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Wake up or be eaten alive by inflation!

Richard Daughty
...the angriest guy in economics
The Mogambo Guru
May 4, 2005

- Chuck Butler, president of the Everbank and author of the of the Daily Pfennig column, says, "Looking at the spreads in the forward market, one has to conclude something's going on." And I am here to tell you that no more scary words were ever spoken, as I have seen too, too many movies where the cowboys are sneaking up to take a look at the Indian encampment, and there they all were, decked out in war paint, dancing and whooping it up around their campfire with drums going "boomity boom boom." After watching for a few moments, one cowboy leans over and whispers to the other one, "Something's going on." Now, I am not sure if Mr. Butler is referring to Indians on the warpath coming to shoot and scalp us and we will have to somehow rescue the beautiful schoolmarm. But the lesson is clear.

The funny thing is that in the same movie when our heroes are trapped in the abandoned mine, and they are watching a fuse burning that is approaching the keg of gunpowder, none of them ever says "Something's going on." They always yell like crazy and everybody starts high-tailing it out of that damned mine! In the movie, the hero and his friends always make it out of danger just in time before it explodes, and then they turn the tables on the bad guys and everybody lives happily ever after. In real life, it "don't work that way."

What is going on may be hinted at by the affable Bill Bonner, whom I assume is affable, although I am not sure. I AM sure, however, that he is succinct, as all our phone calls always end the same way. Ring. Ring. Someone says "Hello?" and I recognize his voice. I say "Hello Bill, this is" and then there is a click on the phone and the line goes dead, and I can hear those CIA guys who are tapping my phone line giggling and laughing at me. But while he is not answering or slamming down phones, he has the time to write, "As for stocks, the bear market that began in January 2000 seems to have resumed. This, too, comes as a shock to many people, who were pretty sure that they couldn't lose money in stocks - at least, not over the long run. But the short-run losses that most investors have suffered are getting longer and longer. It's a rare investor who's made any money at all for the last seven or eight years." Eight years? Eight freaking years in a row? This is the wisdom of "investing for the long haul"? Hahahaha! Another Big Wall Street Lie (ABWSL) exposed! Hahahaha!

And the number of people who have made any money in the last few weeks and months are very few, too, reports Eric J. Fry in his Rude Awakening column in at the Daily Reckoning site. "The S&P 500 tumbled below both its 50-day and 200-day moving average on very heavy volume, although this high-profile benchmark did mange yesterday to claw its way back above the 200-day moving average. Unfortunately, the Nasdaq still languishes well below both its 50- and 200-day averages."

But even after eight years of taking loss after loss, people keep on pouring perfectly good money into the stock market. Why? One of the reasons may be illustrated by the following interesting experiment which I lifted wholesale from someplace or somebody, I can't remember which.


The Psychology Of Civil Self-Policing And Obedience

1. Start with a cage containing five apes. In the cage, hang a banana on a string and put stairs under it. Before long, an ape will go to the stairs and start to climb towards the Banana.

2. As soon as he touches the stairs, spray all of the apes with cold water. After a while, another ape makes an attempt with the same result - all the apes are sprayed with cold water.

3. Turn off the cold water. If, later, another ape tries to climb the stairs, the other apes will try to prevent it even though no water sprays them.

4. Now, remove one ape from the cage and replace it with a new one. The New ape sees the banana and wants to climb the stairs. To his horror, all of the other apes attack him. After another attempt and attack, he knows that if he tries to climb the stairs, he will be assaulted.

5. Next, remove another of the original five apes and replace it with a new one. The newcomer goes to the stairs and is attacked. The previous newcomer takes part in the punishment with enthusiasm.

6. Again, replace a third original ape with a new one. The new one makes it to the stairs and is attacked as well. Two of the four apes that beat him have no idea why they were not permitted to climb the stairs, or why they are participating in the beating of the newest ape.

7. After replacing the fourth and fifth original apes, all the apes which have been sprayed with cold water have been replaced.

Nevertheless, no ape ever again approaches the stairs. Why not? "Because that's the way it's always been done around here!" Hahahaha!

- For you who still have money with which to speculate, Mark Lundeen sent me an update on "Barron's Confidence Index." To construct the CI index, merely divide the yield from "Barron's Best Grade" bonds by "Barron's Intermediate Grade" bonds, which are found, as if you had to be told, in the weekly Barron's newspaper. This is the labor-intensive method employed by guys who have actually mastered the valuable skills, like long division, which ain't me, and it probably ain't you, or else we would be able to get a real job, and would not be sitting here in front of the TV, wishing we were not too drunk to follow the plot line of Bonanza, because it looks like Little Joe is in some kind of a jam again.

The better way, the modern way, the high-productivity way, to determine the CI is to merely look it up in Barron's, where the math, with all that those tricky numbers and multiplying and subtracting and blah blah blah, is already done for you. Merely go to the Weekly Bond Statistics column, and there is it, about halfway down.

The theory of the CI is that during good times, namely bull markets, the poorer grade bonds will increase in value compared to the best grade bonds, as the chances of default on the lower grade bonds is reduced, since everything is coming up roses all over the place, and thus the prices of the two grades of bonds should be roughly equivalent. So when the yields between higher-grade bonds and lower-grade bonds are roughly the same, meaning that the market sees nothing bad coming down the line, the ratio should be, roughly 1.

During bear markets, on the other hand, these marginal companies issuing these high-yield bonds have a higher risk of screwing over the bondholder by being so rude as to go bankrupt, and thus have an increased probability of defaulting on their debt. Then The Mogambo is stopped at the border with a suitcase full of company cash and hauled into court by Eliot Spitzer, where I testify, of course, that I don't remember or that I didn't know anything about Mogambo Enterprises, as a LOT of guys are named Mogambo, so obviously he has the wrong guy. Therefore, since there is a higher risk of you getting nothing on your bond because the company has gone down the tubes, the price on these bonds should be lower, and the yield higher (so as to compensate the bond holder for the increased risk). Then the ratio of the CI will be less than 1. (In case you were wondering, the CI cannot be greater than 1, since that would mean that low-quality debt is yielding less than high grade debt, and if that this is okay with you, then please send all your money to me and I will send you boxes full of Mogambo Bonds that are yielding, according to the latest quotes, nothing, which means, according to this theory, they are very, very valuable. You also get Ginzu paring knife, so you know the offer is on the up-and-up).

So much for the theory. In practice, how has it worked? Says Mr. Lundeen, "The CI called the top of the bull market in stocks" in 2000. And the latest update? The CI is heading down again, big time.

- The Economist accurately describes the U.S. central bank as "the world's giant printing press." In talking about the two years of 2003-2004, the magazine says "In no other two-year period since 1975 has liquidity increased by so much."

And although the increase in the money supply is actually the definition of pure inflation, the practical result is that all that new money will, because it always does, show up as inflation in prices, since there is nowhere for the money to go except into buying something, and with all that new demand, prices rise.

I can see that many of you are groaning and rolling your eyes, because all I ever seem to talk about is inflation inflation inflation. But after you read what has happened to countries in history that experienced price inflation after inflating their money supplies, it seems to linger on your mind and in your nightmares, or at least on MY mind and in MY nightmares.

In considering the horror of inflation, I naturally bring up the fact that no matter how bad the government says inflation is, it is at least twice what they are telling you, because I am hoarse from screaming, screaming, screaming about the government's methods of massaging inflation out of the real inflation numbers by the slimy, lying adjustments devised by the loathsome Michael Boskin, who will surely be known in the future as First Henchman to America's Economic Anti-Christ (who is, of course, AlanGreenspan), so that the government can lie to us with a straight face, "Inflation is low! Inflation is benign! Inflation is well-controlled! Inflation is nothing to worry about! Don't listen to that idiot Mogambo!" so that people, like me for instance, will not run screaming down the street, bellowing "The government is killing our money! You are going to die a horrible, painful economic death, and I don't care if it IS two o'clock in the damn morning and you are all asleep! You should be THANKING me for waking you up to warn you, because you are going to be even CLOSER to economic death when the sun comes up, you stupid, sorry bastards who always called the cops when I was merely standing out in the front yard in my ratty underwear and bunny slippers, not bothering you, just minding my own business, maybe testing-firing a new machinegun, or maybe a rocket launcher. But would you listen to me? NoooOOOooo! Now you are going to be eaten alive by inflation! Now wake up and open this door! And stay away from that telephone!"

Now, everyone admits that my approach seems riveting-yet-stupid, like living theater, especially when it is on Court TV and I am being dragged into the courtroom in a straightjacket, screaming and crying, struggling to break free, and trying to kick the bailiff, whom I call a "stinking fascist bastard" in this real loud voice, but I know that is probably unfair because he is just doing his job. But, then again, that excuse didn't save those Nazi bastards at Nuremburg, either. But Reader David B.C. is so much more witty when he notes that the new "official" inflation numbers are frightening. He calmly writes "Nice inflation numbers, huh? Now they are indigestable even when they are cooked." Hahahaha! Well said! But I'll bet nobody listens to him, either!

- According to Reefer Madness: Sex, Drugs and Cheap Labour in the American Black Market, by Eric Schlosser, "Marijuana, pornography and illegal labour have created a hidden market in the United States which now accounts for as much as 10% of the American economy, according to a study. As a cash crop, marijuana is believed to have outstripped maize, and hardcore porn revenue is equal to Hollywood's domestic box office takings."

This interesting factoid has inspired me to draft the Mogambo Pot And Porn Act (MPAPA), which I urge Congress to adopt, where I note that if marijuana is this popular when it costs so much AND you can go to prison for lengthy terms for smoking it, then the market for legalized-and-taxed pot must be freaking enormous! And the Porn part of the Act is to give acting jobs and camera-crew jobs and lighting jobs to the idiots graduating from high school today, and don't get me started on the astonishing dumbing-down of school curricula. The MPAPA works like this: If you can get the nation's senior citizens to start legally smoking it, inhaling and puffing away until they zone-out and perhaps even get so wasted that they think that the music of the Grateful Dead sounds good, then you can balance the nation's budget deficit with the taxes from legalized pot, and screw the old-timers out of their Social Security benefits since they are too stoned to notice. And we investors, for our part, can make a fortune by investing in companies that produce munchies, especially the yummy kinds that you can eat by just opening the package, gobbling it down and then lying there on the couch with your mouth full of food and you languidly say "I am sooOOOoo wasted, dude!" I call it my Mogambo Plan To Save America And Give Everybody A Good Buzz (MPTSAAGEAGB), because we are going to need a lot of soporifics and diversionary entertainment (known as the Roman expedient of "bread and circuses") when this stupid debt bubble, and this stupid stock market bubble, and this stupid bond market bubble, and this stupid housing bubble, and this stupid Big-Government bubble finally burst. Which they will. Because they must.

- I know that you are, as I am, astonished to read that incomes are going up, because all the people that I am trying to borrow money from are all telling me that their incomes are stagnant or down. But if incomes are going up, then who (meaning "everybody but me and these lying bastards I am trying to get a small loan from") in the hell is making all this bigger money? Well, as a helpful tip, take a look at the compensation of the executives of the companies whose quarterly statements are arriving in your mail boxes. It is a rare, rare thing to see any of the top five or ten or employees of any large company making less than a million dollars a year, some several times that, plus gobs and gobs of stock and stock options and "performance incentives" and bonuses, that all get paid no matter how badly the company does.

I know that you don't believe me, and I would have very little respect for you if you did. But perhaps you will listen to Graef Crystal, a columnist for Bloomberg, who was not literally referring to this big Mogambo macro picture (BMMP) where executives are all a big bunch of grossly-overpaid wienies, but he was making a comment about a tiny slice of executive-land, namely the enormous salaries of chief executives at the eight biggest homebuilders. "The chief executive officers of those eight major companies need to find some way -- a legal way -- to show their appreciation of what Greenspan has wrought for them. They, as it turns out, earned an average pay in 2004 of $23.9 million each -- 139 times Greenspan's annual pay of $171,900."

- Marc Faber highlights Paul Kasriel of Northern Trust, who has taken the time to show the change in total household liabilities, figured as a percent of total household spending. "In 2004," he writes "households total borrowing represented 12.5% of their total spending - the highest percentage since the 1952 start of the series."

So, I made seven bucks, and I spent eight bucks, after borrowing that last dollar? Hahahaha! And they think this is something good? Hahahaha! This is the brilliant Americans showing their educational achievements, which, according to published studies, ranks among the lowest in the world? Hahahaha!

As an aside, in Florida, seniors in high school must pass an achievement test called the FCAT, which stands for Florida Comprehensive something something. It appears, according to today's newspaper, that 10%-- a tenth! --of Florida high school seniors will not pass the test, and will not graduate with a diploma. And if you have taken a look at the curricula of the nation's schools, you will be stunned to see the degree that it has been dumbed-down, then you realize that it would take a mighty stupid kid not to pass the FCAT.

But we were not talking about the stupidity of American kids and how they are supposed to be so smart and educated that they will make so much money that just two of them can easily afford pay the entire cost of the enormously-expensive future Social Security benefit packages, and how the thought of these numbskulls even qualifying to get a job flipping burgers seems beyond their ken and how that just cracks me up, where I would then use one of my patented "Hahahaha!" lines. No, we were talking about incomes, and I was going to go from there to some snide comment about wondering how it is that you can actually have savings if you are already borrowing to spend? You saved, even though you went into farther into debt?

And then that was supposed to lead to how a lot of people think that the real savings rate of Americans is a lot higher than the dismal 0.4% that appears in the statistics. Mr. Kasriel then suggests that "another way to look at the alleged underestimated after-tax income and savings rate is to look at households net acquisition of financial assets - stocks, bonds, deposits, pension fund reserves, etc. - compared to their net acquisition of liabilities (in other words, borrowings). Since the Fed provides the relevant data, it is possible to precisely determine whether households are saving or dissaving." He says that he HAS taken a look at the relevant data, and he says that it looks like we are dissaving, and it "looks to me about $200 billion a year."

And I am here to tell you that even if you count financial assets of Americans as part of wealth, the value of those "financial assets" are variable, meaning that they are wildly over-priced now, while the enormous debts of those selfsame Americans are NOT variable. So that $200 billion a year is, to me, wholly optimistic.

- The idiocy known as the European Union is coming apart, and of course it is about money, because all things are now money, and in this case, lots and lots of money, and if it wasn't about the money, they would have an EU for decades. In essence, the EU expanded like crazy to get as many people into it as possible, which was to (so it was promised) increase trade and the velocity of money and all those wonderful things that were supposed to accrue from liberalizing trade and eliminating the exchange rate between different currencies, and therefore MORE wonderful things would happen, and that would cause MORE wonderful things to happen, and, after a few weeks or so, everyone would live happily ever after, and everyone would be rich, rich, rich.

Unfortunately, they all decided that their first priority was to expand their welfare states and provide subsidies to everybody. Thus they needed to spend more and more and more, and they went into debt to get the money to spend, and pretty soon they exceeded the agreed-upon limits of budgetary deficits (3% of GDP, and only for "a limited time") as specifically specified and agreed-to in their Growth and Stability Pact, which was the major reason why they all signed on in the first place. Naturally since they are all now exceeding this limit like the dimwits that they are, they all want to scrap that whole G&S restriction and let everybody have as much budget deficits and inflation as they want. The only problem is that they are all using the euro, a common currency, so huge deficits and inflation in one country affect the money (and economies and interest rates), of the other nations, too! Hahahaha! Idiots!

The euro and the EU may linger for awhile, but only until the moment when the profligate people of Germany, or the profligate people France, or the profligate people of Italy realize that they are suffering, thanks to some other profligate jackass nation that is more profligate and corrupt than they are.

- The fact that mortgage applications keep increasing is not surprising. It would have been surprising to learn they had NOT been increasing. The reason is that so much money has been made in buying and selling real estate since the stock market stopped being profitable in 2000, and since people are so desperate to make some money (now that they have sunk into so much debt, so incredibly, impossibly much debt), that they are willing to take a desperate gamble and plow a few bucks, and a little time, into the housing market, hoping for that big windfall payday (BWP) that will save their financial butts.

Plus, it involves something they understand (houses) as they all live in one, although I am not such an expert, as I live under a bridge and scream at the cars that go by to shut off that damn radio and think about how the Federal Reserve is destroying our money, and then maybe they will spend a little more time at home, thinking and whimpering and hatching plots of revenge against Alan Greenspan, instead of driving up and down the damn roads, up and down, down and up, back and forth, forth and back, night and day, day and night, until I can't stand it any more because it is making me crazy with the driving, driving, driving!

But plowing into real estate they are, as sales of new homes climbed to a record in March. The Commerce Department reported that "sales unexpectedly increased 12.2 percent to 1.431 million houses at an annual rate." But before you interpret this to mean that house prices are going up in response to this increased activity, the Commerce Department also reported that "The median price fell to $212,300 in March from $234,100 a month earlier." Wow! A ten percent plunge in prices in one lousy month!

Beyond that, another "wow!" is in order when you consider that this means that demand is going up, but prices are coming down, violating the whole principle of the theory of supply and demand!

Kurt Richebächer, everybody's favorite Austrian school of economics deep thinker, doesn't even live in the US, but in Europe. But even from way over there across the Atlantic ocean he can easily see that there is a housing bubble in the USA, and he writes that "The growth of home mortgages exploded from an annual rate of $368.3 billion in 2000 to an annual rate of $884.9 billion in 2004, compared with a simultaneous increase in residential building from $446.9 billion to $662.3 billion. Altogether, the United States experienced a credit expansion of close to $10 trillion during these four years. This equates with simultaneous nominal GDP growth of $1.9 trillion. America's financial system is really one gigantic credit-and-debt bubble."

For a moment, the revelation is so startling that it makes time stand still. My brain gasps and reels as it tried to comprehend the concept of ten MORE trillion dollars in debt (which is almost as much as the total value of ALL the goods and services produced in the whole freaking country in a whole year!) in four lousy years!! Note the use of two exclamation points to indicate that my eyes are bugging out in freaking disbelief!! Look! There they are again!

The Financial Times newspapers quote Paul Kasriel, chief economist at Northern Trust, as remarking that, on a nationwide basis, the market value of real estate is now close to 200% of disposable income. The previous high in that ratio was in the late '80s, when it climbed close to 160%. They note that he thinks that "A ratio close to 200% cannot last more than a few months. It is the equivalent of Nasdaq trading over 5000."

Speaking of houses, Jeremy Grantham, chairman of GMO, in his letter to his investors, notes that prices of houses are going crazy all over the place. He notes that in the UK, house prices are selling for 6 times average earnings of the guys buying the houses, a mortgage so huge that it is more than three standard deviations above the earnings norm (3.6 times annual earnings) established during the previous zillion years.

If you remember what a standard deviation is, then you are not drinking enough beer, For the rest of us, I put on my Mogambo Educator Mortarboard (MEM), and explain that it is a measure of the variability from the average (also called the "mean"). In this case, three standard deviations from the mean, which is a long, long way from the average, means that the chances are about 1-in-10 zillion that the mortgage application is going to be submitted to a loan officer who is so drunk or incompetent that he will loan somebody enough money to buy a house that is 3.6 times as much as the guy makes in a whole year. From a financial standpoint, the reason that mortgage people don't loan that kind of money to people is that the guy is almost sure to default on the loan, and the mortgage people hate that. Well, I assume that they hate it, as I surmise from the way the guy at the bank goes ballistic when I tell him that I can't make this month's mortgage payment again, which is a long, LONG way from actual default. In may case, about three more months, I figure.

But it is not just in the UK, but also in Sydney, Australia, where mortgages are routinely made at "about 4.8 times annual earnings." Here in the USA, he notes that "In Boston, a whopping 6.5 times annual earnings (over 2 standard deviations), and for the United States as a whole, about 4.3 times annual income, versus an historical average of 3.4 times income, and is three standard deviations above the mean."

Germany remains about the only place where people did not go crazy with this silly house-buying crap, and so they will be rewarded in the end.

- I have lost the author of "What do we really know?" and if you are the person who wrote it, I apologize, but if you send me a few bucks maybe I will be more careful next time, but probably not. But whoever it is has also looked at things from this standard deviation thing, although they refer to a standard deviation as a "sigma."

They have looked specifically at economic/financial indices that are, or were, at the 2-sigma level, which are pretty rare occurrences. I can see you are on the edge of your seat, and you want to know "What happened?

They say that ALL bubbles (which they define as anything where the average prices are in the range of 2-sigma events) broke and ended badly. So how many bubbles did they find? They found 28 bubbles around the world, including stock markets, currencies, and commodities, and including our stock market bubble here, although they did not, as far as I can tell, include our bond bubble and our housing bubbles in their analysis. And all of them broke, which they characterize as "all the identified bubbles did indeed move all the way back to (or below) the trend that existed prior to those bubbles forming." What they did NOT mention was that the reversion back down to the mean left bankruptcy, heartache and misery strewn all over everything.

And they perfectly sum up The Mogambo's stupid opinion that there is nothing that can be done with bubbles except try and prevent them from forming, and, failing that, suffer from them. They write, "Bad monetarist policy may have caused the Great Depression, and good policy may have let us down gently after 2000 (we shall see), but both were clear asset bubbles and both broke. The monetary environment was different for all 28 bubbles, but all of them broke."

- As an example of government in action, here is an update on the new gold-colored, one-dollar coin that the House of Representatives has approved minting, as if the unpopular Sacagawea dollar-coin was not embarrassing enough. So why was the Sacagawea coin so unpopular? Because it was almost identical in size to a quarter, and you had to squint at the coins in your hand to see how much money you had, and then you realize you had left your glasses at home, and although you can easily discern the nickels and dimes and quarter, you can't see that damn dollar coin, and you have to ask somebody standing nearby to, you know, kind of help you out, and all they want to talk about is how bad you smell and how his wife is all upset that you are hitting on her, which is a lie because she hasn't said a word the whole time, as she is too busy holding a handkerchief to her nose and saying "P-U! What the hell is that smell?"

But, and this is the part that makes me crazy. They are hoping that a new design will make it more popular, although these new dollar coins would be the exact same shape, size and makeup as the gold-colored Sacagawea $1-coins that everybody hates! They are exactly the same! The only difference is, and pay close attention here, the new dollar-coins will have the faces of dead Presidents on them, as if we are all so bigoted that we rejected the Sacagawea dollar-coin because we don't like Indians, or Indian maidens, or the fact that it reminds me that she was probably out partying it up with Lewis and Clark, probably in some kinky three-way action out under the stars, and we aren't getting any action at all, and who needs that slap in the face every time we take out some damn change?

And people still trust the government? Hahahaha!

- Lew Rockwell, Jr. on the Mises.org site has an interesting article entitled "What Made the Next Depression Worse," which is a cute title and I wish I had thought of it. In it, he lists ten reasons why the proverbial we are up the proverbial creek without the proverbial paddle. He says that the Number One reason is the appointment of Ben Bernanke, who left his cozy little academic career to go to work at the Federal Reserve, and from there to be the chairman of the Council of Economic Advisers to President Bush.

Mr. Rockwell says "Please listen to his words from a speech given in 2002, given in the context of trying to settle down people's fears of the economic future: 'The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.' " The scary thing is that he is right, and that is why no sane person would ever say those words, much less a member of the Federal Reserve.

Mr. Rockwell, gracious as ever, does not mention the fact that this Bernanke bird-brain is also in favor of "targeting inflation" which means that he wants to keep inflation bubbling along! Although that is the worst thing that an economy can do to itself!

I can almost see Mr. Rockwell smiling to himself as he says "Well, these comments certainly do calm fears that deflation is in our future." Hahahaha! Always the jokester! Then, waiting until our laugher has died down, Mr. Rockwell goes on to say "But what he seems incredibly sanguine about is the effects of inflation. Already, inflation amounts to a daily robbery of the American consumer. Even in these supposedly low-inflation times, price indexes have doubled since 1980. What this means is that one dollar in 1980 purchases only 50 cents worth of goods and services today. There are no long lines at gas stations and we aren't panicked for our future, but we are still being robbed, only more slowly and more subtly than in the past."

He extrapolates beyond that to the horrid Bush administration when he writes, "The Bernanke appointment is certainly a wake up call for anyone who has a benign view of the Bush administration's economic priorities. Indeed, we might as well say that, long term, this could be the most egregious decision that the Bush administration has made." To which I add the inevitable Mogambo two cents (ITMTC) when I say that appointing Bernanke is not the problem, but listening and heeding the advice of this jackass IS.

This Bernanke halfwit is also the subject of a comment by Bill Bonner of the Daily Reckoning, who reminds us that "Just two week ago, Fed governor Ben Bernanke brought forth his 'Glut Theory' to explain away America's huge current account deficit. The problem was not that Americans spent too much, said he, but that Asians saved too much! We were just doing them a favor by taking the money off their hands. According to this theory, an alcoholic is merely helping to alleviate a glut of booze...and a sex fiend is only reacting to a glut of women!" Hahahaha! Well said! Now you know why clear-thinking people despise Ben Bernanke and everything he stands for.

- Today's installment of the popular Mogambo Guru segment (PMGS) I like to call "I Can't Believe I Am Reading This Crap." Today's item is a column on Bloomberg by Kathleen M. Camilli, "principal and owner of Camilli Economics, an independent economic advisory firm in New York, and is a Bloomberg News columnist." The title of the column was "1970s Stagflation? Not Today's Reality."

She says "In today's world of open global-trading arrangements, deregulation and the use of Internet-based technology, the idea that stagflation might rear its ugly head couldn't be further from the possible." Huh? The economy is stagnating in front of our eyes, and prices are rising, also in front of our eyes, and yet she thinks that this is impossible? Huh?

Apparently she did not read the minutes of the Fed Open Market Committee, or the April 23 issue of the Economist magazine, which, like everybody else, sees "an unhappy combination of lower growth and higher inflation," which is, by definition, stagflation. In fact, they note that the "inflation data were surprisingly bad."

She goes on to say "The combination of free-market capitalism, deregulation, globalization of capital markets and the birth of the Internet have been the death knell to pervasive and entrenched demand-pull and cost-push inflation." Hahahaha! Thanks to China's ravenous and growing demand, this demand-pull has not affected the price of oil, even though the price of oil is already $50 a barrel? Hahaha! Firms are raising prices because their costs are rising, and yet this is not cost-push inflation? Hahahaha!

It gets better! "In this new world," she writes "outsourcing, off-shoring, in-sourcing and global supply-chain management mitigate these traditional forms of inflation. Producers tap into the global labor pool to find the best and cheapest ways to produce goods. Suppliers find the most cost efficient and fastest ways to deliver those goods to customers, including use of the Internet. Consumers, with their insatiable demand for new goods and services, can shop on line day and night to find the product, service and price they want, delivered to their doorstep. Such is the wave of powerful global and technological forces sweeping away old views of inflation."

Hahaha! So the solution to preventing inflation is to build a WalMart on every block? And a gas station on every corner? And somehow all these new outlets will keep prices from rising? Hahahaha!

It gets even weirder than that, as she goes on to say "When a local market is closed to competition, merchants and providers of goods and services do what they wish with prices. If they have higher taxes and heating bills, they pass those costs directly to their customers. It's simply incorrect to assume that this happens in a macro sense across geographic lines and swaths of the consuming public without competitive forces." Apparently in Camilli-world, when a lot of producers or suppliers have higher taxes and heating costs, to name but two, they are happy to make less profit, or even take a loss! And these producers and suppliers are, I guess, going to remain in business, year after year, making no profit, probably making losses, just so they can sell things to customers at a low price! Hahahaha!

What REALLY happens, in case you were wondering, is that all this competition keeps the prices so low, for so long, that many of them go out of business, reducing competition and wasting lots of money and resources along the way. And when the number of suppliers falls enough, then the survivors raise prices. And not just to cover their bills, but they raise them enough to make up for the lost profits of those lean years, too. It's as easy as that.

Then she goes into hyper-weird when she says that inflation of 3% is not even worth mentioning, although 3% inflation is the historical cut-off between inflation that is worrisomely high and inflation that calls for immediate and drastic action. Here in the USA, it was only twenty-five years or so ago that emergency wage and price controls were imposed on the USA because inflation was 3%! So she has no idea of how silly she sounds when she says that "Today, the CPI has barely managed to stay at more than 3 percent." Now, when I say "barely," I mean that it is real, real close, or temporary, or something. In this case, when she says "barely," she means "much more than," as she immediately makes clear when she goes onto say "It is 3.2 percent year over year." So over-stating your case by 7% is "barely"? 3.2% inflation is "barely"? Hahahaha! That is like the policeman, responding to my frantic call to 9-1-1, poking me with his flashlight as I lay there on the kitchen floor, suggesting that I calm down and not file another spousal-abuse complaint because "Your wife repeatedly hitting you on the head with that fireplace poker has barely caused any bleeding, and you are barely losing consciousness!"

She even says that the higher cost of gasoline and fuel is all in your imagination when she blithely notes "Higher oil prices have failed to translate into higher sustained consumer price inflation because the world has changed drastically, and for the better," which I assume means that there is some magical energy source now powering semi's up and down the road, delivering the goods that pack the WalMart. Or maybe businesses will find a way to eat the higher energy and shipping costs that I haven't heard about, either. Or maybe the inflation that we are seeing is not "sustained" enough to suit her, and so that makes it all okay. She never says.

But Mark Rostenko has taken a look at the CPI, too, and come away with a different conclusion about the level of inflation. He says "The most recent CPI data revealed a 'surprisingly high,' (as brain-dead analysts and CNBC pundits like to call it), annualized rate of 7.2%."

- John Myers says that inflation is so insidious that nothing is immune. "In 1969, the Dow was about 1,000. Not bad when you consider that in 1950 it stood at just 200. But the bull market was on its last legs. In 1980 the Dow bottomed out at 759. A 24 percent decline over 11 years would, in itself, be bad enough. But factor in inflation and you find out that in 1969 terms, the 1980 Dow was worth only 363. That means that during the decade that was the 1970s, the Dow damn near lost two-thirds of its value!"

But before you throw up your hands and exclaim, "We're screwed!", there is a way to fight back, and here is how, he says, it is done. "So let's imagine there were index funds back in 1969. Take two investors, each with $100,000, one invested in the Dow Index and the other in the CRB Index. By 1980 the guy who had purchased the Dow would have had, in 1969 dollars, $33,800. The one who bought the CRB would have the equivalent, in 1969 dollars, of $190,000. That means that the guy who turned his back on Wall Street, and instead invested his money in real assets, had done more than five times better than the guy who had stuck with the Dow!"

And to keep this from being a dry history lesson, let's jump into our time machine and whiz forward to the present. "Over the past five years," he says, "the Dow has fallen 32 percent, in inflation-adjusted terms. Yet the CRB Index, by the same measure, has climbed 47 percent. Wall Street is already on a trip to nowhere called stagflation. The economy is getting weaker, the dollar is falling and prices are rising. The good news for us is that we can get out of this damn trap by selling our bonds and big board stocks and buying real asset stocks. Not only will it protect us from the ravages of a bear market in stocks and bonds, but it could make us very wealthy."

- Rich R. says that the political idiocy of the last few decades in general, and the various wonderful new Plans To Save Social Security in particular, remind him of the John Galt Plan, which appeared in the Ayn Rand book Atlas Shrugged. The relevant quote from the book is "The John Galt Plan will reconcile all conflicts. It will protect the property of the rich and give a greater share to the poor. It will cut down the burden of your taxes and provide you with more government benefits. It will lower prices and raise wages. It will give more freedom to the individual and strengthen the bonds of collective obligations. It will combine the efficiency of free enterprise with the generosity of a planned economy."

Which was, of course, a gigantic load of crap. To prove it, at the end of the novel, John Galt, as an exemplar of the rich, ran away, driven away by the demands of the sweating, grubby masses that they sacrifice themselves for the good of the masses. Sort of like today, with the "soak the rich" rhetoric.

- Daniel G. sent me a summary of Ted Butler's observations on the silver market. According to Mr. Butler, the insiders have leased more silver than is available in the whole world. "This means that, currently, the Leased Position is greater than 8 times known inventories and the Short Position amounts to over 2 times known inventories."

The theory is that these slimy manipulators will have to close out their positions by buying silver, and lots and lots of it, and all that demand is what makes silver such an exciting and potentially lucrative asset. Sounds right to me!

- Florida is one of those low-IQ states that has embraced the idea that the way to improve lives is to force businesses to give more money to employees, and thus enacted (by referendum, which demonstrates the fatal flaw in democracy) the idiotic idea to mandate a minimum wage that is higher than the federal minimum wage requirement, which is horrific enough, thus boosting the Florida minimum wage to $6.15 an hour.

Predictably, my Leftist hometown newspaper, the St. Petersburg Times, has filled its Sunday "Money" section with all kinds of happy articles about how thrilled low-wage workers are with their higher incomes and how this is going to be so great, and now we are on the road to Utopia, and how everything will be fine from now on, and poverty will be forever eliminated in a few hours.

But the inflationary downside of doing something as stupid as this is hinted at in the lead article "The Minimum Wage Effect." In it we read that Outback Steakhouse is boosting its prices by 2%, in other industries "increases rippled up the pay structure, meaning raises even for salaried managers," and at the end of the screed we read "As a result, most prices on each McDonald's menu item have been raised by a nickel." Ed Shaw, manager of a McDonald's franchise admits "We're paying more, but so are our customers."

So requiring higher wages is, predictably, inflationary, which will cause suffering to those whose incomes are not increased. Such as the retired, whose incomes do not increase except as a Cost Of Living Allowance in Social Security payments. And the unemployed, whose wages will obviously not increase. But all of them, every single one of them will, as will everyone else, pay the higher prices. And that means that people can only afford to buy less stuff, and thus the national standard of living will fall, which is the exact opposite of what is supposed to happen! The exact freaking opposite!

But beyond the blatant inflationary impact, there is no mention whatsoever about how businesses will now have an incentive to find MORE ways to employ fewer people ("higher productivity"), or fewer American people ("outsourcing overseas") to get out from under the increasing burden of ever-rising employee costs.

Also not mentioned, because it is never mentioned, is why the push to increase wages? The answer is simplicity itself: Because prices have risen so much. And why have prices risen so much? Because the damnable Federal Reserve has created so much money and credit, and all that money devalues the dollar, and the excess money always finds its way into prices. And yet, here in Florida, the people have literally voted to hurt themselves by voting to increase the minimum wage. Like I said; low-IQ.

- Martin Weiss, of the Safe Money Report, reminds us that "In June 1980, the inflationary pressure of soaring commodity prices became too much to bear. The price of 10-year Treasury notes started to collapse, just like they are starting to do now. Short-term interest rates soared from 6% to more 16% in just 7 months!"

He compares the CRB, a composite index of 17 commodities, versus the yield on the ten-year Treasury bond. The gulf has never been wider, all; the way back to 1968, when his analysis began. Instant Mogambo Analysis (IMA): if there IS a connection between commodity prices and inflation (and I think there is), and if there IS a connection between inflation and bond yields (and I think there is) then bonds are waaAAAaaaay over-priced, and the imputed yields are thus waaAAAaaay too low.

Accordingly, with the CRB index exploding in price, signaling hefty and rising inflation, the ten-year T-bond should be yielding, historically, almost 12%. In his words, "Fast forward to today. Interest rates are just coming off of 46-year lows, while commodity prices are experiencing one of their greatest bull markets of all time."

His conclusion? "Interest rates are coiled up like a spring, ready to rocket higher."

In a related vein Ron Insana on CNBC was asking a couple of big shot guests what is causing the abnormal low yield on the 10-year Treasury bond. Donald Luskin, of Trend Macro, said global liquidity, as there are so damn many dollars in the world, and that they have to go somewhere. And the 10-year Treasury market is one of the few things that can absorb all that money. He is exactly right.

Then we heard from Wayne Angell, an ex-member of the Federal Reserve (cue the ominous music), and now the head of his own eponymous firm, Angell Economics, and who is the most laughably clueless bonehead I have ever listened to. Angell= says that Mr. Luskin is wrong, wrong, wrong, and that it is because of all the cash that corporations have! Hahahaha! If the corporations had been buying all those T-bonds, they wouldn't have the cash! They'd have a little cash and a lot of T-bonds as an asset! But somehow, and perhaps I do not understand corporate accounting, cash and T-bonds are now the same thing? Wow! Where have I been all this time not to know that?

Mr. Angell is also infamous around here for forcefully stating, just a few months ago, that anybody who thought that we would have any inflation was "out to lunch."

- According to the Bureau of Labor Statistics, $5.89 in 2004 dollars equals the purchasing power of $1.00 in 1966. So since 1966, the purchasing power of the dollar has fallen to, in 1966 purchasing power, 17 cents. Mark G.'s opinion? "We have experienced a long drawn out inflationary depression; a depression so subtle that we don't even realize that has happened."

An interesting detail about what has happened since 1966 was provided by Philip Spicer, who notes that the Dow Jones Industrial Average "closed at 10,549 on 17 Nov '04, equaling 1,791 in 1966 dollars."

- TheStreet.com's Peter Eavis, senior columnist starts out his article, entitled "Selloffs Suggest a Looming Credit Crunch" with the ominous "The credit boom is still on schedule to collapse in early 2006, taking the economy and the stock market down with it" and then implying that the problems in the stock market are directly related to investors finally wising up.

Jay Taylor of MiningStocks.com is as morose as The Mogambo and Mr. Eavis about the eventual outcome of the Federal Reserve acting like such idiots and creating such a monstrous over-abundance of money and credit, and American acting like idiots to borrow this money and therefore plunge into the unfathomable depths of an over-abundance of un-payable debt. He says, "All that has been accomplished is that the downturn will be much greater. In other words, rather than a garden-variety recession, the Fed has sealed our fate. We will in time, perhaps sooner rather than later, experience the mother of all recessions, namely a Kondratieff winter that is equal to or worse than the last Kondratieff winter experienced by our senior citizens now in their seventies and eighties." Ugh.

**** The Mogambo Sez: The Federal Reserve and the government, in cahoots with their cronies on Wall Street, are going to pull every trick in the book to keep the markets up. How else to explain that the stock market ended up after the Fed raised interest rates today, for the eighth time in a row?

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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