...a bazooka in one hand
& a teddy bear in the other
...the angriest guy in economics
June 23, 2004
As soon as the G-8 finished hatching their secret plans and drinking
all the liquor, they hightailed it out of town, sticking somebody
with the bill. Then things really quieted down. To illustrate
the point, we cut to the dramatic scene where the hero peers
into the dark and hostile surroundings, and says "It is
quiet out there" and a voice says "Too quiet"
and the next thing you know all hell is breaking loose and there
are bullets flying everywhere and the next thing I know a minister
is saying, "I now pronounce you husband and wife,"
and people are shaking my hand and clapping me on the back, and
this strange woman is smearing wedding cake all over my face.
I don't want to lapse into the horror of my personal life, but
I will take a moment here to pass along a great piece of advice;
if a girl in a wedding dress that you have never seen before
pulls out a quart of tequila and challenges you to a
drinking game called "Pass Out," don't do it. So anyway,
back in the world of economics, for the one week it was quiet.
Maybe (dare I say it?) too quiet.
I bring this up because I have only recently gotten up enough
courage to peek out from my hiding place, here in the closet
beneath the stairs, where I have been hiding and hoping that
this is all a bad dream, and that there is actually nobody named
Alan Greenspan. This recent change in the macro economy is real
scary stuff to me, and I wish that I could say that I am a brave,
he-man type of macho guy who laughs-- hahaha! --at danger, but
I am not. In fact, I am scared witless when the G-8 meet, because
they are going to do something to try and solve the problems
caused by their last round of problem-solving, and we all know
how well THAT worked out, which is badly, because it is the reason
that they are meeting now!
I have noted several references to a renewed interest in rereading
Allan Meltzer's "A History of The Federal Reserve."
Doug Noland is one of the guys who has been tempted to venture
back into that terrifying, fetid, diseased swamp of a horror
story, and he will pay a heavy psychic price, as his dreams will
be haunted by demons and his days will be of torment and fear,
followed by inexplicable episodes of anger, viciously swiping
at everyone around him in a screaming blind rage, gradually working
himself into a fit of temper, until that moment when SWAT team
guys swarm over him and some sadistic paramedic is jamming a
needle into his arm and pumping him so full of tranquilizers
that his eyes no longer work in tandem. Now you instantly
comprehend why he entitled his weekly Credit Bubble Bulletin,
"Monetary Instability and Lessons Not Learned," because
if there is one lesson to be learned from a history of the Federal
Reserve it is that they do NOT learn anything, ever.
But what we DO learn is that government does what government
does. That is why there will be increasingly strident calls for
increases in the minimum wage. Calls for increases in taxes.
More tariffs and protectionist legislation to give American manufacturers
a "chance to catch up" and "level the playing
field" blah blah blah.
And sure enough, we have seen all of these things recently. And
soon there will also be tax credits and that whole fiscal stimulus
thing. And, of course, every step of the way will mean more debasing
of the currency by the Federal Reserve, which is merely an arm
of the government, to pay for it all.
All of this is inflationary, if you define inflationary to mean
prices of necessities rising up and up, but you don't have enough
money to buy yourself as many treats these days, and you're kind
of sullen and angry about that, and the snotty kids and the wife
are all whining and complaining that they need more money because
things cost so much these days, and then they get all pissy when
I politely suggest that maybe they could all get up off their
fat, lazy butts and go out and get some jobs, and then they would
have lots of money to spend on themselves.
And I patiently explain that it would be real nice for me, too,
since maybe then I could get moment's peace and quiet away from
all that incessant begging for more money, always more money,
more and more and more, their shrill little voices drilling painfully
through my brain, yammer yammer yammer, gimme gimme gimme, like
ravenous birds of prey pecking my guts out like in one of those
ancient Greek myths. And this scene, as ugly as it is, and believe
me when I say that I am sugar-coating it, is being repeated more
and more often throughout the land, and the collective mood is
souring, as evidenced by the increasing frequency and decibel
level of the neighbors yelling at each other about bills and
prices and how they have GOT to get away from "that lunatic
This is what I call "Lowered Standard of Living Syndrome."
LSLS is usually immediately followed by blaming the Mogambo for
everything, and then they all come over here, like some marauding
lynch mob with their flaming torches and bad attitudes, and then
I laugh -- hahaha! -- at their puny armaments, and then I fire
off a well-placed fusillade of various ordnance items, sort of
a Mogambo Sampler as it were, and then they all decide that maybe
we ought to have a "dialogue." I respond to their queries
by turning up the volume on the Mogambo Megaphone, and I reply
"Let's give the Mogambo a break, here, dudes! I suggest
that we pick on the Jews, since they are the traditional scapegoats!
Go get the Jews!" And all the Jewish guys I know are pretty
resigned to it, and in fact, as far as I can tell, most of recorded
history is the story of somebody killing the Jews or taking their
stuff, and it seems to me that most Jewish holidays are celebrations
of the few times in the last few thousands of years when somebody
was NOT trying to kill them or take their stuff.
I have recently been urged to read "A People's History of
the United States" by Howard Zinn, probably as a result
of the utter contempt I have for the whole Bush administration,
and they figured that maybe I was revealing my secret Leftist
So my wife was going to library, and I asked her to pick up a
copy. Naturally I thumb through it quickly, looking for pictures
of pretty girls in swimsuits. I quickly determine that 1) there
aren't any pictures like that, and 2) it is the history of how
Americans, mostly us white Americans, routinely raped and murdered
and pillaged our way through everything and everybody. Just like
everybody else in history. But let's not get into all that.
But it is the last entry on the last page in the book that tells
a tale, a tale of the future. It is a verse of Shelley, the poet,
which I see as the quintessential weakness of democracy; namely,
that the majority will tyrannize the minority.
"Rise like lions after
In unvanquishable number!
Shake your chains to earth, like dew
Which in sleep had fallen on you-
Ye are many; they are few!"
And, on the other side of the
coin, there is a growing number of anxious people who are nervously
saying "They are many; we are few!" Now, I am a guy
who has experienced many episodes where "They are many,
and I are few!" and I note for the record that it has never
really worked out for me.
I bring this up because the recent news is that one out of 130
Americans now has a net worth in excess of a million bucks. Well,
all that money that the Fed has been creating all these decades
had to go somewhere, I guess. But at the same time, and if you
look at your watch you will notice that the time is "right
now," there are a hell of a lot of people, and I bandy the
figure 25% of the working population to mean "A hell of
a lot of people," who make less than $18,000 per year, and
average household income is less than forty thousand bucks a
year, which used to be a hell of a lot of money a decade ago,
but now can hardly make ends meet. This is because prices have
risen so high.
These are people whose net worth is actually negative, and it
rises and falls with the number of coins that are behind the
couch cushions and the few bucks you can glean sending the kids
to search for coins carelessly left in the cars of people visiting
the neighbors, who didn't even take the common-sense precaution
of locking their damn cars, and yet here they come, predictably
whining and complaining that it is somehow MY fault that their
cars are ransacked and now reek with some peculiar odor of some
And pretty soon, as the income level rises, you are up to the
minority of the population, the ones we heretofore refer to as
"the few." These people have a nice net worth, and
about $50,000 in their retirement plans. Not as much as you,
of course, because you are so brilliant and wonderful and you
haul down the Big Money. But just a paragraph ago I told you
that prices have risen so much that $40,000 gross income was
almost insufficient! So how far is that $50,000 in a retirement
plan actually worth, in terms of buying power?
And a lot of that net worth is because home prices have risen
so high. Anecdotally, buyers here in Florida are shocked to discover
that when they paid an astronomical price for that house, the
assessed value of the house instantly went to the new, higher
valuation, based on the price they actually paid. Thus,
their property tax bills are several thousands of dollars higher
than the bill paid by the former owner. Bummer!
I notice that Richard Russell, he of the Dow Theory Letters,
is getting more somber in tone these days, too. He doesn't actually
mention, in black and white, how his hand reflexively clutches
the handle of a powerful handgun and how his trigger finger occasionally
spasms and how he is drinking bourbon straight from the bottle
to try and drown his fears, like I do, but you can almost feel
him do it from the way he writes. But anyway, he says that houses
are not a good buy, because they don't pass what he calls "The
acid test - there's no way today that you can buy a house, rent
it out, and cover your costs. In other words, it's far cheaper
to rent today than it is to buy a home. That situation has always
meant that the price of a house has reached the over-valuation
So either houses have to 1) go up in value to make them MORE
overvalued, or 2) hold steady while rents increase, or 3) both,
or 4) none of the above, or 5) one or two of the above, one more
than the other, depending, maybe. As you have guessed, I have
no idea either, as it depends on a lot of things, like fiscal
things, for instance. All I can do is look at what has happened
in history, and when I do I quickly chug the last swig out of
the bottle and scurry back into my little rat's nest of a hiding
place under the stairs like the gutless little coward that I
am and spend the next few hours whimpering pitifully with a bazooka
in one hand and a teddy bear in the other.
Meanwhile, the PRNewswire says that only one in five households
in California can afford to buy a median-priced house. The median,
in case it has been a week or more since you took statistics,
is that point where half the houses cost more, and half cost
less. In this particular case, the median priced house in California
costs $453,590. So, half the houses in California cost less than
that. And half of them cost, gulp, more.
The report says that "The minimum household income needed
to purchase a median-priced home at in California in April was
$102,550." And this is a low-ball estimate, based on "a
typical 30-year, fixed-rate mortgage at 5.42 percent and assuming
a 20 percent downpayment."
Last year, the minimum household income needed to purchase a
median-priced home was $84,510. Now it takes $102,550. God knows
what it will be NEXT year! And the year after that! And the year
after that! No wonder people are buying houses with such abandon!
The dollar looks, to me, like it is rolling over, and gold showed the customary response: it went up. Now
keep that essential fact in your mind. Now consider the additional
fact that the dollar is still "rolling over," and being
actively devalued by conscious design by the horrid Federal Reserve
even as we speak, by at least another 30%. And the argument NOT
to buy gold, right now, is what?
The big news for me was that a shadowy suspect that is rumored
to be behind the gravity-defying levitation of the SP500 was
identified by an e-mail to John Mackenzie, and it is some
mysterious trader known as 990N. The way the scheme worked was
that if the market was headed down, 990N would come barreling
into the market and take the bad side of a huge block of trade
involving SP500 futures, and the insiders would take the good
side of the trade, which involved the insiders buying stocks
to make money, which made the indexes all go higher.
At the end of the day, when everybody is sitting around reminiscing
about the good old days when the Mogambo was still trading index
options and they could all make a few bucks by screwing me over
and cheating the hell out of me, the government has effectively
transferred money from The Big Invisible ATM In The Air into
the pockets of anybody connected with equities on Wall Street,
thus keeping the stock market elevated.
I am not surprised. But I would have been surprised to learn
that the government was NOT trying this seamy stunt, gallantly
trying to keep this groaning fat blob of overvalued financial
engineering alive, constantly resuscitating this bloated bull
market corpse that now represents everybody's retirement plan,
every government's revenue stream, a huge segment of the population
speculating on stocks, and a hell of a lot of jobs, not the least
of which are the talking heads on TV who are feeding the mania,
each of them terrified offstage, knowing that they have kids
to feed and a mortgage to pay, and if this stock market things
peters out, then my prospects are grim, since the market for
know-nothing loudmouth shills is crowded enough as it is.
I can almost hear it now. Alan Greenspan and a bunch of Congresspersons
all stand around furrowing their brows and putting on a brave
front. "But it was for our own good! We all prospered when
our retirement plans and our speculative accounts all gained!
We made money! And life went on! And everybody was better off
than if we had just let the economy collapse. And besides, it
was just money that we gave ourselves, wasn't it?"
And it may actually work for awhile! At least until November,
so that Bush can be reelected. And it will continue to work until
the downside of monetary expansion kicks in at the end of the
boom period. You are so charming when you ask, with that impish
little grin on your cherubic little faces, "Pray tell us,
Mighty Mogambo, what is this downside of which you speak with
such dread and conviction that, verily, it makes our blood run
cold to hear you speak thusly, and we are sore afraid?"
As the Mogambo basks in the serenity True Enlightenment, he smiles
inwardly, knowing that he could answer, in ways both profound
and confusing, and then all of you would leave shaking your heads
in complete bewilderment and refusing to put any money into the
So instead of that, let's turn our attention to John Mackenzie's
With a voice both strong and true, he rises, turns to the shining,
upturned faces of the assembled Seekers Of Enlightenment At The
Feet Of The Mogambo (SOEATFOM), and his voice echoes cold and
horrifying as he solemnly explains, "Hyperinflation, the
likes of which we have yet to see!" Actually, I added that
exclamation point there at the end, because I know that Mr. Mackenzie
is a real busy guy, and if he had had the time to think about
punctuation, and if he gave even one moment's thought to how
important proper punctuation is, then I am sure that he would
have used an exclamation point to indicate the requisite emphasis
that the sentence so dramatically infers from the context. So
I am doing him a favor in a way. So he owes me. You hear me,
Mackenzie? You owe me! I am jolted as my Mogambo Senses tingle
as I instinctively intuit, with the Insight Of The Mogambo (IOTM),
what is coming next. With the lightning speed and lithe grace
of a jungle cat I leap to my feet, join Mr. Mackenzie at the
microphone, and with a perfect harmony reminiscent of the Everly
Brothers we simultaneously say, "In the end, it will end
Then we did a scene from the movie "The Graduate,"
where we star Mr. Mackenzie standing in for Dustin Hoffman, and
I play the advice-giving neighbor. I put my hand on his shoulder
and say, "While others may soon see the repo man come and
tow their cars away, Benjamin, there is a way for you and me
to make some money on this thing. Then we can take this found
money and go down and get a real bargain on a nice used car with
very low mileage from the repo man, and still have enough money
left over to go party our brains out. I am talking about gold, Benjamin. Gold, I
say! Remember that, Benjamin. Gold! Forget
that plastics crap! You can fill your damn basement with plastic,
and it won't make a dime. But gold, Benjamin!
Gold!" Then I pat him on the shoulder
to conclude the conversation in a manly way, and I walk out to
the pool to try and get cozy
with Anne Bancroft.
The curtain drops, and of course, the crowd went wild, clap clap
clap! It was only later, after everyone else had gone home, we
were sitting around backstage and one of us was getting really
sloppy drunk, I won't say who, and I sort of lifted my head up
out of the toilet where I was puking my guts out, and casually
asked '"Hey, dude! When do you (bleep!) think that (urp!)
all this (bleep) is going to, you know, (bleeping!) happen with
Things were whirling around, and my memory is not too clear,
but I am pretty sure I heard him say "Sometime in late 2005."
I will be the first to say that I don't know much of anything
about silver. I know that it's an element in the periodic table,
it conducts electricity like a champ, it sells for about five
or six bucks an ounce, and you get a medal made of it when you
come in second-place in a contest of some kind. But not all kinds
of contests, as I have it on good authority that if I am the
most stupid, offensive and totally worthless man who ever lived,
and I ain't seen no stinking medal yet, gold,
silver or otherwise. But a sentence from James R Cook's mini-essay
"Land Baron" in his newsletter Market Update, caught
my eye. He says that there is an argument to be made for accumulating
silver, because, as his friend puts it, "Every other asset
but silver has gone up exponentially, but silver hasn't gone
up yet." I am struck by the imbalance of everything else
going up in price, especially exponentially, but silver, paradoxically,
does not. Hmmm. It makes me think that something is out of whack,
and then I remember what Bill Bonner says about how things that
are out of whack tend to get back into whack, and then I surmise
that Mr. Cook's friend may be hinting at something perfectly
profound and probably pretty profitable.
Some things are constant, however. For example, I see that there
is only one Mogambo, and the price is still zero, and well worth
every penny, I might add. This market-clearing price corresponds
to, by sheer coincidence, actual value. But let's change the
subject about my numerous faults and how everything in the whole
freaking world is my freaking fault, for some reason, and take
a look at some other things, like, oh, I dunno, let's look at,
and this is just a suggestion, any freaking thing you can name!
Go ahead! Try and name one damn thing that is NOT more expensive
than it was last week, last month, or last year! Mr. Cook's friend
tried it, and he found that everything, except silver, was up
Martin Weiss of Safe Money Report has taken a look at "Table
L.4, the Fed's latest data on debts and mutual fund ownership
in America. At the top right of the chart, you'll see the total
figure for interest-bearing debts: $34,029.1 billion ($34 trillion).
Then, at the bottom right of the chart, you'll see the sum for
all mutual fund shares: $4,653.2 billion ($4.6 trillion).
"Divide the $34 trillion by the $4.6 trillion and you get
7.31 " So these figures indicate that debt ownership outnumbers
equity ownership by over seven to one.
As fascinatingly interesting as this is, I call your attention
to the big news, or better yet The Big News, or even better The
Big News That Will Make Your Eyeballs Pop Out Of Your Head is
that a huge pot load of that debt, a huge fraction of that gigantic
freaking mountain of debt, I'm talking the whole top third of
that Everest of debt, has all been bought in the last few years!
When interest rates were pounded, pounded, pounded down to the
lowest point in almost fifty years! That means that the owners
of all that newly-acquired debt paid top dollar for it! Hahaha!
Now, when they sell, they are going to get less money back than
what they paid!
Of course, there are the inevitable statistics about how if they
keep the debt until maturity, then they will, indeed, get all
their money back. Yeah, like THAT'S going to happen! I can see
it now: Everybody is sitting around the office looking at the
balance sheet, and the income statement, and the annual report,
and they all point to various figures and say "Hey! We are
still holding on to that long-term debt we bought in 2000, and
2001, and 2002, and 2003, and 2004! Look! We make a whopping
3%! Hahaha!" And then they all turn and look at you in contempt,
because they know, and everybody in the company knows, that you
are the one who bought that debt, you pathetic incompetent jerk,
and the only reason that they don't fire you is that they want
to keep you around to torture, and you know you can't quit, because
who would dare hire an incompetent bungler you?
For the Tooting My Own Horn segment of today's incomprehensible
and bizarre lecture, I am proud to say that I was interviewed
by Rainer Sommer for the March issue of an Austrian business
magazine, which has the improbable name of "a3 E C O,"
which is such a strange name that I keep checking to see if I
spelled it right. I won't go into the details of the interview,
mostly because it is written in a foreign language that looks
like German and I did not understand many of the words, although
I am quite conversant in German if the conversation stays centered
on the subject of "Where is the train station?" or
what I want to eat, and I am proud to say that I can order wienerschnitzel
and beer in such perfect German that locals dining at nearby
tables rise from their seats to marvel at my linguistic talent.
But the main point is that I am now known not only as a lunatic
here in the USA, but am now an INTERNATIONALLY known moron.
As today's lesson as to why the profession "economics"
used to be referred to as "political economy," we turn
to a June 18 posting on the Bloomberg site, "The World Trade
Organization ruled that $3 billion in U.S. cotton subsidies violate
trade rules, upholding a preliminary decision in favor of Brazil
from earlier this year."
The case is being seen as a landmark because it was "The
first ever trade case targeting domestic farm payments."
And here is the relevant lesson. The Bush administration, like
all governments, is going to appeal the ruling, and for those
of you who just got here from another planet, an appeal is a
long, continually-delayed process employing expensive lawyers
that is going to take, by their own admission, years and years,
decades maybe, to wend its way through the system, so that in
the end the guys who were affected are all dead, and they died
broke and bitter. In the meantime, screw you.
Doug Noland let pass without comment a June 17 item on Bloomberg
by a guy named Anuchit Nguyen who reported "An inflation
rate of 3 percent to 4 percent will benefit the Thai economy
because it will stimulate domestic demand and boost private investment,
said Bank of Thailand Governor Pridiyathorn Devakula. 'Mild inflation
is good for the economy because it shows there is consumer demand.
A rise in product prices also shows higher capacity utilization.'"
I shall not be so courteous. In fact, it is my Tip o' the Day
to you. If you have any money in Bank of Thailand, get it out,
because any bank governor who says that inflation is good for
the economy is a complete and utter moron, and banks being governed
by morons is, if history is any guide, a disaster in the making.
In other news, mainly in the commodity vein, there is a drought
in the western USA that is being trumpeted as the worst in 500
years. And not only that, but the U.S. Geological Survey said,
according to Bloomberg, "The arid conditions there may persist
for several decades." Combine this newsy tidbit with previous
reports about how China is turning into a big importer of commodities,
throw in the news that stockpiles of grains are at multi-year
lows, crank the handle a few times, and out pops the answer:
go long wheat futures. In fact, go long everything that people
I was going to vent my considerable spleen about the Producer
Prices Report, but Peter Schiff of Europac does about as good
a job as I could do even on my best day, which was a long time
ago, assuming that I ever actually HAD a good day, when he says
"Today, the government reported that May producer prices
rose by a higher than 'expected' 0.8%, the biggest increase in
more than a year. Cumulatively the gain over the past 12 months
has been 5%, the most in 14 years. Year to date producer prices
are already up by 2.7%, annualizing to a rate of 6.5%, with May's
8% rise annualizing to a rate of 10%. Yet the Fed and Wall Street
continue insisting that inflation is well contained because the
'core' PPI only rose by 0.3%."
Now most of us writers who wallow in the putrid slime of macroeconomics
stop right there. But Mr. Schiff does not. He goes on to explain
"As there is generally a lag between producer and consumer
prices, such pronounced and persistent increases in producer
prices will ultimately exert substantial upward pressure on consumer
prices in the coming months. This relationship is true for several
reasons. First, producers do not want to react to what might
be temporary price increases that may ultimately be reversed.
Second, producers do not want to risk alienating customers or
losing market share. Third, constantly changing prices are themselves
costly and bad for business. Fourth, some producers hedge, which
keeps their costs down and exerts competitive pressures on those
that do not. However, once it is clear that prices increases
are permanent and likely to continue, and once hedges have expired,
not only will producers pass on current price increases, they
will try to recoup prior price increases which had previously
This helps explain why inflation is so hard to stop once it gets
started. And this, in turn, helps explain why the Bank of England
is raising interest rates, even though their inflation is less
than half of what it is here in the USA! Half! He explains that
the reason for this is that British are not as stupid as we are
here in America. "It's not that the U.K. has a bigger inflation
problem that the U.S, it's just that the Bank of England has
acknowledged the problem and is taking necessary action to combat
We Americans, on the other hand, have the contemptible Federal
Reserve making our decisions about interest rates and monetary
policy, and look where it's gotten us.
---Mogambo Sez: Although the Fed raising Fed Funds rates
by a quarter of a point isn't much to a high roller like you,
but moving from 1% to 1.25% still represents a 25% jump in that
rate! And to raise it to 1.5% would entail a jump of 50%! Increasing
rates by 50% is damn significant stuff.
Jun 22, 2004
The Daily Reckoning
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
and other fine publications.