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Gimme all my money...

Richard Daughty
...the angriest guy in economics
The Mogambo Guru
Jun 01, 2005

- The Treasury is back on a borrowing binge, and national debt rocketed up to $7.781 trillion. And the foreign central banks are back in the game, big time, as they soaked up an incredible $6.759 billion of US debt in the last week alone, stashing it directly at the Fed, bringing their total to $1.41 trillion.

- The cover of this week's issue of Barron's asks "Hedge Funds: Is The Party Over?" If they had taken a moment and asked The Mogambo, I could have told them that the answer is "no": The money that comes OUT of hedge funds has to go INTO something else, and as soon as it becomes clear that a lot of money is moving in to this new thing, whatever it is, then hedge funds will start piling into that, too.

Speaking of Barron's, I was poking around on the Economic Indicators page of their Market Laboratory section, and I noticed that Total Reserves in the banks is $44.5 billion. This is the money and cash equivalents that the banks have to keep on hand in case somebody comes storming into the bank, screaming "The Mogambo is right! We are going to be freaking killed with this insanely-stupid and suicidal monetary expansion of the Federal Reserve! Gimme all my money so that I can go buy gold and silver with it, and I mean right now!" You look up at the guy and say "Hmmm!" to yourself. Then you turn back to Barron's, and your gaze happens to fall on the figure for savings deposited in the banks, which is $4,786.6 billion, and suddenly your mind is sharpened! Your nostrils flare and you start to get really, really scared! This would mean (and I gulp as I say this because my mouth is dry and my heart is beating thumpa thumpa thumpa and all I want to do is run somewhere and hide), that reserves are now roughly 0.0093 of liabilities or, if you prefer, 0.93% of liabilities, which is, obviously less than one stinking percent -- one stinking percent! -- of even just the "savings" part of the banks' liabilities. This is a ridiculously-low, absurdly-low, freakishly-low reserve requirement, such that you wonder why they even bother with having a reserve requirement at all! The textbook example is, I remind our newer viewers, 10%. Now the damnable Federal Reserve has allowed the banks to have on hand less than 1% of this amount! This is where all the money is coming from!

I bring this up because with a at 0.9% reserve requirement, the reserve multiplier is thus huge! If you walk into the bank, take a one-dollar bill out of your wallet, slap it on the counter and tell the surprised teller that you want to use that dollar to make a cash deposit into your account, then the banks are, in effect, empowered to make available (for loaning out to borrowers) more than a hundred new dollars! A hundred!

I also noted that the banks hold almost $1.2 trillion dollar's worth of government debt. It is not just foreign banks that are stupidly accumulating US government debt, which will fall in value as interest rates rise. But added together, $1.4 trillion and $1.2 trillion, this comes to $2.6 trillion, which is about 25% of the entire GDP of the USA! And this behavior by the banks brings up the point that that I am always screeching about: It's always the same thing that causes economic slowdowns and problems and recessions and depressions and collapses; the banks acted stupidly and greedy.

- Steve H., who prefers to be characterized as "alert reader", says that, in reference to a comment last week about high state taxes, "Montana ALREADY has an 11% top rate. And it starts at only $76,199. I'll bet they can't figure out why no one who makes any money wants to live there. What morons!"

And so we see that Montana has political morons, too, which proves that stupidity seems to be, like God, everywhere at once. Which brings up a Cryptoquote by James Feibleman, which recently appeared in my hometown newspaper, which reads "You can say one thing about ignorance: There seems to be more than enough to go around." Hahaha!

- Speaking of alert readers, David B.C. sent a link about Paul McCulley of Pimco, who is commenting about what is referred to as the Bretton Woods II system, which is, according to Marshall Auerback of the Prudent Bear website, "posits the notion that the world is effectively back to a regime of global fixed exchange rates pegged to the US dollar like the original Bretton Woods regime that lasted from 1945 to 1973. Mr. McCulley writes "by linking mercantilist emerging market countries, notably China, into a de facto monetary union with the United States, represents a positive shock to global aggregate supply relative to global aggregate demand." Well, not necessarily, because it would take a willingly stupid US consumer to go into debt to buy the new supply of goods and services. But, ass it turned out, Americans DID willingly act stupid! What luck for foreigners!

Anyway, it is the next part that makes me foam at the mouth and stick pins into a voodoo doll. "Consequently," Mr. McCulley writes "it is America's global civic duty to live beyond its means. And it is the Federal Reserve's global civic duty to facilitate American hedonism, because in the face of a positive structural shock to global aggregate supply, notably labor, American hedonism is not inflationary." My mouth is hanging open in stupefaction!

Well, I will agree that a glut of supply does not necessarily lead to higher prices immediately. But I am here to tell you that the weird economic distortions and mal-investments of such a shocked system WILL, sooner or later, have to be paid for, in one way or another, because that is the way that economics works. But nowadays, that is considered to be a matter of opinion, I guess, sort of like how everybody says that I am weird, stupid and hateful little drunken bastard, and I disagree and tell them that I am NOT drunk!

But it is the part about our "civic duty" to go into debt that makes me, ummm, I am looking for the right word, crazy. This horrid little McCulley putz, and those words came immediately to my lips, actually says that it is our damned obligation to go into bankrupting levels of debt? We have a duty to consume more that we can pay for? If I decide to go into the business of making lousy chocolate pies, it is automatically the duty and obligation of my neighbors to buy the pies, and eat the pies, and borrow more money to buy more pies? And the bank has an obligation to loan them the money to buy the pies? Wow! It is a good thing that this McCulley dude is good at managing a bond portfolio, because the career options for what appears to be mentally-ill socialist crackpots who declare that an entire country has an obligation to "live beyond its means", and that it is similarly the duty of the central banks of that country to provide the financing for such gluttonous excess, regardless of the consequences, must be very limited, indeed, as I have never seen a "help wanted" classified ad where anybody was looking for one, and as a mentally-ill crackpot myself, I happen to be somewhat of an expert in that particular employment area.

Can you cite another time in all of history when anybody ever said "It is the duty of the nation to live beyond its means, and to borrow and consume to the limits of our greedy imaginations"? And, assuming that there is actually some precedent for this, gleaned from some backward little enclave of economically-ignorant dirtbags in the forgotten backwaters of economic history, how did it work out? I am asking because I have never, ever read about such a thing happening. I have never HEARD of such a thing happening. In fact, I have never heard of anyone ever even SAYING such a thing! Never! Only now, in 2005, for the first time in all of history, we have a guy saying that we owe it to the world to plunge ourselves into ever-more debt, day after day, month after month, year after year! It boggles the damn mind! It must be a weird mutant variety of Keynesian stupidity taken to new extremes or something!

Or perhaps Mr. McCulley is extrapolating beyond Mr. Auerback's comment that "Implicit in the Bretton Woods II model is that the presumption is that the arrangement is symbiotic and mutually beneficial for everybody." But perhaps if Mr. McCulley was not so anxious to make a fool of himself, he would have heard what Mr. Auerback said next, as he goes on to immediately say, "Ironically, the very aspect of BWII lauded by exponents as introducing the virtues of an quasi-fixed exchange rate system has in fact propagated enormous international imbalances, the unwinding of which will almost certainly be hugely destabilizing."

Or perhaps the words of Eric J. Fry, who writes the Rude Awakening column, will explain the errors of such irresponsible socialization. He writes "As we pile up foreign debts, we are also piling up liabilities that must be 'socialized' away. We must all, collectively, satisfy the cost of our excesses, either through taxation or currency-debasement, or both."

- Mike C. who is another alert reader who was driven to comment on my boring , predictable and overly-strident denunciation of the stupidity of anyone WANTING to have constant inflation, as the horrid Ben Bernanke and other fellow-traveler central banking morons advocate. He writes that South Africa, where he lives, has a central bank that "is happy with 3.8% y/y inflation." In fact, those South African central bank boneheads are already targeting inflation, like the asinine Bernanke advocates! He writes "Their CPIX target is range of 3%-6%." Wow!

For us, as it is with everybody, such a suicidal plan would dictate a constant devaluation of the dollar, which means a constant lessening of buying power, which means that prices constantly go up and up, which means that tempers go up and up, and pretty soon the world is awash with unions on strike, demanding higher pay, and those existing on government handouts demanding more money, everybody needing more money, lots more money, but nobody is getting more money, much less lots more money, and the government responds by creating MORE money and credit (monetary inflation), which makes price inflation even worse, thus everybody is grumpy as hell and getting grumpier every day. And while I am not an expert on the subtleties of the Elliott Wave theories, one salient aspect is that nations that are grumpy do NOT prosper. And although there is some debate as to which causes which, please use your sharply-honed, SAT test-taking skills and parse the previous sentence to determine if prosperity and grumpiness are 1) mutually exclusive, 2) coincident, 3) both of the above, 4) neither of the above, or 5) who the hell cares? The answer for you and me, as mere mortals who are grumpy, is 1. The answer for the government and the central banks and the monstrously huge, jimongously huge, unbelievably huge financial services industry is, obviously, 5.

And perhaps that is what has led Dan Denning, of Strategic Investment, to make the comment, "Liquidity, simply speaking, is the flow of cash and credit through a financial system. When you have more savings and/or credit in an economy than there are productive places to invest them, you get a bubble: Too much money chasing too few good opportunities. The prudent monetary policy in such situations is to take your medicine and tighten credit. Greenspan, for the most part, has done the opposite. He has flooded the U.S. financial system with excess liquidity, in the process creating bull markets -- or bubbles -- in stocks, real estate and bonds, while fostering a related bubble and in consumption (the symptom of which is a huge trade deficit)."

What we need, we tell one another, is a way to make some fast money on this. Looking to The Mogambo for an answer is, as has been proved, a total waste of time. So where do we turn? To our good fortune, Mr. Denning has the answer! "But for traders, there may be a profitable solution to the liquidity black hole problem. If you could quickly and easily 'buy' volatility in the options market, you could buy the one thing that WILL go up in a liquidity crisis. You'd want to buy the 'fear gauge,' better known as the volatility index (VIX)."

But before you run to the phone to pick up some VIX, he goes on to say "The Chicago Board Options Exchange (CBOE) was scheduled to begin trading options on two separate VIX-related indexes in late April. But as usual with a new product, the launch date was missed. CBOE hasn't said when VIX options will start trading." Apparently, the symbol for two of the first VIX products will be VXB and VBI.

- Rob Peebles, writing on the PrudentBear.com site, says that the Japanese Nikkei and the 10-year U.S. Treasury bond yields track each other. I see a flurry of hands go up, as we all are scratching our heads, and quizzically asking ourselves "The Japanese stock market and the American 10-year T-bond are coincident? Now, why would stock prices all the way over in Japan be so closely correlated to U.S. bond yields?" Without even bothering to let us ask the question, Mr. Peebles breezily goes on to note that Michael Panzner (author of "The New Laws of the Stock Market Jungle") wonders if it's because "when the Japanese invest in our bonds (to support the dollar vs. the yen and to take up the slack from our financial imbalances), they divert funds from their domestic equity market." And vice versa. Well, that's the way it used to be, but with central banks no longer willing to loan us so much money, who knows any more?

- For those of us, like me, who are anxiously waiting for gold to shoot to the moon, Mike Swanson offers his "Three Signs Of A Gold Bottom." First off, he notes that "The divergence between the XAU gold stock index and gold reached an extreme level. The action in gold stocks tends to lead the action in the metal. When gold stocks outperform gold it has historically been bullish for both the stocks and the metal. However, when the stocks trade weaker than gold a correction is usually near." In particular, he monitors the XAU/gold ratio. "When this ratio is rising," he writes, "gold stocks are outperforming gold, and when it is falling, gold stocks are trading weaker than the metal, which is bearish."

More importantly, he notes that "What many of these people don't know is that this divergence between the stocks and the metal has reached an extreme level, which has marked important bottoms in gold and the gold stocks over the past 14 years." My little antennae are quivering at the words "important" and "bottom", which means I can go long, and not have to go short anything, which is nice, because I know that if I have to go short to make a profit, then I am going to be squeezed by the sharks on Wall Street who will buy and buy, and force the price up, squeezing my short position until blood squirts out of my ears, and I will lose my big, fat butt, and then my wife will be asking embarrassing questions like "Where did all the money go?" and "Why are these people taking away our stereo?" and "Did you just fart?"

His second point about the bullish case for gold, which he cleverly labels as 2), is that "Commercial futures traders are covering short positions. This is important because, during the past five years, important bottoms in the gold market have been made when the commercials have been net short 40-60k contracts." Again with the "important bottom" thing! Are you as intrigued as I am?

His third and final point is that gold is still hanging in there, despite rampant manipulation by the central banks, which he characterizes as "3) Major support levels have held."

- Bob Bauman, editor of the A-Letter asks and important question when he writes "We ask again: Does anybody in America care that freedom, liberty and privacy are being diluted, diminished and destroyed? We raise this question because of the deafening silence, the near total non-reaction of the public and the 'news' media concerning the pending consideration of the PATRIOT Act in the US Senate, where the bill was marked up in secret. Next week debate begins on this legislation. The PATRIOT Act, which gave the FBI and other police agencies unprecedented monitoring powers over us all, was approved only weeks after the terrorist attacks of Sept. 11, 2001. The 342 page law, passed sight unseen, gave police the unchecked ability to conduct Internet surveillance without a court order, secretly to search homes and offices without notifying the owner and to spy on bank and other financial accounts and freeze cash almost at will."

The answer is "no." Nobody cares. Nobody mistrusts the government any more. But they will care one day, and nobody will trust the government ever again, and then people will scratch around for some protection from the government, and they will re-discover the Constitution, and they will read it, and they will be outraged, and they will throw all present and former government elected and appointed officials in jail for life, and desecrate the graves of those previous government elected and appointed officials who took the coward's way out and died before we could get our hands around their nasty little throats.

As proof of the incompetence and treason of Congress, they passed the Patriot Act, a piece of nightmarish, Orwellian horror, that they did not even read, and that guts the whole purpose of the Constitution and the Bill of Rights. And that is why America is doomed; it is doomed because it deserves to die, and it deserves to die because Americans acted like morons when they voted, and voted, and voted for the jackasses we have (and have had), in our Congresses, and who appointed the jackasses we have (and have had), on the Supreme Courts.

- Mike Shedlock, the guy who runs the blog entitled Mish's Global Economic Trend Analysis, gives us another little peek into Weird Places Where Normal People Do Not Go (WPWNPDNG) when he reports that "President Bush is now urging tax credits for homebuilders!" He even provides a quote from President Bush himself, who perversely has said to the National Association of Realtors, "To boost housing sales even more, Congress needs to pass my single-family homeownership tax credit."

This amazing Presidential disconnect with reality comes at the same time as U.S. new home sales jumped 12%, to a record 1.431 million (at seasonally adjusted annual rate), in March, which smashed the previous record of 1.304 million homes, set in October, and at the exact same time as the median house price rose to $206,000, too! The median household income is about $50,000, and the median new home is now four times their entire annual income! Gaahhh! At the same time as the prices of everything else is rising fast! Gaahhh! At the same time as incomes are actually stagnating! Gaahhh!

Mr. Shedlock notes "New home sales are at an all time high, 69% of American families own a home, prices have gone parabolic, but...the FHA wants to compete against subprime lenders, and the president wants to give tax breaks to an industry that has been setting record profits for the last four years. Is this blatantly stupid or what? Is that an industry that needs tax credits?"

Well, yes and no. If the housing market keeps on getting massive financial infusions, then houses will continue going up in price, and new houses will continue to be built, and a lot of people will pay a lot of money and (more crucially) a lot of taxes on the gains, and pay loan origination fees, the cost of the documentary stamps, and the transfer fees, and the mortgage insurance fees, and title fees, and title search fees, and one damn cost after another, item after item, until you realize that everybody is screwing the hell out of you and they are all out to get you. And that is the whole point of it; getting more money to go into incomes and taxes, especially taxes.

But we are suddenly in full agreement when he says "Since there is no conceivable way this can possibly end well, I have a fail-safe prediction: It won't."

And I note that several other writers have noticed that some housing prices have started to fall slightly, and that foreclosures are rising. The significance of this is supplied by Bill Bonner, of the DailyReckoning.com site, who writes "The Greenspan Fed has made the likely effects of a recession far more dangerous. By increasing personal debt levels and causing a bubble in housing, the Fed raised the cost of recession. More people will have to cut back more than usual. Contracts to buy will be dropped. Mortgages will be abandoned. The result could be that an ordinary recession could turn into a fat tail credit implosion - a deflationary collapse."

Even Phil Spicer, who is usually calm and steady and is usually found sitting on my chest, soothingly trying to get ME to calm down and stop screaming about monetary policy and how he promises that everything is going to be alright, has had his mind boggled by the idea of someone buying a house for $750,000, especially when one considers that "the annual interest cost (at 5%) would be $37,500 a year." Then he adds in property taxes at twelve grand, plus insurance and those kinds of things, and when one hits the "total button" on the calculator, it looks like $4,000 per month is the monthly cost of buying one of these homes.

And he did not even mention the cost of what to put INTO the damn house, because believe me when I tell you that you are wasting your social-climbing money buying that big, fancy house, unless the insides are as spectacular as the outside. And as a guy who once disastrously tried living in one of those upscale houses, I can reliably report that the typical neighbors are not impressed with ratty furniture rescued from the dump, or bookcases made out of boards and some concrete blocks. And after you visit one of THEIR houses on a reciprocal visit, you will learn that you must add many, many more thousands of dollars, tens of thousands, for furnishings alone. And don't get me started on artwork, although I still maintain that Playboy foldouts stapled to the walls was a hell of a lot nicer to look at than anything THEY had in their houses, some of which you couldn't even tell what it was, maybe a cow eating an umbrella or something.

And since we are talking about reciprocal things, that means you gotta invite them over to your house, which means MORE thousands of dollars for drinks, food, munchies, decorations, and, (depending on your circle of friends), drugs, establishing alibis, and a live band really making it wail, dude.

But there is more to life than money, live bands, getting totally wasted (although a lot of life is also involved in recovering from spending too much money, tinnitus from the live band and suffering from a killer hangover). Then he gets into the real meat of the thing, as far as I am concerned, and notes that "Interest-only mortgages are enslavement!"

And he is exactly right, as even the thought of owing money perpetually, but making interest payments month after month after month until I die, gives me the willies. The only way that it is NOT enslavement is if Ben Bernanke gets appointed to be the chairman of the Federal Reserve over my strong objections. This guy is saying that he advises that we "target inflation" which is a benign-sounding term that actually translates, after running it through the Mogambo Translating Machine (MTL), that he intends to CAUSE INFLATION! Ben Bernanke, and a lot of other mentally-ill people here and around the world, actually think that you can have a permanent, constant inflation, and that somehow, I guess, "A rising tide lifts all boats". This is a nice metaphor for boats, but is ridiculous when used in economics, because I am here to tell you, with that patented snotty Mogambo smug arrogance (PSMSA), that in an economy there is NEVER an example of rising ANYTHING that is good for ALL the boats. Some of the boats, yes. Many of the boats, sometimes. A few of the boats, often. But all the boats, never. And while this applies to beneficial things like tax breaks, it goes double for inflation. Triple, even. Or more!

But one of the "boats" will be, according to the Bernanke theory of permanent inflation lifting all boats (BTOPILAB), houses. And so your house, for which you paid a king's ransom today, will go forever, again theoretically, up and up in value! You will be able to constantly, all your life, borrow money against your appreciating house, and so you will never again, in all your life, have to work, and you can borrow and spend, and borrow and spend, and borrow and spend and borrow spend borrow spend borrowspendborrowspend until you wonder "I wonder if this Mogambo idiot is going to ever stop borrowing and spending and borrowing and spending?" But then, suddenly, it stops. You hear the sound of ravenous wolves howling in the distance. Creepy.

Notice the use of all-capital letters when I say that Mr. Bernanke wants to "CAUSE INFLATION, which is a clever literary device that I use to indicate special emphasis. He is even saying, out loud, and in front of witnesses, that he literally advocates the "targeting of inflation"! And since we are talking about it, I will tell you that I cannot WAIT to get on the witness stand as a witness, and how this is going to be sooOOoooo sweet, and testify against this guy, and hopefully get him banished for life, and then he will live out his days in torment and misery because everyone hates him, and even little children spit on him, and call him names like "Mogambo moron!" and "Get the hell out of my tool shed, Mogambo!"

This Ben Bernanke person, and notice how 1) I cannot even say the name without spitting it from between clenched teeth and how 2) my intensity and inner fire closely match those of James Dean, the original Rebel Without A Cause (RWAC) who, I am sure, would have been as outraged as I am about this whole Bernanke inflation-targeting thing, is therefore on record as advising the exact freaking opposite of the Federal Reserve's explicit freaking mission in life, which is to achieve "price stability"! That is what they are freaking supposed to do! That is what the Federal Reserve is literally freaking chartered to do, dammit! A bunch of private businessmen are given the awesome power of creating all the money and credit for the entire nation, at their total discretion. In return, they are supposed to achieve price freaking stability, so that the economy neither booms nor busts, but just keeping on perking away in a steady, controlled growth, with no price inflation (which is the literal definition of "price stability"), and everybody will be happy! Look it up if you don't believe me! It's all right there!

Except for the "freaking" thing. I put that part in because I thought it added a little "elusive, indefinable pleasing quality" which, in French, translates as je ne sais quoi, which I use as an example of my new respect for the French, who have had the good sense to reject the monster known as the European Constitution, which is not just another layer of government, but a HUGE, new, suffocating layer of trans-national government, and at least the French are smart enough to recognize that layers of government always get larger, and more expensive, and they all have "mission creep" as they take on more and more responsibilities, and a whole NEW government, with a bizarre Constitution that runs over 500 pages, is even worse!

But we were not speaking of the French, nor the EU Constitution, but about how Ben Bernanke and lots of other people suddenly want to, to my horror, create inflation. And if the moronic Mogambo (MM) immediately recognizes the glaring error of that, then surely someone with YOUR brains, and YOUR education, and YOUR good looks, and YOUR high-IQ brilliance must REALLY comprehend the profundity that if prices are going up, then prices are NOT "stable"!

And now I want you to look deep into my eyes to see my utter, utter conviction when I say to you that prices of things you need WILL be going up thanks to all the money and credit that has been created since Alan Greenspan took control of the Fed in 1987. But if we ever made the horrific mistake of appointing Ben Bernanke to anything where he has any power, or say-so, or authority of any kind, then we will never again see "price stability", because this horrid little man has promised to cause inflation with his every breath! Right there, for everybody to see! And to make sure that you wake up in the dark of the night, bathed in sweat, screaming in bloody fear, President Bush wants him as the head of his economic advisory team! Arrrggghhhh!

And if he gets in charge of the Federal Reserve and he actually does this, then, yes, one day in the future, a $750,000 house will be a chump-change fixer-upper, lived in by rats and derelict gold-bug screwballs, perhaps even The Mogambo himself, still screaming about the horrors of inflation and how it is going to kill all of us. Of course, the price of a small pizza, one lousy topping, cash-and-carry crappy crust and all, (betcha can't say "cash-and-carry crappy crust" five times real fast!), will cost $75. Per slice.

And let's not forget about property taxes, because they are not going to be "price stable," either! They are also going to go up and up. And not only going up in nominal terms as a fixed percentage of your house's value, but as a constantly-increasing percentage of your house's value, because every dime that any government gets its hands on gets spent on something that requires funding in the future. It is always either some building that will always need painting and a new air conditioner, or a new group of unfortunates that needs a handout, but which always needs more money because prices are rising faster than their handouts. And that means that the government spending will rise faster than simple inflation, and the cost to taxpayers for those things must always rise faster than simple price inflation. And that means constantly higher and higher taxes.

As a perfect example, on the Bloomberg new site we read, "Venezuela boosted government spending by 28 percent in March as surging revenue from record oil prices paid for bigger outlays for social programs."

And what this Bernanke guy is not telling you is that, thanks to his inflation, your retirement is toast. Hewitt Associations figures the average 401(k) plan has a balance of just $69,000. So, guess what? At retirement your stupid little $69,000 that you have in your stupid little 401(k) will be worth less than what a janitor makes in a month. How far do you think you are going to get on that?

But, now that you mention it, we were not talking about inflation or the Federal Reserve or Ben Bernanke. We were talking about houses. Seemingly thankful to get back to talking about houses, Mr. Spicer goes on to note that "Houses deteriorate over time", which is true in the best of cases, and more so now, because if you think that these crappy little cracker-box houses that they are putting up these days, made on the cheap whenever possible, will NOT need lots and lots of loving care from expensive construction labor every day of their attenuated existence, then you are not dealing in reality as the rest of us know it. And then you will spend the rest of your life telling the story of how the house seemed to just fall apart and how these construction guys screwed you and screwed you and screwed you out of so much money, that you finally had to sell the house at a loss? Hahahaha! Look! I am laughing, because it seems so ludicrous to imagine otherwise! Hahaha!

- Speaking of houses, InvesTech has come up with a new indicator, which they call the "Housing Bubble Bellwether Index." Rather than me reading it and trying to understand things, which requires a lot of reading and thinking and I still get it all mixed up, let me quote them exactly: "Compiled of what we consider the best bellwether stocks in the real estate sector, this Index gave decisive warning before each of the last three bear markets." By the term "decisive warning", they mean that the bellwether stocks usually turn down a couple of years before the real estate market went down.

The other thing follows from the first, in that the housing stocks have not turned down. Ergo, it would seem that the housing market is at least two years away from peaking, according to this theory/indicator.

- The essay "Silver is Money" and subtitled "The Four Horsemen ­ Part III" by Douglas V. Gnazzo on FinancialSense.com, says that trading on the Comex OTC market and the overnight access market is perfect for you, "If you are a big player in the futures market and you want to keep your trading unknown, as neither the over the counter market nor the overnight access market have any disclosure whatsoever. No one knows who is doing what to what degree. This raises derivatives to a whole different level: now it is unknown and secretive, as well as extremely risky, and potentially explosive."

And if you want to make risky profits but not have to make good on your losses, then the Comex is even MORE fun for you if you are a Member! Join today! Their "Force Majeure" rules are custom-made for themselves. These rules come into effect when somebody can't, or won't, make good on their contracts. For example, in rule 402.C.1.d. we find that Force Majeure is defined as "The actual or threatened bankruptcy or insolvency of any Member or the imposition of any injunction or other restraint by any government agency, self regulatory organization, court or arbitrator upon a Member which may affect the ability of that Member to perform on its contracts".

From this they give themselves powers, awesome powers, such as the power in rule 402.C.2.c., which is to "Impose or modify position limits and/or order liquidation of all or a portion of a Member's proprietary and/or customers' accounts" which shows that they can just wipe out the positions of customers (you) and screw you out of the money that you were due, and counting on! And it gets even better in rule 402.C.2.d., which can "Order liquidation of positions as to which the holder is unable or unwilling to make or take delivery." Note that they can order liquidation, at a price of their own choosing, if one of their friends is "unwilling" to fulfill an obligation! Man! There have been MANY times when I would have LOVED to use that rule!

The really interesting part is that, according to Mr. Gnazzo's analysis, "The futures market is structured in the same way that our paper fiat monetary system is. Both systems employ irredeemable obligations based on fractional reserves." In short, the Comex can just create commodities on paper, out of thin air, and sell them to you. And if we all try and redeem them, which is impossible since there are more commodities on paper than exist in the real world, they can just screw you out of the money by citing their own rules! No wonder Ted Butler and so many others have such a low opinion of the Comex, as this, apparently, perfectly describes, among others, the silver market at the Comex.

- James Puplava of FinancialSense.com, writes that "Credit expansion in the US is hyperinflating. Outstanding debt in the US has grown by 38% over the last four years to $36.2 trillion, an increase of over $10 trillion in the last four years. Last year alone consumer borrowing expanded by $1,017.9 billion, up from $839.4 billion the prior year.

As if this isn't bad enough, he goes on to write "Spreads began narrowing considerably over the last year right after the Fed began its latest rate-raising cycle. The spread between the 2-year and 10-year note has narrowed to 50 basis points. A narrowing of spreads to less than 25 basis points is indicative of an approaching recession."

Well, let's take a look at the spread. Considering the 10-year T-note, the yield has sunk to a laughable 4%, with official, hedonically-adjusted inflation running at 3.5% and real, unadjusted inflation running at twice that. It makes no sense!

"Moreover, as spreads continue to narrow with each new Fed rate hike, the Fed risks collapsing the 'carry trade,' which is dependent on widening credit spreads. As credit spreads have narrowed, hedge funds and other speculators have had to go further out on the risk curve in order to maintain a positive spread. The 'carry trade' may have started out with Treasuries, but it has moved further out on the risk scale towards the fat tail."

And the "fat tail" that he alludes to is where enormous dangers lurk unnoticed, the kind that took down Long Term Capital Management, with all their precious little PhDs and their darling Nobel Prizes and all their hot-shot, know-it-all arrogance.

But there is some good news, and that good news is that you will make a lot of money by buying oil. He says "The US trade imbalance is structural, not temporal. One structural problem is our deficit in energy. As US production declines by 5-6% a year and the price of energy rises due to tight supplies and competing demands, energy imbalances will become a permanent part of the US trade imbalance. Furthermore, the average price paid for imported oil has been hedged with an average price of $36. As these hedges mature, America's import energy bill will rise."

But apart from the guys that own oil (you and me), he notes that not everyone else will be so lucky. "The fact that the US trade imbalance is structural means there will be no easy fix -- no easy way out. A lower dollar is not going to make it go away. However, a lower US dollar, which is inevitable once foreign intervention wanes, means even further problems for the US. A lower dollar means higher inflation as the cost of imports rises." And higher price inflation means, usually, that gold will also go up, which he does not mention, because I guess he is waiting for me to bring it up. And sure enough, I did!

The dollar has fallen about 30% in the last few years, and he comments that already "Year-over-year import prices have risen 8.1%. As the dollar falls and as foreign intervention cools, interest rates here in the US will begin their inexorable rise. This will be bad news for the stock and bond markets, the US economy, and the next tipping point: the US consumer."

And since we are talking about the consumer, Mr. Puplava notes that Mister And Missus Consumer (MAMC) are already up to their ears in debt, as "Since the year 2000, consumer indebtedness increased by $3,246.2 billion compared to an increase of consumer income of $1,440 billion."

The bottom line? "In 1995 the US added $4 of debt for every $1 in savings. Last year that figure expanded to over $20 of debt for every $1 of savings. In effect, the American economy has turned into one giant hedge fund."

- If you are having a hard time even conceptualizing a trillion, then reader Paul C. is your man. "To visualize a trillion," he says, "one simply has to imagine fields totally covered with upright beer cans". If these cans of beer cost a dollar apiece, which he calls Beer Can Units (BCU's), all you have to do to visualize a trillion cans of beer, all laid out side by side in a giant square, and then drive your car around the circumference of that square, which is 37 and a half miles on a side! Hahahaha!

For those of you more at home with square units, he computes that "This would comprise an area of 1406 square miles, or if you prefer 899,243 acres (but now we get back to difficult to imagine numbers)."

- I am always happy to report on the activities of anybody trying to get the American dollar back on a basis of precious metals and out of the hands of the slippery banks, which simply prints up as much money as it wants and thus always ruins the economy when their raw, filthy greed outmatches their smarts, which is always. As such, I am proud to report that Bernard von NotHaus, renowned Monetary Architect of the pure-silver Liberty Dollar, has announced that "Final arrangements have been made for the Liberty Dollar University 6, RCO Congress" on June 29 ­ July 4th" in Austin, Texas. But I am also EXTREMELY happy to report that they will also be offering "Michael Badnarik's Constitution Class", as somebody of his philosophical perspective lecturing about the Constitution is exactly what this country needs a lot more of.

And, in keeping with that, the New Hampshire effort to get precious metals re-introduced into their economy as money has not been killed. Yet. Unfortunately, the one to get silver monetized in Mexico has been.


*****The Mogambo Sez: Keep buying precious metals and oil. Why? Ask Bill Bonner, who says, "We buy gold because we see a dangerously unbalanced world economy with no painless way to set it straight. Americans cannot continue to run up debts forever. Their houses are not going to increase in price at three times the rate of GDP growth for much longer. The Chinese cannot continue to build factories in order to make products for people who can't afford to pay for them. And the Japanese are not going to lend money forever to a country that cannot pay it back. But the most alarming feature of the world financial market circa 2005 is that so few people find it alarming. Every hedge fund manager and homeowner is leveraged to the eyeballs. Every analys[t] and strategist is confident. Every central banker is complacent."

Richard Daughty

email: RichardSmithGroup@verizon.net
Daughty Archives
Provided as a courtesy of Agora Publishing and The Daily Reckoning

Richard Daughty is general partner and C.O.O. for Smith Consultant Group, serving the financial and medical communities, and the writer/publisher of the Mogambo Guru economic newsletter, an avocational exercise the better to heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning and other fine publications.

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