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No feather headdresses, but . . .

Richard Daughty
...the angriest guy in economics
The Mogambo Guru
July 21, 2004

We start off with a look at the Federal Reserve, because it is always a Good Idea (GI) to stay current on the activities of guys who are trying to destroy you. This is a handy lesson in tactics that I got from watching a lot of action movies, as they are always sending out patrols and scouts to keep abreast of the actions of their enemies, who are everywhere, just like today. The only difference is attire. In the olden days the bad guys wore feather headdresses, or black hats, or Nazi uniforms. Today it is much more difficult, as today they all wear suits. Not the SAME suits, I assume, but similar.
[Editor's note: Wrong, Oh Mighty MoGu... click]

But while we cannot tell at a glance WHO our enemies are anymore, we know where they work, and so all we have to do it is sit outside their offices until they come out for lunch or go home, and then we can run up and yell at them right in their smug little faces, and put curses on them, and stick pins in little dolls that look just like them, and maybe hit them up for a few bucks because we could use a few extra bucks right about now, but they never give us anything except to waive that damn Restraining Order in our face and complain about how there is never a policeman around when they want one.

And our task is made all the easier because they all work for the federal government, and the most dangerous of the lot work at the Federal Reserve. So if we are going into that hellish place of dangerous people, it is only natural that we put on our body armor and don our helmets. Properly protected, we soon see that we are overdressed, as the Federal Reserve was fairly sedate last week, and there was only the blip upward of monetary mayhem, in this case buying debt outright. But creating a nice $2 billion chunk of money out of thin air is still a healthy bite. And to show you why I used the word "blip," I am going to demonstrate how this is done.

Alan Greenspan picks up the phone, and it goes "blip." He calls down to the demons from hell who work in the bowels of the Fed (and if you don't why I used the word "bowels" when referring to the activities of drone workers at the Federal Reserve, then you have not been paying attention), and every telephone number he keys into the phone makes another "blip" sound. Greenspan barks into the phone "Make more money!" Then a worker bee walks over to a console and hits a button called "Magic Money," and it makes a little "blip."

Then the computers at the banks go "blip," and $2 billion of brand-new money appears on one part of their ledger, "blip" and $2 billion of government debt disappears, "blip," from another part of the ledger, and then those actions are published "blip," and then when I read about it my heart goes "blip! blip! blip!" and then I bring up this week's issue of the MoGu and I grind my teeth and I say to myself "I'm gonna get those blipping blippity blip guys if it's the last blipping thing I blipping do!" and then my heart monitor starts going "blip! blip! blip!" and my wife is screaming "Will you pleeeaaassse turn off that blippity blipping machine that keeps going 'blip blip blip' all damn day long until I can't stand it anymore and I am going out of my blipping mind with all that blipping!"

Dan Denning of Strategic Investment sums up my rationale for knocking on the doors of all the neighbors and getting them up out of bed at two o'clock in the morning and trying to get them to sell their damn equities and get into commodities, but they never do and sometimes they don't even answer the door anymore. He says, "If it can be chipped, mined, grown, or smelted, China wants it. A lot of it. And that virtually guarantees MASSIVE demand and commodity price hikes all around the world... almost as far as the eye can see. The biggest bull market in commodity history."

Doug Noland passes along a little bit of news from the Bloomberg site, where Michael McKee and Jessica Brice quote U.S. Commerce Secretary Donald Evans, who said that he's "not worried that oil prices will lead to higher inflation." If he really wanted to get my attention, he would have said that he is not worried that eating bag after bag of chocolate-chip cookies will lead to higher weight gain. They both make the same amount of sense, although one is much more delicious than the other.

But Mr. Evans is not finished sounding really stupid. He went to on say, and I am providing the exact quote, because if I did not you would accuse me of making this up because it is hard to believe that a senior member of the government would say something so ridiculous, "Oil prices have been above $35 to $40 for quite some time now. If that was going to have a serious impact on inflation in this economy, it would have begun to feed its way into it. From what I can tell, inflation remains in check and remains under control."

The Fed has raised rates to stem this rise in prices, yet this guy says "From what I can tell, inflation remains in check and remains under control." All the inflation indicators are rising, rising, rising, and yet we get a government doofus saying "From what I can tell, inflation remains in check and remains under control."

Oil is staying over $40 a barrel, and yet "From what I can tell, inflation remains in check and remains under control."

And then people ask, "Hey, Mogambo! Why are your eyes all glassy and vacant?"

Frank Shostak, in an essay on Brookesnews.com "Alan Greenspan: Can His Monetary Policy Prevent Economic Busts?" asks "But is it possible by means of a gradual and transparent monetary policy to undo the damage inflicted to the economy by previous loose monetary policies? According to mainstream economic thinking, with which Alan Greenspan agrees, it would appear that this is the case. What are the sources of this way of thinking?"

I am sure that Mr. Shostak will wait a long, long time before Greenspan would tell him what he is thinking, so I will enlighten Mr. Shostak: They are not thinking anything. They just do things. And the things that they do are to pound down interest rates and create money and credit by the ton. And we have just spent the last four years of profligate, unprecedented loose monetary policy in trying to reverse the horrible results of their similar incompetence for the last two decades, all for naught.

And not one of the morons at the Fed foresaw that monstrously excessive monetary looseness would result in price inflation. Now, belatedly, they are starting to gradually, painfully gradually, increase interest rates to try and stem this rising price inflation, although their efforts are ludicrous. How does one define ludicrous? How about "Raising interest rates from a third of the rate inflation to slightly less than half the rate"? And that is not all. Mr. Shostak, who is one of those guys who really has firm grip on this kind of thing, tells us what the future holds in store for us. "Once a tighter monetary stance is introduced it sets in motion an economic bust. The severity of the bust is conditioned by the length and magnitude of the previous loose monetary stance and by the state of the pool of real funding."

So how severe will the bust be? Worse than anything you can imagine, as the degree of monetary laxity under the horrid Alan Greenspan is worse than anything anyone could possibly have imagined, sort of like when you were young and you were wondering what it will be like to be married, and never once did you interrupt the carnal daydreams and idyllic visions of staying up as late as you wanted and eating cake for dinner to consider that it would end up being an unending hell, where you spend your waking moments praying for death to deliver your from getting any more of what you so richly deserve for being such a moron and having such a loose grip on reality.

The Aden sisters, who have also been around this economic biz long enough to see the writing on the wall, write that "Inflation is headed higher," although they qualify their assessment with the soothing qualifier, "It may not become as extreme as it did in the 1970s." Well, they have their opinion and I have mine, which that it will be worse, much, much worse, than it was in the 1970's, only because the outrageous level of money created and the sheer size and expense of the government makes the 1970's look like a day at the beach in comparison.

They then give a little snapshot of how prices are acting lately. "Last month import prices soared at an annual rate of 19.2%. Consumer prices had their biggest jump in 14 years this year with the latest rise at 7.2% annualized. This included a 55% surge in energy prices and a nearly 11% gain in food prices (both annualized). Excluding these, the popular core rate was obviously less. But since we all eat and drive, the core rate is actually meaningless."

"Producer prices reinforced the other inflation figures. They too have soared the most in 14 years over the past year with the latest up at an annual rate of nearly 10%. Energy and food prices surged over 19% and 18% annualized, respectively. So who says there's no inflation? There is, and it's soaring."

Richard Russell "The fact (which few seem to realize) is that the Fed is still fighting the dragon of deflation. For the year-to-date (the last 25 weeks), M-3, the broad money supply, is up $430 billion or an annualized rate of 10.1%. This is double last year's rate, so it seems clear that Alan Greenspan still believes it's necessary to fight deflation."

And what is this deflation that Greenspan is so worried about? The prices of stocks and bonds and houses. The sky-high prices of stocks are the end result of the damnable Congress making IRA and 401(k) and all those other retirement accounts deductible, and we have had over twenty years of people and businesses pouring their money into the stock market, with everyone believing that they will get rich and retire with the riches provided from their stock market investments, although there is not one instance of that happening to all the participants in an entire economy.

The fact is, and you can look it up, that you cannot, on average, get more money out of the stock market than you put it. This is especially true over the long term. The best you can really hope for is that your stocks will rise enough to offset inflation, although it never really seems to do that, either. Usually it bankrupts everybody, and then everyone gets real grumpy, and they all swear that they will never buy another share of stock as long as they live, and then they don't, and then they get old and die, and a generation or so later another group of intellectual pygmies tries it all over again. We are just the latest group of intellectual pygmies to give it a go.

But when Mr. Russell refers to the growth in the money supply, it brings up an interesting observation by Jim Cook of Investment Rarities, who said "If
gold had kept up with M2 money growth over the past seventy years, it would be over $5,000 an ounce. This fact should eventually accrue to the benefit of gold holders."

Marc Faber in an article in AMEinfo.com writes "I would argue that for monetary policies the 'Mother of all Monetary Tests' is unfolding right now, as it may be that monetary stimulus is no longer going to boost the economy, but inflation alone, which would lead in a benign scenario to stagflation and in a worst case scenario to a inflationary depression a la 1980s in Latin America. Whereas one could argue that the US dollar is about where it should be against the Euro, the dollar is certainly grossly over-valued against the Asian currencies."

He also makes my case when I screech in my irritating little nasal voice that putting money into the stock market will not make money over the long haul. He writes "In 1982, the Dow Jones Industrial Average was no higher than it had been in 1954, and adjusted for inflation it was down by 70%." So, if losing 70% of your buying power is not a bad investment, what is?

J.R. Nyquist asks "Is al Qaeda Preparing A Nuclear Hit?" He suggests that "Top U.S. officials are worried that al Qaeda is preparing a major assault before the November elections." What kind of major assault? Well, Paul Williams, who apparently is some terrorism expert and former FBI consultant says that "al Qaeda acquired 20 nuclear suitcase bombs from the Chechen mafia between 1996 and 2001."

Believe it or not, an outfit calling itself "CNBC University" send me two tickets to a "Free Investor Workshop." Tip to CNBC: We already know the investment philosophy of the regular lineup on CNBC, which is "Buy more stocks, all the time, at any price." And after all these years we are pretty hip to the philosophy of CNBC, and its parent, General Electric, too, which is "Buy more stocks, all the time, at any price." So I don't need no stinking tickets to any stinking seminar.

One of the gripes that I use to illustrate the utter incompetence of the American educational system is that in every restaurant there is a requirement that employees wash their hands after using the facilities. It is good advice, and I take it myself.

The problem is when I am finished running my wet hands under the warm air dryer and I turn around to leave the restroom: I have to open the door by grasping the handle or knob. If the person who just left did NOT wash his hands, and even worse if lots of people have been leaving without washing their hands, then my hands are thus re-contaminated.

So apparently while I, as the lowly food service worker, must wash my hands after using the bathroom, it is NOT against the law to, in effect, then shake hands with everyone who has previously left that bathroom, whether or not they have washed their hands, by grasping the handle or the knob to open the door.

And remember that the brilliant architects who designed the place are all college-graduates with degrees, and they go to testimonial dinners and give each other awards and stuff, this is the best they can come up with! This is, of course, not to mention the people we elect, who correctly made it against the law for food services workers not to wash their hands, but did not continue thinking about what happens to the food service worker AFTER he, or she, has finished washing his, or her, hands.

It merely proves, as if one needed more proof, that the public education system of this country is unbelievably bad and is apparently peopled by incompetent jerks. And I note with dismay that the mental midgets that infest the public school system have pledged their votes to Kerry for President. Not a ringing endorsement as far as I can tell, unless you can point to a reference that declares "Stupid people make wise choices."

The Cato Institute reports that the "Regulation of business if estimated to cost the economy some $800 billion a year." Now, as much respect as I have for the Cato Institute, and have been a member of it in the past, this is a load of crap.

The fact is that this regulation didn't cost the economy, as a whole, a dime. One man's cost is just another man's income. You paid more for the goods and services, thus paying prices that are higher than they otherwise would be, because companies paid that $800 billion, and they need to get that money back.

But somebody got that $800 billion! Where else could the money go? So all that $800 billion "cost" was somebody's income. Ergo, the economy is even-Steven! The only difference is that we now have $800 billion a year that is not going into producing things that people want to buy. Instead, we have $800 billion a year going into things that businesses are being forced to buy. Big difference!

"The Bear Is Back" is a column by Zbigniew Piekarski in the Warsaw Business Journal. He writes "Consumer spending posted a new historical record in the sense that it outpaced total economic growth. With an overall increase of $625.8 billion, for the first time in history it exceeded the simultaneous GDP growth, up $581 billion. The consumer achieved this with a debt surge of $1.7 trillion."

This is certainly not news to a guy like me who is holed up like a cringing little coward in a dank cellar as a result of this NOT being news to me. But he goes on to say "But there appears to be a savage credit crunch in the offing, and nobody seems to even notice." This is a Bad Thing (BT) because a credit crunch implies less borrowing, and thus less spending, and thus less economic vigor, because "Consumer spending remains so predominant that any weakness on its part would instead pull down the other components. A hint of such a decline is being registered by the Economic Cycle Research Institute's leading weekly index of U.S. economic growth. At the beginning of the year, it was close to a 20-year high, but has now suffered the sharpest drop since the last quarter of 1987, falling from 11.8 to 3.1."

Peter Schiff of Euro Pacific Capital writes that "The dollar index is plunging to the point where it is approaching multi-year lows and crude oil has resumed its rapid upward trajectory, to the point where it is close to a new contract high. Both of these moves are unmistakable signposts on the road to higher inflation."

Then he shows his dark sense of humor when he writes, "For the first half of 2004, the CPI is already up 2.5%. Given that most analysis are still calling for 2% inflation in 2004, the CPI will have to fall by .5% during the next six months to make that dream a reality." Hahaha!

Bloomberg had the headline, "Low-Income Workers Seeing Housing Woes." The headline of the Mogambo Daily News was "Memo To Low Income People: You Ain't Seen Nothing Yet." When you read down into the article, you will discover that 1) the government IS out to get me, and you, too, and 2) low-income people are going to be seeing woes in damn near everything that costs money.

Gary North, who writes the newsletter Reality Check in his spare time, quotes T. Boone Pickens from an interview on the CBS Evening News on July 18, who said that his gut feeling was that the price of oil is headed to $50 a barrel, and soon, and that gasoline could hit $3 a gallon before the end of the year.

This is because of a lot of factors, not the least of which is that we are in the process of reaching the peak in oil production at the same time as the demand is exploding, and the dollar is going down in purchasing power. Mr. North goes on to quote a guy named Adam Hamilton, who is a CPA, who compares the price of
gold and the price of oil, discounted by the latest GNP deflator. He calls this "Gold Boiling in Oil."

Mr. Hamilton says that while nominal oil prices are hitting new highs, when you adjust for the decline in the value of the dollar, oil would have to reach $92 per barrel in current, 2004 dollars, to surpass the high reached in April 1980, since the dollar was so much stronger back then, and I was younger and much better looking, too, in case you are taking notes or wondering if I always looked this way.

Mr. Hamilton also looked at the price of
gold, as was implied when he titled his piece "Gold Boiling in Oil." He says "Gold is seriously lagging oil in real terms and will have to rally sharply from here to catch up and preserve the integrity of its strong historical relationship with crude."

It is the phrase "rally sharply from here" that is your clue as to where some nice money will be made over the next, oh, say, days, weeks or months.

John Mauldin, who writes FrontLineThoughts.com, opines that "The Chinese government is doing what they can to create a dynamic manufacturing machine which creates new employment, which will create internal demand and doing so in a way that is creating a true future economic powerhouse."

And to that I say, "I sure HOPE so, because if they were not, then that would be de facto evidence that they are really, really stupid, and if there is one thing that I am desperately afraid of is that the Chinese, who make up nearly a third of the population of the world, will end up acting as stupid as us!"

In fact, it is exactly what the American government SHOULD be doing, too, but they did not. Instead, our idiotic government spent all their time and money growing the size of government like a cancer, and installing every idiotic socialist, communist, and fascist entitlement program that they could think of. And now look at us!

He quotes Ian Douglas of UBS, who Mr. Mauldin thinks has something important to say about the gigantic accumulation of dollars in the banks of the world. "In the 12 months to Mar 04, global reserves grew by a staggering $791bn (equivalent to around 7.5% US GDP), a 30.3% year over year increase."

Notice the way he uses the word "staggering" to characterize the size of the pile of money represented by $791 billion. This is how literate this guy is. As for me, I would have been perplexed for days, wondering to myself "What is that word that means 'to act like you have been hit in the head by a knockout punch delivered by a professional heavyweight boxer who is in a real bad mood and now your brains are scrambled'?"

I will understand if you cannot comprehend how much money that is, especially in one year. Your puny earthling brains cannot comprehend the enormity of money excesses that big. But just between you and me, and don't let this get around, but there are only a few exotic species in this whole sector of the galaxy that are so stupid as to create this much money and credit, and they are considered such lowlife creatures that what you call "UFO sightings" is actually "taking the kids to the zoo."

Then the music gets all spooky, and off in the distance you can hear a wolf howling. We come in for the close-up. "Something was reported last week that hasn't been seen since Dec 2001. Global liquidity fell."

Now, normally I would launch into some long-winded and pointless diatribe about how bad this is and then suggest we all go out for something to eat, but I am feeling particularly lazy today, so I will turn the microphone over to Martin Hutchison, and let him read form his column "The Bear's Lair: Life After Greenspan." I sit back, open a fresh beer, and listen along with you as he says "Contrary to much calming media and analyst speculation, the rise in inflation is the beginning of a long-term trend, caused primarily by excessive money creation over almost a decade." Of course, he is referring to the inevitable inflation that monetary insanity causes.

He does not stop there, although I wish he would, as my heart is pounding like a kettle drum, boom boom boom. He details how Greenspan is so far behind the curve by saying "If inflation is running at 4.9 percent per annum, or even at the 3.7 percent per annum of June's superficially-anodyne figure, then a Federal Funds rate of 1.25 percent is not the beginnings of restriction, it is still wildly inflationary, being minus 2.5 percent or more in real terms. Now that inflation has stirred, to the 3.4 percent to 4 percent range, the neutral Federal Funds rate is not 4 percent, but at least 6 percent."

But it is this next part that ought to freeze the blood of equity investors. "The May inflow of foreign funds into the U.S. economy was also announced Friday; at $54.8 billion, down from $81.2 billion in April, it dropped for the fourth successive month."

This lack of buying is the dreaded deflation that the Fed is so anxious about. There is a disaster afoot if stocks deflate from being "insanely overpriced" to merely "overpriced."

And all those grossly under-funded retirement plans can only get properly funded if somebody starts pouring lots and lots of money into the stock market, making prices rise like crazy, and for a long time, too. And foreigners are the only ones with money anymore, attested to by the $540 billion trade deficit. But if they are not buying American stocks, then bad things are going to happen when all those old people start wondering about when they can start retiring, because they are not going to like the answer.


---Mogambo Sez: Things are getting so weird here lately that I am more scared and dyspeptic than usual. You can bet that every trick in the book is being used, and will be used, to keep this whole thing from collapsing until after the election in November. If they can do it, then this may be your last chance to buy
gold and silver at these prices. And if you do not want to buy any gold and silver, then send me the money and let ME buy some more!

Jul 20, 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.

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