My problem seems to be that nothing makes any sense anymore. A story in The Post says essentially the same thing when the author notes "In the past few weeks, the world's financial markets have acted in a confused, counter-intuitive, bipolar fashion." Doug Noland entitled his Credit Bubble Bulletin this week "Conundrums." Mike Hoy writes "I have never seen as many red flags being raised at one time as what I see right now." It's everywhere!
I mean, inflation is up, but bond yields are down, which is the exact opposite of what you would expect. In fact, the yield on the 10-year T-note is barely over 4%! Foreign demand for US debt is down, yet prices for debt go up, the exact opposite of what you would expect. Inflation is up, yet gold is down, again the exact opposite of what you would expect. Demand for oil is up, yet prices are coming down, the exact opposite of what you would expect. The economy is slowing, yet stocks are soaring, the exact opposite of what you would expect. It just goes on, day after day, item after item, which explains why I am cowering in the hall closet, gobbling tranquilizers and whimpering "It doesn't make sense! It doesn't make sense!"
Perhaps Bill Bonner sums it up best for me when he says, "And then we stand back and wonder: what kind of monster is this? It has such a strange, Frankensteinian look to it. The world's richest, most powerful country depends on the savings of the world's poorest. The world's most dynamic, flexible economy offers its money at negative real interest rates...and is afraid to 'normalize' them for fear the whole thing will collapse. Americans buy what they cannot really afford...and the Chinese build factories to produce what their principal customers don't have the money to buy. And the whole world economy advances - apparently - only so long as house prices in America continue to rise at three to five times nominal inflation and an infinite multiple of household income, which went backwards in 2004."
But what has made some sense of it all is that Total Fed Credit, which has not been showing its usual parabolic rise here of late, has started back upward, and expanded by $4.3 billion last week. So at least we know where the money is still coming from.
And speaking of the Federal Reserve, it looks like they are shifting into high gear on buying debt outright, as they are almost consistently buying, outright, over a billion dollars a week. A billion! A week! This is the ultimate fraud; the government creates bonds to get money, and the Fed creates some money to literally buy the bonds! Government debt is now creating money directly, and people wonder why I am so weird all the time! I was weird before all this happened, but I am much worse now.
Jeffrey Simon of The Market Nugget notes that everything seems to be about interest rates. "Aside from the above, it is, and remains, all about INTEREST RATES! The Federal Reserve is raising short rates and talking up long rates; if they are not successful in talking up the long end then an inverted yield curve is almost certain. As Greenspan himself has previously noted, an inverted yield curve is the most accurate indicator of an impending recession is the market already pricing in future interest rate reductions in anticipation of this occurrence? The current picture does not look good with the spread between 6 month and 10 year interest rates having narrowed to barely over 1%."
Foreign holdings of American debt held at the Fed expanded back to its former glory, too, and it went up by $4.7 billion last week. And not to be outdone, the Treasury admitted to plunging us another $13 billion in debt, and the banks admitted to buying $13 billion in Treasury debt. What a coincidence, eh?
- The Leading Economic Indicator fell. This is the indicator of future production. So, with a fall of 0.05%, the future seems bleak. The Coincident Indicator, is, as the name implies, is an indicator of current business activity, and it is up from 119.5 to 119.6, which is slightly up. This goes along with the report that the "Fed Bank of Philadelphia's general economic index for May fell to 7.3 from 25.3."
But my wife sees me hiding in the closet behind the vacuum cleaner, and wants to know what is wrong. I tell her that it was the Lagging Indicator that made the hair stand up on the back of my neck, and I should be out stacking sandbags around the old Mogambo Bunker, as the Lagging Indicator is the indicator of inflation, and that is why The Mogambo pays particular attention to it. And I'll bet that you already guessed something was amiss with the Lagging Indicator, and you would be right. It was up from 99.4 to 99.7, which was not much, I'll admit, even though I am loath to admit to anything, especially about where I was last Tuesday about 8 p.m. But it is not the nominal size of the increase in the Lagging Indicator that is important. It becomes important only when measured against the Leading Indicator (which actually fell) and against the Coincident Indicator, which rose barely a third as much.
This goes right along with the new official rate of inflation, which is 3.5%, up from 3.1% last month, and up from 2.3% this time last year. And yet the dollar rose! Weird!
Even Peter Schiff of Euro Pacific Capital is pretty amazed all of this. He writes, "The reality is that year-over-year consumer prices are up 3.5%. Thus far, during 2005, CPI is rising at an annualized rate of 4.8%, its fastest pace since 1990." Now, Mr. Schiff and I are pretty upset at this, and stunned that nobody else is. And how bad is this? He writes that it is "0.3% higher then the 4.4% rise in 1971, the year in which inflation was so bad that Richard Nixon imposed wage and price controls to contain it." Inflation has always, always, always been considered very bad news, up until the current crop of idiots got out of whatever asylum they escaped from and bizarrely achieved prominence. And poor old Nixon was just responding with the appropriate degree of alarm and desperation. But nowadays? Nothing! The Mogambo cries alone.
But Nixon has been singled out as the perennial bad guy, an infamy that is not, maybe, altogether deserved. Mr. Schiff notes, "Perhaps had President Nixon been a little more 'tricky', he might have come up with the concept of 'core CPI' himself, rather than resorting to such draconian and misguided measures." But Mr. Nixon is famous for having said "I am not a crook." I notice that politicians don't say that anymore, and for a very good reason, too!
So what is inflation? Doug Wakefield, president of Best Minds, says that Webster's Dictionary defines it as "An increase in the volume of money or credit relative to available goods resulting in a substantial and continuing rise in the general price level." Beyond the sheer academics of that, Mr. Schiff goes on to say "The Federal Reserve has recently pursued the most inflationary monetary policy in its 89-year history. Initially, inflation resulted in the stock market bubble. However, as stock prices are not components of the CPI, no one cared. Next, inflation made its way into rising real estate prices. Again, no one cares. More recently, inflation is causing commodity prices to rise. The CRB is up 22 percent this year, and is now within 1 percent of a 4 year high." And STILL nobody cares! But let me try mowing the damned lawn in an old ratty pair of underwear, and suddenly EVERYBODY cares about everything, as I gather from hearing them yelling "He's doing it again!"
But we were talking about money and inflation, and to show you how MUCH nobody cares about that, take a look at the bond market. Bonds are going up in price! People are actually locking in their money for long period of time, measured in years and years, to get a yield that is, after taxes, less than inflation! They are going up in price because morons are scrambling to buy them, bidding against each other to buy them, actually tripping over each other in their haste to sink more money into the bond market! At the risk of repeating myself, they are thus driving the yields down to almost the rate of inflation, and, after accounting for taxes that will be due on the taxable interest, they will receive less than the freaking rate of inflation! Less than inflation! They are actually, purposely, losing buying power the longer they continue doing this silly stuff!
- The amazing run-up in stock prices, I submit because that is the kind of suspicious and paranoid loser that I am, is that it was to bail out some hedge funds, which operate on the principle of massive leverage, and which have sustained such losses that the chumps (the banks) who loaned out so damn much money to these guys were on the phone to Greenspan and then on to the Plunge Protection Team, screaming "Save us from ourselves! Save us! We acted like greedy little jerks, and now we are whining!"
Jon D. Markman of TheStreet.com is no stranger to hedge funds, and writes "Now enter the hedge funds seeking to provide dependable returns to pension managers. A new breed of math geniuses entered the scene not too long ago with financial models that they believe help them understand when certain tranches are undervalued relative to other tranches. The big idea is that if you can figure out which ones are overpriced and likely to lose value, and which ones are underpriced and likely to gain in value, you can short one and buy the other and make a few bucks as their prices converge."
Okay, but this kind of crap is a zero-sum game. If they make money, then someone has to lose money. The other side is; somebody has to take the other side of those trades, and they will LOSE the money that these guys make. The big question, of course, is "Who is so stupid as to take the other side of those trades?"
Mr. Markman suggests some likely suspects. "One of the big trades that hedge fund managers working on behalf of your pension put on in recent years has been to buy the 'mezzanine,' or medium-risk bond tranche of CDOs, and short the equivalent amount of money in the equity tranche or equity of the company. The amount of money involved in these trades is quite enormous; because the trading environment was so tame up until quite recently, the equity tranches were leveraged by as much as 17 to 1." So the idiots who are buying debt at these absurd prices is you and your pension fund! Hahaha!
So what happens when these geniuses fall on their faces? "At times like this, the Federal Reserve and other central banks have learned to flood the system with money to avoid big disruptions. If we see big up days in the market followed by big down days, you can be sure that funds are using every uptick to unload inventory to meet their obligation and avoid bankruptcy."
- Justice Litle, writing on the Daily Reckoning site, has a new essay entitled "Financial Madness." He writes "As of year-end 2004, China had more than $600 billion in U.S. dollar reserves. That is a sum that could effectively tear the financial plumbing system apart, if it were unceremoniously dumped on the markets with such massive pressure in a compressed period of time the pipes would surely burst. Of course, this would be fiscal suicide for the dumpers as well, which is precisely why such a move is not feared. China's own economy would be sucked into the vortex too, so why would the Chinese put a gun to their own heads?"
And there is more at stake here than money. With that kind of leverage over the U.S., there are extortions everywhere, as each of our creditors wants something in return for playing Mister Nice Guy. And what they want is stuff like guns, bombs, planes, supercomputers, allies against their enemies, and maybe a nice pizza with everything.
And they may be getting them. In the San Francisco Chronicle we read that "The Department of Defense, already infamous for spending $640 for a toilet seat, once again finds itself under intense scrutiny, only this time because it couldn't account for more than a trillion dollars in financial transactions, not to mention dozens of tanks, missiles and planes. Defense, which recently failed its seventh audit in as many years."
Donald Rumsfeld, the American Secretary of Defense, has said "The financial reporting systems of the Pentagon are in disarray . . . they're not capable of providing the kinds of financial management information that any large organization would have." To which I say, "Why not?"
A trillion dollar's worth of stuff, including whole airplanes, has disappeared? And I am supposed to believe that it has simply been misplaced? Hahahaha! They are incompetent to merely keep track of their own toys, and yet they have the brains to wage something as complicated as global war against everybody? Hahahaha!
- Eric Fry has noticed something in the numbers that is very interesting, too, and if you are thinking about buying a house, then perhaps it will give you the appropriate pause. He writes, "Now, for the first time ever, lending to purchase real estate comprises more than half of all lending in the U.S." Half of all lending is going into buying overpriced houses?
And where are these people getting the money to make the payments until they can unload these houses? Well, about 70% of all new real estate loans are now interest-only, and about half of them are adjustable rate! Hahaha! What a nation of gamblers! No wonder poker is so popular these days!
- A lot of people are speculating as to who will be the next chairman of the Federal Reserve when Greenspan retires next January. The leading candidates are supposed to include Fed Governor Ben "Birdbrain" Bernanke, who has written papers that actually prove he is incompetent to be a central banker or have anything to do with economics whatsoever, as he stridently WANTS inflation, and lots of it, as a potential remedy for stocks "deflating" from these stupidly-high levels. Bush, astonishingly, has nominated this dimwitted twit to head the White House Council of Economic Advisers, which ought to tell you all you need to know about the Bush administration. Of course, this is the perfect opportunity to bring up a quote by everybody's favorite curmudgeon, H.L. Mencken, as highlighted on 321gold.com, who seems almost prescient when he said "As democracy is perfected, the office of President represents, more and more closely, the inner soul of the people. On some great and glorious day the plain folks of the land will reach their heart's desire at last, and the White House will be adorned by a downright moron." Ergo, it was almost pre-ordained that Bernanke would be picked as chief of the White House Council of Economic Advisers.
Also in the running to replace Greenspan are Harvard economist Martin Feldstein and former Bush adviser Glenn Hubbard. Notice that The Mogambo is not on that list, and there are two very good reasons for that. One, they are all out to get me, and two, that I would not take the job, as it is, as the Brando-ism goes, "A one-way ticket to Palookaville."
- The TIC (Treasury International Capital system) report came out, and there is something seriously amiss, as numbers on the report mysteriously change from one month to the next. Caroline Baum of Bloomberg, while not actually explaining how this happened, is nonetheless hip to what it means. "Whatever the outcome portrayed by the TIC data, it was always negative. There was no upside to this report, not to mention the multiple problems with interpretations."
Rob Kirby of FinancialSense.com is even less charitable. "Economic history has apparently been rewritten, folks. The inconsistencies and conflicting data being fed to us by officialdom are brazenly astonishing."
But this is just another example of the frauds and corruptions that are now so endemic that I can quote RCMP Chief Superintendent Peter German, who told the banking, trade and commerce committee "I don't think anyone will deny the fact that white-collar crime is a growth industry."
- "Quoted Pearls on Energy" is an essay by Jim Willie CB, editor of the Hat Trick Letter. He writes on the 321energy.com site, "Contract prices for crude oil have risen for the 'out' years, the distant future months. A tectonic shift has occurred since last autumn 2004. Those who mistakenly (very shallow analysis) point to the recent pricing of crude oil above $45 per barrel as a temporary aberration, might want to check the forward pricing of crude oil futures contracts. A $10-12 rise across the distant year spectrum versus last Oct2004 is evident in futures contracts. This should be interpreted as 'crude market recognizes post-peak supply declines' integrated into pricing structures. Couple the reality of finite limited oil supply with steady relentless demand increases, especially in emerging markets. Supply will struggle to meet 84 to 86 million barrels per day demand. Population growth and economic growth foster demand, a reflection of reality."
He also quotes T. Boone Pickens, who has been around oil for a long, long time, as saying "The oil price is going up. We are heading to $60. This is the weakest season of the year, when inventories are built up. From the second quarter and third quarter, we will be coming into demand. The current oil price is legitimately based upon supply & demand. In the short term there is plenty of oil around right now. We will make it to $60 by the third quarter for sure. The typical backwardization [in futures contracts] has changed dramatically."
- A letter from a Norwegian reader to Bill Bonner of DR and his newsletter "The problem is that the politicians here, just as in the U.S., don't have a clue. They are spending the oil and gas revenues on better schools, better homes for seniors, more expensive roads, higher minimum wages, etc. and all of this is driving up prices. Now we are facing a rate (tax) hike, I'd guess."
Well, if not now, then soon enough, as the continued expansion of a socialist state always involves everything getting more and more expensive, bigger and bigger, and the money to pay for all of that has to come from somewhere. And when you couple that with how everyone is trying to live at the expense of everyone else, you get a system that will continually get more and more weird and expensive.
But there is no stopping the socialist state. Walter Williams writes, "How many times have we heard advertisements from law firms that specialize in elder law urging, 'If you anticipate that you may have to enter a nursing home down the road, an elder care attorney may be able to help you create a plan that will both protect much of your assets and make you eligible for government benefits'? Boiled down to basics, the lawyers are suggesting that they can arrange for you to live off others should you ever require long-term care instead of having to spend the assets you've accumulated during your lifetime."
As another example, now that the Leftist morons in Congress have passed so many laws mandating that hospitals provide first-class service to anyone who shows up, you can see why people are not paying their health insurance premiums; they are going to get all the health care they need whether or not they can pay. Which means that somebody ELSE has to pay, and that is, apparently, me, as my health insurance carrier just informed me that my premiums are going up another 15% as of June because, as I quote from their letter, "Pharmaceuticals, hospital and physician expenses are simply out of our control and continue to rise." Health insurance is now my biggest monthly cost.
And the socialist state is not something that is just some hypothetical construct. James Cook of Investment Rarities writes, "Our state legislature here in Minnesota has given us a look into the future. Liberals introduced a proposal to increase the state tax to 11% on incomes over $166,000.That would be the highest state income tax in the country."
But you can be sure that he is correct in his assessment of the future, as the layers and layers of government, city, state and federal, are now so large that they ARE the economy, and whole giant swaths of the population depend on the government. And there are more and more of them every freaking day who want to get on that gravy train. Ergo, for the economy to grow, the government must grow.
The point is that for an economy to grow, the government must grow, and that takes money. Lots of money. More money than the human mind can comprehend.
And even then, after getting more money, we will still be in the original paradigm; for the economy to grow, the government must grow, and that takes money. MUCH more money than the human mind can comprehend.
And even then, after getting more money, we will still be in the original paradigm; for the economy to grow, the government must grow, and that takes money. Much, MUCH more money than the human mind can comprehend.
And even then, after getting more money, we will still be in the original paradigm; for the economy to grow some more, the government must grow some more, and that takes money. Much, much, MUCH more money, a whole LOT more much more money, more and more money until the words have lost all meaning, and then it is just money money lot lot money lot money money, all the time more money, more and more and more money than the human mind can comprehend, until I breathless talking about it and scared out of my mind thinking about it.
The Mogambo looks up from his reverie, and the grasshoppers stir themselves at the sight. Raising himself up on one elbow and spilling a can of beer off his lap, The Mogambo speaks, and the assembled crowd marveled at his words. And they were thus: "And you ought to be thankful that you can't comprehend that much money, because if you DO comprehend it, then your brain would explode. Your consciousness would be blown to atoms because you have came face to face with (pause for dramatic effect) Infinity. And as you would gaze upon the face of Infinity, it would look like The Mogambo, only with nicer clothes and a snazzy new car. Yea, verily I say unto you to heed the words of the earthly Mogambo, he who was always screaming about this kind of Big Government crap, and how a fiat currency and a fractional banking system will always kill you and your stupid economy freaking dead."
With that, The Mogambo sank back into his chair, exhausted by the effort. And then the room suddenly went dark. Onto the wall was flashed a chart of how exponential growth gets bigger and bigger and bigger. It starts of innocently enough, gently rising. Then it starts getting steeper. And then steeper. You glance up at the title of the graph. It reads "Exponential Growth." You realize that this is characteristic of damn near everything in America. Debt is growing faster and faster, and so the curve gets steeper and steeper. Your heart is beating faster. Off to the right, the curve gets steeper and steeper and steeper, and then, suddenly, the line starts going almost straight up! You are sweating like a pig and your heart is pounding pounding pounding from the panic! On the graph, the amount of debt DOES go straight up and completely off the page, always growing faster and faster and faster, and then a short time after that it starts approaching infinity! You scream in fear! And then you remember that nobody was screaming in the movie "2001: A Space Odyssey," and so you feel like a big crybaby, and then you remember that ARE a big crybaby anyway, but you don't care who knows it anymore, and so you keep screaming your head off until your throat is sore and bloody from screaming because you are facing the ultimate horror.
Of course, things cannot grow to infinity, and things will fall apart eventually. And, if George Ure and his web bot program is correct, it will be very, very soon indeed.
- Carl Swenlin, in the "Did you notice?" column of the Daily Reckoning, gives us a little technical insight into money flows and prices, and a little solace for those of us who have bought gold and silver and watched in dumbfounded horror and amazement as they went down. He writes "While cash flow normally runs parallel to price, divergences can often appear ahead of price reversals. Rising prices and negative cash flow will usually result in a price correction. Now we have a situation where cash flow into the Precious Metals Fund has been flat and now positive, while prices have been falling like a rock. This indicates that bulls are trying to hold their ground and that accumulation of precious metals shares has been taking place. The end result will probably be a rally in precious metals shares."
Speaking of gold, Bud Conrad of Macroanalysis notes that "the US government claims to have about 261M oz of gold, which is worth about $110B at today's market prices. Our annual trade deficit is running about $660B per year. Using gold to pay off this trade imbalance, the entire stash would be gone in 2 months. And that assumes the gold on our books is really there and that accounting is accurate -- there has been no audit in decades."
He goes on to say "As a relative size comparison note, the Federal Reserve has issued $755B of paper money called Federal Reserve notes. If this currency were backed by gold at 100%, the gold price would be $2,892."
- Castrese Tipaldi is a guy whose ego is so strong that he doesn't even care that people know that he reads the Mogambo Guru newsletter, and has titled his latest essay "An Answer for the Mogambo," which is in reference to my question along the lines of "If bread rises 1000% in price, but your stock holdings have collapsed by 90%, do you have inflation or deflation?" He writes "Twenty-four centuries ago, Aristotle understood that very well already: 'A paper money would not be a bad idea, on condition that you have a God ruling the printer'." So what does this mean? He writes "My educated guess is that in time gold will always appreciate against every fiat-currency."
- John Mauldin, who is one of those guys who has a lot of smarts, doesn't think that there is a lot of room left for big gains in anything, which is probably a wild exaggeration of what he really thinks, although I once tried to snag half of a bagel from his plate when he was not looking, and I can tell you that I DO know what he thinks about THAT. He says "There seemed be a general consensus that we are in a low return environment for both equities and bonds in the near-to-midterm future. While there might not have been agreement as to what the words 'low return' mean, I think it was understood that the 8% annualized returns implicit in many pension fund and retirement plan projections are unlikely to be achieved."
"A flat (or very low) equity return environment over the next 7-10 years would mean that public pension plans would be underfunded by somewhere close to $1 trillion. If you go to the S&P web site, you find the P/E ratio for core earnings for the S&P 500, which is a good proxy for corporate America, is still a quite high 21. That easily puts it in the top 20% of all the years for the past 100 years. And as I have often noted, when P/E ratios are in their top 20% range, the return for the next 10 years averages approximately 0. The shortfall would have to be made up by taxpayers."
- Doug Noland quotes Helen Yuan and Xiao Yu of Bloomberg, who report, "China's imports of steel products rose to a one-year high in April, indicating efforts by the government to cool economic expansion isn't dampening demand from makers of home appliances and cargo containers." This proves that the Chinese are just like everyone else, and that the lure of a new washing machine and dryer combo is one of those things that people will stretch to have, and the machinations of a government are not much of an impediment.
Mr. Noland also refers to an article by David Turner in the Financial Times, who reports that "Japanese wholesale prices showed their biggest monthly rise in six years in April, raising hopes of another blow to the deflation that has bedeviled the country for many years." A blow to deflation? Bedeviled? It makes you wonder how in the hell the Japanese got a reputation as hot shots in the first place, as the curse of inflation is certainly not something that one would want. In fact, the history of intelligent people is that they actively try to AVOID inflation, and they sure as hell don't go around celebrating it as some kind of savior!
- Ron Paul, probably the only Congressman that is not an idiot, has written another informative essay that has a title ("Congress and the Federal Reserve Erode Your Dollars") that really hits the nail on the head. Beyond that, he hits us where we live when he concludes that the effort to get the Chinese to un-peg their money from the US dollar is absurd. "If anything, the US government should be embarrassed that another nation has depressed its currency by tying it to the US dollar. An economically sound nation would take pride in its currency, one that maintains a stable value and provides incentive for savers. Yet here we are, mad at China for our own sin of flooding the world with cheap dollars."
***The Mogambo Sez: Keep buying gold
and silver and oil, as these obvious manipulations
to keep the price down cannot last, or even produce positive
lasting results, and these current low prices are a gift from
a despicable, lying and corrupt government to you. Beyond that,
prices have to rise, according to Jim Jubak, whose column, Jubak's
Journal, is published on of MoneyCentral.msn.com. He writes
about the secular history of inflation. "If the history
of prices is an accurate guide, we're now about 100 years into
a wave that hasn't yet peaked." And I will amend that to
say that the history of prices is a VERY accurate guide, and
that is why I know that inflation, the rip-roaring kind that
makes you throw your wallet at the checkout clerk at the supermarket
and scream "Here! Take it all, you thieving bastards!"
is coming. Whether or not precious metals will prosper, I don't
know. They always have. So I figure that they will this time,
too, for the upty-umph jillionth time in a row in the history
of corrupt governments, fiat money and economic death by inflation.