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A hard rain's a-gonna fall

Richard Daughty
...the angriest guy in economics
The Mogambo Guru
May 5, 2004

Without even opening my eyes I can tell you that the Fed increased Total Fed Credit last week, because that is what they do. The only question is, how much? For this I look in Barron's, and I simply read the amount, namely $5.7 billion. The foreigners with holdings of American government debt, and deposited at the Fed, actually decreased their huge wad of those assets by $1.8 billion for a change. Over in the banks themselves, things aren't going so hot. But they still managed to soak up, amazingly, $15 billion in government debt.

This is the perverse nature of banking revealed in all its glory. Even as the Fed meets to decide who lives and who dies (answer: they live, you die) and how soon they can manage to bring interest rates back up to within visual distance of normal (answer: sometime between now and eternity), the banks are, and you will notice that my eyebrows are arched in disbelief, buying debt! They are buying this debt even though they know, with mathematical precision, that whatever they buy will be worth less money pretty damn soon, and probably measured in seconds, minutes, hours or perhaps, at the outside, days. They literally know they are buying a loser investment before they are buying it! And yet they do it!

But they are not the only ones, of course. Those trillions of global and domestic dollars that went into buying our debt over the last few years and last few decades are all going to be worth less very soon, handing each and every one of those dimwits a paper loss. But don't cry for them just yet, as most of them have probably managed to sell out at a profit and stick that load of losers into YOUR retirement account! Hahahaha! Welcome to the real world, sucker!

I saw another of those dreadful shows about why the pyramids look like they do, and how the universality of this building plan showed up all around the world is some evidence of communication between the cultures, countries, and continents, which is a nice piece of alliteration and I didn't even plan it! It just came out! I don't know how I do it, or even why, mostly because the big-shot mental health professionals assigned to my case keep assuring me that "You don't want to know. Trust us. We're professionals." The fact is that if you want to build higher and not have it collapse, then there is no other shape that is possible. They must have tried squares, because their houses were square, so obviously they had tried it. And obviously it had failed, as it must. So what to do? Round? No, too many problems, the most important is that round rocks tend to run away downhill, since they did not have a United States Congress back in those old days to solemnly pass laws against that insidious and terrorist-influenced Force of Nature, Gravity. If they did take the precaution of electing preening morons to their government, like we have, they could have made it illegal for the Forces of Nature to operate within fifty feet of a tall structure, or within a thousand feet from a school just to show you that we are always "Saving the Children."

So round is out, too. How about triangular? Nope, because the second layer of triangular stones would have all the weight concentrated at a point, which will break the stones. Ergo, that is why all tall structures are pyramids, on a square base, made with rectangular stones.

With pyramids, it all comes down to one thing; gravity. The same goes for economics. You can try and make an economic structure out of many things arranged in many ways, but it is one thing, inflation, that will bring it down. And that is why I am so fixated on inflation. Which is a nice segue into where, on the Bloomberg new site, we read "The Personal Consumption Expenditures price Index, a measure of inflation watched by Greenspan and other policy makers and tied to spending, rose at a 3.2 percent annual pace, the fastest in three years. Excluding energy and food, the core index rose 2 percent at an annual rate, the biggest rise since the third quarter of 2000."

But these figures are not adjusted for inflation. So what was that deflator? "The GDP price deflator used to adjust the figures rose at a 2.5 percent annual rate compared with a 1.5 percent rate in the fourth quarter." So adjusting for the change in prices makes the picture a lot less rosy. And remember also that prices are chained, and the inflation measure carries around with it all those low inflation costs from months and months ago. "Once upon a time, bread was cheap, because they had just invented bread. So we are keeping those low costs in the inflation gauge, even though they have no meaning whatsoever to you bozos in the checkout line at the supermarket today."

And these inflation figures are without those two pesky components, food and energy. What is the inflation rate of THESE two components? Nobody likes to talk about them, but oil hit $39 a barrel this morning, and I don't pay any attention to food prices any more, as all I can afford to eat is cat food, which is, in case you were wondering, going up, too. An article in the Christian Science Monitor was "Inflation Hits the Family Dinner Table," by Ron Scherer, who writes "In the category most families would relate to - food and gasoline - prices rose at a 5.3 percent annual rate." But even this may be too low, and I've heard a 7% figure bandied about, which is probably too low, too, seeing as how gasoline alone is increasing about 1% a week, and every time I turn on the TV to get the news, some cute little thing is looking into the camera and saying "Gasoline prices are hitting new record prices at the pump" with her mouth while her beautiful eyes are saying "I want you, I lust for you, I am burning up with passion for you, Mogambo!"

And it just keeps getting worse. No, not my incapacitating paranoia and repulsive personality, but this inflation thing. Bloomberg further reports that "Benefit costs -- which include severance, health insurance, vacation pay and referral bonuses -- rose 6.9 percent over the past 12 months, compared with a rise of 6.1 percent in the year-earlier period. U.S. costs for labor jumped 1.1 percent in the first quarter, as benefits costs rose the most in more than two decades." Two decades!

In a similar vein, "The employment cost index, a gauge of labor expenses for businesses and government, had climbed 0.8 percent in the fourth quarter, the Labor Department said in Washington. Benefit costs rose 2.4 percent from January through March, the most since the third quarter of 1982, and wages and salaries rose 0.6 percent, the government said."

And we can thank Greg Ip ("Thanks, Greg!"), a columnist for the Wall Street Journal, for helping us identify the culprits in this horror. He posted an interesting article in last Friday's edition, entitled "Fed May Have Acted on False Alarm," wherein we read that the Reserve Bank of Atlanta concludes that "most of the drop in inflation between 2001 and 2003 was due to unusual behavior of residential rents and used-car prices indirectly caused by low interest rates."

So, once again, the Fed acted like clueless chumps, and like ignorant children randomly playing with their little computers and their precious little models, they incorrectly and stupidly overemphasized how the Fed idiocy of desperately pounding down interest rates to negative real rates affected things. Mr. Ip concludes that "If the study is correct, underlying inflation may not be as low as it appears." Well, I have no idea if the study is correct or not, but if it comes from anyone connected with the Federal Reserve, then I am pretty sure it is chock-a-block full of stupidity, lies, and outright fraud. But I don't need no stinking Fed study to tell me that inflation is higher than they say it is, as I already have whole armies of snotty checkout clerks who remind me of that every time they hit the "total" button on their cash registers.

The Ip article goes on to say that "The study, which made no inferences about monetary policy, doesn't represent mainstream Fed thinking. Chairman Alan Greenspan and most of his fellow policy makers consider productivity growth and the degree of unused slack in the economy more important to the course of inflation than the behavior of individual prices." Huh?

Please permit me to interpret this for you. In plain English, the majority of the power-hungry bozos at the Fed are in total agreement that prices going up does not mean that prices are going up. They have also decided that the blazing sun being directly overhead does not mean it is daytime, and by their calculations the correct time is three minutes past midnight. They further conclude that since there is some slack in the economy, the result of idiotically massively overbuilding during the boom years, then prices should not have gone up. And since they should not have gone up, then they did not actually go up! And even though they did, of course, go up, this just means that prices are rude, and Miss Manners thinks that you should just ignore rudeness. So they ignore higher prices, bringing us back, once again, to their official announcement that prices are not going up, even though prices are going up.

Of course, what is NOT mentioned by the same dimwitted "mainstream Fed thinking" is that they do not consider gigantic, mind-blowing creations of money and credit to be important to the course of inflation either, especially as pertains to prices, which is somehow, weirdly, perversely, not important to them at all. If there was ever a reason to gather the townspeople together and follow the Mogambo to march to Washington DC as an unruly mob singing witty and catchy tunes about how the brave proletariat worker will arise in glorious revolution to throw off the shackles of the hated ruling class and take our Flaming Torches Of Freedom to the Federal Reserve and to drive those idiots out into the street and give them a good thrashing, it is their bizarre insistence that price inflation has nothing to do with prices rising. It is beyond insane to even say such a thing. Beyond Orwellian!

Gary North and the Daily Reckoning people sent an e-mail over the weekend, in which they issue what they term "An urgent warning." I am not exactly sure what really happened, because as soon as I saw the words "urgent warning" I immediately ran into the Mogambo Bunker and slammed the door shut behind me like the sniveling little coward that I am. This is because when somebody issues me an urgent warning, it is usually the neighborhood kids telling me that those pesky unmarked black helicopters are circling over my house, or a friend is phoning me up to tell me that my wife has now confirmed one of her suspicions about me, or something like that, and what links all of these things together is that pretty soon now somebody is going to be whacking me on the head and I am going to be saying "Ouch!"

But this urgent warning is of a completely different nature. They start off with the reason for the warning, namely "Fueled by artificially low interest rates - and the dangerous policies of Fed Chairman Alan Greenspan - millions of Americans are about to be blindsided by an event more destructive than the Stock Market Crash of 1929." Well, nothing new there for me, as it is just the kind of thing that I have been raving and ranting about for years, and now that you mention it, I cannot remember a time when I was NOT ranting and raving about it, even though official records are spotty during that period of my life when I was in grade school, but newspaper reporters always note that everyone still remembers that I was loud and obnoxious angry misfit loner, and that all my old teachers agree that there was "something definitely wrong" with me.

But they continue with a time frame that is more restrictive than my nebulous "one of these days when you least expect it," forecast. They say "This nation's enormous consumption bubble - created entirely by the United States government - is in its final days. In fact, the dominoes have already begun to fall in a dramatic event that will come to a head as soon as May 4." I look up at my calendar, and I note with some satisfaction that Miss May is smiling with a come-hither look and is making me forget the now-departed Miss April, but my little reverie is shattered when I note with alarm that TODAY is May 4! Gadzooks! And although the destruction of everything that we hold near and dear may not necessarily be today, they assure us that it is almost a certainly within three weeks. Three weeks! A gutsy call!

Of course, Marc Faber has been saying the same thing a long time, too, and he said it again just this last week: "A painful resolution of the current asset inflation is inevitable." So, in slightly different words, he is saying the same thing, but without the short time frame.

And what is this urgent warning that may descend upon us as early as today? Nothing less than, and I quote the e-mail, "The Total Destruction of the U.S. Housing Market." They note, and they want me to note, and they want you to note, too, that "the bottom is about to fall out of the U.S. housing market." They figure that "A total of $2.5 trillion- or more - will be wiped away in a matter of days." Wow! How they figured that now is the time for all this to happen is beyond me, but they say they have.

It may have something to do with the same thing that Tony Sagami of Safe Money Report is saying, who writes that we will soon be getting, "A new wave of disappointing results from big name tech companies." And if there are two things that idiot Americans believe, it is that technology stocks always go up in value and that houses always go up in value. So if tech stocks are hinting that they are all going to be erupting in flames and incinerating everybody who owns shares in those companies, maybe houses will be next. Who knows?

Or maybe it has something to do with Victor Hugo, an analyst at GoldSignals, saying "Long term technicals on the Dow Jones Industrial Average suggest that the last three weeks have been setting up scope for an aggressive sell-off soon." And since we have collectively re-mortgaged our houses and invested the extracted equity in stocks, then a stock market sell-off COULD have deleterious effects on the housing market.

Or maybe it has something to do with Mr. Hugo also going on to forecast that "Momentum and cycle evidence say the dollar is merely taking a breather before resuming its downhill trend - 15% or more lower in the next year and perhaps still weaker after that." And a weaker dollar means lower purchasing power, and combining that with stagnant wages, the idea of continuously bidding up overpriced houses seem preposterous.

Or it may have something to do with James Grant himself also noting in his Grant's Interest Rate Monitor that the US dollar is a piece of overvalued crap, as he writes "The pell-mell purchase of dollars for yen, renminbi and other Asian currencies constitutes the largest exchange-rate manipulation in the history of the world," and that a massive devaluation of the dollar is in the cards as soon as those Asians decide to stop acting like trusting jerks.

Or it may have something to do with Christopher Mayer commenting on the same thing, namely how Asians are buying mountains of dollars to effectively devalue their own currencies, all for the sake of stimulating their imports of goods and services to the USA, and then him saying "The end of Asia's vendor-financing scheme will herald unhappy times for the holders of many U.S. financial assets, but it will likely reward those that have hedged or sold their dollars for assets likely to rise against the dollar. The biggest casualty will likely be the U.S. housing market."

H.A. Scott Trask, always good for an informative and entertaining read, had another of his fabulous essays on the Mises.com site, this one entitled "Inflation and the French Revolution: The Story of a Monetary Collapse."

He notices a lot of eerie parallels between modern America and 18th-century France. "As in so much else, the French revolutionary regime (1789-94) was the precursor of the centralized, totalitarian, managerial, pseudo-democratic despotisms that now reign over the West. It is also a reminder that mass democracy and inflation go together, as surely as thunder and lightning."

In those old days, he observes that the French government "was spending enormous sums on public works projects in Paris and for bread subsidies." In modern America, we are likewise spending large sums on public works projects (e.g. the huge new Transportation Bill in Congress) and bread (Medicare, Medicaid, welfare subsidies). So make another mark in the margins to denote "another Twilight Zone eerie parallel."

But not all French people were morons. "Many delegatesopposed the measure on economical principles. They argued that the new currency would depreciate, that it would be followed by additional emissions, further depreciation, and that the calamities of John Law's Mississippi Bubble (1717-20) would be re-enacted across republican France. Their objections and warnings were brushed aside." So far, it sounds EXACTLY like the USA, just as the Mogambo is similarly brushed aside, and usually very brusquely too. He goes on to say "The enthusiasts essentially argued that economic laws did not apply to France." This is really eerie, as this is exactly what the moron economists running roughshod over economics and common sense here in the USA, and in the central banks all over the freaking world, are all saying, too. Even as we speak!

But to show how the modern economists are one up on those old French fools when in comes to sheer nerve, today our economists all proclaim that there ARE no economic laws, and that economies do as they are told, because everything is like a big, interconnected machine, and when you turn a fiscal knob or adjust a monetary lever, the result is automatic! How's THAT for hubris?

So, anyway, the French kept on issuing money. "The consequences of the second issue were just as the unpopular economists had foretold: depreciation in their value, rising prices, feverish speculation, complaints about a shortage of money, calls for more, the prostration of commerce and industry, inordinate consumption, and declining savings." Man, this is getting too weird! All of these things and more are exactly, and note that I said EXACTLY, what are happening right this very minute! And, again, to show you what chump-change pikers those old frogs were, while they were merely speculating on stocks, we are also speculating on our very houses and our retirement monies, too!

Of course, the rest of the story is that France collapsed under the deadweight tonnage of the ignorance and stupidity of THEIR central bankers and government doofusses, while we are still in the process of collapse. The inevitable result following a collapse is the rise of the military strongman, who promises to make things right through sheer force. In the case of France, it was Napoleon.

But Napoleon did some good things for France. For one, he invented a delicious pastry, the creme-filled Napoleon. For another, "It took Napoleon to restore hard money to France. As First Consul (1801), he introduced the 20 franc
gold piece and insisted that from thenceforth soldiers, contractors, and merchants would be paid only in gold, or its equivalent. The paper blizzard was over. Napoleon would go on to conquer most of the Continent while on the gold standard." You never hear of any scholarly paper where the guy says, "Freed from the confines of real money, he took a paper, fiat currency and went on to conquer the world."

Mr. Trask concludes with "His success gives the lie to generations of scholarly and academic excuse making that for all its pitfalls the assignat 'saved' the Revolution. On the contrary, it helped bring on the Terror and set French progress back a generation. Will the fiat dollar one day do the same to America?" A better question is "WHEN will the fiat dollar do the same to America?"

Steve Forbes reviewed the new book on Alexander Hamilton entitled "Alexander Hamilton" by Ron Chernow. It is probably a real good book and all that, but if they want me to read a biography about somebody, even old Alex, then there has better be some good stuff in it, like "How to Score with Chicks" or "Making Powerful Aphrodisiacs from Ordinary Kitchen Cleaning Products" or something like that that people can really use.

But Mr. Forbes hits one nail right on the head when he writes "The only thing missing in Mr. Chernow's biography is a proper discussion of Hamilton's decision to put the dollar on the
gold standard where it remained - except for the Civil Was period -until 1971. The gold standard played a critical part in America's impressive growth, since it saved the collar from Latin-American or French-style inflations. Currency debasement undermine entrepreneurship and the rule of law."

Brazil raised minimum wage by 8.3%. Bloomberg reports that "Brazilian President Luiz Inacio Lula da Silva, seeking to keep the budget deficit in check, raised the minimum wage by less than one-fourth the amount unions were demanding, prompting the largest civil servants confederation to call a work stoppage."

Now, you and I would probably love to have a nice 8.3% raise in our wages, although you are so smart and well-paid that you are probably having trouble spending all of that money you earn, and I am the only one looking in the neighbor's garbage cans for things to sell at a garage sale. So why are the Brazilians so grumpy with such a nice raise? Inflation, you fool! It turns out that the 8.3% raise is less than last year's 9 percent inflation rate, and so prices went up more than their wages. This means they had a falling standard of living, just like we are having right here in the USA, as prices rise faster than wages. And let's not forget that these Brazilians got a 17 percent minimum wage increase last year, which was also eaten up with higher prices, leaving them worse off.

A doofus named Gilberto Cordeiro, who is the head of the huge Federal Civil Servants' Confederation, said "Shame on this government." He wants to mobilize his union members to hold a 24-hour stoppage on May 10 to protest the paltry increase. He hits the nail right on the head when he complains "Workers' spending power has decreased substantially during the past ten years.'' What this lame-brain does not realize is that wishing to shame the government into simply granting his people more money is the same reason WHY they have had a fall in their standards of living in the first place; the government idiots did exactly what he wants them to do now! They borrowed more and more money, they printed up more and more money, and they passed out more and more money, spending everything they could get their hands on! And now they are suffering the predictable depredation of the currency. And now this dimwitted union twerp wants to have MORE of the same, but expects different results! There is no hope for these people.

While we are waiting for the Fed to make its "decision" on interest rates, perhaps it is time to recall Hans Sennholz's definitions of what interest rates are. "The market rate of interest is a gross rate usually consisting of three distinctive components: the pure rate, the inflation rate, and the debtor's risk premium. The pure rate is the very core stemming from man's mortality which forces him to view economic phenomena in the passage of time. He ascribes a lower value to future goods and conditions than to present provisions; the difference is the pure rate. The inflation component appears whenever government or its central bank inflates and depreciates the currency; the rate of depreciation determines the size of the component. The debtor's risk premium, finally, reflects the reliability and trustworthiness of the debtor."

So let's take a look at our market rates. The pure rate is still the pure rate, as the passage of time still, ummm, passes. The central banks are still inflating the currency, so we still have inflation. One result is, says Dr. Sennholz, is that "Such credit expansion, unsupported by genuine savings and actual production, generates illusionary gains making people believe that they are more prosperous than they actually are." Or, as Bill Bonner says, "The hotting up going on in the U.S. has little in common with a classic business cycle expansion. What is expanding in the U.S. is not production... but consumption; not the output of goods and services... but the output of money and credit."

And I won't go into that whole trustworthiness thing, as I go ballistic at the mere mention of trustworthiness in government, and when that happens I never know WHERE in the hell I am going to wake up weeks from now, although I hope it is in a cozy straightjacket in some nice facility somewhere out in the country and with maybe some little birdies to sing sweetly outside the window, and not one of those ones where I wake up in some stinking alley, face down in the mud and filth, being screamed at by bad-tempered SWAT team guys with itchy trigger fingers who are yelling at me to "Give it up, Mogambo!"

So what does this have to do with anything? Nothing. I just think it is quaint how some of us old timers still remember when interest rates were the result of negotiations between savers and borrowers. Nowadays, of course, interest rates are merely a function of Alan Greenspan's mood or something.

Peter Schiff at Euro Pacific Capital has taken a look at the new GDP numbers and says "The startling reality of today's GDP figures reveals an economy in which weaker than expected. Growth is occurring against a backdrop of accelerating inflation. However, upon closer review it is clear that the 4.2% figure consists largely of soaring federal spending that overcame decelerating private sector growth. For example, Federal spending increased by 10.1%, with defense spending growing at a rate of 15.1%." And then I remember the huge defense budget and this whole War on Terror thing, and so obviously we are making new weapons, and weapons are classified as "things." But even though they are "things" you still can't get a simple Building and Zoning Permit to install a "Second Amendment Thing" in my backyard, which they INSIST on rudely labeling as "An anti-aircraft cannon, for God's sake, you freaking lunatic!" which means, so far, "no."

But this advance in GDP just shows how spending, all spending, by everybody, all eventually flows into all the little nooks and crannies of the economy, just like water will flow into all your nooks and crannies, no matter how snugly your bathing suit fits. Rather than showing some wonderful economic vigor, it merely shows that somebody, somewhere, spent a bunch of money. In this case, most of it was military spending, some of which went to the actual guys who were fighting and dying, but mostly the really BIG money went to the suppliers of all that military hardware. It is a scary return of Dwight Eisenhower's admonition to beware of the dreaded "Military-Industrial Complex."

One-half of the "Military-Industrial Complex" (MIC) is the defense industry which exists to produce lotsa weapons for the military, plus the ordnance needs of your modern domestic variety of armed paranoid paramilitary groups, plus many nasty foreign dictators and revolutionaries, and, of course, the Mogambo, who is not "para" anything except paranoid, and who thinks that is plenty enough in itself. The other half of MIC is the government, which exists to fund the defense industry by giving them money, taxing everybody in America money to pay for the distortion of the whole economy, and having a lot of foreign guys in other countries pay with their lives.

Without any debt to pay, a case can be made that it would make a pretty sweet deal, especially if you weren't one of the guys who were being killed. But with debt to pay, the dollars are not re-cycled by government spending. They are gradually paid into the pockets of the rich, who are the only guys who are either 1) rich enough to afford loaning that kind of big bucks to the government, or 2) capable of dealing with that much money. And then the rich merely get richer and the poor get, predictably, poorer. And the economy is transformed into something ugly and weird that cannot exist on its own.

David DeRosa of Bloomberg wrote a timely article entitled "Four Questions IMF Candidate Rato Should Answer," which refers to the former Economy Minister of Spain Rodrigo Rato being in line to head the IMF.

One: "Do you believe in strengthening creditors' rights?'' Mr. DeRosa is alluding to the fact that "The IMF has done a splendid job of advocating the rights of debtor nations. It was rewarded for those efforts when Argentina stopped paying its obligations on $99.4 billion of debt in December 2001." So somebody had to eat those defaults.

In a very similar vein, Mr. DeRosa asks Question Two: "Mr. Rato, do you endorse Acting Managing Director Anne Krueger's proposal for a Sovereign Debt Restructuring Mechanism? Or is that a dead issue?"

This is the plan to appoint the IMF to run a corporate-bankruptcy-style process to resolve a sovereign default, with creditors put on hold. This idea goes against the grain of the IMF, whose motto is "More money for everybody, and less responsibility for us!"

Three: "What do you plan to do if countries begin to default on IMF loans?" Argentina, Brazil and Turkey account for more than 70 percent of the fund's $107 billion in outstanding loans, and so any one of them defaulting would be catastrophic to the IMF. And that means that the IMF would turn, once again, to the US to please, please, please give them some more money, so that they could continue to eat in the finest restaurants and fly around the world in cushy first-class seats while doling out more money and idiotic economic advice.

Four: "What gives the IMF the right to insist that it gets repaid ahead of all other creditors?'' The author has a better idea, "Let the IMF be paid last. Since the IMF is never shy about giving out economic advice, maybe it's time the fund had a taste of its own cooking."

And while we are asking questions, perhaps we ought to be asking the United Nations some questions too, such as "Will the United Nations ever be more than just a den of know-nothing, loudmouth, anti-American thieves?"

At the 321gold site, there is an interesting article in their archives entitled "Billions for the Bankers, Debts for the People. The Real Story of the Money-Control Over America" by Pastor Sheldon Emry.

He writes in 1960 "Current fractional reserve requirements allow them to use that $1 billion in bonds to 'create' as much as $15 billion in new 'credit.' " How quaint! Today, circa 2004, which is, if I am using my calculator correctly and am looking at the correct calendar, and there is that Miss May again with a twinkle in her eye, a scant 44 years ago. But turning to Barron's and gong to the data on the banking system, we note with wry amusement that Required Reserves are only $42 billion, and that Total Reserves is not that much better, coming in at $44.3 billion.

So how much money has been loaned against that $44.3 billion? Somewhere north of $4,600 billion. So $44.3 billion has been multiplied by 109 times! Hahahaha! If there was ever anybody who doubted that the Federal Reserve and the banking system are killing us, this ought to shut them up!

Hahahaha! That means that in the last 44 years; the fractional reserve requirement has expanded from the textbook example of 10:1, to 15:1, and now to 109:1! One lousy dollar of reserves has created $109 in new lending! Hahahaha! This is insane!

Leonard Kaplan, of Prospector Asset Management, writes that there is an unwritten law in the commodity markets, which he titles "Kaplan's Law of Perversity." It succinctly states that "the market will always do whatever hurts the most people at any point in time."

It seems funny, but on sober reflection it is mathematically imperative that the markets work like that, and when I sober up, I'll reflect on it a little. He correctly notes that "Remember, the laws of probability dictate that it is virtually impossible for the majority to win money from the minority in the markets," even though it is not the laws of probability, but the laws of simple adding and subtracting.

To illustrate, if everybody has a dollar in the market, then for a third of the people to make a 300% profit, then 2/3 of the people have to lose everything. Ergo, Kaplan's Law of Perversity.

If you want to know the jobs of the future, here is a hint. Here in Florida our legislators recently authorized the position of Anesthesia Assistant, which is a person who, according to the article in my hometown rag of a newspaper, this newly-enfranchised Anesthesia Assistant will be "helping doctors put people under for surgery." What it means in practice is that now another position in the healthcare system is filled by a lower-paid healthcare professional.

Actually, the need for doctors needed to actually do things is declining. As an example, when I went to the specialist heart doctor on a follow-up after my heart attack, I got hooked up to this whiz-bang EKG machine with all those electrode wires pasted onto my chest and back and side. For awhile the machine kept shocking me, and I could hear the doctor laughing to himself as he fiddled with the knobs, but then he got it adjusted. The machine read the inputs from those electrodes, evaluated the information, and consulted with another EKG machine in the closet and so both of them could file for payment from my heath insurance carrier, and then the machine printed out its findings. Which the doctor merely read to me! He quoted the machine verbatim! I mean, how much am I paying this guy? And for what? So look for EKG Machine Attaching Assistants, Splinter In The Finger Assistants, and, and, well, I am sure that you can name lots of other things.
Of course, I also figure that businesses installing beds in cars will also be very successful, as more and more people will be reduced to living in them.

The Wall Street Journal had an editorial today (Tuesday) entitled "Tax-Happy Taft," which excoriated the governor of Ohio, Bob Taft, for increasing taxes after promising that he would not, and who then acted like a slimy little toad to extract more money from the citizens so that he and his little government playmates could have some money to spend on themselves and their grubby, greedy little friends. In short, government business-as-usual.

The interesting part is where the lackluster WSJ editors compared Ohio's budget in 1994 of $14.4 billion, with the 2004 budget of $24.8 billion. Running those numbers through the old HP 12-C, we note with a smug smile on our face that that is "only" a 5.5% annual inflation compounded. "What?" you ask. "Only 5.5% inflation?" So how is it when food and fuel rise at that annual rate, it is somehow "benign," "low," or the ever-popular "too low?" But when a state does it, then it is NOT "benign," "low," or the ever-popular "too low."

My question is a little more personal. I ask "How is it that the editors of the WSJ have a hissy fit about that, but they don't have a conniption fit, like the Mogambo, when Bernanke or some other jackass Fed weenie stands up and says that they are actually trying to get inflation roaring?"

Dennis Gartman shares a little of his forecasting acumen, and says that if he had only one indicator, it would be the Ratio of Coincident to Lagging Indicators. They apparently have taken some heat for their philosophy, and say "Let the economic sophisticates take issue with our thesis; we find that it works; works well; works easily and remains uncommonly useful... and until proven otherwise, that is our story and we are stickin' to it."

Not content to do that, they even go farther and save you the trouble of going back and looking up all those numbers and dividing one into another and then looking at them hour after hour comparing them to other charts until your eyes are bleary and red. No, being the sweethearts that they are, they do the work for you and tell you "Unless something terribly untoward happens in the next several months, we can push the envelope for any possible return to recession out seven months hence... if even then."

John Mauldin - the guy is a prince! - has done a little work validating what Dennis has to say! "When I look at the actual ratio," says John, "I find it does indeed turn down prior to recessions. It also turns down prior to slowdowns that do not become recessions, so in that sense it can give some false 'positive' signals."

Then he, and the treasure trove never stops, also analyzes the graph, too "But combining that ratio with the yield curve, even if we guesstimate a natural curve, suggest that barring some unknown event, we are not due for a recession this year and probably not until the second quarter of 2005 at the earliest."

And since we are talking about econometric models, I would be remiss if I did not mention Tom Fenlon, who has come up with a novel explanation of Fed announcements. According to this bold, new theory, Greenspan has his head so far up his own butt that when he opens his mouth to speak, it always looks like the light at the end of the tunnel.

To show you another example of hyperinflation caused by a falling dollar coupled with abnormally low interest rates, the scene on CNBC changed from some story of real estate prices and how they are in this boom, then cut back to the studio, where one of the anchor-ladies on CNBC made the ad-lib comment that she was thinking about putting some money into this real estate thing to cash in on some of these juicy profits!

And that is how hyperinflation starts. And it makes perfect sense, as long as money plus interest is lower than the price of the house times inflation. Or, in math terms:

And then when the day comes where that equation is NOT true anymore, then the cost will be increasing faster than the price. And that's when, and I'm talking about the exact moment in space and time, these speculators slap their hands to their foreheads and exclaim "What in the hell am I doing? I gotta get out!" So they stop paying while they look for a buyer. They ending up dumping the houses back onto the holder of the mortgage, which is, nowadays, not the bank, but Fannie Mae, which sold the debt into the retirement accounts and investment portfolios of millions and millions of unsuspecting people, both here and abroad. You, for instance.

Bob Dylan is right when he sang about "a hard rain's a-gonna fall."

A blurb on Bloomberg about Indonesia was "Indonesia's 231 million consumers could become a big draw for investors, although their potential won't be realized as long as per capita income remains subdued." Hahaha! Where has this guy been? Doesn't he know that you don't need any damn income to consume? Credit, man! Credit! It's how we Americans do it, and if it is good enough for Americans, it ought to be good enough for Indonesians, too!


---Mogambo Sez: The recent downdraft in
gold is a buying opportunity, and I hope you took advantage of it. The investment paradigm of the next, oh, zillion years or so, will be to buy gold and commodities on dips.

Thus spake the Mogambo.

May 4, 2004
Richard Daughty
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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