for a long time, because you can trust me when I say that the government will have all kinds of wonderful tax breaks and stuff to develop these alternative energy sources as soon as gasoline rises high enough and voters start screaming about how "something must be done!"

- One theoretical problem going forward may be the insurance industry, as suddenly people are realizing that they are sitting on a big, fat, over-valued asset, and that they are spending plenty big cash (PBC) on insurance premiums on that very asset. One night, and this is only a hypothetical situation, after you have been out drinking with some of your hoodlum friends, which you cannot afford, you stumble back into your house, fumbling around in the dark, feeling lonely and blue, and wishing that you were a musician so that you could pour out your aching heart in song, mournfully singing and playing the blues. But then you realize you are not a musician, and so the chance of you singing and playing the blues in some smoky bar seems more and more remote, and with it go your chances to pick up some hot groupie chicks that are already half-drunk, saving you lots of time and money, and so your frustration only increases, until pretty soon you come up with this plan to burn that damn house, or building, or business to the ground and collect the insurance money, which you could use to pay off your credit card, and then you would get a "fresh start."

- From Bloomberg we learn that the Federal Reserve Bank of New York reported manufacturing in the state of New York "grew at the slowest pace in two years in April as orders fell. The Empire State Manufacturing Survey, which gives a clue to the current performance of U.S. industry, dropped to 3.1 this month. The reading is close to zero, the dividing point between expansion and contraction. The index record was 39.6 in February 2004."

Not only that, but the measure of expectations over the next six months dropped, "the new orders index fell (to minus 0.2), also the lowest in two years, from 8.6," an index of new orders also dropped, and "The New York Fed's current employment gauge dropped to 8.6 in April from 11.3 in March. The average workweek index dropped to minus 4.4, the first negative reading in more than a year."

Well, it could be worse. Oops! It just got worse. The Producer Price Index came out and showed that for the 3-month period just ended, the annual rate of increase for finished goods is up 5.9%, intermediate goods up 8.7%, and finished goods up 15.9%! And I am supposed to believe that there is no inflation? Hahahaha! Tell me another one!

- For a shining example of the type of weird thinking that pervades the world of economics, I draw your attention to the Economics Focus column in the April 16 issue of the Economist magazine. It is entitled "Life After Debt" and it talks about the new bankruptcy laws here in the USA. The idea is, see, that a few university professor hot shots, obviously desperately flailing about in a "publish-or-perish" academic environment, wrote these stupid papers about how easing or toughening of bankruptcy may affect entrepreneurship and risk-taking and how this would affect the growth of an economy and blah blah blah. What crap! Bankruptcy is never any good for anybody, for one thing. It is intuitively obvious, to everybody, and that probably explains why nobody has ever said "Hey! I know a good economic paradigm! Let's let debtors screw their creditors!" And the reason is that a lot of people, namely creditors, lose their money, and if there is one thing that I know about economics, it is that losing money is not profitable. I sheepishly admit that I am not sure that I have ever actually read this in a textbook, but I have had a lot of valuable Mogambo experience (ALOVME) with losing money and having investments going down one stupid rat hole or another. Thus it has always had a very deleterious effect on my bottom line, which means that I have to go to my wife and borrow some money from her just to break even. So when the creditors get screwed out of their money by these idiot entrepreneur deadbeats going bankrupt, they have to go to THEIR wives and ask to borrow some money, and it probably isn't any more pleasant for them than it is around here, as I am, among other things, supposed to come up with, Solomon-like, answers to unsolvable riddles, such as when she asks me "How could you have been so stupid?" and "How could you have been so stupid, you filthy idiot?" and "How could you have been so stupid, you horrible, stinking little man who is now going to pay and pay and pay, until you are on your knees praying for death to give you sweet release, you creepy little loser bastard!" and while I am scrubbing the damn kitchen floor as part of the loan agreement, she is on the phone to everyone in the family, regaling them with the uproarious funny story about how I failed again, and how I am this big stupid loser, and how marrying me was the biggest mistake of her life, like they've never heard that before or something.

And the result of these darling entrepreneurs refusing to pay their debts, the creditors, smarting under their losses of another deadbeat loser going belly-up, have less money to spend. And having less money to spend, and spending less money, is also another thing that is, and you may want to write this down, bad for economies.

Another sorry fact is that 90% of the businesses started by these precious entrepreneurs fail, and they fail because nobody wanted their stupid product or service! So all they did is 1) lose a lot of money for a lot of trusting people and 2) waste scarce resources of all kinds, keeping the price of those resources high, which made it much harder for the guy whose business IS creating goods or services that people want. So screw entrepreneurs if they want to make bankruptcy easier because it would make it more pleasant for themselves! Jeez!

Like I said, what a load of university-professor hot shot crapola. Shame on the universities that hire teachers who would write such drivel. And shame on the Economist magazine for wasting their time on such stupidity.

- And if you are going to waste your time by playing "financial planner," you may want to note that the SP500 is at the same level that it was in 1998. So, on average, you haven't really made a dime in seven freaking years! Brilliant! Remember how you listened with rapt attention as the little eager little financial planner laid out graphs and charts and prospectuses, all in glorious color, and how it showed very clearly how your investments were going to make 9% a year -- or more! -- and you would retire rich, rich, rich? Hahaha!

Unfortunately, you made, on average, zero percent a year for the entire seven-year stretch. Furthermore, it is impossible for everyone to make money in the stock market, because if it WAS possible, then all a country would have to do is print money, give it to the people, who would then buy shares with the money, and then they could all sit back and watch with glee as they all got wealthy, and everybody in the country could retire in luxury! And if you think THAT is going to happen, then, and at the risk of repeating myself, "Hahahaha!"

Of course all the boneheads on CNBC and their "usual suspect" guest list all DO believe that this is possible, and that is why they are all sure, absolutely sure, that this is the perfect time to pick up more shares of stock. Any shares. Just buy. Now. And lots of them.

- Richard L. Solyom, Chairman of the Sound Dollar Committee, has written a nice summary of the essay "THE FEDERAL RESERVE SYSTEM: A FATAL PARASITE ON THE AMERICAN BODY POLITIC" by Dr. Edwin Vieira, Jr. Mr. Solyom writes, "Dr. Vieira's central theme is that today's scheme of Federal-Reserve-System fiat currency and fractional- reserve banking is plainly unconstitutional, inherently fraudulent, economically unworkable in the long run, and subversive of America's political traditions of individual liberty and private property."

He adds, showing himself to be the sunny optimist, "Hopefully, Dr. Vieira's message will prove to be a warning that comes, if none too soon, at least not too late."

"Hahahahaha!" says The Mogambo. "Of course it is too late! It is far, far too late! Head for the hills, dragging your precious metals and machineguns behind you!

- Rob Peebles, in his Prudent Rear Random Walk column, notes that Ed Easterling has written a new book entitled "Unexpected Returns-Understanding Secular Stock Market Cycles." The salient point is that when the price earnings (P/E) is high, then the subsequent rewards for buying stocks at these high P/E ratios are low, and when the P/E is low, then the, as you would expect, subsequent rewards for buying stocks are higher.

And where are we now? The P/E on the SP500 is around 20, which is on the very high side, historically, although not in the extremely high side (like it has been in the last few years) and not in the insanely high side, which is where a lot of Nasdaq stocks dwell, mostly because they have little earnings, but have, people think, good prospects for one day actually having some. Which they won't.

- Bob Wood, of Kaizen Managed Assets, has been reading a book called "The Decline and Approaching Fall of the U.S." and it has shook him up pretty bad. For instance, for 1998, 1999, 2000 and 2001 the deficits were (less trust fund assets) $725.5b, $738.0b, $667.6b and $816.6b respectively, which, when added together, comes to $2.947 trillion. Those are just the budget DEFICITS!

Ugh.

**** The Mogambo Sez: The surprising resilience of the stock market to go up in the face of all of this is not surprising, as the Fed is on record as saying that they stand ready, willing and able to use "unconventional" methods to keep the markets from imploding (what they refer to as their dreaded "deflation"), including, but not limited to, buying futures, shares, bonds, mortgages or even land and houses. And I am sure that a lot of pressure is being brought to bear from foreign governments, whose citizens have invested a lot of money in American assets, and they sure as hell want to make sure that prices do not fall.

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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