 Wake up or be
eaten alive by inflation!
Richard Daughty
...the angriest guy in economics
The Mogambo
Guru
Archives
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.
Tradition
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.
Recent Gold/Silver/$$$ essays at 321gold:
Apr 12 Gold & Silver: The Start Of Something Big? Morris Hubbartt 321gold
Apr 12 Gold, Miners Overboughtness Adam Hamilton 321gold
Apr 12 Outside Reversals in Gold and Silver Bob Hoye 321gold
Apr 11 Silver - Finally a Breakout Bob Hoye 321gold
Apr 09 Gold and Silver will Correct Unless the US/Israel Start World War Three Bob Moriarty 321gold
Apr 09 Dovish CPI: A Super Surge For Gold? Stewart Thomson 321gold
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