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At least the Japanese robot is not going to kill us

Richard Daughty
...the angriest guy in economics
The Mogambo Guru
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August 10, 2005

- I knew it! I knew that Greenspan and the horrid Federal Reserve would again start cranking out more money and credit creation! They can't stop! And sure enough, last week they again started increasing Total Fed Credit, this time by a cool $5.8 billion, which, after cascading through the banking system at the unbelievable fractional-reserve rate of almost 100:1, created a potential $580 billion increase in the money supply. To turn it into money, all that needs to be done is somebody walking into the bank and borrowing it!

Maybe this would explain where the money has been coming from for all the stocks that were bought in the last few weeks, and the increase in Consumer Installment Debt, which ballooned by $14 billion in June. And this does not even count the loans on all those cars that were bought, as the auto dealerships rolled out their highly successful "priced at what employee's pay" sales campaign, which again proved that Americans cannot resist a big sale, no matter how far in debt they already are.

And this sudden expansion of Fed credit could also explain how the Treasury was able to unload another whopping $60 billion of bonds in July. Normally, if a guy wanted to buy $60 billion in new Treasury bonds, he would have to sell something to get the money. This has the ugly property of causing whatever it is you are selling to go down in price ("deflation"). But now, thanks to the idiotic lunacy of having a fiat currency and trusting the Federal Reserve not to abuse the privilege of creating money out of thin air and using it to enrich themselves, the banks play footsie with the government, and they both get everything they want.

And God knows that we need more credit! Kevin Duffy, a principal of Bearing Asset Management, said, "With the stocks of the country's largest credit engines ­ Citigroup, JPMorgan Chase, and Fannie Mae ­ shutting down and nearing 2-year lows, this credit rocket is sputtering on fumes. Mr. Greenspan, we have a problem."

- There are those who lay awake at night wondering things like "What does The Mogambo use as technical indicators?" and "What in the hell is wrong with me that I even care what the stupid Mogambo thinks about anything?" I'll ignore that last remark, but I will be happy to address the first question by example. Let's mosey on over to the banks and start rooting around in their fetid bowels. What do we find? Well, for one thing, we find that the banks are getting rid of government securities, and their total stash of that toxic waste went down over the last month. This is, as one of the Famous Mogambo Market Indicators (FMMI), a very bad omen. For one thing, it means, since bond prices have fallen over the last few weeks, that the banks have lost a lot of money as they sold the bonds.

Sticking just to the facts and not launching into a long, tiresome tirade about how the banks and the Federal Reserve banking system are killing us and how they have doomed us with their stupid neo-Keynesian idiocy, the last time this kind of weird thing happened was in 2000, just prior to the market tanking! Of course, it may have been just a coincidence, but maybe not. Anyway, after the stock market dropped, the banks started buying government debt like crazy in 2001, and by the middle of 2003 had increased their holdings of government debt by 40%. Then the stock market stopped falling and was rising. By the middle of 2004 the banks pretty much stopped accumulating government debt, but only after they had increased their total holdings by 50% in just a couple of years!

Also, this forecasted decline in the market is strangely in keeping with the famed Fibonacci ratio. The SP500 topped out at about 1520, whereupon it fell to about 820. The difference is 700. So, a multiply that 700 point difference by .the Fibonacci number of .618, and you can expect a market rise of 432 points. The market is now at about 1220. So it has climbed 400 points from its low of 820, which is pretty close to what the Fibonacci predicts. The next step is, as I understand the theory, another big leg down in the market, breaking the previous low, as the secular downtrend continues.

And Samex Capital has observed that mutual fund cash levels have again reached historic lows. According to the Investment Company Institute, mutual funds decreased the amount of cash on hand to very low levels. How low? Well, cash is 2% LESS than what they are required to hold! They have sunk more than every available dime into the market!

Now, I am sure that there are lots and lots of very good reasons why this could be so. After all, they are hotshot investment type guys pulling down the big money because they are so smart and handsome and bathe regularly, and I am just a guy sorting through the neighbor's trash as my tentative entry into the lucrative "identity theft" racket. But the stock market has been flat, despite all of this buying, and so that means that somebody was taking money OUT of the market at the same time as all this money was flowing INTO the market. Hmmm I smell a big, fat, stinking conspiracy here! Only this time it does NOT involve brain-sucking lizards from outer space or the CIA.

Samex writes "This is only the third time in history that mutual fund cash-to-assets ratios have been this low. December 1972 marked the high point for more than a decade, and was followed by a 50% loss. March 2000 has marked the high point for more than five years to date and was followed by a 50% loss."

Another interesting market-timing indicator is found in a recent research paper entitled "Congress and the Stock Market" by Michael Ferguson of the University of Cincinnati and Hugh Witte of The University of Missouri reports that "an astonishing 90% of all the gains in the Dow Jones Industrial Average occurred while Congress was not in session. Dow Jones gains during Congressional sessions have been rare, they typically occurred when Congress had a high approval rating."

But before you run out and construct a new financial plan to time the market based on this highly interesting fact, perhaps you should also note that "According to a recent poll by the Gallup Organization, only 35% of the U.S. currently approves of the way Congress is handling its job." Which proves, I guess, is that more than a third of Americans have absolutely no clue as to what in the hell they are talking about. What is more important, however, is that this is not an omen for a rising market!

And another indicator of the future of the stock market is the NYSE advance-decline line. If you have been watching the advance-decline line, you can't help but notice the rise. This is usually a very good indicator of how the stock market prices have been going, which is, in turn, a pretty good indicator of where prices WILL be going. Well, maybe yes and maybe no. John P. Hussman writes, "In short, despite the apparent serenity of the NYSE advance-decline line, the market is already exhibiting the sort of internal turbulence and speculative characteristics that are hallmarks of late-stage bull markets. That's not to make any pointed forecast that stocks will or must turn down any time soon. Rather, the point is to emphasize that there are emerging signs of distribution in market action that investors shouldn't ignore." And "distribution" is the polite term used to mean "dumping these dog stocks onto some dumb suckers at high prices."

Eric J. Fry of Rude Awakening knows Jay Shartsis by sight, whereas I only know him as the guy who yells at me "Don't call here again trying to borrow any money, you creepy little jerk!" Anyway, he says that he has noticed some interesting market indicators, too, and has found "A dizzying array of troubling signs, omens and auguries are warning that the stock market is due for a drop of some significance." And how does he figure that? "The small-time option traders ­ those who buy or sell less than 10 contracts at a time - have been aggressively buying into the market. On only two prior occasions in the last five years - July 21, 2000 and Jan. 16, 2004 - did small-time options traders buy more call options than they did last week." The upshot to all of this? Oh, nothing important. Forget I even said anything. Well, if you MUST know, he says that "On both of those two prior occasions, they soon regretted their buying binges...and they probably will again this time."

Even Carl Swenlin in the "Did You Notice...?" column of Daily Reckoning, has noticed some interesting things, and writes "A good way to determine overbought (and oversold) conditions is by tracking the percentage of stocks above their 20-, 50-, and 200-day moving averages, indicators which measure market conditions in the short-, medium-, and long-term respectively." Well, he has taken the time to look at the stocks in the S&P 500 Index, and he notes that "they are all approaching the 90% level, a level that represents the most extreme overbought conditions."

Mr. Hussman goes on to say "If investors don't keep valuations, skew, and other factors in mind, it may be relatively easy to get sucked in by the continual talk of '4-year highs,' while forgetting that the annualized total return on the S&P 500 over those 4 years has been just 2%, and that the index still shows a negative return over 5 years." So the average investor has been earning just 2% over the last four years? Hahahaha! That's a mighty fine investment manager you got there, dude! Hahahaha! And this moron has actually given you a NEGATIVE return over five years? Hahahaha! I'm laughing so hard that my stomach hurts! You lost 5% in nominal terms, and you also lost at least 25% in buying power because the dollar has lost that much in value. So adding them together, you lost 30% over the last five years? Hahahaha! Mr. Hussman sneers at my impolite guffawing, and showing what a class act he is, with understated dignity simply says "Suffice it to say that I don't find the talk of 4-year highs, economic sweet spots, and 'great earnings' overly compelling."

The monetary base has stopped growing, and M3 is not growing much either.

The dollar has obviously started to roll over, as I gather from the chart. So SOMEBODY is out there dumping dollar-denominated financial crap!

And maybe last by not least, from UPI we learn that Saudi Arabia said it was "working to bring back to the kingdom a total of $360 billion invested abroad in the last 18 months." A third of a trillion dollars is coming out of something, and into Saudi Arabia? Wow! Woe betide whatever in the hell it is that is facing a withdrawal/sale of $360 billion!

Putting all of this together, if you are the gambling type, (and if you are married then you ARE the gambling type and you already know what it means to lose and lose big! Hahaha!), this is the time to start thinking about index put options, with all that lovely leverage and limited downside.

- The National Debt has been going up at about, oh, I dunno, it looks like about two billion a day. A day! Since, like Jethro Bodine, I cannot help but want to show off my skills at cipherin', and soon my fingers are flying across that calculator keyboard! After a few false starts, and I finally triumphantly announce "That's $730 billion dollars a year, Uncle Jed!!"

And then Ellie Mae, hoping to make me look like a fool, asks "Well, Mister Smarty, how much is that per person?" I smile as I think to myself, "This will be the perfect time to show her how a third-grade education really pays off!" So I say, with this haughty attitude that I know she hates, I tilt my head back until I am looking down my nose at her, and I say, "Well, there are 120 million people who have jobs that are not government jobs, so all I have to do is divide $730 billion by 120 million!" My heart stopped when she said "Okay. Then do it!" So, in a panic, I said, "I'm tired of cipherin'. You do it!" And then, to my complete surprise, she says "Okay! Let's see; 730 billion dollars divided by 120 million people is, umm, is, umm" And that is when Uncle Jed yells at us, and says "For crying out loud. It's $6,083 per worker, you hillbilly morons!"

Okay! This is great! We have learned two important, big-city things! 1) The damned federal government is forcing everyone who has a non-government job to somehow pay back the interest on another $6,083 this year. Even at a measly 4.5% interest rate, this comes to $273, and for the rest of their freaking lives, and 2) Uncle Jed thinks we are hillbilly morons. But if we WEREN'T hillbilly morons, we wouldn't be living in Beverly Hills, or have our own television show! So who's the moron now?

In light of this, the loathsome Bush administration announced that it will resume issuing the 30-year Treasury bond next year. Treasury Secretary John Snow cited this as (get a load of this!) evidence of "our commitment to prudent debt management." Hahahaha! Mr. Fry is, who is far too professional to laugh out loud and spew beer out of his nose, or maybe he doesn't see this as funny as hell, says he is "dubious. Prudent debt management seems a bit like prudent alcoholism management. Wouldn't the most prudent course of action be to eliminate the vice that requires managing? Unfortunately, now that our national debts total nearly $8 trillion, debt-management has become an eternal imperative. However prudently the U.S. might manage its debts, it is imprudently increasing them, which is not very prudent at all."

The main reason that they are issuing the long bond is so they do not have to keep going back to the bond market to keep rolling the debt over so many times. You only have to sell a 30-year bond once in 30 years, but with 2-year notes you have to tap the market 15 times to keep rolling it over! Hahaha!

There are other reasons, I am sure, that they are reviving the 30-year bond, mostly related to letting financial centers create more damned derivatives so that they and their friends can profit from the spread between borrowing money at low short-rates and investing the money to lock in longer long-rates. In short, the government is meddling in the economy, trying to manage it. As Axel Merk of the Merk Fund writes "We provocatively call the active management of the yield curve a symptom of a modern command economy. The micro-management of an economy, be it through the active management of the yield curve, extremely low interest rates, large tax breaks, or manipulation of exchange rates, all are aspects of a planned economy."

And one of the characterizing features of a planned economy is that it destroys itself.

- One of the interesting things to me is that a 6-month Certificate of Deposit now yields 3.95%, less than a half of a point less than the 5-year Treasury bond! With the CD, there is no risk of loss of principal. It is guaranteed by the bank. So, you are definitely going to get all your money back, and with a tidy little 3.95% bit more. With the T-bond, on the other hand, you get a guaranteed LOSS of principal, as the Fed has made it very clear that they are going to be raising interest rates. And the market price of a bond paying 4.3% is a lot less than the price of a new bond paying 5.5%. Hahaha! The capital losses you will realize by holding T-bonds at these ridiculously low yields will dwarf the puny coupon rate! Hahahaha! The world is full of suckers!

Which may also explain why the Foreign Custody Holdings at the Fed only increased by only $1 billion last week. Do you hear those cannons in the distance? Somebody is getting the hell blown out of them as bond prices fall, and if you listen long enough, you will notice that the cannons are getting closer and closer to you. That's because they ARE getting closer to you!

- I recently read the prattle of another bozo who thinks that inflation is caused only by an excess of demand over supply. Wrong. Price inflation is caused by a whole lot of things. For example, let the damned government put another tax, or tariff, or levy, or fee on something, and the price you will pay will go up, irrespective of demand. In fact, demand will probably go down! But if the retailers are making too thin a profit margin as it was, then the selling price will still rise!

Normally, when faced with falling sales due to the increased price, firms will run around and try and get the price down, perhaps by increasing productivity somehow, or using cheaper materials, or firing The Mogambo who is just dead weight around here anyway, or calling their Congressperson on the phone and getting them to rescind the damned tax, or tariff, or fee, by reminding them that campaign contributions come from these sales, and without sales, there will be no more campaign contributions. Or votes from the workers that are laid off. That usually gets their attention pretty fast.

But these are not normal times, and they are not normal because we have the loathsome Federal Reserve, which acts abnormally, and so the results are, as you would expect, abnormal. The whole trick of economics, they think, is to just lower interest rates! Hahahaha! This makes it possible for people to go farther into debt! Hahahaha! This is the depth of their understanding of economics! Hahahaha! You can do anything you want, no matter how stupid, and when things go badly, all you have to do is lower interest rates and everything will be okay! Hahahaha! It surprises the hell out of me that people give the Federal Reserve any respect at all!

But people will actually go deeper into the quicksand of un-payable debt to finance their overly-indulgent lifestyles rather than cutting back on anything. So the banks create more money, the banks loan out the money, and the money supply expands, and the debt bubble gets bigger. And harder to pay.

And now with all that extra money floating around, it flows into increased demand for other things, and thus all prices are driven up. So the lesson is that price inflation is caused by central banks creating more money and credit.

Inflation is also caused by other government-mandated cost increases, like increasing the minimum wage, or mandating that firms supply their workers with benefits, or by unions. In that regard, "Rethinking American History, Completely" by David Gordon, on Mises.com is a review of the book "Politically Incorrect Guide to American History," by Thomas Woods. Mr. Gordon writes that Mr. Woods says, "The ways in which labor unions impoverish the economy are legion, from distortions in the labor market to work rules that discourage efficiency. In a study published ... in late 2002 ... economists Richard Vedder and Lowell Gallaway of Ohio University calculated that labor unions have cost the American economy a whopping $50 trillion over the past fifty years alone."

That was in 2002. Three years ago. And now that unions of government workers (a cancerous abomination if ever there was one) has had three more years to reap additional gains. If you take a look at your local government's budget, you will notice the expensive results of allowing government workers to unionize. The same guys who decide how much your taxes are being raised.

- Phil Spicer sent me a copy of the essay entitled "You Call This a War?" from the Sobran.com site, which throws a lot of cold water on the stupid idea that "The War on Terror" will, or even can, be won. "The United States and the United Kingdom are never going to win the 'war on terrorism.' The reason is simple: it isn't really a war. And nobody can win or lose it.

"We should stop talking about it as if it were a war. It's a clash of wills. The enemy is obscure, but can't be fought or defeated as if he were a state. He has no vital secrets or single mastermind that can be found by, say, taking, questioning, and torturing captives. 'He,' in fact, is a loose federation, not a centralized power." So without a central authority, there is nobody on the terrorist's side to surrender to us! This is probably why the some of the terrorists have declared that Iraq will be another Vietnam, which was an economically draining disaster, not to mention all its other glaring faults.

So, like bubble economies, there is no solution. But that will not stop our government from trying, and therefore he is exactly right when Mr. Sobron writes "Expensive 'security' measures, most of them useless, will be a permanent feature of our lives and economies, like the huge military budgets of the Cold War. We are still paying hundreds of billions in taxes for weapons systems we never needed; more to the point, we pay most of the money for military salaries and pensions that have become an ineradicable part of modern existence, like a second welfare state. What starts as a means eventually becomes an end in itself. What we thought was only a specific emergency measure turns out to be a whole way of life." And an expensive way of life, too!

And where will all of this money be going? Companies connected with defense in any way, from rations to trucks to nuclear weapons. And what will happen to the stocks of these companies? They will almost certainly rise! So, this is another Stupid Mogambo Investment Tip (SMIT), if you must buy stocks, then buy anything that supplies anything military. And don't write me and ask me which ones, because I do not know, and I don't want to know.

- In October, the new bankruptcy laws will take effect, making it more difficult, if not impossible, for people to just walk away from their debts. According to USA Today, "The number of bankruptcy filings in the second quarter of 2005 spiked by 12% compared to last year." So, it looks like there is another bubble building! Hahaha!

- Jim Willie of the Hat trick Letter figures that the Federal Reserve has a plan to get the housing bubble under control. "It is my contention that the US Fed march toward neutrality is achieved when ARMs are nearly equal to fixed mortgage rates. That is their unstated goal. At that point, homeowners can swap into fixed mortgages, lock their rates, and protect themselves from a potentially higher interest rate environment." Whew! So we can all relax! The Federal Reserve has a plan!

And the plan is to pump so much money and credit into the economy that it drives interest rates to absurdly low rates? Again? And in doing so, adjustable rate mortgages will charge the same interest rate as long-term fixed rates? And people will just swap out? At this point, my mouth has dropped open in stunned disbelief.

- TheSpoof.com cracked me up with the headline "Alan Greenspan Charged With Killing Off Middle Class, Setting Stage for Economic Collapse." The text of the article was really a review of the new book, "Greenspan's Fraud" by Ravi Batra, who is also a university economist. The headline of the spoof and the title of the book tells you what is in store for us.

- David Branz sent a BBC News release that had a story about how "Japanese scientists have unveiled the most human-looking robot yet devised - a 'female' android called Repliee Q1Expo." While the robot is pretty much a dud from a utility perspective, it is a breakthrough in looking like a real person. "More importantly, we have found that people forget she is an android while interacting with her. Consciously, it is easy to see that she is an android, but unconsciously, we react to the android as if she were a woman."

It reminds me that the Federal Reserve looks like a respectable, responsible institution, but it is merely appearance. At least the Japanese robot is not going to kill us, like the Federal Reserve is!

- Tony Wile of FreeMarketNews.com is one of those intelligent people who recognize Rep. Ron Paul as being "one of the only Congressmen who makes a daily effort to keep his votes in line with what the Constitution actually says." But he says that Rep. Paul has also "written extensively on CAFTA, and from his point of view the bill is anything but free-trade oriented. Here's his take, 'We don't need government agreements to have free trade. We merely need to lower or eliminate taxes on the American people, without regard to what other nations do. Remember, tariffs are simply taxes on consumers.' " This is because tariffs act like a tax, as it just drives up the price.

And this is exactly right, as tariffs have to be paid by someone, and that someone is the final consumer, who is also paying for everything else, too.

Mr. Paul goes on to add, "Americans have always bought goods from abroad; the only question is how much our government taxes us for doing so. As economist Henry Hazlitt explained, tariffs simply protect politically-favored special interests at the expense of consumers, while lowering wages across the economy as a whole. Hazlitt, Ludwig von Mises, Friedrich Hayek, Murray Rothbard, and countless other economists have demolished every fallacy concerning tariffs, proving conclusively that unilateral elimination of tariffs benefits the American people." Yeah! Get 'em, Paul!

But if the fact is that only an idiot wants to add another tax on consumers, you can bet that Congress is, at this very minute, trying to slap some tariffs on something. Why? Well, who gets the money that the tariffs bring in? The government! Which they will use to hire more customs inspectors and associated government employees, which will cause the employment statistics to go up, and then the stock market will go up, and then everything will be wonderful wonderful wonderful. Right?

- Chris Viale, chief executive of Cambridge Credit Counseling, says, "Americans are in big trouble right now." What kind of trouble? He notes that 1 in 4 households, a full quarter of all households, is either "behind on card payments or are over the credit limit on at least one account" So three of my neighbors are NOT behind or delinquent, and yet they say they don't have any money to lend me? Those cheap bastards! No wonder I am behind AND delinquent!

- An article in USA Today by Dennis Cauchon entitled "Medicaid Insures Historic Number", contains the interesting factoid that "The nation has so vastly extended taxpayer-funded Medicaid to the working poor this decade that it has produced the biggest expansion of a government entitlement since the Great Society was launched in the 1960s. With little notice, the medical care program paid by federal and state taxpayers has grown from covering 34 million people in 1999 to 47 million in 2004." A 38% increase in six years!

This means that "About 100 million people - 1 in 3 - now have government coverage through Medicaid, Medicare, the military and federal employee health plans." And as bad as that is, it could be worse, as "More than 10 million others are eligible for Medicaid but have not signed up." So, more than a third of Americans now have the government providing their health care! With this much increase in demand, and with constant Congressional meddling forcing insurance companies to constantly provide more and more specific coverages of all sorts, and with capping Medicaid and Medicare payments to providers, it is no wonder my health insurance premiums and deductibles now consume almost a third of my after-tax income!

Michael Cannon, director of health care studies at the libertarian Cato Institute in Washington, is a guy that I really love when he says, "Shame on us for creating perverse incentives that cause people to give up private coverage for Medicaid."

But John Begala, a member of the Ohio Commission to Reform Medicaid, which is an obvious government program and he is an obvious Democrat, says Medicaid's expansion "is one of the great policy success stories of the decade." Hahahaha! Wrong, Begala-boy! It is, to the contrary, one of the biggest government failures of all time! While it may be true that, as he says, "most Medicaid recipients have no other option and need coverage to keep working", but if so, then it is a severe indictment of the excruciatingly, criminally poor job that the government has done and the damage it has inflicted upon America. There is no way that the free market could produce such a bizarre and bankrupting result.

Perhaps in the same line, but not only has healthcare grown so expensive, thanks to the idiots in government, but Mike C sent an blurb from the Oregon Oregonian that "organized retail theft has grown to a $38B 'business' (people stealing from retail stores)." This means to me that the monetary idiocy of the Federal Reserve has caused prices to rise so high in relation to wages that the bottom half of the IQ bell curve can earn, that they would prefer to risk a criminal record (and perhaps jail time) rather than work!

- Joseph Z, is a guy who is familiar with the taxi business in and around the Hamptons (which he humorously characterizes as "Living in and around the Rich and Fatuous"), and he has noticed that people are taking fewer taxi rides and fewer bus rides. Moreover, the traffic to casinos has apparently dried up a lot, too. As for the locals, he noticed that on Jobs Lane, "THE Hamptons' fashion street", he recently counted 14 shops that had closed.

As a guy who actually works for a living, he says that it is completely unmistakable that the old trend of "increased work for average workers within the services industry has not only ground to a halt. The trend has reversed." People are working less? Oops!

But this has not affected the prices, which you would expect to go down when people are, theoretically, making less money. But, in contrast, he says, "Let's examine a dish called 'Surf and Turf'. Again, once upon a time, this dish consisted of a filet mignon and the tail of a five pound lobster. Now, this selfsame dish is a 'New York strip steak' and the tail of two and one-half pound lobster. The price per head? About a 15% increase from the summer of 2004." Paying more but getting less! And yet we are supposed to believe that there is no inflation!

- Gary North asks how much should a family be saving? "At least $4,000 a year. Like clockwork." I read somewhere recently that for the average family making the average $40,000 a year, they should have (if they retired today) between $400,000 and $600,000 saved up. Of course, since our horrid Federal Reserve is bizarrely creating inflation to correct its previous mistakes in conducting monetary policy, you can double those figures for every ten years it takes you to get to retirement, meaning that if you are going to retire in ten years you had better have between $800,000 and $1,600,000 saved up by then. In ten short years! Hahahaha! Ten years! The average American is in debt up to his eyeballs, has less than ten thousand dollars in his retirement plan, and with ten years to go he is going to have to save up almost, on average, a million dollars? Hahahaha! If your retirement is twenty years away, you can double THOSE figures again! Hahahaha! You want to know the horror of inflation, this is it.

It just goes to prove what David J. Taffi, of Taub Associates, says is true when he writes, "Like waves on the seashore, an incessant drip of a faucet, or the perpetual nag of the proverbial mother-in- law, your dollars as a store of value and labor are continually clipped and filed down by the Central Bankers' silent tax."

- Alert reader Mick K. write, "a friend of ours was in China recently and brought back a ton of photos he took. What stood out to me is the fact that in each photo he took you could see large boom cranes building something. He said the ongoing building of China was un-believable." Now get up and go look out of your window. Do you see any cranes building something? Of course, the roads are all torn up as money always pours into roads and road repair and road building. So whose economy is growing?

- Roger Van V. tells me that half of his notes-receivable are not paying well, and he had to turn eight of them over to his attorney, hoping that he might get some of the money he is owed through the court system. And the owner of a small trailer park he knows has vacancies in 60% of his of his rental units vacant. The surprising fact? A third of the vacancies are the result of the tenants being picked up for drug violations! His assessment is "that one item is becoming an epidemic."

- Eric J. Fry of the Rude Awakening reminds us, because he is an evil man who wants me to have nightmares, that the current account deficit and the budget deficit combined to total nearly 10% of GDP last year. Gaaaaaaaah! See? I'm screaming, and I am not even asleep!

- Emanuel Emanuel Balarie, who is the Senior Market Strategist for Wisdom Financial, Inc. penned an essay on Financial Sense.com where he extols the investment virtues of palladium. Currently, platinum is selling at around $900 per ounce, while palladium has fallen to under $200 an ounce. He says "Whenever an asset falls in value by 80%, it has to be examined for its potential as a contrarian, value-oriented investment." Well, something that has fallen 80% needs to be looked at, alright!

Since most palladium is used in catalytic converters for cars, helping reduce exhaust emissions, he writes "From a cost-effective point of view, palladium catalytic converters are substantially cheaper. However, this has not always been the case. When palladium was at record highs, the automobile industry switched to platinum-based catalytic converters, and in the process accumulated a substantial amount of reserves. As the automobile industry starts to deplete its platinum reserves, they will revert back to the cheaper palladium." Which will, because of the increased use of palladium, cause its price to rise.

So what is the historical price of palladium? I have no idea, but I could look it up. Or we could read farther into the article and see if Mr. Balarie mentions it. Sure enough, he does! "Palladium has been a volatile and speculative metal," he writes, "with prices trading from over $1000 per ounce (January 2001) to as low as $150 in April 2003."

- Puru Saxena writes that "China now produces more steel and five times more cement than America! It is also the largest consumer of copper. The Middle Kingdom is already the biggest consumer nation in the world and it is getting bigger! So, you can see that over time China will become the single most important empire in the future." The future, hell! It has already turned itself into a powerhouse!

Mr. Saxena goes on to say that this trend isn't likely to reverse, either, because "In a nutshell, Asian economies are much healthier than the US economy and this trend is likely to accelerate over the coming years. Impoverished for decades, Asians now work extremely hard, they export and save, while Americans import, consume and are going deeper into debt."

- Martin Weiss of Safe Money Report says that Russian oil production is slowing down, and that the former Evil Empire, the world's second largest oil exporter, is running at less than half of last year's growth rate. It is still getting bigger, but half as fast. And it gets worse, as he writes that in Norway, "the world's seventh largest oil producer" , is also in bad shape, and that their production of oil is "nearly 9% lower than a year ago" In Iraq, oil production is "now 40% below capacity and 50% below pre-war production."

If you want a reason to invest in commodities, this may be a particularly auspicious time to do so, as Mr. Weiss also reports that "China's grain harvest has declined in four of the last five years, plunging nearly 18% from 392 million tons in 1998 to 322 million tons in 2003." Remember, these are Chinese people, whose government has hundreds and hundreds of billions of our dollars just sitting around losing value. Guess what they are going to buy?

But it is also India, the second most-populous country in the whole world, as Mr. Weiss reports that they are also "facing a severe food shortage." But beyond that, it seems that "The Indian diet is also changing, as the Indian economy grows and people have more money to spend for food. The demand for meat and eggs in India, for instance, is projected to be 20 million tons by 2020, four times the 1993 consumption rate of 5 million tons."

And, to put a little icing on the cake, he calculates that "by 2030, a short 25 years from now, there will be 9.3 BILLION people in the world to feed." A fifty-percent increase in mouths to feed (higher demand) and a finite amount of arable land (fixed supply) means, by simple Economics 101, higher prices for foods.

But the news just gets worse and worse, as he notes that "The United States itself is starting to consume more agricultural products than it can produce. And American producers are already virtually maxed out."

- Calan M. Newman at Crosscurrents.com writes that he has noticed "a huge jump in Dollar Trading Volume versus GDP over the last three months. We are now at levels only matched in the fateful year 2000. DTV for the New York Stock Exchange is nearly 29% higher than in 2000. At the present rate of transactional velocity, the year 2005 will witness DTV at 199% of total market cap." So it looks like there is a lot of churning to kick up commissions, eh?

Well, it may be just computer programs doing the buying and selling, as he notes that "Programs now account for the lion's share of activity on the most senior of U.S. stock exchanges. Program activity is still rapidly on the rise after accounting for more than half of all volume last year. Program volume has more than quadrupled in five years, even as non-program volume has declined."

And so what is the downside of a lot of program trading? "The more shares are traded on the basis of 'strategies,' rather than for their investment potential, the greater the risk that the shares may become mispriced relative to their value." And things almost always revert to their real values, meaning lower, meaning that you will earn a loss if you hold any of them.

And there are other things, too. Such as "Total margin debt is now more than 1.8% of GDP and over 1.4% of total market cap, clearly not as high as in 2000, but considering how prices collapsed after March 2000, at very worrisome levels nevertheless."

In summary, they ask "Where does the mania lead? In our view, lower or sideways prices for years to come."

Ugh.

***The Mogambo Sez: My mood is dark. The world of economics is dark. Dark dark dark.
Only the glittering of gold consoles me now.

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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