Movie Company presents:
...the angriest guy in economics
July 14, 2004
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
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
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
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
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
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!
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
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
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
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
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,"
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
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.