To 321gold home page

please click banner to support our sponsor.
Home   Links   Contact   Editorials

Mogambo Movie Company presents:
Celsius 9/11

Richard Daughty
...the angriest guy in economics
The Mogambo Guru
July 14, 2004

[Editor's note: Complaint to Mogambo -- you didn't mention gold this week, grrrr]

The Treasury cranked out $6.9 billion in actual, hot-off-the-presses cash last week, which is probably a record of some kind, and not the good kind of record, either, where you get to shake your bootie and party down on the dance floor. In the same week, Foreign Holdings at the Fed leapt by another $10 billion, which is magical place where all those central banks soak up US debt and thus recycle back into the USA all those dollars produced by the trade deficit, which allows us to keep acting like idiots by issuing more and more debt and everyone goes into more debt. Everyone is maniacally trying to manage a flood of fiscal policy money being poured into the world's economy by the Bush administration and the Congressional boneheads in the USA, plus another gigantic wad of money created by the idiotic Europeans who are as intellectually corrupt as we are, in that they are turning a blind eye to Germany and France and Italy, which together make up about 90% of the whole freaking European economy, running deficits that exceed 3% of GDP, which is the "puke point" that they all agreed was the farthest limits that rational, sane people, who had the benefits of a good education, would allow. And let's not forget the Japanese, who are rolling around in a sewer created by a budget deficit of 7% of GDP. And increasingly the Chinese are buying US debt, too, and everybody is rolling in dollars from the trade deficit.

Now you know why Trichet, a guy who is known for exactly this kind of stupidity, was put in charge of the EU central bank, and why we have Alan Greenspan, who is also known for this kind of stupidity, is in charge of the American central bank.

Since the need to identify a scapegoat is arriving, it is time to cast a little blame. Rising to the occasion, the Mogambo strides up to the microphone at Cannes and announces that the Mogambo Movie company has started producing its new release, "Celsius 9/11."

This fabulous documentary explains how the banking system is to blame, just like it always is. Using newsreels, tapes, Congressional testimony, candid photographs, gossip and rumors, vicious innuendo, bogus interviews, outright lies and fabricated evidence, it captures, wonderfully, how all the way through history, in every country in every time and space, economic crises are always caused by bankers, as there is no other agency that is able to perform such miraculous magical acts, namely, creating money out of thin air. Money, beautiful money! Created by somebody going into debt, and then expanded a hundred-fold through fractional banking, to make more money, for other people to borrow, to go into debt! Which causes, paradoxically, more money to be created. To be borrowed. Which causes more money to be, well, you get the idea.

Or as Bob Moriarty explains in an essay entitled "Battle of the Titans" on 321gold.com, "The cause is simple. In a fractional reserve system, even a gold fractional reserve system, all money is created by loaning money into existence. And the more loans you make, the more profit you can make. It is a perpetual motion machine. Just as long as you keep expanding the money supply (inflation) everything works. Or until people borrow far more money than they can afford to pay back. At that point the system implodes and deflation sets in as the money supply collapses."

Kenneth Gerbino is one of those guys who really has a handle on how these things work, and says "The United States at this time, since the 1930s, has made tremendous progress and advancements in all areas ...science, technology, medicine, arts, etc., but the truth of the matter is that in the field of economics, the opposite has occurred. An incredible regression has developed. Economic policies today are much, much worse than in 1929. The five economic evils are all alive and well in modern America: big wasteful government, high taxes, paper money, government debt and budget deficits. But the worst practice is the creation of money out of thin air, which always brings on inflation, higher interest rates and disrupts the normal free market economy."

All that money, all that glorious, fabulous money, turns into, first, debt to finance economic expansion, and then, only later, the decline and deflation The eventual and inevitable decline is caused by prices going up, as all this money works its way into higher prices. And then people stop buying as much stuff, and economic decline sets in. And why don't they buy as much stuff? I can't speak for everybody else in the world, but for me and everybody I know, it is because of a double-whammy, that the Germans might call der Dopplekopfwhackenmachen, in that a) my income is not rising enough to b) allow me to afford to buy things whose, c) prices are rising faster than my income.

And then comes, if you are at all adept at the Austrian school of economics, the inevitable bust, which is one of the ingredients when you play in the sandbox of the Boom-Bust Cycle.

And if you are NOT familiar with the Austrian school of economics, then I suggest that you make reading the Mises.org website a part of your everyday online browsing, and after a year or so you will notice a large decrease in the number of times that you scratch your head in bewilderment, and a HUGE increase of the number of times that 1) you agree with me that Austrian economics is the only one that is logically correct, intuitively obvious, historically proven, and intellectually compelling line of economic thought, 2) you agree with me that central bankers are the actual culprits who cause our miseries because they do NOT believe in the Austrian school of economics, and 3) you will stand shoulder to shoulder with me to declare that what this world needs is a good low-calorie, low-carb, low-fat chocolate cookie that you can eat by the bagful and never gain an ounce. Or, as Mr. Moriarty so clearly explains, "Here's something you have never read before. With the exception of wartime periods, between 1783 and 1913, inflation was zero. Essentially we had no inflation. But as soon as the Federal Reserve system came along, here comes inflation. Using the government's own figures, we can soon see that to equal the purchasing power of $100 in 1913, we would need $1,840 today. All the product of the Federal Reserve system."

In case you were wondering, that works out to an annual inflation of only 3.25%. The knotheads we call American economists call this "benign inflation" and "low inflation" today. It is not.

As if to provide a nice coda to my remarks, the dollar has started back down, and it is falling faster now than it was when it was rising, which in keeping with the general theory that things decline faster than they grow.

Wayne N. Krautkramer wrote an interesting essay entitled "Gentlemen, Man The Lifeboats!" He says "On June 23, 2004, the Securities and Exchange Commission (SEC) changed the rules regulating short sales. Until now, it has been illegal to sell a stock short unless it was sold on an uptick. This was the result of Regulation SHO, which was created by the Securities Exchange Act of 1934. This is a major change in the philosophy of the SEC. The new Regulation SHO will allow short sales without waiting for an uptick."

Now this could be some serious stuff, because the nagging question I have is, "Why now?" Huh? Why now? I am always real paranoid and suspicious when it comes to governments and banks, and to prove my credentials in that regard, merely look at my FBI file, and after a few hours spent poring through page after page of my hysterical rebuttals about the crackpot psychiatrists and court-appointed "experts" who think they are qualified to judge MY sanity, and who have obviously ganged up together and have conspired against me, but I am sure it says in there someplace that I am, as I claimed at the outset, both paranoid and suspicious. But what is NOT reflected in the record is that I am ESPECIALLY so about big changes like this, especially at such an odd time. For those of you who like that "Up close and personal" stuff, I turn my head to the camera, lean in, and say "In one of my previous incarnations when I was a junkyard dog, I would cock my head to the side, like this, and raise my ears as if to say 'Huh? I was so cute!"

Anyway, out of the corner of my eye I can see that Mr. Krautkramer wants to get away from this digression into my previous lives, and he is equally as bored with my stories of economies on other planets, too, and so he goes on to say "Since the founding of the SEC in 1934, their philosophy has been to discourage the selling of equities. Short sales have been portrayed as a demonic instrument that will destroy America."

The idea is that if a stock is plummeting because I am an incompetent boob and my gross mismanagement has ruined yet another company (or, heaven forbid, the whole stock market was dropping), then savvy predator guys will e-mail each other and these market vultures will sell my stock short, or all the stocks, as they are falling, adding to the selling pressure. Which makes prices fall even MORE! And the specialists have to buy the shares in a falling market, trying to make a market in the shares because that is their damn job, and that is why they are allowed to always make profits at the expense of everybody else by manipulating their books of business. But now they start sitting on big losses, making them real grumpy. And the poor slobs who are leveraged to the hilt on the long side are getting clobbered by the swoon in prices, and their brokers are on the phone with the dreaded Margin Call From Hell (MCFH), meaning that you better get off your fat butt and get some pants on and get down here immediately to deposit a gigantic chunk of money, more money than you have ever seen in your whole life, into your margin account so that you can hold on to these plummeting stocks that you bought on margin, boldly borrowing the money to buy them, and now the leverage of borrowing the money to buy those falling stocks has now demonstrated the Dreaded Downside Of Leveraged Bets (DDOLB), namely that your pain is multiplied! The stock moves a buck, and you lose ten bucks! Twenty bucks! Fifty bucks! Who know how much leverage is out there? It's BIG BUCKS! And in the time it has taken me to tell you about this, you have lost another $12,000! So, get a move on, dude!

And because you know that you don't have that kind of money and probably never will have, for the rest of your pathetic life, you scream into the phone "Sell! Sell! Get me out! For the love of God, get me out! Sell, you lousy bastard! Sell!" and so the broker looks up at the clock and discovers that it is time to go to lunch and when he finally gets back he will eventually get around to selling those shares, too, driving the market down some more. And all the legions of ordinary holders of the declining assets, like banks and retirement accounts and mutual funds, are watching their assets go up in smoke. And some of them have pledged those shares as collateral for other loans, making everything worse.

And then the government is looking at all those now-lost capital gains, involving billions and billions of dollars. And not only is all that wonderful cascade of capital gains tax money all gone -- poof! -- but the government has to start giving out tax deductions for losses! Everybody is taking a whacking.

So you can see why Alan Greenspan does NOT want a deflation in asset prices. He wants an inflation in all prices instead.

But not everyone will be hurt. Some will prosper, like, of course, the guy who was shorting all these lovely sales, and who is now suddenly rich and living it up someplace and laughing at us, a place where he is happy, where everybody likes him and when he goes to a restaurant they give him a table that is not by the bathroom, just because he has money out the wazoo and we are broke, perhaps someplace tropical. Which is a sharp contrast to, seemingly, the whole rest of the freaking country, who is on the phone demanding that you "Do something!"

But before we were sidetracked by my predictable hysterical rant about something or other, we were talking about the change in the short sale rule. To show the asymmetry of this bias against people who short stocks, he notes that "It is interesting that the SEC never made a purchase subject to a down-tick rule." But maybe it just us, but see if this sounds fair to YOU: You can go long anytime. You can call up your broker and buy a stock, and then sell it, anytime you want. BUT, you can't sell first with a short sale, which is nothing more than borrowing the shares and selling them, except after the stock has had an up-tick in price. If the price was going down, or even stays the same after going down, you can't short the stock. You can, however, still close out the short sale any time you want, by buying the shares back and returning them to the guy you borrowed them from. The only common denominator, and remember this for the SAT's, is that you can buy, either to establish a long position or close out a short position, anytime you want. It's only when you can establish a position by selling short a stock that is different.

There is always a justification for why we do and allow this, of course. It was always done with the best of intentions. The only guys who get hurt are the short-sellers, and everybody knows that they are, somehow, evil for taking advantage of stupid people doing stupid things with money, namely morons buying overpriced stocks.

He finishes up with "Current valuations of the stock market reflect some 60 years of political and economic manipulation." I get out my watch and take a look at it, and independently verify (certified by the attached "Mogambo Seal Of Authenticity And Approval (MSOAAA)") that 60 years sounds about right to me, give or take a few years.

Paul Mampilly, chief correspondent for Capuchinomics, wrote an interesting essay in a Prudent Bear guest column entitled "The Zero Years," by which he means the years that begin with zero, as in 2004. "My next statement is ludicrous but yet I feel compelled to say it. The stock markets are completely underestimating the effects of higher rates. Higher rates will not just be bad for stocks, they will be disastrous."

I make it a policy to always pay attention to when somebody says "disastrous," and if you are young and in need of a personal creed, I suggest that "Pay attention when somebody uses the word disaster" is as good as any, and better than most.

Robert Folsoms' Market Watch on Elliott Wave reports that "Portfolio managers dipped into fund cash reserves in May to increase stock holdings," and that they bought so much stock on behalf of investors that they succeeded to "outspend their investors by $10 billion during the month. The result was a net cash inflow of $334 million into equity funds in May, according to AMG Data Services."

So, let me see if my math skills are up to par. If they "outspent" by ten billion, and the investors themselves only put in $334 million, then together they put in $10,334 million, which is almost thirty times as much as the investors themselves put in! Very interesting!

The significance is highlighted when Mr. Folsom notes that "The cash/assets ratio has a long history of hitting record low levels just as the stock market reaches a major turn."

As soon as he said that, you know why I wa struck by the way NYSE market breadth has hit a new high, yet the prices of the underlying shares have not risen. This breadth is consistent with the amount of money still being poured into the stock market, but the price decline is consistent with the distribution from strong hands (the guys who know what is going on and are getting out when prices are high) to the weak hands (the guys who DON'T know what is going on, namely you and me, who are buying the damn things when prices are high).

Richard Benson of Specialty Finance Group has taken a look at the Bureau of Labor Statistics and noticed that wages have increased 0.5% in the last year. On the other side of the coin, prices have gone up, at a 3.5% minimum because we are still using government figures here, and so we know from the outset that 3.1% is nothing but the biggest lie that they cunningly think they can get away with, and not have the Mogambo banging on their door and screaming "Liar, liar! Pants on fire!"

Jeffrey Simon at Market Nugget asks, "If you are so smart, how come you sound so stupid?" No, wait! That is NOT the question he asked. That is, instead, the question that I get asked most often. No, what he really wanted to know is "If employment is picking up, why is it not showing in these reports? The Median Duration of Unemployment report shows that the median duration of unemployment has stagnated at 10.8 weeks, plus or minus less than one week, since April 2003. Further, the report shows that the trend in the last three months has been for the median duration of unemployment to be increasing, not decreasing as would be expected if the employment situation was improving. For the curious, the median number of weeks unemployed peaked at 11.1 in June 2002."

He goes on to note that The Index of Help Wanted Advertising, using his words, "continues to scrape the lows, and remains at the multi-decade lows last seen in the mid-1960s." Now, if was me saying these things, you would reply "You are a liar, and you smell funny, too." But perhaps he anticipated your clever retort, and he takes the extra step of supplying a little factual backup, and gives us "the historical index levels" of the index. In chronological order, these are: in January 2000 the Index was 89, in January 2001 the index was 77, in January 2002 the index was 47, in January 2003 the index was 41, and in January 2004 the index was 39. It doesn't take a high powered computer to see the obvious trend.

He finally brings us up to date when he reports "The most recent report has the index at a reading of 39." So he was factually correct when he said we are "scraping the lows."

Bob Bronson of Bronson Capital Markets Research has taken a look at Consumer Installment Debt, and has noticed that it is not going up so fast these days. And without somebody buying things, the American economy does not move along.

He is also make reference to the Kondradieff Winter, or, as he calls its "A delationary economic BAAC Supercycle Bear Market Period" until, and you might want to get our your calendars and write this down, October 2014, plus or minus four years. And since I have no idea what a BAAC Supercycle Bear Market Period is, but am impressed with the way the charts look, then I have no reason not to believe the time frame, either. Something to think about.

Bill Gross in an essay for PIMCO entitled "Back to the Garden" which is excellent writing and sums up a lot of things in a clear and succinct way. He says, "Like the doomsayers we are, we stated that the global economy was more imbalanced than at anytime in the last 25-30 years." Later on he says it again "Because of these realities based on historically high levels of debt issued during a period of superficially low interest rates, the global economy is indeed in my view, more vulnerable than it has been for the past 25-30 years."

His opinion is that Total Credit Market Debt, at more than 300% of GDP, "is our major sin and largest stumbling block in any attempt to get back to the Garden of economic prosperity and attractive investment returns."

"Not only our housing market, but the financed-based profits (40% of all profits) of American corporations are at risk. This in turn speaks to the stock market, P/E ratios, and wealth/paper-based prosperity, that depend on the continued low cost of excessive debt taken on in recent years."

Doug Noland "And it is the nature of orchestrated inflations to become increasingly destabilizing and unwieldy over time." That is why they don't last; the whole economy just collapses.

"The notion that our system can and will 'inflate its way out' of our debt problems is erroneous conjecture and dangerous policy." Dangerous? Did he say dangerous? Is playing Russian roulette with an automatic pistol dangerous? It is NOT dangerous! It is fatal! Being merely dangerous implies that if you watch your step, and be careful, and take precautions, then probably nothing will happen. But this is NOT like that. Something very bad is going to happen.

"That hedge funds, Wall Street proprietary trading desks, and derivative players have displaced long-term investors as the instrumental source of liquidity is, indeed, a defining characteristic of the Post-boom reflationary Boom. This development is today worth contemplating." And it is worth contemplating because speculation is a defining characteristic of late-boom behavior, and history is pretty clear about what happens after the late-boom excesses have appeared. Marc Faber seems to agree with my historical assessment, when he says "Thus the 25% inflation rate shows up in speculative finance, the traditional cubbyhole for excessive credit."

Then he says something that reverberates throughout history. "And, in such circumstances, it does not take a wild imagination to envisage a global flight to 'stores of value,' including aggressive energy, metals and commodities procurement." This short list of investment options is the inevitable result of you spending your time securely locked inside the Mogambo Bunker, thinking, thinking thinking, trying to come up with some place to store your money that will be safe from the coming inflationary conflagration. And, in the end, you can never come up with anything other than precious metals, because nobody has ever come up with anything other than precious metals, because if you COULD come up with something better than precious metals, then there would not even BE anything called "precious metals," and you would have, instead, "precious soybeans," or "precious government bonds," or "precious real estate," or something.

Le Metropole has also taken a look at our problems, and has concluded that "Greenspan is caught in a dilemma between raising rates enough to thwart inflationary pressures (building materials, food, energy, and healthcare) and raising them too much and popping the existing bubbles in stocks, bonds, real estate, and credit. There is no easy way out. Something will have to give and it will not be pretty."

When he says "something will have to give" he means that somebody's investment has to turn to crap. And it is that "crap" metaphor that implies that, like he said, it will "not be pretty."


---Mogambo Sez: I have been getting calls from desperate people wanting to, mostly, know what is going on with the decidedly lackluster performance detailed in the mutual fund statements that are showing up in their mailboxes like bricks, and quite a few inquiries about when I am going to return their BBQ grill or pay back some of the money I owe them.

To each of these topics I am at a loss to explain. I was real embarrassed about it, until I read that Marc Faber, yes THAT Marc Faber, he of Marc Faber Ltd headquartered in Hong Kong, who admitted, when you read between the lines of what he literally said, that perhaps the Mogambo is not as stupid as everyone says, and handily explains that my confusion is because "We live in the midst of the largest financial bubble the world has ever known. World bubbleasiation is courtesy of a monetary phenomenon that lacks antecedents. Never before has any country printed as much money or extended as much credit without melting down the printing presses. The credit madness is difficult to comprehend. It is hard to understand in relation to past economic imbalances, because none exist."

All I know, and all anyone knows, is that it will not work out. We just don't know how, or when.

Jul 13, 2004
Richard Daughty
For 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.

321gold Inc