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Captain's Log, Stardate 6501 mark 3

Richard Daughty
...the angriest guy in economics
The Mogambo Guru
June 15, 2004

Well, the big G-8 meeting came and went, and from the few press reports it was all low-key, and they talked about how awful it was about Iraq, and how the Stanley Cup was a lot of fun, and they told a few jokes (for example, "How many central bankers does it take to change a light bulb?" The answer is "None, because he can lower interest rates, and so that ought to fix the damn light bulb, since they believe that lowering interest rates can cure anything, including your damn stinking light bulb, and how dare you question anything we central bankers do, you little pipsqueak, because we have enough money and power to squash you like a bug just by snapping our fingers, and don't you forget it.") And they all got all caught up on the gossip, and ate like kings while trying to slip Viagra pills into each other's food when they weren't looking, and then they spent the rest of the time conspiring to harass the Mogambo because if I do win the election and become the President of the United States, then I will undoubtedly fulfill Campaign Promise #362, "Round up all the central bankers and lock them into a farmhouse in Waco, Texas, and send Janet Reno to arrest them."

The other big news of the week, at least for me, was of a political nature, and it was where the Bush White House argued that the President has powers that can nullify any law or treaty at his discretion, especially as it pertains to torturing terrorist prisoners. Putting the awesome mental powers of the Mogambo into action, I tune into the vibes of the cosmos, and am starting to get a real good idea why the Democrats are so worked up about getting rid of Bush.

On Tuesday Greenspan testified before a Congressional panel, and we were treated to Charles Schumer demonstrating why 1) he should not be allowed to hold office and 2) why New Yorkers should never be trusted, as they are the ones who elected this blathering lunatic to office. But he asked if Greenspan didn't agree with him that a budget deficit will harm "the recovery."

News flash to Schumer: everybody knows that budget deficits WILL stimulate an economy! Everybody fully agrees that budget deficits will stimulate an economy! It has to! How could it NOT make an economy rev up? Watch my lips, doofus: "Money is being created out of thin air and is spent! And spending, especially higher spending, is the very definition of what a economy does!" Jeez! What a moron!

The only bone of contention concerns the aftereffects. Will the eventual pain of inflation be worth the immediate pleasure? I say no, only because it never is, and I have too little imagination to believe that now, for the first time ever, it would work out for the best.

Doug Noland got back from vacation, and thanks to him leaving for two weeks and not ferreting out any more horrendous economic idiocies as concerns debt and inflation, both monetary and price, gave my heart a chance to heal itself. The air smelled sweeter! The birdies in the lush, green trees sang with a new beauty! The sun seemed to shine with a bright glow, and all was tranquility and delight.

But now (insert dark and gloomy soundtrack) he is back! He's baaaaaaaaccckkkk! Normally, my response would be "Run for your lives!" But I have hopefully stayed one step ahead of this Noland guy, and I have had defibrillating wires surgically implanted into my chest, and so, of course, I am now feeling really cocky, and I figure I'm more than ready for this Noland guy. Plus, the terminal ends of the wires look like nipple rings, and so I am hoping that if I DO succumb to the panic attack and have to be rushed to the hospital, then maybe the nurses will see them as I lay on the table, and they will say to themselves "Hey! This old guy has nipple rings! That is soooooooo cool! Let's save this one!"

So I thought I could do it. But I was wrong. Like a sledgehammer hitting me between the eyes, he starts off with "Total Non-Financial Credit expanded at a seasonally-adjusted annual rate of $1.927 Trillion during the quarter. Examining seasonally-adjusted data, Federal Government debt expanded at an 11.6% rate, State & Local 9.6%, the Household sector 10.9%, and Business 4.1%. One can only be discouraged by the continuing surge in non-productive debt growth."

Did he say "discouraged?" Who is this Noland guy that he can look Death in the face and say he was "discouraged"? I'd give anything to be only discouraged! If I was only discouraged, then maybe I could sleep and not have to be strapped down every night to the bed with these big leather things with buckles, and the next thing I know it is 2 a.m. and my wife and angry, sleepless neighbors are cramming rags into my mouth to try to muffle my screaming of raw, primordial fear.

Captain's Log, Stardate 6501 mark 3, I can feel the defibrillator emitting a whole series of little buzzes, and my left eye twitches, which Mr. Noland ignores, and he goes on to say, "The Household sector increased debt at a record annualized $1.008 Trillion." Bzzz! My eye twitches. "Total Mortgage debt increased $251.3 billion ($1.01 Trillion annualized), or 10.7%, to $9.618 Trillion." Bzzz! My eye AND my hand twitch. "Total Mortgage debt was up $1.04 Trillion over the past year (12.1%), with growth of 24% over two years and 83% over the past 25 quarters (since the beginning of 1998)." Bzzz! Bzzz! Bzzz!

I'm flopping on the floor! This is insane! I heroically pull myself up onto one elbow, look deeply into your soul, and say "Look into my bloodshot eyes so that you can comprehend my cosmic intensity, and attend my words, my little grasshopper! There are only 138 million people in the damn country who have jobs! Look at me when I am talking to you! And sit up straight! I said that there are only 138 million people in the country who have jobs! And about one of out six of them, 17%, works directly for a government! If you were as handy with a calculator as I am, then you, too, could have impressed people by determining that that annualized householder debt increase comes to $7,304.35 for every last worker in the country, including government workers, and notice that I have figured it right down to the cent! To the very penny!

Of course, this is after rounding off the number of employed people to the nearest million or so, which is a cheap statistical trick that the government is fond of doing. And since it is obviously so popular with everybody, then maybe if I do it, too, then I will be popular too! And maybe then I will get invited to parties! And maybe finally find a friend who won't turn me in for the reward! And maybe I can finally get a real life of my own that does not revolve around court dates, or mental health professionals talking about how vivisection might reveal some important clues about what the hell is wrong with me.

But I am not here to talk about my problems. The crucial bit of information is that, on average, everybody who has a job will go farther into debt by another $7,304.35, and I again included the thirty-one cents for you obsessive-compulsives out there.

"Household Mortgage debt expanded at an 11.4% rate during the first quarter ($819bn annualized), 26% over two years and 85% over 25 quarters. Since the beginning of 1998, Total Mortgage debt has increased from 65% to 85% of GDP."

By this time the little defibrillator was buzzing continuously - Bzzzz! Bzzzz! Bzzzzzzzzzzzzzzzz! - and my nipple rings were glowing red-hot from the sheer amperage. Suddenly, my eyes would not obey my brain, which was screaming "Look away! Don't look at it! Look away!" Like a man in a trance, I remember reading "Foreign sources accumulated U.S financial assets at a stunning pace during the quarter, expanding a record $423 billion (not annualized!) to $8.43 Trillion (a 21% growth rate)."

One of the big mysteries to me is why Alan Greenspan, a guy who wrote a defense of
gold as money, and at the same time writes a classic denunciation of fiat currency, and yet he does what he does. It makes no sense. I am not the only one who has pondered this enigma. Many theories have been propounded, including one vicious rumor that I tried to get started, in which I postulate that Alan is some kind of robot who is married to another cyborg robot, named, I think, Andrea Mitchell, and who is, in real life, a shrill Leftist harpy from waayyyyy back, who regularly hangs out with other robot Leftists who are trying to turn our government, Frankenstein-like, into a brain-dead communist cannibal that eats the guts out of an economy. Okay, I admit that was veering off onto a tangent.

But remember that the history of space, from one end of the cosmos to the other, is full of examples of some poor, pathetic planet that was destroyed by idiotic central bank monetary policy after the Starship Enterprise and that horrid Captain Kirk visited them. And that is why they are, in turn, using central bankers to destroy the Earth, instead of using laser ray-guns, which ends up burning things and making a big mess. And laser ray-guns aren't cheap, either.

But talking about robots taking over the government is not what we are here to talk about, but I will admit is what we seem to always END our meetings by talking about. No, today we are going to talk about an alternative theory that I particularly like. It concerns the total extinction of all life forms on earth. These Mass Extinction things seem to happen with some periodicity, and the one beneath Yellowstone National Park is now due, as are several others scattered around the globe.

In case you missed this, let me bring you up to speed. Under Yellowstone National Park is a supervolcano, which is, if memory serves, fifty miles long and ten miles wide. When this humongous thing blew up in the past, and it has several times with a frightening predictable periodicity, it has wiped out, like, 95% of the life forms on the planet when it exploded and covered the planet with dust, which blocked out the sun and smothered things on the ground, for ten years or so.

So if YOU knew that the Yellowstone supervolcano was going to erupt in a few days, weeks, months or years, what kind of monetary policy would YOU follow? I know that you know that I know that you know where I am going with this. But getting away from Alan Greenspan and the Theory Of When A Mass Extinction Is Imminent, Committing Economic Suicide Is A Reasonable Course Of Action, the good news is that you can now easily live through a mass extinction. A Mass Extinction may kill every other living thing on the planet, but it need not kill you. Mass Extinctions are no longer fatal! All you need is about 700 MRE's (Meals Ready to Eat, the kind that the Army uses) per person per year, all safely tucked away somewhere, and a nice, deep well to get water. So, figuring about ten years for the effects of the Mass Extinction to die down enough so that sunlight can strike the ground again, you need 7,000 MRE's per person.

However, surviving such a thing is the theme of some Twilight Zone episodes, and I'm sure you know how those turned out!

On the Mises site they have included a quote by Murray Rothbard, who was one of the biggest of the brains in the circles of theoretical Austrian School economics, who wrote of "The Myths of Reaganomics" He said, "The greater the amount of inflation generated by the federal government, the higher will be the GNP." This is because GNP, and GDP, too, for that matter, count prices as the measure of GDP. It ain't how MANY widgets you make, it's how MUCH they sell for.

So that is why GDP is rising; the lying government jackasses don't tell you that all this fabulous "growth" in the economy is not growth at all. It is inflation. Oh, they COULD adjust GDP by the GDP deflator, but then their whole reason for being, and collecting paychecks, and securing their places in Hell for their despicable lying and hypocrisy, is to, as their job description implies as far as I can tell, 1) lie to the People to make the government look good, and 2) call Security if the Mogambo ever gets into the building again.

For example, consider Mogambo Manufacturing, a company that makes widgets. We make a hundred widgets a year, and we charge a dollar apiece for them. Total company income: $100. What is the company worth? Well, suppose you are a skin-flint, and say that you will only pay two times sales. So, using the metric, we multiply the $100 in sales times two and we get, and wait a minute while I check the figures again, oops, wait, let's see, multiply, no, that's not right, well anyway just round off the whole things and say the company is worth $200.

Now suppose that inflation comes zooming in, and now we are charging $1,000 per widget. We are still making only 100 widgets a year, but now our sales are $100,000. What is the company worth NOW?

From Bloomberg we learn "Walt Disney Co. and three French banks agreed to bail out Euro Disney SCA for the second time in a decade in a package that prevents Europe's biggest theme park operator from defaulting on $2.9 billion of debt." It makes you wonder how stupid these three French banks are, as this clueless Disney crew have never made a profit, and have had to be bailed out twice in ten years. And yet, and I hope you are sitting down for this, these French banks gave them MORE money! More! And then the French turn right around and wonder why nobody gives them any respect.

To show the complete idiocy of Disney, they even tried raising prices! Brilliant! Nobody wants to come as it is, so they decide "Let's make it more expensive! Maybe they will flock to our Disney park if we make it more expensive!" Alas, it was not to be. The article does go on to say "Higher admission prices and spending per visitor boosted theme-park revenue by 6 percent in the first half ended March 31. Total sales were unchanged at 474 million euros." So, fewer people came, but the ones that did, spent more money.

This sets us up for some gratuitous sarcasm. I curl back my lip in a sneer, and my honeyed voice drips malevolent venom as I say "I am sure that these fleeced theme-park visitors are already busily making plans to return for another shearing."

"The Story of the Fed Is the Story of a Crime" by George F. Smith on the Strike-the-Root site, as it reviews the latest, fourth edition of "The Creature From Jekyll Island" by G. Edward Griffin. "The American people, of course, have been handed a thoroughly scrubbed version of the Fed: It exists to stabilize the economy and protect the public. Never mind the crashes in ' 21 and '29, the Great Depression from '29 to '39, recessions in '53, '57, ' 69, '75 and '81, another crash in '87, a bear market in 2000 that wiped out $7 trillion in stock market wealth by 2003, and constant inflation eating away 95% of the buying power of the dollar."

You don't have to be the Mogambo to realize that this record of the Federal Reserve is one of abject failure, and it is simple deduction to realize that Alan Greenspan should not be appointed to another term.

As if almost on cue, a butt-covering tissue of lies and distortions by the Fed president of the Chicago Fed Bank, Michael Moscow, appeared in the Tuesday Wall Street Journal, entitled "The Inflation Game."

He starts out with the asinine assertion that "Over the last three years, the Federal Reserve's accommodative monetary policy has supported both of our primary goals of maximum sustainable growth and prices stability." Price stability? How can price inflation that is already 50% above the EU ceiling, and rising, be considered "stable"?

Then, in the very next sentence, the following garbage comes out of his mouth, "Not only did it provide useful stimulus to real economic growth, it helped prevent inflation from falling to undesirably low levels." My eyes bug out of my head! For one thing, there is no such thing as inflation "falling to undesirably low levels." Inflation should be zero or less.

In fact, the ultimate beneficial economic scenario is when prices are gently falling, NOT rising, and in this way all of the people on the lower end of the economic scale would achieve a rising standard of living, as would everybody else. Everyone could consume more things with the same amount of money. Then there would be no calls for a higher minimum wage, poverty levels would drop, the Mogambo would stop screaming about how the coming inflation will make you so miserable that you will curse your own mother for having given you birth, and everything would be fine.

This mealy-mouthed moron Moscow goes on to say that inflation is lower than many people have predicted, and he wonders why. And then he goes on to say that "The Federal Reserve Board's staff's inflation forecasts have performed better that those of professional forecasters over the last 20 years. Perhaps this is because Fed forecasts are informed by a wide range of economic indicators, a variety of analyses, a healthy dose of anecdotal information, and judgment." He did not mention the REAL reason, which is outright lying, which is, in actuality, the ONLY reason that inflation is reported to be as low as it is. Actual price inflation is roaring, and yet this clueless lying weasel gets away with such transparent lying that one can only shake one's head and conclude that Americans are idiots, and the Federal Reserve is a clot of lying, deceptive and corrupt jackasses who refuse to admit that they screwed things up royally.

As an example, John Hathaway of Tocqueville Asset Management was interviewed by Aaron Task in the article
"Gold Maven Unbowed By Fed Speak" on thestreet.com, and he says. "Average new car prices have risen by 308% since 1979 in actual dollars, but only by 71% according to the hedonically adjusted CPI."

But the Fed is not the only culprit. Oh, no! The Fed merely made financing available for the governments. A Los Angeles Times article "States Feeling Less Pinched, But Budget Belts Still Tight" illustrates the complete corruption of government in general and the chuckle-headed Leftist morons in particular whom the incompetent American electorate votes into office, term after term after term. After paragraph after paragraph of how states have been cutting expenses and inflicting misery on everybody in a desperate attempt to balance their budgets, we get to the end where it says "State spending will inch up, on average, 2.8% next year, according to the National Association of State Budget Officers." Inch up? Inch?

Ceri Shepherd, "Oil, the Finite Resource" on Financial Sense.com "Another important point to grasp is that oil is priced in dollars. As part of Alan Greenspan's efforts to fight what was, and in my opinion still is, a very serious economic situation, he has chosen a policy that has sacrificed the dollar which is down already by about 35%. If the dollar has approximately 35% less international purchasing power and oil is priced in dollars, would it not be fair to assume that oil, a tangible commodity, should rise by at least 35%?" Yes it does... and I smile that you realize this. He goes on to say "The Europeans and Japanese have not seen very large oil price increases because there currencies have not been debased as much as the dollar."

Nevertheless, he says "As Adam Hamilton of Zeal recently pointed out as part of his excellent series of weekly essays, oil, even in dollar denominated terms, by historic inflation adjusted standards at present is certainly not expensive."

This would certainly be true if incomes had increased as fast as the dollar has depreciated and prices have risen. But, they have not. To the contrary, inflation-adjusted incomes of us proletariat boobs out here have been falling for decades, and after adjusting for the constant increases in taxes and fees that every layer of government has been socking us with, our real incomes, the kind where you go to the bank and cash your pathetic paycheck and the teller snickers in sneering contempt as she slides a couple of singles, some nickels and a few dimes across the counter, have literally plummeted.

Therefore, the price of oil strictly adjusted for inflation may not be, as he says, expensive in the big, two-dimensional macro picture, but for those of us whose incomes, mine for instance, have NOT increased in lockstep with inflation because we are mentally unstable and are already getting paid far more than we are worth, gasoline IS very expensive, and I am certainly not in the mood to listen to any crap about how I ought to compare my current situation with some distant time in ancient history when health insurance was affordable and property taxes were much lower and the sheer suffocating size and cost of a grasping, cancerously-large system of governments was not eating out my substance, which is a phrase I picked up from guys who were writing during the American Revolution, the one where we, the people, stood up and grabbed our rocket-propelled grenade launchers, loaded up our armored personnel carriers and went to war against the nasty British, who were abusing us by taxing us at the horrific rate of less than 1 lousy percent. 1%! We fought to the death because of a 1% tax! Nowadays, total economy-wide taxation is greater than 50% of total income!

The phenomenon that will bring this whole mess down is a story that I call "The Little Red Hen Who Was Behind On Her Credit Card Payments And Ran Out Of Money." The Little Red Hen owed a lot of money to the Rooster, and one day she doesn't have any money to pay. She tries selling a few things from around the house to make ends meet, and then another day comes when she again doesn't have any money to make a payment, and as she was heading out to pawn the last of her treasures, namely a portrait of Elvis lovingly rendered in day-glo paint on black velvet, to get a few bucks to put towards the Rooster MasterCard, she realizes "Wait a minute! This is stupid! If I sell my stuff to pay people back, I will not have my stuff anymore! A better plan would be to tell everybody to go to hell, and just not pay them! That way, I get to keep all my stuff!" And that is what the Little Red Hen does.

And the Rooster to whom she owed the money is also noticing that he is having to sell some of his stuff to pay the Cat, from whom he borrowed money, and then HE wakes up a 3 a.m. in the morning and scares the hell out of his wife and says "Wait a minute! This is stupid! If I sell stuff to pay people back, I will not have my stuff. A better plan would be to tell everybody to go to hell, and just not pay them! That way, I get to keep all my stuff!" And that is what the Rooster does.

And then the Cat sees that he is not making as much money, and is selling some of his stuff to pay the Dog, from whom he had borrowed money. And then one day as he is lying in the sun catching a little nap, he suddenly sits upright - boing! - and says to himself "Wait a minute! This is stupid! If I sell my stuff to pay people back, I will not have my stuff. A better plan would be to tell everybody to go to hell, and just not pay them! That way, I get to keep all my stuff!" And that's what the Cat does.

Well, I won't take you through the rest of the story, but I'll bet you can see how I am going to bore you to tears about how the Cat owes the Dog, who owes the Cow, who owes the Bull, who owes Farmer, who owes the Bank, who owes the Depositors, who is taking his money out of the bank and investing it in
gold coins and powerful, large-caliber weapons, and he gets so hungry from all of this heavy work, hauling sacks of gold coins around and storing cases of ammunition, that he kills the Little Red Hen, who started the whole thing, and cooks up a mess of tasty and crispy fried chicken.

Speaking of
gold, David Morgan addresses the whole point of having gold as money, and says "The discipline that precious metals puts on the money creators is normally shaken off at some point and then the issuing of worthless paper 'notes' takes over, leading to either an inflationary depression or a debt-liquidating depression." This is demonstrably true, as evidenced by 4,000 years of various government knotheads trying, and trying, and trying to make a fiat currency work. It never has worked. And every effort to make it work has, as Mr. Morgan so elegantly put it, ended in an inflationary depression or a debt-liquidating depression. As part of your SAT's, mark number 31 as "true" that "True or false: The common denominator of the paragraph is the word 'depression.'"

Robert B. Gordon on FinancialSense.com, in an essay entitled "Suggestions on Building a Serious Portfolio," he has looked at this very issue and says "Neophyte investors should go to a large library and read the exciting books about previous market crashes from London in 1720 to Tokyo in 1989. From all these amazing stories, we learn the same truth, namely, that every one of these manias was followed by a major economic depression."

What he did not mention, probably because he does not want to alarm you, was that there usually was a war or two in there somewhere, too, as the brain-dead population wanted strong "leaders" to fix the problems, and they finally resorted to trying to fix their problems by taxing the neighbors through what is, essentially, a 100% estate tax, namely by killing them all and taking their stuff. If they won, sometimes it would work for awhile. If they lost, well, they were doomed anyway.

So you can probably surmise why the Mighty Mogambo bows his head in resignation and regards this war in Iraq as just the latest example of this.

Jim Willie CB at FinancialSense.com wrote a scathing essay entitled "Tales of the Crack-Up Boom," and I suggest that you go there and read it for yourself so that you can get the full effect of his ill-disguised contempt. He is looking, as I look, at the inflation that is blazing away in the economy. He writes "Across the spectrum, from production to raw material to energy to intermediate products to food, costs are rising almost out of control. These items are not so much rising in price, as the US Dollar is declining in value." He notes that the government figures for inflation are, in my words, so ludicrous, so comically and blatantly false, that he says "One must qualify as an utter moron to accept the CPI at any number under 7%. My personal claim is simple. The CPI is three times what is publicly reported, no less."

But he reports that "Back on Main Street, those who must get through the day with their families and homes, those who must operate an ongoing concern business, we see clearly through the false façade of farcical fortifications in financial markets." And I include this particular sentence of his because I just gotta stand and salute that long, luscious alliterative phrase. Although, looking at all those "f" words makes me think of a few choice "f" words of my own, and I grit my teeth trying not to have what I call a "Tourette's Syndrome episode (TSE)".

The "crack-up boom" he refers to is what Ludwig Mises originally referred to in 1949, when he said "Once public opinion is convinced that the increase in the quantity of money will continue and never come to an end, and that consequently the prices of all commodities will not cease to rise, everybody becomes eager to buy as much as possible and restrict his cash holdings to minimum size If the credit expansion is not stopped in time, the boom turns to crack-up boom: the flight into real values begins, and the whole monetary system founders."

Then he notes that "The Austrians warn of severe consequences in the end game of fiat money, identified by accelerated monetary expansion and currency competition."

And then he chillingly reminds us what is meant by "severe consequences" and lays it out for that someone as dimwitted as The Mogambo can't miss it. "History is clear. No intentional inflation initiative has ever succeeded without horrible economic and financial market damage."

He then goes on to list "Anecdotes and Tales" which are actual vignettes of real people and businesses who are being destroyed by inflation caused by Alan Greenspan and the central banks.

Eric Fry is another one of the witty and smart people over at the DailyReckoning.com website who won't have anything to do with me but who really knows this economics business, and he writes extremely well, too. As an example of each, I demonstrate productivity out the wazoo when I select a single sentence of his, namely "The growing trade deficit testifies to the stupidity of managing an economy by mismanaging its currency."

President Mugabe of Zimbabwe, having grown bored with merely stealing the farms of the prosperous farmers to give to himself and his friends, has decided to totally abolish the private ownership of land, and to nationalize all the farms. Tip o' the day to the people of Zimbabwe: write out your wills, dudes, because you are doomed. The communist idea of communal property has never worked, and it will not work for you either. Additionally, you might be interested to know that history is highly instructive as to your future, as the lessons of communism are splashed all over the pages of history.

I am not sure that you Zimbabwe people are real big on history books, so I will clue you in with the Executive Summary version. You will suffer progressively more and more, and then finally, as the final act of desperation and despair, where the threat of death by violence is preferable to the threat of imminent death by starvation and disease, there will be some bloody uprising of one sort or another, and lots and lots people will die, and you will appeal to the Western nations to put you on welfare, which will be too little too late, and which will only prolong your misery, and then one day, after a lifetime of misery and deprivation, you will die a miserable, lonely death.

Magnus Ekervik wrote "Where Is The Horror?" on the 321gold website, and he has a theory. "I think the FED directly or indirectly via US banks are liquefying the two Government Sponsored Enterprises, Fannie Mae and Freddie Mac. I think a severe shock is about to hit the financial markets in the form of a GSE collapse."

Well, I think that a severe collapse is happening to the insurance business, too. I say this purely from an anecdotal perspective, in that my homeowner's insurance ballooned up by the legal limit of 42% for the third year in a row! But one has to wonder how is it even possible that an insurance company would NOT raise premiums when its investment choices are limited to 1) getting low interest income, or, 2) getting zero return on stocks, which ain't done squat for a few years in row. They ain't made no money, but their record of payout claims were right on track. And who caused this collapse in interest rates that has decimated the balance sheets of insurance companies? Alan Greenspan, Federal Reserve Chairman From Hell (AG,FRCFH).

John P Hussman, Hussman Funds wrote "The Cicada Dance," an essay that notes the odd parallel between cicadas and bear markets. "One of the interesting things about the cicadas is the complicated way the species survives. Depending on the type, they emerge every 13 or 17 years ­ both prime numbers ­ so that any regularly occurring predator on a shorter cycle will not be present with any consistency. And they come out in such numbers that it's impossible for predators to eat them all. In short, the cicadas survive because they have inherent defense mechanisms built into their existence." This is imminently more practical than evolving into giant monsters that have flames shooting from their eyes and lasers that shoot out of their mouths, and who all have this inherent hatred for the city of Tokyo for some reason. And while we are speaking of it, I don't know why the people of Tokyo don't just abandon the cursed city and go someplace else, and let Godzilla, and Mothra, and Rodan, and Gamera, and all the rest of the rampaging monsters who regularly attack Tokyo, just have the damn place. "The financial markets have their own species like that ­ the secular bear. Secular bears emerge at a point of extreme overvaluation and have historically survived about 17 years until the markets reach a point of durable undervaluation. Between those points is a series of 'cyclical' bull and bear markets, with the characteristic that each successive bear market ends at a lower level of valuation in terms of price/earnings, price/book, price/revenue and other fundamental measures."

He also reveals an interesting factoid that "The peak-to-peak growth rate of S&P 500 earnings across market cycles has been remarkably consistent at about 6% annually regardless of whether one looks at the past 10, 20, 50 or 100 years. All of which explains why valuation arguments based on present year-over-year inflation rates or 10-year Treasury yields are so painfully vapid."

He goes on to say "The Market Climate in stocks remains characterized by unusually unfavorable valuations and unfavorable market action. As usual, that's not a forecast, and it's important to keep in mind that we align ourselves with the prevailing Market Climate rather than make any attempt at prediction."

Suddenly, the Mogambo springs out from behind the curtain, and the surprised Mr. Hussman is soon overwhelmed by the Mogambo, the Caped Marvel. "Step aside, Mr. Hussman, you wimp!" cries the Mogambo. "You are a pathetic Earthling, a weakling who dares not make a prediction, but I, the Mogambo, am strong and manly! I dare, yes, I dare to make a prediction!" The crowd is hushed, except for Mr. Hussman who is loudly wondering who in the hell I am and who in the hell do I THINK I am, which are two entirely different things, and I snatch the microphone from the podium. Bending low and bringing my cape over my face, the drummer clicks his sticks together three times, the band hits the intro, and I come in on the downbeat with "You're go-onna cry, cry, cry, cry, baaabyyyyy."

In case you were wondering why in the world people would be buying stocks at a time like this, the answer is quite complicated, but it boils down to the fact that we are idiots. I know you don't believe me, perhaps you will listen to Stateline.org's essay "High School Exit Exams Set Low Bar" by Eric Kelderman "Achieve Inc., a bipartisan, nonprofit education organization formed by governors and prominent business leaders, analyzed public high school graduation exams in Florida, Maryland, Massachusetts, New Jersey, Ohio and Texas. Students in those states make up a quarter of the nation's high school students and half of U.S. students who must take exit exams to earn a diploma."

"Math tests required for high school diplomas in those six states measure what students in other countries are learning in seventh and eighth grades, Achieve concluded."

"The study also found that English exit exams in those states cover material that most U.S. students should have covered by 10th grade or earlier. Standards for passing both the mathematics and English tests are 'only a fraction' of what colleges and employers expect, according to the analysis."

Ned Schmidt of Value View Gold has taken a look at how
gold correlates with the money supply. Theoretically, as the money supply grows, the value of the dollar should fall, and the price of gold should rise. Does it? He writes "From January 1998 to the present, the R2 was 77%. What does that mean? R2 tells us how much of the variance of the U.S. dollar price of Gold can be explained by the variance of the U.S. money supply. What does that mean? Well, it tells us how much of the wiggles in Gold's price are caused by wiggles in the money supply." And I am sure that you are aware that a correlation of 77% is pretty high.

But as high as that is, he writes "The relationship has strengthened. From January 1999 to the present, the R2 was 85%." And since he is not here to fill you in on the details, the money supply is exploding to the upside, and with a correlation of 85%,
gold will soon be heading up, too.

James Turk, in his terrific article "The Coming Revaluation Of The Yuan," he writes "The Chinese have been reducing the quantity of dollars in their foreign exchange reserves. Why? It may to an extent be prudent diversification out of the dollar into stronger currencies like the euro, sterling or yen. But the reduction in dollar holdings may also be in preparation for a revaluation of the yuan to the dollar. The Chinese are good traders, and their strategy of dumping dollars before their revaluation makes good sense from a trading point of view. Anything they dump now can be bought back after their revaluation with less yuan, 57% less yuan if the purchasing power disparity of The Economist is to be eliminated."

Peter Schiff of Europac is as alarmed as anybody about the latest trade deficit report. "The trade deficit represents goods that Americas cannot afford to buy from the world, but which were nevertheless supplied to them on credit. The fact that in April Americans could only sell $93.9 billion worth of goods in exchange for the $142.3 billion of goods purchased means that the difference ($48.3 billion) had to be bought on credit, i.e. paying for them with U.S. dollars instead of goods."


---Mogambo Sez: It just keeps getting weirder and weirder, and I just keep getting weirder and weirder, too.

Jun 15, 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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