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008: Licence to Rant

Richard Daughty
...the angriest guy in economics
The Mogambo Guru
April 27, 2005

- The world is slowly coming apart, and the big news, for me, is that some yahoo high up in the Chinese banking world, Zhou Xiaochuan, who is the governor of the People's Bank of China, admits that they may be prodded along by international pressure to more quickly allow their currency to appreciate against ours. How much? Well, I have no idea, but the Financial Times newspaper noted that the futures market was "betting on an exchange rate of Rmb7.818 to the dollar in 12 months' time," down from the current peg of about currency 8.3 to the dollar. So, in answer to your question, the dollar will suffer a 6% devaluation, give or take, in twelve months. Since there is nothing that says that the devaluation will stop there, perhaps you had better count on a 12% devaluation in twenty-four month's time, too.

This implies that, ceteris paribus (which is a Latin phrase that I use to try and impress somebody, since it seems classier than saying "all other things remaining the same") imports from China will cost 6% more, twelve months from now, and you can call the Federal Reserve all day long to try and find somebody who will say that paying 6% more is a lot of inflation in prices, but you won't find anybody. What you WILL find, however, is a lot of people (maybe even Greenspan himself!) who will tell you that inflation is low, lower than low, very low, extremely low, so low they can hardly see it, and even when you DO see it, after and you deflate that 6% rise in prices by the fact that you don't have to haul as much stuff home (which saves you gas and wear and tear on your car), and you don't have to rent a place to put all your stuff because you won't have so much stuff (saving you rental money), and when you add all of these hedonic adjustments-- and more! --to the raw inflation numbers, you can make inflation magically disappear! So therefore, there is no inflation!

But you can call the Mogambo, day or night, and I will tell you the first damn time the phone rings that 6% higher prices is a LOT of inflation and it is bad, bad news. And for you doubting Thomases, here is actual video footage to help you change your mind. The room goes dark, and suddenly the screen is filled with the scene of the reception area of the swanky offices of the chairman of Mogambo Enterprises, a man both hated and feared, but mostly hated. You notice that I am keeping James Bond waiting, and he is one of Her Majesty's Secret Service guys and is a big, big movie star, too, so obviously I must be a Real Important Guy (RIG) to keep a guy like him cooling his heels, him and his snotty little 007 License to Kill, which are almost impossible to get unless you "know somebody," and all the people I know hate and fear me, but mostly hate me, and so they usually aren't in the mood to do The Mogambo any favors.

Anyway, the camera moves through the big oak door with the reinforced gun portholes, past the security guard who demands you keep your hands where he can see them and then nobody will get hurt, and into a lavishly decorated office, then out the back door, down the hall, around the corner, and next to the janitor's closet is the cramped little dingy office of The Mogambo himself. Suddenly, the phone is ringing! Perhaps it is a world leader, asking for advice! Perhaps it is a national bank, begging for help! Maybe it is Mrs. Kravitz, yelling about how she saw me throw that dog crap over the fence into her yard!

But without even checking his Caller ID, The Mogambo picks up the phone on the first ring, and yells into the receiver, "That's a hell of a lot of inflation, dude!"

So, given this demonstrated difference in level of service, who you gonna trust, me or the Federal Reserve?

Now before you answer, let me tell you that the Cleveland Fed President, Sandra Pianalto, has joined a number of other despicable, lowlife, lying pieces of Federal Open Market Committee garbage, in that she has come out as supporting a Fed inflation target, which translates into her and those other Rabid Monsters From Monetary Hell (RMFMH), actually wanting the Federal Reserve to maintain a constant, simmering inflation! And yet the Congress, always sticking their noses into everything and are always calling witnesses and inviting testimony and strutting around like they are such hot stuff, are forgetting that the damn private banks who have all banded together and called themselves the Federal Reserve are given the responsibility to achieve "price stability" as part of their damn mission! That is one of their expressed and explicit duties! That is why they are supposed to do! And yet here are these Fed morons actually saying they want to do the one thing that is guaranteed to cause suffering; create inflation!

I know that you are incredulous, and could not imagine anyone connected with the Federal Reserve, or claiming to know the first thing about economics, would actually admit that they are so insane or stupid that they want to purposely create inflation. I was ready for you skepticism! Here are her very own words. "My view," and notice that she says it without the least bit of shame in her voice, "is that the rate of inflation should average about 1.5 percent as measured by the Personal Consumption Expenditure index, over periods of about three to five years." See? That's her talking! She's actually saying it! If the American people were not so ignorant, thanks to the abysmal and manipulated school system, about the horrors of inflation (and how what you really want is gently falling prices because then everyone would have a rising standard of living, and that is the whole freaking point), they would be brandishing flaming torches and storming the Cleveland Federal Reserve Bank, running this Pianalto bozo and all her creepy little cronies out of town, and then spending the rest of the day leaning out of the windows, waving to the adoring crowds, and having a big party, now that they are National Heroes and they have saved our money from a planned 1.5% per year loss in buying power! The crowd goes wild! Yayyyyyy!

But if Ms. Pianalto gets her way, and you better hope that she does not, then you better start kissing-up to your bosses in a more unctuous and toady way (and I recommend "Gee, Mogambo! All your ideas are swell! You are not as stupid as everyone says!" and "I'm not going to finish this chocolate donut. Do you want it the rest of it, Mogambo?"), as you have to find a method to increase your income by at least 3% a year just to stay even with the rise in prices, as you buy stuff with after-tax dollars, and so you need at least 1.5% more after-tax money to pay the higher prices.

But while I am not sure how we digressed, I am sure that we started off talking about the coming devaluation of the dollar and how my mind is screaming in fear and my whole life is flashing in front of my eyes as I clearly see our destruction looming, looming, looming before us. For one thing, ceteris paribus again, oil ought to cost 6% more, or about 13 cents more per gallon.

The reality is that to move the peg to Rmb7.8 to the dollar from 8.3 means that they are raising prices to the world's best customer! And not only that, but the gigantic hoard of American debt and assets, that the Chinese government and the Chinese citizens now own, will be worth 6% less yuan in one year! I know what you are thinking. You are laughing and going "hahahaha" at the Chinese idiots who thought that buying all that American debt and equities was such a smart move! And if you REALLY want a big laugh, then if interest rates also rise in the year, they will lose an additional big chunk of change on top of that, as their American bonds will go down in price! Hahahaha! They could easily be looking at a 50% loss on their investments that totals to a huge, whopping huge, gigantically huge loss of wealth! Hahahaha! Chinese chumps!

Bill Bonner of the Daily Reckoning says he already knows that 1) we have inflation in the USA and almost everywhere in the world, and that 2) the Chinese are going to suffer losses due to a devaluation of the dollar, and 3) he certainly doesn't need a nitwit like me to call him up to tell him either of those things. Then I innocently ask "Then what DO you need a nitwit to call you up about?" But instead of answering me, he sums up the inflation and dollar-devaluation thing with the pithy "U.S. standards of living must fall; foreign lenders must get stiffed."

- Market notes that the allure of
gold in these uncertain times not quite unique to America, as you have no doubt erroneously heard. They say, "Since 2001 gold has increased in value against the US dollar, the Euro, the Yen, the Canadian dollar, the Pound, and the Swiss Franc. Gold now appears to also be starting to strengthen against the South African Rand, previously the strongest currency." Now, I can hear you saying to yourself, "This is all well and good, but tell me, mighty Mogambo (MM), how does that affect me, the American homeowner with an SUV, 1.5 kids, debt out the wazoo, a monster mortgage that could choke a pelican, and a serious drinking and drug problem?" I'm glad you asked! This is the perfect time to introduce a lesson in values. If you had accumulated gold all these last few years, especially back when it was actually under $270 an ounce, see, instead of accumulating an SUV, 1.5 kids and a crippling mortgage, you would be sitting on a HUGE pile of gold, and thus a HUGE pile of capital gains, and then you could afford to buy a house outright, and have lots of money left over, which would give you a lot of spare time, which you could use to produce the 1.5 children in your palatial master bedroom, instead of in the backseat of your parent's car. And it gets even better for people who own gold, or are anticipating owning some, when he says, "Although the price of gold in the different currencies has fluctuated, the long term trend is still up."

- Speaking of
gold, in one of the more unusual bits of news of late is that the United States Mint announced that it will manufacture pure gold, 24-karat, un-circulated, "gold bullion investment" coins. They hope to get this thing up and going sometime in, so they say, early 2006. This will be, according to various articles, the first time that the United States Mint has ever produced 24-karat gold coins.

This fits in perfectly with a lot of the email I am getting lately, where the prospect of the US government again confiscating everybody's
gold looms heavy on their minds. Some say yes, some say no, some (me) say it is only a matter of time before those who say "no" start saying "yes," because if there is one thing that I know for a fact, it is that the Constitution-shredding, lying, despicable FDR was not an aberration, but is emblematic of everything horrible about government, and they will stop at nothing to keep their Big Government socialist system from collapsing under its own bankrupting weight. And the idea of the government getting into such desperate shape that they declare a national emergency of some kind, and that they own everything, especially gold, is almost certain.

But they have to give you dollars for the
gold, so they can make the argument that they aren't screwing you out of anything, although they are making you take dollars in exchange for your gold, and then the government goes on debasing the dollars. So in the end, they ARE screwing you! See? I TOLD you that they are out to get us!

So, is this the scenario? The government starts flooding the world with these new
gold bullion coins, created from the gold that they are still holding from FDR's confiscation? Which drives down the price of gold? Which gives them cover for their own inflationary ambitions, because they can now say "There is no inflation! If there was, then gold would be rising! But look! It is not!"? Plus, they make a few bucks on the deal? Then, one day, they stop, thus driving up the price of gold? Which they then confiscate again? And then you are supposed to use those dollars you got in the exchange to resuscitate the economy by spending it? Sounds about right to me!

- The trade deficit over the last twelve months (to February) has ballooned to $693 billion, which almost certainly means that we will be going over the 700-billion mark pretty soon, if not already. This is a hell of a lot of stuff! This is about $2,400 for every freaking man, woman and child in the whole country! What's worse, this is about $7,000 for everybody who has a freaking non-government job in the whole country! All of these people are going off to their boring, horrible little jobs and working eight, nine or ten hours a day, every damn day, alongside horrible little co-workers who are always accusing you of stealing their lunch from the refrigerator, but who won't lend you any money to go buy any lunch of your own, so who is REALLY the victim here? But they have to pay their higher taxes, and their higher housing costs, and buy higher-priced food, and pay for the depreciating cars, and pay, pay, pay for every damn thing in the whole damn world out of one lousy little paycheck. And after all of THAT, they are supposed to STILL have $7,000 left over to buy imports?

But it is going to get worse and worse for these people, as the Washington Post notes "Treasury Secretary John W. Snow called on China to stop pegging its currency to the dollar, a reform intended to allow the Chinese currency to rise, easing the flood of cheap exports that contributes to the record U.S. trade deficit."

So how does the Chinese not pegging its money to the dollar ease the flood of imports, and thus reduce the level of imports? I leap to my feet and wave my hand enthusiastically in the air! This is an easy question! Call on me! Let me answer this one! So the teacher calls on me, and everybody groans. I rise to my feet in my best John Wayne impersonation, and I drawl "Because everything will cost more, pilgrim! So while you are still spending the whole $7,000, you get less stuff!" The teacher's jaw dropped open, and the whole class breaks into spontaneous applause because The Mogambo finally got one damn question right! Even though we are spending just as much money (all of it), we are getting less stuff, and so our standard of living has fallen. Damn! No wonder I am real sullen here lately.

But to show you that he was just kidding, Mr. Snow then says, "at the same time" according to the article, "promised cuts in the U.S. budget deficit." Hahahaha! Somebody in the Bush White House is saying that the budget deficit will be cut? Hahahaha! Anyway, he figures that cutting the budget deficit "would reduce the nation's consumption, including the consumption of imports." And although he does not say it, and the Post does not say it, this cutting of the deficit would necessarily be accomplished by, obviously, cutting people's incomes, as all of that deficit is actually somebody's current income. And so these people would be forced to consume a LOT less stuff, both because their incomes are lower and because things cost more at the same time, including things like food and gasoline and donations to the Mogambo Oil For Food program (modeled on the famous United Nations program which was a bonanza for insiders), and then I would have to declare bankruptcy and fire everybody and skip out of town in the middle of the night with all the money. Again.

Mr. Snow, and remember that he is the Secretary of the Treasury, so you would think he would comprehend this stuff, thinks that Japan and the European Union should be urged to "promote growth, which would suck in U.S. exports." And hopefully suck in the current level of exports that the USA will no longer be importing with heretofore gusto, because if we ain't buying, then somebody has to.

And that is one hell of a lot of stuff to suddenly buy! It is so much stuff that you could fill up a line of shopping baskets so long that could reach out of the supermarket, down the street, all the way to Disney World, down to South Beach in Miami to gawk at the freaks, up to Daytona beach for a couple of beers, then back across to Tampa, across the bridge, down to 54th, up the street, into my driveway, and still scratch my car.

So who is going to buy all of this stuff? Hell, the entire euro area is only showing a trade surplus of $82 billion, and this is with Germany, the worlds largest trade-surplus nation, showing a whopping $198 billion surplus all by itself. Japan and China -- combined! -- only show a surplus of less than $200 billion. So who in the hell is going to step up their economies to even start to absorb even a tiny fraction of the amount of the $700 billion of stuff that we Americans now import? Hahahaha! And then, on top of that, they are going to also suck up increased American exports, too? Stop! Stop! My sides hurt from laughing!

- E.R. Maybury, in the Mar-Apr 2005 issue of his Early Warning Report, notes that "Every major war Washington has ever gotten into has produced inflationary trends. This means, for speculators, wartime is as close as it gets to a no-brainer." So the way to make a few bucks on this is to invest in those areas that benefit from inflation? A nice piece of investment advice! And the good news is that you don't even have to be in a hurry, because you have all the time in the world to get your money invested in things that will benefit from inflation, as he concludes that "The 1990s were the decade of high tech. Next, I am afraid, will be the decade of war." And thus, I assume, the decade of inflation. And profits from owning the stocks of companies that make war materiel, too.

- The Bureau of Labor Statistics has released the Consumer Price Index (CPI) report. From Bloomberg we read "Overall U.S. consumer prices rose 0.6 percent last month, the Labor Department said in Washington. Core prices, which subtract food and energy, rose 0.4 percent."

Yahoo! News did a little research, and noted that the "worrisome" 0.4 percent rise in the core rate of inflation was "the largest jump in 2 1/2 years."

Couple this inflation news with the stagnant economy, and it is no wonder that we read two back-to-back paragraphs from AP about stagflation. "Economists said the new inflation report was likely to raise worries at the Federal Reserve because of price pressures becoming evident outside of the energy area" and "The higher inflation pressures are coming at a time when a number of reports in recent weeks have shown economic weakness, from a disappointing employment rise in March to lower-than-expected retail sales."

Then AP provides a quote from a guy from the old school of economics, David Wyss, chief economist at Standard & Poor's in New York, who says "We are getting slower growth and higher inflation numbers. The Fed would like to keep interest rates low to keep the economy moving but on the other hand they have to fight against inflation."

See how this is so old school? The Fed does NOT have to fight against inflation any more! In fact, as this Pianalto butthead has said, she and other jackasses in the Federal Reserve WANT inflation!

George Ure takes us a little farther into the report when he says. "Buried further into the news release is word that health care for the first three months of this year was increasing at a 10.3% clip and energy commodities, like gasoline, were up 39.6%"

Okay, now what happened? I mean, here is the government, which is doing everything it can to disguise and deny inflation, and yet their best efforts STILL resulted in inflation that made the poor Mogambo (TPM) run screaming into his little steel-reinforced concrete bunker, put on that stupid aluminum-foil hat, and start feverishly loading fresh ammo into the Mogambo Self-Defense System (MSDS), which is centered around firepower that emphasizes caliber, as in "large," and I am not going to get into any of that whole Freudian thing about how, deep down inside, this is my pathetic way of trying to compensate for my feelings of inadequacy because, although it is true, I just don't like discussing it, and I would rather talk about how I was raised by wolves, who do not have any firepower at all, putting them at a severe disadvantage that exists to this day, and there is a Mogambo Lesson In Nature (MLIN) in there, if you take the time to look.

But we were not talking about any of that, but we were talking about was how the inflation report came out, and it was horrible. But, like some mondo bizzarro mass hysteria, bonds went up in price! Guys were bidding up the price of bonds in some insane buying frenzy! I can close my eyes and imagine them climbing all over each other to buy bonds, driving up their prices, which gives them a lower yield, at the same time, no, make that at the EXACT SAME FREAKING TIME as the inflation report shows that every dollar in existence will buy less! They are deliberately losing wealth to inflation!

Suppose that a bond costs a hundred dollars, and it gives you 4% interest. So, at the end of each year, the bond issuer will pay you the four bucks, in cash. Hey! Neat! So, after waiting an entire year, you can buy four bucks worth of stuff and you (theoretically) still have your original hundred bucks! Buy yourself something nice! I recommend something fried, like a nice juicy hamburger. In fact, make it a double! And the good news is that you can get a Big Double-Chubby Combo burger-- with fries! --down at Eddies Easy Greasy Grub ("High-class chow!") for four bucks! This is going to be soooOOOOoooo sweet!

Now, continuing our happy tale, after the year is up, which you spent moaning and groaning because you spent the hundred bucks on that damn bond and if that interest check doesn't get here soon I am going to go wring my four bucks out of somebody's neck because I really could use a little cash right now. But every day, it's the same thing; you meet the mail carrier at the mailbox. There is no check. You accuse her of stealing your check. She denies it. I tell her she is a filthy lying thief. She sprays me with Mace, and the next thing I know she is storming off in a huff. So I brightly say after her "See you tomorrow!" and she makes a rude hand gesture, showing everyone that postal workers are a rude bunch of people.

But then, one day, your ears prick up at that unmistakable sound of something dropping into your mailbox! You run out! She sees you coming and she takes off, trying to spray Mace at you over her shoulder! Tears of joy come to your burning eyes and you drop to your knees in grateful thankfulness, because there, right there in the mailbox, sitting on top of all those "Final Notice" and "Payment Overdue" letters, is the check! The money came!

So, quick as a bunny, you jump in the car and make a high-speed run down to the bank and cash the check. Four bucks! In cash! Yahoo! Running out to your car, you drive like some demented demon from hell to get something to eat, and then it strikes you "That double hamburger that The Mogambo recommended sounds mighty, mighty tasty!" So swerving to take the 42nd Street exit, you go down Hoffner to 66th Street, though the alley, hang a left, go two blocks, and it's there on your left! You can't miss it!

Sure enough, suddenly, there it is! Eddie's Easy Greasy Grub restaurant! Yanking the steering wheel over, you screech into the parking lot with tires squealing, motor racing, and pedestrians scampering. You park, run to the counter and declare to the cashier, "Gimme a Big Double-Chubby Combo with everything!" "Fine!" she says. "That will be five bucks, please."

"Five bucks?" you scream. "When the hell did a Big Double-Chubby Combo cost five bucks? They cost four bucks just last year!" and she says, all snotty like (and to tell you the truth I don't understand what Eddie sees in her), "We had to raise prices in the last year, and now the Big Double-Chubby Combo is five bucks. You want it or not, jerk?" and I say "Yes I want it, you stupid fat cow, that's why I came down here and ordered one! But I only have four bucks!" and so she laughs in my face, and that makes me so mad that it takes every bit of Mighty Mogambo Willpower (MMW) I can muster to keep myself from reaching out and slapping her smirking little face, and not because I am averse to slapping the old bag, but because she'd jump over that counter and beat the hell out of me again, which is embarrassing and painful. Mostly painful. She says that I can still get a lousy Big Double-Chubby sandwich for four bucks, but no fries.

So what have we learned? We have learned that if you are going to loan money, then the smart thing to do would be to make sure that you at least charge enough interest so that you can stay ahead of inflation. And if you want to be really smart about it, you charge enough interest so that you not only stay up with inflation, but maybe make a little extra, so that when you get that annual interest check in the mail, you can stroll into Eddie's Easy Greasy and order not only a Big Double-Chubby Combo, but also get a nice Biggie Beverage, and still have enough left over to leave her a tip, which you won't, because you hate her guts and she hates yours.

But these "investment professionals" that are supposed to be so smart (and that is why you are letting them manage your retirement account), are doing the exact opposite of this! As prices rise, as the purchasing power of the dollar falls, they are locking themselves into getting less money by buying bonds at these lower yields! Of course, all this buying makes the price of bonds go up, but it does not affect you, since you bought your bond last year. But if interest rates rise in response to this rise in prices, your bond, which you bought for a hundred dollars, will now be only worth $80 or so! Hahahaha! Chump! And your income stream will still be that same four lousy bucks a year, for the next thirty years! Hahahaha! Pretty soon you won't even be able to afford a lousy bag of fries, which will rise and rise in price until THEY cost four bucks, all by themselves! Hahahaha! Welcome to the world of inflation, dude!

And yet here are these people, and I again use the phrase "investment professionals" in a decidedly derogatory fashion, are financially killing you faster by doing the exact opposite of what rational people, people who actually know what they are doing, do! It's astonishing! And yet, there it was, right in front of my eyes, as I watched in rapt fascination, munching on, as if you had to guess, a Double-Chubby hamburger, watching these guys purposely lose wealth. What a weird world!

- The National Legal Debt Centers notes that the rise in inflation and interest rates are not such good news, as "Interest rates are starting to increase and many homeowners are finding themselves falling behind with their mortgage payments." This is reflected in the number of people who can't make their mortgage payments, which, according to, is up, as the number of "Foreclosure listings nationwide went up 50% from February to march 2005." Numbers-wise, they say, "over one million Americans were late on their mortgage payment last month and half went into foreclosure."

Part of the explanation for this may be found in an interesting essay entitled "Riotous Real Estate" by Mike Davis, "The great American housing bubble, like its obese counterparts in the United Kingdom, Ireland, the Netherlands, Spain and Australia, is a classical zero-sum game. Without generating an atom of new wealth, land inflation ruthlessly redistributes wealth from asset-seekers to asset-holders, reinforcing divisions within as well as between social classes." So, buying over-priced houses does not create any new wealth, but only new debt? And this is NOT going to end badly? Hahahaha! Where in the hell have I been all these years not to have learned this? Hahahaha!

- Richard Russell offered "One more tidbit -- How much does the public love
gold? Central Gold Trust of Canada is now selling at a 4.5% DISCOUNT from its actual gold holdings. That will change, count on it." Shares of a gold fund are selling at a discount to actual gold holdings, and his whole 40-plus years of career in being mostly right about the market is telling you that "this will change" and you are NOT buying shares of Central Gold Trust of Canada to lock in what must be a profit? Why not? Oh, right! Like me, you don't have any money. But if you HAD some money, you'd buy the shares, right? Me, too!

- An interesting bit of information comes from the Turov On Timing newsletter, where he has looked at what happened when the stock market in other Januaries have been down, and there have been six of them since 1953. "In all s
ix cases, the SP500 has declined over the remaining eleven months, for an average decline of 9.21%." Now, I am probably not like you, because you are brave and fearless, but when something happens every time, a little bell goes off in my head, and I just can't shake the idea that the same thing will happen again.

- I watched some of Alan Greenspan's testimony before the Senate Budget Committee last Thursday, and if you want proof that these people are morons, I can sum the entire thing up for you: They have no clue. They think that they can, by careful questioning, tease out of Greenspan some fabled middle ground, where taxes are not raised, yet spending is increased, and everything will work out just fine. Like I said; morons.

- The housing market, as it eventually had to, is perhaps showing signs of cooling off, as evidenced by housing starts falling by 17.6% in March. But untold hundreds of billions and trillions of dollars have been created out of thin air and washed into the economy via being spent on houses, and the sellers got some and spent some, and the mortgage brokers got some and spent some, and the real estate agents got some and spent some, and everybody got a little piece of the action, and the excess eventually worked its way into the stock and bond markets, creating inflation in those assets, too. In the end, people who were up to their eyeballs in debt are now up to their eyebrows in debt, but the aggregate spending level of the whole country was artificially held up for awhile.

In the same housing vein, on the site we got the report entitled "Will the Walls Come Falling Down?" which is a kind of a play on words or something, I guess, since it has to do with houses, which have walls, but I don't know, as I was never any good at that kind of literary symbolism thing, if that IS what it was. But then again, I don't know, because, as I have already admitted, I was not very good at that kind of thing, so why in the hell don't you just leave me alone and quit picking at me, always picking, picking, picking at me about it? Are you looking for a fight or something? Is that what you want? Huh? You want a piece of The Mogambo? Is that what you want, punk?

But that is not what they wanted, thank God! They wanted to tell us about how houses affect the GDP of a country. They write, "It is probably not a coincidence that Germany, one of the few European countries where house prices have not been rising, fared far worse during the slowdown than its neighbours or America. Unfortunately, when housing markets decline, the same process works in reverse: consumers have to cut back their spending and save more to compensate for lost home equity. Lower consumer demand generally means a slowdown in GDP. The sharper the correction, the greater the effect on the overall economy."

If that was not enough to scare you, the article went on to say "An IMF study on asset bubbles estimates that 40% of housing booms are followed by housing busts, which last for an average of four years and see an average decline of roughly 30% in home values." And what happened to the other 60% of housing booms? Well, obviously they just petered out. So the lesson is clear that in 100% of housing booms, a few people made money, but most people either lost money or did not make any money. And you call this "investing?" Hahahaha!

And speaking of bubbles, let's not forget that the Nasdaq bubble stands at only 60% of its peak value five years ago! A dollar invested at the top is now only worth forty cents! Hahahaha! The Dow and The SP500 are also off from their peaks of years ago, too. And now they think that housing will be the bubble that never bursts? Hahahaha! I can't help myself! I gotta laugh! Hahahaha!

There may be many reasons why the real estate market and continual profligate consumption that defines America has not collapsed in flames, but one of them is not because of rising wages, as wages have been lagging price inflation for at least a year now. In fact, the Labor Department said that "average real weekly earnings fell 0.3% in March and 0.5% in the past 12 months. Increases in average hourly pay for 80% of U.S. workers have not matched the increase in prices." Now, anybody who knows me knows that I am probably the biggest idiot on the planet, and that is why I am not able to comprehend how it is that some fabulous robust economic growth is going to happen when people are only able to buy less and less stuff. Maybe magic or something, and my uncle James is going to pull a quarter out of somebody's ear or something.

- I heard that the CEO from Annaly Mortgage Management Inc (NLY) was on CNBC, and what he said reverberated around the net. He apparently said: "We are witnessing a slow motion car wreck in credit. GM was just the first to go through the windshield." Hahahaha! But the bigger joke is that General Motors is going to throw itself a lifeline by tapping the $6 billion in the retirement fund of employees.

- From we get a nice tip on how to play the technical timing game. They says that the glossary on the site describes the VIX as "The Market Volatility Index (VIX) measures the volatility of the market. Traders use the VIX as a general inverse indicator of market volatility and sentiment. High numbers mean that there's excess bearishness, and low numbers indicate excess bullishness."

Well, as good as this is, it gets better. "Extreme lows in the VIX are often followed by periods of increased volatility and some corrective action in stock prices." So, what we want to do, as I understand it, is wait for these of "extreme lows" in the VIX, and then go short the market! So where are we now? They say we are there! "Recent readings in the 11-12 range can be considered extreme lows."

And apparently you can even use the VIX to time whipsaw action in the markets, as they explain "In periods when stock prices go one way and the action is not confirmed by the opposite direction in the VIX, it often means stock prices will reverse."

- I had a few frequent-flyer miles from an airline, I forget which one, but I DO remember that all the damn airlines seem to have some "policy" against letting drunk and abusive passengers get MORE drunk and abusive, and it always involves the co-pilot coming back to my seat and kicking me in the groin for some reason, although NONE of them is able to show me where it actually says that in writing. But the miles had gone bad, see, now that I don't fly much, not that I don't want to, you understand, but if YOU think it is easy getting on an airplane with one of these Justice Department ankle-monitor alarms beeping like crazy and people supervising my Community Service sentence are screaming "Stop that man!" then you must be a rookie to the system. But instead of just cheating me out of my frequent-flyer miles, I was offered the opportunity to subscribe, absolutely free, to some magazines for, apparently, about six months.

So you can imagine my delight when I got, in the mail, Money magazine, because on the cover is a photo of two people, one standing, one sitting, on either 1) a beige shag rug that is covering something, or 2) a congealed mound of puffed rice or wheat or something, I'm not sure which. But there is no explanation or hint of it anywhere in the magazine, and I know because I looked.

But this is not about how Money magazine is covering up some dreadful secret with an old rug, almost surely in violation of some little-known provision of the Patriot Act, and it wouldn't surprise me a bit to learn that the Homeland Security Department is already on the case. But this is about these two people posing on the cover. One is a pretty young Asian-American woman and the other is a handsome Hispanic-American male, ditto on the young side, for which I am both jealous and hateful, as MY youth is far behind me and these two complete strangers are showing off how they are still young and beautiful and apparently rich! It's not fair! They are, I assume, the pictorial representation of the magazine's feature article, "Getting rich in America. The strategies that work now. P 98."

You can imagine my excitement as my trembling fingers scrambled to turn to page 98. "Getting rich in America"! Man! These guys are talking my language! I am already IN America, so I already have something going for me as I save those transportation costs! This is going to be so great! Upon reaching page 98, I quickly scan the article. I scan it because, although I would certainly like to be rich, I'm an American, and as such I don't want to waste ten whole minutes of my valuable time actually reading some dumb article. I want it now! I want everything now! But I quickly find out that if I want to be rich, (and you might want to write this down, because it was the thrust of the featured article in the magazine, so it must be important!), I should get more education, speculate in houses, and start my own business. Man! That IS easy! Golly! Thanks, Money magazine!

But although the advice was mere pedestrian fluff, towards the end of it, we get this interesting paragraph. "So does that 1999 way of getting rich, the stock market, matter anymore? Yes, but definitely not as a quick way to wealth. One of the reasons that people thought you could get rich in a hurry buying stocks a few years ago was that many people did. The S&P500 returned about 28% a year for the five years that ended in 1999. That party, of course, is long over."

Wow! This is Money magazine declaring, as an apparently a commonly-acknowledged fact (as I glean from their use of the phrase "That party, of course, is long over"), that the stock market is a loser, as a way of getting rich quickly, anyway. But if you take the speculative money out of the market, what is left to cause the froth that sends prices up so high? And how can they be held at these heights without that speculative money?

- A guy named Sam Vaknin, Ph.D. has written "The Bursting Asset Bubbles - Introduction (Part 1)" on the site, and it is a nice essay about how bubbles in assets are not new, they always burst, and many other bad things about bubbles, and that is why you never read of anybody but central bankers waxing ecstatic about bubble economies and how they love to foster bubble economies, and that is why they cannot recognize that a bubble is a bubble (and that is why they continue financing them) until after it bursts (when they will step up their financing of them to prevent "deflation" of the bubble).

He says as much when he notes "Ponzi and pyramid schemes have been a fixture of Western civilization at least since the middle Renaissance." To prove it, he notes that the famous tulip-mania happened in 1634.

And these get-rich-quick schemes are still happening, and one of them was in Israel, as "More than one fifth of the population of 1983 Israel were involved in a banking scandal of Albanian proportions. It was a classic pyramid scheme. All the banks, bar one, promised to gullible investors ever increasing returns on the banks' own publicly-traded shares. "These explicit and incredible promises were included in prospectuses of the banks' public offerings and won the implicit acquiescence and collaboration of successive Israeli governments. The banks used deposits, their capital, retained earnings and funds illegally borrowed through shady offshore subsidiaries to try to keep their impossible and unhealthy promises. Everyone knew what was going on and everyone was involved. It lasted 7 years. The prices of some shares increased by 1-2 percent daily."

So people were getting rich, and a fifth of the population was now involved in it, all of them trying to get rich. Then, "On October 6, 1983, the entire banking sector of Israel crumbled. Faced with ominously mounting civil unrest, the government was forced to compensate shareholders. It offered them an elaborate share buyback plan over 9 years. The cost of this plan was pegged at $6 billion - almost 15 percent of Israel's annual GDP. The indirect damage remains unknown."

This is not about how Israel is full of people who will fall for a Ponzi scheme, as EVERY country is full of people who will fall for a Ponzi scheme. Why do they do this, you ask? Search me, but the author concludes that "People know that they are likelier to lose all or part of their money as time passes. But they convince themselves that they can outwit the organizers of the pyramid, or that their withdrawals of profits or interest payments prior to the inevitable collapse will more than amply compensate them for the loss of their money. Many believe that they will succeed to accurately time the extraction of their original investment based on - mostly useless and superstitious - 'warning signs.'"

But it is more than people acting like idiots. He goes on to say that "Investments by households are only one of the engines of this first kind of asset bubbles. A lot of the money that pours into pyramid schemes and stock exchange booms is laundered, the fruits of illicit pursuits. The laundering of tax-evaded money or the proceeds of criminal activities, mainly drugs, is effected through regular banking channels. The money changes ownership a few times to obscure its trail and the identities of the true owners." People are laundering money in these schemes, too!

But this is not about Ponzi schemes and how people are so stupid that they fall for these idiotic scams time after time and never seem to learn, or how criminals are laundering money, nor is this about how governments using a fiat currency is the biggest Ponzi scam of all, and how we never seem to learn from this either, although it is obvious that every other idiot government in the history of idiotic governments have always started spending too much, and they all resorted to one currency-debasement scheme or another in their dire desperation, that they thus destroyed the currency, and then that destroyed their country.

No, the REAL lesson that I wanted to note was that the government stepped in to bail them out! The winners won, and the government paid back the losers! Which unleashed not only inflation, as the money supply rose, but more stupidities, too!

And speaking of government stupidities that are unleashing more idiocies, United Airlines in unloading its busted pension fund, and sticking it in the PBGC (Pension Benefits Guarantee Corporation), even though the PBGC is itself already $23 billion in the hole from the OTHER busted pension funds that it absorbed! Part of the pain will be felt by the people covered by the plan, as their total promised benefits will be cut by almost a third ($3 billion), but the rest of it will, theoretically, be borne by everybody, as the government sells bonds to pay the retirees through the PBGC, which drives up the money supply, which makes inflation rise, which makes everything worse for everybody. Especially when the other airlines find they cannot compete with the deadweight of THEIR retirement plans.


*** The Mogambo Sez: One of the new heroes is John Ruiz Dempsey, who has filed a class action lawsuit against banks "on behalf of the People of Canada alleging the financial system creates money out of 'thin air'." The lawsuit argues, according to, that "financial institutions illegally charged interest on money that was loaned to borrowers," as "Banks and credit unions did not actually have the capital that it gave as loans, and didn't have the right to loan depositors' money without obtaining consent. Furthermore, the lawsuit claims that money was counterfeited by digitally creating money that never existed."

He is right, of course. Likewise, his suit will fail, of course, as he does not have a prayer in trying to keep the banks and the government from having as much money as they want, to spend and play with as they want.

Richard Daughty

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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