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The Crumbles of a Subprime Pie Crust

Richard Daughty
...the angriest guy in economics
The Mogambo Guru
Provided as a courtesy of Agora Publishing & DailyReckoning.com

Archives
Jul 5, 2007

"This few-hundred-billion-dollar subprime mortgage stinker is just emblematic of the whole derivatives stinker, a similar convoluted global spider web of a leveraged-to-the-hilt financial mess"

I am in a total funk lately, too dispirited to even test-fire the latest upgrades to the Mogambo Arsenal Of Sheer Firepower (MAOSF), even though Mrs. Kravitz finally replaced her old bullet-riddled garage door with a shiny new one, making a tempting, convenient and very shiny target.

My poor attitude mostly has to do with how my golf game has gone all to hell since everybody started insisting that I play by the rules, but it was not helped by the fact that Total Fed Credit was down $4.7 billion last week, which indicates that money and credit are not being created with the usual irresponsible insanity by the Federal Reserve, which means a big change in trend, and over-stretched markets eventually take a very dim view of changes in trend.

Or maybe my dismal outlook is the result of foreigners owning so much of our future earnings, as their holdings of Treasury and agency debt stashed at the Fed went up for the zillionth week in a row, and with the latest purchase of $8.2 billion's worth of debt, this one bank account alone possesses $1.975 trillion's worth of our future!

Or maybe my dyspepsia is the result of the news that the Bureau of Economic Analysis reported that personal income went up 0.4% in May, which sounds like good news, but if you read on, you learn that personal savings actually declined by a negative 1.4% in May! Yikes! In one month! A net loss of 1% of income!

I feel real fear when I realize this is the same horrific negative 1.4% savings rate that we saw in April, too! As Bloomberg.com puts it, "A negative rate suggests consumers are tapping savings to maintain spending." And (I gulp to report) at a compounding rate of more than 18% per year, too! Yow!

Or maybe I am down in the dumps from the gloomy-yet-corroborating news that the Commerce Department reported that consumer spending indeed rose 0.5% in May, although, when adjusted for inflation, spending only rose 0.1%! The majority of increased spending was to pay higher prices, not to buy more stuff!

Or maybe my inner terror is that oil is back up to over $71 a barrel, or that the dollar is falling to 81 and below. I scream as if in mortal agony "Inflation is killing us!"

Bill Bonner of DailyReckoning.com takes pity on me and tries to lift my spirits, probably trying to talk me into going home, or going to the mall, or going to a bar, or just going any damned where to just go away and get the hell out of his office. He says, hopefully, "No one, anywhere, has ever seen a worldwide Crack Up Boom. We're the first, ever. Pretty exciting, huh?"

It doesn't work, although I appreciate the effort. Perhaps it is because I am too upset since the Mogambo Inter-Planetary News Service (MIPNS) had its editorial eye on winning a nice, juicy Pulitzer Prize for breaking open the Collateralized Debt Obligation (CDO) fiasco in the mortgage business that has already brought down a couple of Bear Stearns hedge funds, but quickly realized that the beautiful dream was completely quashed, as everybody in the whole freaking world was already talking about it. And the little showoffs all seemed to know a hell of a lot more about it than I do, too, leaving me with nothing. Less than nothing. Bummer.

But this CDO thing being on everyone's lips is not too surprising, as this whole CDO markdown thing is Big Bad News (BBN), although this few-hundred-billion-dollar subprime mortgage stinker is just emblematic of the whole derivatives stinker, a similar convoluted global spider web of a leveraged-to-the-hilt financial mess that is so big (audience shouts out, "How big, Mogambo?") that it is estimated to be in the $450 trillion range, which is roughly nine (pause) times (pause) global (pause) G (pause) D (pause) freaking P!!

Nine times bigger than the sum total of the complete, total annual Gross Domestic Product output of the entire freaking globe!!!

So this CDO meltdown thing is truly (bravely disregarding the risk of repeating myself), B (pause) B (pause) N, without exclamation points, as I am just too drained by it all.

For an example of what I mean, MoneyWeek.com refers us to "Monday view: Credit Crunch will 'Shred Investment Portfolios to Ribbons'" by Ambrose Evans-Pritchard at Telegraph.co.uk.

The "ribbons" thing was from Albert Edward of Dresdner Kleinwort, whose quote was, "This is the big one: all investment portfolios will be shredded to ribbons."

Mr. Evans-Pritchard actually opens his piece with a delightfully apropos description of the stinking, slimy economic mess that the Congress, the Federal Reserve and the Supreme Court have gotten us into by waxing lyrical with, "The near collapse of two Bear Stearns hedge funds has lifted the rock on our 21st century mutant capitalism, exposing the bugs beneath to a rare shock of naked light." Ahhh! Perfectly phrased!

The specifics, stripped of the disgusting-yet-highly-appropriate grubbiness, he relates by saying, "When creditors led by Merrill Lynch forced a fire-sale of assets, they inadvertently revealed that up to $2 trillion of debt linked to the crumbling US sub-prime and 'Alt A' property market was falsely priced on books." Oops! Hahaha!

It reminds me of the deafening explosion and flying crockery when my wife first found out during the honeymoon that I was not correctly priced, either, in that not only do I have a huge fear of commitment, but I apparently don't even know the meaning of the term, which in turn likewise lifted a rock and shed light on the rest of my glaring character flaws, including the one where I go violently insane when my character flaws are pointed out, or even alluded to.

And as she watched in horror as our marriage and her whole future crumbled into a putrid puddle of poodle poop at the sudden revelation of my "true worth", likewise the prices of bonds crumbled, and "Even A-rated securities fetched just 85pc of face value. B-grades fell off a cliff."

Faced with a sudden realization of the enormity of the unfolding calamity, "The banks halted the sale before 'price discovery' set off a wider chain-reaction."

What is the reason for all of this? Reading between the lines, you can easily see that Mr. Evans-Pritchard answered that the Austrian school of economics was right, and that all booms and busts are caused by greedy banks creating too much money and credit, and that if we had all listened to The Mogambo from the get-go, then none of this would have happened, and there would be peace and inflation-free prosperity all over the world, and that is why The Mogambo should be put in charge of everything to rule with a mighty truncheon of iron in one hand and a whopping, huge salary-and-benefit package in the other! All hail The Mogambo!

As you have probably guessed, he really didn't use those exact words, but I say it was obviously implied when he did say that the reason was, "The ultra-loose policy of the world's central banks over a decade. They 'fixed' the price of money too low in the 1990s, prevented a liquidation purge to clear the dotcom excesses, then kept rates too low again from 2003 to 2006."

Therefore, he says this CDO mess "is a 100pc-proof government-created monster. Bureaucrats (yes, Alan Greenspan) have distorted market signals, leading to the warped behaviour we see all around us."

He even reports that even the Bank for International Settlements (BIS) "notes tartly in its warning on the nexus of excess, this blunder has official fingerprints all over it. 'Behind each set of concerns lurks the common factor of highly accommodating financial conditions' it said."

"Nexus of excess"? Fabulous! I can't help but smile at the unexpected linguistic delight, and also at the polite understatement of the phrase, "Lurking behind"! Hahaha!

"Highly accommodating financial conditions" ain't lurking! It is the freaking bedrock foundation of the whole crazy economic thing! I mean, if you can't snag the really big jack in yo' hand, you can't party down to the really big boom! You dig, BIS dudes?

Mr. Evans-Pritchard sniffs with famed British condescension at my colorful and down-home, albeit faux ghetto expression, and offers instead an analogy that runs to the gastronomic, as in, "The subtext is that you bake slumps into the pie when you let credit booms run wild."

Pie? Excitedly, I raise my hand and ask, "What pie? We have pie? Where is the pie? May I have some pie? How come I don't get any of the pie? Where is the damned pie? Did you eat the whole damned pie, Mister Ambrose Evans freaking Pritchard? Is that why we ain't got no damned pie? Because you ate it all, you stinking, gluttonous, greedy little Limey pig bastard?"

Quickly realizing his mistake, he rephrases his answer as, "You can put off the day of reckoning, as the Fed did in 2003, but not forever, and not without other costs", which I assume means there still ain't no stinking pie, although with more inflation in prices and more (and bigger) financial busts. Damn!

And pie or not, the mess gets much larger, and more personal for more people than a bunch of slimy banks in cahoots with their slimy Wall Street and Congressional co-conspirators, as Peter Schiff of Euro Pacific Capital explains. "Just as CDOs are not worth the 'marked to market' value conveniently assigned by Wall Street," he explains, "homes throughout the country are not worth anything near the asking prices listed on 'For Sale' signs."

Henry To at MerketThoughts.com wittily characterizes the "everybody loses" problems in the mortgage markets as "Essentially, this has now turned into a game of musical chairs - but with no chairs."

The Federal Reserve met and discussed monetary policy, and Chris Gaffney of EverBank, writing at the Daily Pfennig, reports, "The FOMC left rates unchanged, and their accompanying statement showed they have not really changed their overall view of the economy. In Bernanke's mind, the U.S. economy is growing at a 'moderate' pace and inflation remains the 'predominant' concern. This is what has been termed a 'Goldilocks' economy, not too hot, not too cold. I would agree only to the point that our current FOMC seems to be living in a fairytale land!"

Hahaha! "Fairytale land!" Well put, Mr. Gaffney! But I would be remiss in my duties if I did not point out that Mr. Gaffney's problem in reconciling the official FOMC stance with cold, hard reality actually stems from a simple, rookie error of improper punctuation.

To illustrate, notice how his own words make it all perfectly clear as I deftly edit the one sentence with correct punctuation to emphasize the inherent facetiousness: "In Bernanke's 'mind', the U.S. 'economy' is growing at a moderate 'pace' and inflation remains the predominant 'concern'".

Now, thanks to the miracles of proper punctuation, we can clearly see that Bernanke has no ideas or real knowledge about economics in his mind, there is no economy as such, it is growing at a negative rate, and the Fed is not concerned because they are sure that they can lower interest rates enough to make everything wonderful, wonderful, wonderful again, anytime they want. Hahaha!

See? It's all so easy when you apply the benefits of education!

To prove that the Supreme Court really IS on the side of the business-oriented scumbags of the earth (like me!), they have just ruled that it is not enough that a company (like, for instance, Mogambo Money Grubbers, Inc. (MMG)), defrauded you, lied to you, cheated you, took your money, ignored your cards, letters, emails and phone calls, laughed at you, and now everything is gone, gone, gone because I am such a stinking, lowlife crook who blatantly stole your money, and now your only pathetic, meager hope is to seek justice in the courts by suing me and maybe get enough settlement money to keep from starving for a few more lousy months.

Now, thanks to this fabulous new ruling - fat chance, sucker! You can't sue me unless you prove that I knew I was wrong when I defrauded you and took all your stupid money! Hahaha!

My Mighty Mogambo Mind (MMM) instantly teased out the essential lesson in this, and in less than two minutes I was out the door, into the snazzy Mogambo-Mobile, engine roaring, tires squealing, blazing off to commit a string of misdemeanors and felonies by the score, all involving the employee pension plan, receivables, payables, payroll, petty cash, accrued tax payments, all the assets I could conceivably get my hands on and enough personal data from the employee personnel files to steal all their identities a hundred times over.

Normally, I would be all nervous about what would happen when I got caught (and I always get caught because I am stupid, careless and clumsy). But now I am cool and confident because during the commission of each one I was uttering, over and over and over so there would be no doubt whatsoever, "I sincerely believe that this activity is perfectly legal! I sincerely believe that this activity is perfectly legal!"

I assume that this new court precedent is somehow connected with Richard Schlessel sending an email with the note, "Buy This Wonderful Book - Pieces of Eight" by Edwin Vieira, which I assume he did because he knows that I love to get evidence that (according to Mr. Vieira) "the monetary system of the United States is [today] the very antithesis of what the Founders contemplated and the Constitution embodies."

This type of written proof will doubtlessly come in very, very handy when every current and former member of Congress, the Federal Reserve and the Supreme Court, dead or alive, in person and in absentia, are tried for treason in the Mogambo Kangaroo Court Of Star Chamber Justice (MKCOSCJ), found guilty as charged, and then turned over for immediate execution of sentence at the hands of the angry mobs of belligerent, broken, bankrupted people clamoring outside the courthouse, sort of like the French Revolution, only with rap music.

The specific part of the book that pertains to my latest outrage at this latest Supreme Court idiocy is how "This book reveals how the Supreme Court is no more bound by the Constitution than the other federal branches", and "presents a thoroughly detailed historical account of the perfidy of many of its justices, who - assuming that they were not acting from inexplicable stupidity - are time and again recklessly driven by perceived political expediency at best, and narrow self-serving interests at worst, in complete disregard of the Constitution."

Knowing that the time to put dreams into action is drawing near, I practice my technique by banging down the gavel and thundering, "Guilty as charged! The penalty for treason is (pause for dramatic impact) death! Next case!"

Junior Mogambo Ranger (JMR) Ben writes that we can witness "Gresham's Law in action, and what other countries will be facing with this rampant worldwide inflation."

In case you forgot, Gresham's Law is popularly known as, "Bad money drives out good money." In effect, people will hoard valuable money but will spend (and thus get rid of) money that is relatively more worthless.

The case in point that JMR Ben thoughtfully provided was a link to the news.bbc.co.uk report titled "Sharp Practice of Melting Coins." It seems that inflation in prices in India (due to the Indian central bank creating so damned much money and credit every freaking day, just like all the other stupid central banks of the stupid world) has made the rupee almost valueless, but the little bit of metal in the coins is so valuable that "Millions of Indian coins are being smuggled into neighbouring Bangladesh and turned into razor blades."

How much more valuable is the metal in the coin? The conversion ratio is a one-rupee coin can be made into seven razor blades, worth 35 rupees!

The natural result of Gresham's law in action is "an acute shortage of coins in many parts of India."

Naturally, coping mechanisms spring up, such as, "Shopkeepers ask customers to buy more to make it a round figure so that small change does not have to be given out", shopkeepers giving "toffees or cigarettes to make it a round figure", and even issuing cardboard scrip.

The most surprising, astonishing and terrifying thing was the actual, in-your-face admission of further government debasement of the money! My eyes pop from my head in disbelief as I read that "The mints took corrective action - scaling down the metal content of the coins - but that has not stopped the shortages."

If the Indian mints wanted to take "corrective action" against the inflation that is rendering the coins worthless as money, they would storm the central bank of India and stop them from creating so much money and credit!

And it is not just Indians, but according to a fax from Junior Mogambo Ranger (JMR) Andrew G. of a Globe and Mail article, inflation in Canada is making them think of ditching the penny. The metal in the Canadian penny is worth so much more than the one-cent face value of the coin that pennies are, just like in India, being hoarded. To make up the shortfall, the Royal Canadian Mint was forced to increase production of pennies to 1.4 billion last year, enough pennies to represent "63 percent of total circulating coin production."

This phenomenon of disappearing coins must be happening almost everywhere, too, as all currencies are being debased by their central banks, and coins with a low, fixed denomination on them are doomed as the buying power of the coin falls below the melt value of the metal in the coins.

And sure enough, the article notes that "Australia [stopped] making one-and two-cent coins in 1990. New Zealand stopped making them three years before that. France, Norway and Britain are among the other countries that have eliminated low-denomination coins."

So inflation is hitting everywhere, literally rendering money increasingly valueless, and yet the governments allow the banks to just keep printing more and more of it! This is insane!

Bill Bonner of DailyReckoning.com doesn't want to talk about what or who (looking directly at me) is insane or not, but astutely notes that "if you could really get rich by printing more currency, Zimbabweans would all be as rich as Midas, since the Mugabe government runs the presses night and day."

And to underscore this point, Junior Mogambo Ranger (JMR) Phil S. forwarded the latest Cathy Buckle letters from Zimbabwe. She lives there, coping with the highest inflation (over 5,000% at last estimate) in the world, the most stupid, corrupt and demonic government in the world, and where prices are now (according to Ms. Buckle) "going up by an estimated 10 per cent every day."

But Ms. Buckle does not want to be drawn into a boring discussion with The Mogambo about inflation in the theoretical abstract, but sticks to the horrific specifics and says, "Because of the oppressive, iron-fist regulations from Harare, individuals are only allowed to withdraw one and a half million dollars at a time from the bank - even if they have just deposited a hundred times that amount the same day. The bank charges a 'handling fee' for the withdrawal of amounts of one and a half million dollars or less, but you cannot withdraw more without applying for permission from the Reserve Bank in Harare."

Aside from the fact that the Zimbabwe dollar and the U.S. dollar were on a rough parity a decade or so ago, "To put all these figures in perspective," she explains, "you have to stand in a queue in the bank for four days in a row - each day drawing out the maximum amount, each day paying the 'handling fee' - in order to purchase one tank of fuel for your car." One tank of gas!

And if you want to hear some good news of belated smarts as pertains to money and how fiat money in the hands of an irresponsible government always becomes worthless, Julian D.W. Phillips in The Gold Forecaster newsletter notes that "Italy has no plans to sell any gold, which is unsurprising given the very poor history of the Italian lira. They too have seen several currencies come and go in the last one hundred years, so they have few illusions about the joys of compound interest. After all, adding noughts to a currency doesn't make them more valuable; it's the buying power that counts."

For those of you who cheered whenever an American President or one of his underlings justified some bizarre, imperialist policy because, "It is good for America" and, "It's in America's best interests", you will be cheered to note that you can also hear Vladimir Putin say, "It's good for Russia" and "It's in Russia's best interests" at Agora Financial's "The 5-Minute Forecast." Specifically, we read that the Russkies are snatching up "over 460,000 square miles of Arctic territory - including the North Pole."

The Russians also have their lapdog "experts", just like we have, and so it was a no-brainer that "Russian scientists recently confirmed that the Lomonosov ridge, an underwater shelf that begins in Russian territory, continues underneath an enormous portion of the northern Arctic."

And how big is this area? Addison Wiggin himself answers, "Imagine a mass larger than France, Germany and Italycombined. Here's the real kicker: If the international community can't stop him, Putin and company will have access to over 10 billion tons of oil and gas that, according to his scientists, could be extracted easily."

Immediately I have questions, such as, "How much is ten billion tons of oil and gas?" and, "Could Superman lift such a weight?" and, "If he could lift so much weight, then what does that work out to in pounds-per-square-inch if Superman wore a size 10-D shoe?"

Mr. Wiggin, aghast at seeing where this is obviously going, opts for the easy question, and says ten billion tons of oil and gas, "would easily secure Russia's spot as the No. 1 gas producer in the world, and catapult them it past Saudi Arabia as the No. 1 oil producer."

Like I said; it's a Russian saying that it is in Russia's best interests, so it must be okay according to New American Ethics 101! And as everyone in America knows, if it's the American way, it's always the best way! Hahaha!

George Ure at UrbanSurvival.com is under no illusion as to what historically comes next, as governments always come up with a reason to go to war and act like paranoid fascists when the economic situation gets like this. He writes that the idea is to "Squeeze regular folks, stir 'em up with some terror and roll out the Amero next spring as the answer when ends won't meet and the economy is toast."

Ugh.

Mogambo sez: For those of you who question my smarts ("You're an idiot!") and wave your little clinical reports around ("And I can prove it!") when I say that gold will explode upward in price because gold ALWAYS explodes upwards in price in the bust that follows the boom, I present the MarketWatch.com headline, "Gold rises on safe-haven buying, dollar weakness."

This is how it always is at the beginning of the bust after the long boom; people get tired of running back and forth between stocks and bonds when they seem to lose money every time as both stocks and bonds will trend downward in price as the asset boom deflates and consumer prices rise, and they finally say, "I'm getting slaughtered here! To hell with this! I'll buy what people always bought at times like these, when stocks are overpriced, and bonds are overpriced, and houses are overpriced, and government spending and size is huge, and everyone is up to their ears in debt, and there is nowhere else to go; I'll buy precious metals!"

That's why I know, with absolutely no doubt in my mind whatsoever, that the big moves in gold and silver are ahead. It's how history repeats itself. And it always does, as it seemingly must.

Note: This year, the Mighty Mogambo is actually going to bravely exit his Big Mogambo Bunker (BMB) in order to speak at the Agora Financial Investment Symposium in Vancouver, British Columbia. Don't miss this opportunity to hear his rants live, on why "We are all Freaking Doomed!"

Agora Financial Investment Symposium - July 24-27

Jul 5, 2007
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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