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"Urk!"

Richard Daughty
...the angriest guy in economics
The Mogambo Guru
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August 4, 2005

- As my hands are permanently clenched into fists of rage, I am typing this week's newsletter by holding a pencil between my teeth and laboriously pecking the letters out, tap (pause) tap (pause) tap. It all started innocently enough, as all I was doing was reading the paper, casually checking for the usual photo advertisements of pretty ladies modeling underwear or bathing suits to get the old heart started, and it was a slow day. Suddenly, my heart went "urk!" when I saw that the new total for the national debt, the honest-to-goodness total net debt that the federal government has racked up over the years, and I am suddenly afraid. Very afraid.

Then I saw that the stock market has been going up ever since China devalued the dollar! The stock market goes up, even when oil is going up! This is insane! Now I am even more afraid!

By this time I am on the floor, completely paralyzed from fear. My wife, who has not received the final paperwork on the new, big life insurance policy she took out on me, is scrambling to find some good news that will reverse my horrifying condition, lying there on the floor, covered in coffee where she spilled it all over me.

Flipping on CNBC and frantically scanning the Wall Street Journal, she says "Oil is up, just like you said!" I start to relax. Then she says "Gold is up, just like you said!"  I am now able to shake the stiffness from my mighty Mogambo shoulders (MMS) and slowly rise to my feet. But my hands are, alas, useless, as is my brain.

- You can always count on Peter Schiff, of Euro Pacific Capital, to tell you the real ramifications of the revaluation of the Chinese yuan. And sure enough, he says "Some have incorrectly argued that a rising yuan will make American exports more competitive in China, and therefore benefit our economy. Such a simplistic analysis is flawed, as its proponents fail to comprehend the basics of international trade. The only reason our exports become more competitive is that we will be selling them for fewer yuan. In other words, we will now be forced to pay the Chinese more yuan to purchase their products, but in return receive less yuan for the products we sell them. The bottom line is, paying more and getting less is a bad deal for Americans."  Exactly!

"For Americans, the opposite will be true. This change will result in reduced purchasing power, lower real incomes, and a falling standard of living. The Chinese will no longer be subsidizing American consumers and borrowers with low import prices and interest rates. Without these supports, consumer prices and interest rates will rise, credit and the economy will contract, stock and real estate prices will fall, service sector jobs will be lost, the federal budget deficit will worsen, and the dollar's decline will accelerate.

"As credit contracts and interest rates surge, home prices will plunge, wiping out trillions of dollars of paper equity for millions of American homeowners. However, while the equity will vanish, the mortgage debt will not only remain, but be that much more costly to service. Imagine the implications for the U.S. economy and dollar-denominated financial assets, should this financial nightmare become a reality."

Perhaps this has something to do with Dan Denning, with Strategic Alliance, writing "Good-paying, white-collar, 'Ward Cleaver' jobs disappear."  But it is not only jobs, but everything else is in danger of disappearing, too! For example, he postulates that we will also see where "Soaring health care expenses go unpaid. Property prices plunge in the wake of panic selling. Rampant price inflation sends the cost of food and energy soaring to new highs. Police, fire, and highway crews shut down services in strapped states and cities. Countless schools close for lack of funding. City and state governments default on their bonds. One 'safe' pension fund after another goes the way of Enron."

Sound gloomy to you?  Well, imagine how I feel, thinking this kind of stuff all day!  But do you ever think about ME and my life of gloom and sorrow? No!  It's always about you, you, you, isn't it?  Always about you!  But the ugly reality is that these are the kinds of things that have always happened at the collapse of bubble economies, and they will happen every time a bubble economy collapses. Lots of money has to be lost, as that is the nature of bubbles, and economies do not ever seem to prosper when everybody is bankrupt, and miserable, and homicidal,  and people are stringing more expensive barbed wire around the inside perimeter,  and having ammunition and supplies delivered by truck because your car can't hold that much stuff.

Mr. Denning thinks I am not being forceful enough, and so he shoulders me aside, and takes over the microphone and says "Please understand that these are not alternatives. As Peter Peterson, former White House economic adviser, says, 'Absent a colliding comet or an alien invasion, this will surely happen.'   There is no way for American investors to avoid this event. They can only choose how to protect themselves from the outcome."

Well, I would say that guys who were long in the categories of food and energy and commodities WILL "protect themselves" as their prices will be "soaring to new heights."  And food and energy are only two of the items in the category of "commodities."   The wise investor's ears should prick up ("poink!") at the mere mention of things whose prices will be "soaring to new heights."  That's the whole point of investing, isn't it?

And the gains in corn are sown (cute pun, huh?) by Congress, as part of the new energy bill, which contains all kinds of gigantic tax credits and deductions for all kinds of things, including ethanol, which is made from the sugar in some foods. Ergo, corn will do well for three reasons. 1) The Chinese have a stronger yuan, making corn cheaper for them to buy,  2) there is a drought all over the damned place, 3) and now Congress has made it financially advantageous to also compete for corn. So, the Mogambo Tip o' The Day (MTOTD) is relayed when I reach out and place my hand on your shoulders, look into your eyes, and say "Buy corn."  Fade out, and you are left with an indelible memory, so that years and years later it will pop into your mind as you are scratching around in the dirt looking for bugs to eat, and you will wail in woe because you did not follow the path of the Mogambo (POTM).

And, lest I forget, two other items in that "commodities" category, that aforementioned category of things whose prices are soon to be "soaring",  are silver and gold, which are a hell of a lot handier to buy and store than corn, soybeans, wheat and oil.

- John Crudele of The New York Post reports that "American Auto Association calculates that gasoline prices have risen 21.5% since this same time last year. But the government swears gas prices are only 6.9% higher over the year."   What a discrepancy!  The upshot is "That little trick alone saved the CPI from being 0.53% points higher."

And it is not just about gas, as he goes on to write, "Despite all you've read, the government thinks housing is only 2.2% higher over the past year. Others, including the National Association of Realtors, calculate that housing is up at least 12.5%."

In short, your government has screwed things up royally, but instead of fixing the problems they caused, they prefer to lie about it.

But they don't have to lie about it if they can keep it secret. Paul K. McMasters, who is the "First Amendment ombudsman at the Freedom Forum's First Amendment Center" says that the "latest figures released by the federal Information Security Oversight Office show that government workers are manufacturing secrets at the rate of 125 a minute, or 15.6 million a year. At the same time, they are declassifying fewer secrets, and the president is extending classification authority to more departments and agencies. Layered on top of those secrets are an even greater number of pseudo-secrets labeled 'sensitive but unclassified' that, too, are beyond the reach of the public."

What makes this so bad is that "The problem with excessive government secrecy is that it is a refuge for incompetence -- or worse. It is a policy reeking of desperation -- or worse. It is reflexive rather than deliberate, defeatist rather than courageous. And in the end it hides not only what our leaders know but, more important, what they don't know."

And in saying that, this is the perfect time for Axel Merk of the Merkfund.com to remind us of the immortal words of George Bernard Shaw, who famously said, "You have to choose between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the government. And, with due respect to these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold."

- I have been reminded that I have been somewhat remiss in pointing out the anomaly in the price of silver, and why that makes silver so undervalued that it is a screaming screaming screaming buy. But I was spared the trouble of getting up off of my fat butt to correct that mistake when I read an essay entitled "Copper, Oil, & Silver" by Jason Hommel. He writes "Not all commodities move up at the same time, so this means there is the opportunity to invest in those that have lagged behind, such as silver and/or copper. It is important to look at charts of ratios between commodities." 

The first one out of his mouth is about silver!  "In 1980, at the prior peak prices for both silver and oil, oil hit about $43/barrel, and silver hit $50/oz. In other words, an ounce of silver was worth more than a barrel of oil." 

Even at the recent low prices of silver and oil "silver languished at $5/oz., and oil bottomed out at $10/barrel, maintaining the 2:1 ratio."

The upshot?  "Using those high/low prices as guides, and given the price of oil today, silver should be somewhere between $30 to $60 per ounce!  Either that, or oil should be worth between $7 and $14/barrel. But which is more realistic?"

His point is that "if you are bullish on oil, you should invest in silver instead, because in the long run, silver will surely outperform oil prices as the ratios return to historic ratios of 2:1 or 1:1." 

So silver, currently selling at seven bucks (and change) per ounce, should be, by historical precedent, selling at somewhere between $30 and $60 per freaking ounce, you say?  Which works out to (at $7.30 per ounce) a gain of 411% and 822%?  Wow! A home run!  Let me at it!  There are not many guarantees in this world, but the dead-bang certainty that silver will rise in price faster than the rate of inflation seems to be one of them!

Even by its rough historical average ratio of 16:1 against gold, it should be selling higher than twenty-five bucks an ounce right freaking now!

And don't get me started on the shortage of physical silver in the world, or the blatant corruption and fraud that is apparently rampant on the COMEX exchange, which is so bullish for silver in its OWN right that you don't even NEED any of this ratio-to-oil or ratio-to-gold crap!  And so here is another Mogambo Tip O' The Day (MTOTD), where I reach out my arm and put my hand on your shoulder, and look into your eyes and say "Buy silver."

And then you say "What the hell are you talking about? A minute ago you were telling me to buy corn. Now you are telling me to buy silver!  I am confused and your smell is making it really unpleasant to be here!"

I smile at the reference to the olfactory sense, and make a mental note to put into your Permanent Record how you are a rude little bastard, which will make it harder for you to enroll in the Mogambo University, where everybody gets straight A's by just sitting around bitching and whining about the idiots in charge of things, and how they are screwing it ALL up. But I smile inscrutably, and I look into your eyes, and say only "Okay. Buy corn AND silver."

As you turn around to stomp out of the room in justified disgust, I suddenly grow angry at your insolence, and I grab your shoulder and spin you around, and start yelling into your face "And gold! And soybeans!  And wheat! And pork! And manganese! The one underlying theme, in case you ain't noticed, is commodities, Jack!  Commodities!   Now, go make a fortune in commodities and make us all proud of you!"

And it is not just me, Mr. Fry and a lot of other people who have an opinion about this, but also Puru Saxena, who was specifically asked what will be "the best investment for the next ten years?"    Without missing a beat, we get the reply, "Commodities. Why have I chosen commodities out of all the assets? For the simple reason that in 2001, commodities were the cheapest they had ever been in the history or capitalism."

The cheapest they have ever been!  Ever!

Continuing, "Let us take a look at the most important commodity - oil. Over the past 35 years, there has not been a single major oil discovery anywhere in the world! Global production is peaking and there is no additional supply. Meanwhile, demand for oil continues to rise especially in the emerging world where populations are huge and per-capita consumption of oil is still extremely low. As global demand rises and supply remains tight, oil prices will continue to surge."

I jump to my feet and excitedly exclaim "See? I told you that oil was going to keep going up!"   As everyone appears irritated at my rude interruption, I hurriedly sit back down, chastised. Now that I am no longer "creating a disturbance," the class now learns that some commodities are already in a bull market, as "So far, industrial commodities such as metals and energy have done exceptionally well."  The best part (from an investor's perspective) and the worse part (from a consumer's perspective) "is that "agricultural commodities such as sugar, corn, wheat and orange juice haven't gone up as much and are still close to their all-time lows adjusted for inflation."

But once again, our old friend gold is alluded to, as we read "Furthermore, I expect gold and silver to outperform industrial metals over the coming years. We now live in an era where inflation is the norm. Fed Governor 'Helicopter' Bernanke comes to mind. Despite what the mainstream media says the 'deflation threat' is not a real concern, but only a smokescreen, which allows central bankers to continue printing more money for their own benefit. In today's world, where paper currencies are only empty promises backed by nothing, I expect all of them to keep losing value against time-honored wealth - gold." 

And speaking of gold, from BFIConsulting.com we learn that "The World Gold Council recently released supply-and-demand statistics for the first quarter of 2005. Demand for gold in the first three months of 2005 is up 32%, year-on-year. According to the Silver Institute, statistics for 2004 show that a boom in investor activity was largely responsible for a 36% rise in the silver price to 17-year highs."

Further, the Japanese are apparently lifting the bank deposit guarantee, and that "banks are in trouble in Japan, and the government is removing the safety net that protected Japanese deposit holders."   BFI sees this as triggering "increased demand for precious metals."

And these BFI people are big believers in silver, as they note that "If the gold price doubled from current levels, it would be at all-time highs of $850 per ounce. However, if the silver price doubles from current levels, it would on be a one-third of all-time highs of $50."  A third!  Wow!

To add more urgency to their argument, they note that "silver production has not been able to keep pace with demand for 16 straight years. The result is a dwindling of above-ground supplies to alarmingly low levels."

Perhaps in a similar commodities vein, George Ure at Urban Survival got a letter "Just a note to update you on my conversation with a longshoreman from the Port of Seattle last night.

"The ratio of full (30%) vs. empty (70%) cargo ships leaving the US has stayed the same. We are still buying more than selling (except for scrap and food). What is more important is that beginning in June this year, when the cargo trade usually starts to significantly increase at a seasonal level, trade is slowing. This year, cargo ships are not coming into the port as they did in past years and the work load has been down for those on the docks."

So, if the workload on the docks is down, then that means there is less stuff going to retailers, which means that retailers are not buying as much stuff, which means that consumers are not buying as much stuff. Hey! I thought the economy was supposed to be booming!  

The longshoreman said they are the first to know of an upturn or downturn in business. They are now saying that with the downturn of imports, a slowdown in the economy "could happen in 6 months or less."  Then they also bring up a little history. "If you remember, last year," they said "the ships were coming in so fast that a waiting line occurred at all the west coast ports. That line is not happening this year."

- To prove that even the US government thinks that people will start running to gold, the U.S Department of the Treasury, Financial Crimes Enforcement Network has released a bulletin announcing, and I hope you find this as humorous as Phil Spicer and I, an "interim final rule". Hahahaha!  "Interim final"! Hahahaha!  If you are finished laughing, the news is that dealers in precious metals, stones or jewels are now "required to establish an anti-money laundering program."

One of the interesting parts is that the dealers are supposed to develop "policies, procedures and internal controls, based on the dealer's assessment of the money laundering and terrorist financing risk associated with its business." Hahahaha! To be a retailer they have to be experts on the financial impact of geopolitical risk?   Hahahaha!

- Loren Steffy of the Houston Chronicle has looked at the advertisements that say things like "Buy Now and Save!" which strikes her as funny, "as if buying and saving are on the same side of the equation. By definition, buying is the absence of saving."  Hahaha! Exactly! 

But there are apparently a lot of people who actually DO believe that you can "buy now and save", as he notes that "Last year, among U.S. households that have credit cards, the average total debt was $9,300, according to Cardweb.com. At the same time, the household savings rate is essentially zero and has been for several years." And the latest report shows that saving IS now, officially, zero! Zero! We spend every freaking dime!

One of the few places left in America where people do NOT think this is a good idea is (drum roll, please) Texas, which "will soon start requiring high school students to have basic financial literacy."  Hahahaha!  Basic financial literacy!    This is just one more example, as if we needed one more, of the egregiously bad job being done by America's idiotic educational system!

- Jim Otis of the Optimist notes that insurance and guarantees are not written in stone, as the companies must invest the premiums in the same markets that you do, and they will not fare better than you do, either. "A sometimes overlooked but essential requirement for a good hedge is that there must be a solid guarantee that the agreed benefits really will be paid when the need arises. If the company that is collecting the premiums each month has all of its assets and many policy liabilities in the same 100 year flood plain, that company might be too busy talking to its bankruptcy lawyer to return your frantic phone calls."

- Reuters noted that politicians have gotten an earful from their constituents: "It's about gas prices, gas prices, gas prices," House Speaker Dennis Hastert said. "Consumers are getting squeezed at the pumps. House Republicans want to do something now."

Perhaps that is why we have the sudden emergence of an enormously expensive energy bill from Congress. Martin Weiss has a nice remark about that outrageously expensive energy bill that is speeding to President Bush's desk. He says that "It's a welcome extra bonus for investors in energy. If you are an investor in energy, the bill will not reduce oil prices nor reduce oil imports. It does little to address America's growing appetite for fuel. And even its proponents agree that it will not reduce America's reliance on foreign oil imports."

But the whole point of the energy bill is that it will "lavish generous subsidies on many companies. It's packed with tax breaks - worth about $11.5 billion for the industry. It contains a provision that would give subsidies of up to $1 billion to promote oil drilling in the Gulf of Mexico. It also includes a tax credit for gas stations to install equipment that could handle an ethanol blend."

What does it add up to?  "Bottom line: No end in sight to the energy boom." And, though he was too polite to say so, there is no end to the budget deficits, either, as another result.

We get pretty much the same story from WhiskeyandGunpowder.com, who write that "bookings of supertankers for oil exports from the Middle East soared to the highest monthly level this year in July -- and shipping costs doubled along the way, according to Bloomberg.    Oil production in Norway -- usually the No. 3 global exporter, behind Saudi Arabia and Russia -- has hit an 11-year-low...and China's oil-thirsty economy is humming along at 9.5% growth, shrugging off any and all efforts to slow it down."

"What's more," they write, "speaking of OPEC, the Saudis also recently told the world's leading industrial powers that OPEC will not be able to meet Western oil demand in 10-15 years. This was the first time -- ever -- that OPEC has made such an announcement."

This is oddly in line with a report in the Daily Reckoning, which stated "Last year, according to testimony given to the U.S. Congress, more oil was expended looking for new oil resources than was actually discovered. Even OPEC isn't immune from draining wells. Oil production has fallen so precipitously in OPEC member Indonesia that it has turned into an oil importing nation, and may have to withdraw from the cartel."

In spite of all this, Daniel Yergin and his Cambridge Energy Research Associates (CERA) are saying that The Mogambo is a big stupid idiot who makes disgusting noises when he eats. Well, they don't actually come out and say that in so many words, but you can get the drift by reading between the lines, as they are predicting that there is nothing to worry about, as we will soon have oil everywhere!    CERA thinks that we "will have 6 to 7.5 million barrels per day of excess capacity and we can expect an extended period of lower prices ­ perhaps by 2007. Petroleum production will be expanding faster than demand over the next 5 years. The report has tabulated 20 to 30 new projects with a capacity of over 75,000 barrels per day that will become available in each and every year until 2010. By then, worldwide production could increase by up to 16 million Bbl/day. However, most of the increased production will come from reworking existing fields, rather than new oil discoveries, and after 2010 the majority of new production will come from OPEC."

I am unable to comment, as my eyes rolled around in disbelief, my tongue cleaved to the roof of my mouth, and my brain locked onto the word "huh?"  when I read those words. So it is fortunate for us that Ronald R. Cooke has taken a look at this CERA stuff, and found that they made 18 big, big assumptions. So he wrote a rebuttal, "Oil Depletion? It's All In The Assumptions" on the FinancialSense.com. He writes, charitably, that "CERA's optimistic views are in the minority. In the final analysis, however, the pivotal point for all of these assumptions and scenarios rests on the motivations, political realities, and production capabilities of the Middle East. If they are willing to act in the selfish-best-interest of the industrialized nations, then CERA's 'Best Case' scenario is possible."   Note that he said "possible," which is akin to my wife saying that it is possible that I will stop acting like a mentally-ill crybaby paranoid homicidal maniac, but we all know how likely THAT is.

The punch line is "If not, we are in for a long period of cultural and economic agony."

Perhaps the CERA people did not talk with Martin Weiss, of the Safe Money Report, who writes "On a per capital basis, China consumes 1.8 barrels of oil per person per year. In the U.S., it's 25 barrels, or FOURTEEN TIMES MORE. Now, fast forward to 2010, just five years from now. And make the conservative assumption that, despite China's rapid industrialization and modernization, its per-capita oil consumption will still be about a FIFTH of ours - 5 barrels per year.

"That single event will add at least 8 million barrels per day to worldwide demand. It will require a production increase equivalent to that of another Saudi Arabia, the world's largest producer."

- I get a kick out of clowns who see no inflation even when it is beating them over the head, but after all these years, my sense of humor in that area is waning. The astonishing growth in global credit is one of the largest inflations in history, and even though the growth of money and credit is the actual freaking dictionary-definition of "inflation," these guys still say there is no inflation!

Houses are in the biggest price inflation ever witnessed in history, and yet they say there is no inflation!  But if this rise in prices is not inflation, then what in the hell is it?

Bonds are also in one of the biggest prices inflations in history, and have now gotten so highly-priced that they are yielding--  even long-term! --less than (after-tax and after-inflation adjustments), the real rate of inflation! But if this rise in prices is not inflation, then what in the hell is it?

Stock prices have risen so much that the SP500 is paying a dividend of 1.8%. The SP500 is priced at $1235, and the SP500 is earning $60, so the P/E is over 20!  My Mighty Mogambo Mind (MMM) quickly scans the entire economics literature to try and find a single reference to the idea that "buying stocks at an average P/E multiple of over 20 turned out to be a good idea, everybody who did such a thing got rich, rich rich,  and they all lived happily ever after."   I comically spin my eyes, wiggle my ears, and after a few seconds making noises that resemble R2D2 from "Star Wars", I announce that the total number of hits resulting from the computer search is zero. Zero! Hahahaha!   (Actually, this is a cheap trick, and you can try this the next time you are at a party, as there ARE no such references, anywhere, by anybody, ever). And the reason is that the long-term historical average P/E is much, much lower than that, down around 11 to 14. And so the P/E ratio is, seemingly, destined to go back down to, and probably below, the long-term average. So what in the hell do you think is going to happen? That the earnings were going to go up so much that it brought the P/E down?    Hahahaha!  I love your sunny optimism! 

Jas Jain is not laughing, and with this deadpan look on his face writes, "The US stock market, with S&P 500 as the proxy, was never more over-valued than today, except for period since the bubble of 1990s and a brief period in 1929." And we all know how well stocks worked out BOTH of those times!

Have you noticed how the soundtrack is suddenly dark and gloomy with thunder and lightning?  Well, it is there for a purpose. It is there to properly prepare you for the knowledge that what always happens is that the stock prices go down, and people lose their butts, and that makes people stop spending, and that makes earnings of companies go down, which makes the P/E ratios of the companies' stocks go up, which means that the prices of the stocks have to come down, which makes people lose their butts some more, so they quit spending some more, and that makes the earnings of companies go down, which makes the P/E ratios of their stocks go up, which means that stock prices have to go down, which means people lose some more of their butts, so now they REALLY quit spending, and around and around and around it goes, spreading misery and suffering around so that everybody gets a little.

And yet they say that there is no inflation anywhere. If that is not inflation in stock prices, then what in the hell is it?

And all of this presupposes that you believe the numbers that are being reported, and there is very little reason that you should. As an example of the financial engineering that is rampant in the world, let me point you to Tony Sagami of Money and Markets, who has taken a look at IBM when they reported $1.12 of Q2 profits, "which is 9 cents per share better than the $1.03 Wall Street was expecting. Right? Not so fast!" he says.

"First, the $1.12 excludes 10 cents of costs related to stock options. If you include those 10 cents of true, real, hard compensation expenses, IBM would have missed forecasts by one penny.

"Second, there was a trio of one-time, non-operating costs that IBM used to manufacture two cents of extra profit", which he identifies as "$775 million (29 cents per share) gain from the proceeds of the settlement with Microsoft, a $1.1 billion (45 cents per share) gain from the proceeds from the sale of IBM's PC division to Lenovo Group in May, and 1.7 billion charge (72 cents per share) to cover the cost of job cuts against earnings for the cost of 14,500 layoffs. That's a combined 74 cents of one-time gains versus 72 cents of one-time losses."

If you are like me, your head is swimming and you desperately need a beer and a cigarette. But instead of us getting out notepads and calculators, he does the work for us! What a guy!  He says "Net result: 2 cents of non-operating gains."

But this is not about IBM or the fact that corruption and accounting fraud is all over the place. No, what we are talking about is inflation. And in keeping with that, the cost of government is going up by leaps and bounds, and everyone agrees that government is a cost to us all. A HUGE cost!  Yet these boneheads will stand up in front of me, walk right up to the bars of my padded cell, look me right in the eye and say that there is no inflation!  Again, if it is NOT inflation, then what in the hell is it?

Health insurance. Property insurance. Gasoline. Taxes. All of these are going up at double-digit rates. And some of them, like health-care costs and insurance, have been going up like this for years!    But if this is not inflation, then what in the hell is it?

And to compound the heart-breaking tragedy, the money that is used in all of these transactions is losing buying power because of all of this monetary insanity crap!  Trust me when I say that there are more people taking a financial bath than a couple of million sleazy, slimy financial hustlers. There are many, many, MORE people in this old world who have little or no connection to the stock market, or bond market, or housing market. In fact, a larger and large percentage of people are becoming actual parasites of the government. And every one-- every one!  --of these pathetic people are suffering the pangs of paying for rising prices, but who are still limited by static incomes. 

So  (and I really shouldn't be telling you this because you might blab to the Parole Board), but if I ever get out of here, if see one more clueless jerkwad jackass lying piece of dog crap moron halfwits tell me that there is no inflation, I will probably really lose it. Big time.

- Arnold Schwartzenegger, governor or California, has a fight with the entrenched morons and commie bastards who infest California politics. Sticking point? Trying to revamp the budget process so that the dimwits do not take windfall revenues (such as the now-busted dotcom bonanza) and create on-going programs (or provide more funding for existing programs) that will still be needing all this money (and more!) long after the windfalls dry up. A rich uncle dies and leaves you $100K, and you plan to increase your annual spending by $100K. Do you plan to have a rich uncle die every year? Hahahaha!  And then they turn around and wonder why California gets so little respect!

But it is not just California, to be sure. And it is not just America, either.

- From Alan Greenspan's August 2002 comments from Jackson Hole we read that he acknowledges that you cannot deflate bubbles. "It seems reasonable to generalize from our recent experience that no low-risk, low-cost, incremental monetary tightening exists that can reliably deflate a bubble. The key policy question is: If low-cost, incremental policy tightening appears incapable of deflating bubbles, do other options exist that can at least effectively limit the size of bubbles without doing substantial damage in the process? To date, we have not been able to identify such policies, though perhaps we or others may do so in the future."

Hahaha!  Everybody in or out of government for the last 500 years has tried, and failed, to "identify such policies," and not one of them has even come close. But Greenspan, clueless-yet-optimistic, thinks that one may be found!  I stand up and shout "What a moron!"

As security guards surround me and drag me away, I hear him admitting, now that I am out of the room, "data suggest that nothing short of a sharp increase in short-term rates that engenders a significant economic retrenchment is sufficient to check a nascent bubble."  Well, duh!

- ContraryInvestor.com has taken a look at the unbelievably low interest rates, especially the low Fed Funds rate.  "With a Fed Funds rate at 3.25% (soon to be 3.5%) and an implied forward inflation rate of 3% (as measured using the average TIPS yield YTD), we have a spread of 0.25-.5%. C'mon, if that isn't theoretical zero, then what is it?  Bottom line?  On a real basis, the Fed is still wildly accommodative. Wildly. Money is still free, so to speak. What the Fed has essentially done over the last 13+ months is bring the Funds rate from negative territory to near zero on a CPI inflation adjusted basis."

Warming to the subject, they go on. "Let's put it this way; if the Fed is even close to done in terms of tightening rates at the current time, it will be one of the most accommodative monetary policy stance relative to CPI at the end of a Fed tightening cycle ever seen in the last half century at the very least, if not ever. In other words, 'what tightening cycle?'  There hasn't been any!!!!!!"   Note the four, count 'em four, exclamation points!

Really getting going, they write "fixed residential investment as a percentage of GDP rose to 6%. For you history buffs, that's a new fifty year high. How about one last historical marker before we part company?  Along with the GDP report last week came the Employment Cost Index for 2Q. The year-over-year change in wages and salaries recorded its lowest level EVER." Prices are up, but wages and salaries are not! And you think that this portends a healthy, growing economy? Hahahaha!

Even worse, according to Challenger's monthly job cut analysis, "overall job cuts are on the rise in 2005, reaching 538,274 through June." Ugh.

***The Mogambo Sez:  This is a dangerous market to go short, as there is something so manipulative about it. I am pretty sure that it has something to do with Alan Greenspan, John Snow and that whole idiotic, war-mongering Bush administration, which could be properly characterized as Comanche, which other Indian tribes defined as "Somebody who wants to fight me all the time."  

And although I do not know where all the money went, in the first 29 days of July alone , the national debt went up by $60 billion dollars! More than two freaking billion dollars a day!

If you don't think that this is a reason to buy gold and silver, then nothing is.

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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