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Hell, even an idiot like The Mogambo knew to buy gold!

Richard Daughty
...the angriest guy in economics
The Mogambo Guru
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Oct 5, 2005

- I am, as hard as that is to believe, getting freaked out more and more. The Federal Reserve didn't increase total credit by much, but they did continue accelerating down the Road To Economic Hell (RTEH) by buying, outright, $2.4 billion of debt last week. In short, the government borrows by issuing debt, and the Federal Reserve creates the money to buy the debt! Bingo! Not only creating more money and credit, the damn thing that got us to this point, but to fund the activities of the government! Gaaahhhh!

But the bigger news in this filthy area of the economic world, for me, is that Foreign Holdings of US debt deposited at the Fed went up by a whopping $7.6 billion last week. Whew!

But the biggest, scariest thing of all was that nominal incomes dropped. And when you adjust nominal incomes by the reduction in buying power from all the inflation around here, then it is no wonder that inflation-adjusted incomes dropped so much, too. But I wail like a wounded banshee (ooOOooOOoo!) when I realize that the government's piddly little chain-weighted, hedonically-adjusted statistical adjustment to incomes for inflation is around two stupid little percent. At that, I laugh this big booming Mogambo Laugh (BBML)! Hahahaha!

I am here to tell you, with the courage found only in a guy fully clad in body armor and sporting a machinegun in one hand and a flamethrower in the other, inflation is a LOT higher than two or three percent. Horribly higher. Like somewhere in the range of six to nine percent, at least. And so when you adjust incomes for the REAL rate of interest, then the drop in real, inflation-adjusted incomes is getting to be pretty significant!

Don't believe me? Ha! Then I know that you are either rich or locked up somewhere under supervision of competent authorities, and so you are completely unaware of what things cost. And maybe even BLISSFULLY unaware, depending on how much of a buzz you can get out of the prescription drugs the nurse gives you if I can hoard them and save them up until, when I have enough, take them all at once! Gulp! Ahhhh! Bliss! I am finally not screaming and angry and scared and hysterical over what is happening in the world of inflation, central banks and governments, namely getting bigger and meaner and more insane with every tick of the clock tick, tock, tick, tock, tick, tock, all the time tick, tock, tick, tock, until I am out of my mind with the freaking tick, tock, tick, tock, and the relentless tick tock growth in the tick tock central banks and the tick tock growth in the size of governments, and inflation rising with every tick tock of the clock. This cannot, and will not, end well. Tick tock.

Well, let me put it a non-clock oriented way; booms have never worked out in all of history, except at the beginning, where it has worked every time. You always get a boom when you stimulate, stimulate, stimulate the economy, year after year. The ENDINGS never worked out well, because inflation in prices always results from inflation in money and credit. And here we are again, standing up to our ears in debt at another ending of a period in which monetary and fiscal sins were indulged in, and the boom happened, and now we are again standing by the side of the road on the way out of town with the company payroll under my arm, one step ahead of auditors and creditors, inflation rising up to devour everything, with my only consolation that at least I got out with a few bucks, and my kids are old enough to beg, so they will be fine.

But it is inflation that is the killer. For example, in my little hometown Leftist rag of a newspaper, the St. Petersburg Times, we have been getting stories of how people are getting squeezed by the rise in gasoline prices, and how they are coping. Mostly by cutting back.

And what do I mean by "cutting back"? Well, consider Daryl, who says "My family owns three supermarkets. We are building a new one currently. Costs will exceed estimates by over one million dollars (or 25%). My rent increased 13% this month. My local taxes increased over 100% (open space crap) this year and my ex needs more money for after-school daycare for our daughter. And my income remains the same."

Or consider alert reader Charlie R, who writes "Yesterday I was at a local Ford dealership. Sales were very, very slow. Across the street is a Chevy dealer. 6 months ago they had 16 salesmen. Today 8, and are about to let more go. A muffler & tire shop laid off half of its employees. A furniture store is about to close the doors."

Here, listening (well, reading) this, is exact place where The Mogambo weeps, and the mighty heart of The Mogambo (MHOTM) breaks, because this is the price of inflation. Driving the car, at work, in your sleep, wondering wondering wondering how in the hell you are going to pay all of this money, when you ain't got no money, and you ain't a-gonna GET no mo' damned money, neither!

Or maybe you will listen to Mark Faber, who is the editor and publisher of the Gloom, Boom & Doom Report, who writes that "The Bureau of Labor Statistics has calculated that health care inflation in the last ten years or so averaged about 4% per annum. However, from private studies we know that health care costs have risen by around 10% per annum in the last few years. Moreover, whereas the weighting of the BLS's health care expenditures within the CPI is only 6%, health care represents about 17% of consumption."

And it is even worse than Mr. Faber thinks, as we learn from the latest inflation report. He writes that, according to the write-up on Bloomberg, prices paid by U.S. consumers rose 0.5 percent in August. That's 6% per year. They blamed it on the steep rise in energy prices. The Labor Department said that, excluding energy and food, the increase was "less than expected." Probably because of a 0.5 percent increase in July. So-called "core prices rose 0.1 percent, restrained by auto discounts, declining hotel rates and steady medical costs." Steady medical costs? Hahaha! And as for the increase in food costs, apparently none of the government has been eating at Greasy George's Gobble and Go Restaurant!

But Mr. Faber is still indignant about the fraud being committed in reporting inflation. "I think there is no better example to expose the US government's continuous lies about the health of the economy. By understating the rate of CPI inflation the bond market is being fooled and real (inflation adjusted) GDP growth rates artificially boosted since real GDP is nominal GDP less the rate of inflation. So, if nominal GDP increases by 6% and inflation instead of averaging 3% per annum is in fact more likely to average 5% per annum, real (inflation adjusted) GDP growth is not 3% but 1% per year!"

Mr. Faber notes that "Reuters interprets that data as 'Increased competition and gains in productivity have so far helped keep higher raw materials costs from passing through to consumer goods." Hahaha! I love this! I remember, fondly, telling the CEO to tell the board of directors that we are making less profits because I am unable to pass along our increased costs to our customers! I remember it so well because it was the first time I was ever bodily thrown out by security personnel with the laughter of my boss ringing in my ears. Of course, if I had known what I know now, I would have shouted back, "But we can make it up through clever accounting tricks!"

Perhaps it is with that famous dry Faber sense of humor, but he follows that up with "Reuters reported that growth at New York State factories slowed in September, as they are experiencing fewer orders and higher costs." So not only is the firm not making any money on their existing output, but the level of output is also dropping! Compounding the losses!

I don't know where I got this next part, as it showed up right here after a lot of frenzied-yet-stupid cutting and pasting, but somebody, and maybe it was Mr. Faber, predicted "a Dow low of 8450 by December 1, 2005." Which is checking my watch, two months away! Wow! I look up the Dow average, and it is 10,568. So a drop to 8450 is 20%! Whoa!

As a kind of interesting coincidence to this prediction is the appearance of the Hindenburg Signal, which is a signal based upon the number of new stock highs and new lows as a percent of total volume that was developed by Kennedy Gammage. The Hindenburg Signal predicts that a stock market crash has become likely within the next 30 days. Not only that, but the McClellan Oscillator is negative.

Somebody, I forget who, noted that the latest University of Michigan Consumer Sentiment also produced a stock market crash signal, in that it had a one-month fall that was the biggest drop in fifteen years or something.

What does one do? Well, The Mogambo starts borrowing money like crazy. And when that (predictably) doesn't work anymore, I work double shifts at the stop light, wearing my sign that says "Homeless. Crazy. Pleaze help! Help me! Give me money or I will take down your license plate number and track you down, and you will be sorry!" And I don't want to hear from any of you about how this is extortion and the poor woman hasn't had a good night's sleep ever since she looked in her rear view mirror and saw me writing her tag number down, because this is not about who is extorting who, or who threatened who, or who did what to somebody's damned ugly yard ornaments. No, this is about inflation in prices that comes after you have an inflation in the supply of money and credit because the Federal Reserve acted like halfwits and morons. Without an increase in wages, people can't afford to buy as much stuff!

Rick Ackerman, of the newsletter Rick's Picks, was talking about the rise in prices, especially heating oil, and he writes, "Where will the money come from? Surely not from our piggy banks, since household savings growth has been wallowing near the zero line. The answer, quite simply, is that the higher costs will come out of discretionary income." How much? Well, he has this buddy, see, named Doug, who works at Merrill Lynch, and he "calculates that, compared to last winter, the average household will face an increase in non-discretionary spending of at least $700 per month, or $3,500 for the five-month period." And where will people get that kind of cash? I am, personally, hoping that you would send me a few bucks, but for the rest of you, it "means it will be directly subtractive from the retailer's share of GDP -- a prospect that Wall Street should not be shrugging off so blithely. The economy is headed for a precipitous fall, and stocks are going down with it."

And it ain't just savings, either. The American Bankers Association said number of people in the U.S. past due on their credit-card bills rose to a record high in the second quarter of this year. So not only do they have no money, but they are up to their ears in un-payable debt, too!

- If you think we are NOT in some weird, parallel universe, let me disabuse you of that foolish notion by relating a quote, an actual quote. It won't be any normal quote, like me quoting one of my stupid, hateful neighbors, mostly in the snippy "Get out of my garbage cans, you little pervert!" type of comment. No, this quote is from Alan Greenspan. The quote, and I swear I am not making this up, is "The vast majority of homeowners have a sizable equity cushion with which to absorb a potential decline in house prices." Hahahaha!

Composing myself, I say "Oh? According to Contrary Investor.com, total owner's equity is the lowest point since 1945, running about 57% of the market value of the houses! And not only that, but mortgage debt as a percentage of GDP is at the highest since 1945 too! And all those people who bought lately got into houses they cannot afford, with zero down, adjustable rate, no closing cost loans, have zero cushion!"

And if that was not enough, a September 2005 study by Greenspan himself, along with a Fed staffer named James Kennedy, shows that home-equity extraction totaled $600 billion last year, representing a whopping 7% of disposable income! So where in the hell this Greenspan moron gets the idea that people have this "cushion" of home equity, I have no idea. But I have always said that the Federal Reserve and Alan Greenspan were idiots who actually think, in spite of all evidence to the contrary, that they and their stupid New-Age theories were a big stinking load of hooey (BSLOH).

And Greenspan is the same Federal Reserve bozo who told the French that we Americans "have lost control of our financial destiny." And why is that? Because this jackass created so damn much money and credit, which flowed to foreigners, that they own us! But they will not foreclose right away. First we have to go through a long period of time where they extort our compliance, such as staying away from Taiwan.

- I finally got a copy of Addison Wiggin's book "The demise of the dollar and why it's great for your investments." As I looked at the title, I was secretly hoping that the title DID accurately describe the book, in that he thinks the stock market is going to go up. Ha! I was spoiling for a fight because I was going to finally going to get even with this Wiggin punk and how he makes me look bad by comparison, because if you want a guy who is sure that a dead dollar is NOT a recipe for a booming stock market, then you are looking at him.

So I bought it, and on the way home I'm getting ready in my mind to tear this talented and over-achieving little showoff a new one. But, alas, after reading it, I gotta tell you that while the title is terrible, the book is great, in that it says all the stuff I have been saying all these lonely years, but with a lot more style, wit and class than I could ever muster, even if I wanted to, which I don't. So, he did NOT make such a stupid assertion as suggested in the title. In fact, I agree with him right down the line on every page. So what investment is a demising dollar supposed to be good for? It is not until the last page of the book, the very last page, that he explains that the "demise of the dollar IS great for your portfolio - if you position yourself in tangible assets rather than in empty fiat promises and the bizarre economic premise of U.S. monetary policy." The "bizarre economic premise" is, of course, that you can borrow, spend and consume your way to prosperity.

He has a lot of good suggestions about that these "tangible assets" are, and one of them is gold. And speaking of gold, Richard Russell in his Dow Theory Letters notes the recent "breakout of gold from a powerful base." Not only that, but he thinks "It's interesting to note that the gold/oil ratio has reversed in favor of gold. This does not mean that oil has to decline, it simply means that gold is turning stronger than oil." So what does this mean? Mr. Russell jumps in and explains, "Either oil is far too high in relation to gold or gold is far too cheap in relation to oil. My bet is that the ratio will rise in favor of gold. Even if oil declines to 50 dollars a barrel, gold is too cheap in relation to oil. My bet - oil will remain above 50 dollars a barrel, and the price of gold will continue to rise, as will the ratio."

And gold is starting to get some attention, and even CNBC, the most clueless bunch of shameless stock touts on TV today, has been forced to show how well gold is doing. And why are they doing that? As Mr. Russell explains, "When real money raises its head and makes the news, even the crowd knows that 'something is wrong.' The unspoken and maybe even the unconscious thought is - 'Why are they buying gold? Why are people trading in their paper dollars for gold?' Or, as when my wife's friends all advised her to dump me, "What do these people know that I don't?" She did not listen to them, to her eventual dismay. And if you are not listening to what gold is telling you, then you will eventually find out to YOUR dismay.

But perhaps it has something to do with what Bill Gary, of the newsletter Price Perceptions, alludes to when he writes "As long as foreign nations print money to buy dollars, and the US prints dollars to cover deficits, the world economic system is buoyed by liquidity."

And it is this continual increase in the supply of money that makes "Investors realize that holding any nation's currency is not a storehouse of wealth. The idea of holding gold for the longer term as a safety haven is just beginning to gain acceptance."

Mr. Russell says that even people as stupid as I, including complete idiots and farm animals, will soon see the light, because "as gold works its way higher, and as central bank inflation continues, the 'great unwashed public' will become increasingly more concerned with protecting their purchasing power and protecting what wealth they still possess. Thus fear of loss of wealth and purchasing power will continue to power the great bull market in real money -- gold."

On the other hand, being the suicidal maniac that I really am, I will play devil's advocate, and stand up and say "But duuuude! If all this money continues to slosh into the marketplace, the money has to go somewhere! Right? So inflation has to show up somewhere! Right? So If it goes into houses, or stock, or bonds, then it's same-old same-old, and you will be in another bull market of some sort in one, or two, or all three of them again. There will be money to be made, dude!"

I can see Mr. Russell's face turning red with anger, but he is mostly transfixed with rage because, apparently, he left some stupid "specific instructions" that the security personnel were to keep me out, both denying me several of my Constitutional and civil rights by requiring that I pay the admittance fee like ordinary humans. Fascist .

But this is not about how everybody is out to get The Mogambo for God only know what reason, except that they hate me for no reason, and I hate them right back, and everything is normal. No, this is about whether it is possible to encourage more asset accumulation in the stock market or the bond market or in the real estate market. To find the answer, I spin the crank on the legendary Mogambo Presumptions Matrix Calculator (LMPMC), and things go clink and clank, and there is a lot of grinding of gears, and then, after awhile, a bell goes "ding!" and everything stops. The wire services stand by, breathless!

Grabbing the printout, I walk to the microphone and announce the famous Mogambo prediction (FMP), which is (fanfare of trumpets going taaa-daaaaaa!) that I freaking doubt it (IFDI).

Did you hear me? I said "I freaking doubt it." And I mean it with all the sincerity I can muster, and if you could see my face you would instantly see the sincerity and probably a few crumbs of a pepperoni pizza on it. And I will go farther than that! I will go so far as to say that I doubt it NOT because I am the great Mogambo from another planet, unfortunately without the crucial powers of being faster than a speeding bullet "(pow!), having more power than a locomotive (chug chug chug!) or the ability to leap tall buildings at a single bound (boing!), not to mention the power of X-ray vision, which I used to think was so cool, but now am not so sure, because the gizmo power to look into your house and under your clothes already exists, and if it exists, then the government is probably monitoring you right now, because that's what governments do. And if you don't believe me, then Shhhh! What's that sound?

But I am sure that I am just being paranoid, but I am pretty damned sure about a lot of things. One thing that I am sure of is that this increase in money and credit will not ultimately work is because I can read, and because I can read, I have read economic history, and because once you begin to read economic history, you quickly realize that having money can (and will, a lot of times) save your stupid little butt because you are really, really stupid about a lot of things, mostly about money and how to get along with people. And I am also sure that one day, out of the blue, you are lying on the floor of some smoke-filled barroom, where Eddie kept serving you when he could PLAINLY see that you are smashed out of your freaking gourd, and as you lie there waiting for the paramedics to arrive, the other patrons of the bar will be pouring beer on the crotch of your pants so it would look like you had peed on yourself, and then the jukebox plays a tune, and that is that moment of Mogambo enlightenment (MOME) when you achieve total consciousness in the song lyric "Nobody loves you when you're down and out" because, brother, I've been there, and I am STILL picking birdshot out of my butt from the last damned time I was down and out.

And I am pretty damned sure that my wife (or the government spies who are all around us) will kill me in my sleep one of these days, and that will be the end of The Mogambo, unless I can come back and haunt them from beyond the grave, and if I can, then I am sure that I am going come back here as some kind of Super Mogambo Ghost (SMG) and make a lot of horrible people very, very miserable for the rest of their lives, the nasty little bastards and bastardesses. BooOOOoooooo!

But I am I am also pretty damned sure that this money will NOT go into American stocks and bonds and real estate, because if that was all there was to it, then everybody would do it! And everybody would always have done it! We would have Egyptian pharaohs and pyramid-building laborers investing their money in stocks and bonds and houses. But they don't. And the reason is that the guys who DID try that particular idiocy all ended up bankrupt and in a depression and everybody and everything went kaput.

Do think I am being unduly pessimistic? Then perhaps you did not hear that the latest report from the Institute of Supply Management showed that their index of prices paid for raw materials has suddenly skyrocketed from 62.5 to 78, which is the largest single jump in 15 freaking years. And wait until those price increases start showing up in retail prices! Then we'll see who is being pessimistic!

- But I notice that I have not been pounding the table for silver lately. So let's turn our attention to alert reader Chris M, who writes "You might be interested to note that the delivery time for physical silver in New Zealand has expanded to a four-week wait on account of the Australian refineries that supply the NZ Mint not being able to crank out ingots fast enough. Two months ago I only had to wait two weeks for delivery. Four months ago there was no wait at all. With all this demand you'd expect the price to rise more."

Well, as a guy who HAS a little
silver because I was once watching TV and this priest threw a pure silver crucifix at me as part of some kooky exorcism ritual or another while he and my wife were chanting "Die, Satan! Die, Satan!" So this rise in silver demand comes as good news for me, because I happen to believe that increases in demand without an increase in supply means that prices will go up!

And if you are into gold, and you should be, it gets even better, according to Mike Swanson of free Weekly gold Report, who writes "People have been asking me where do I think gold stocks are going to go next year? Okay, I'm going to go out on a limb here. I think the XAU is going to 193."

The gold index is going up by HOW much next year? I realize that what I think is the level of the XAU must be wrong, because the numbers don't make sense. So I quick run over to Kitco and check out where the XAU is right now, and it is at 113. That's a 71% rise in one glorious year! A year that market people will talk about for decades and decades as the first official year of the Great gold Rush, when the gold index rose 71% in one year! And it kept going and going and going after that, and all the people who owned real assets, especially gold and silver, made out like bandits, and you will smile knowingly to yourself because you were on the ride up the whole way, and, in fact, that is where you got all your money, and now that you are stinking rich yourself, you realize why being rich has always been so popular!

If you ask him "How did you come up with such a specific number" he says "So how did I come up with such a specific number? It's simple, Elliot Wave Theory."

He cleverly infers from the way I say "Huh?" that I am as stupid as they say I am. But rather than try in vain to teach me Elliott Wave theory with me protesting all the way because I hate learning new things (like putting my dirty underwear in the hamper), he just tells me that "we should be beginning wave three of the Elliot Wave sequence." Again I am clueless. Exasperated, he says "What is exciting for gold investors is that phase three of a bull market is the most profitable phase to be in." Now that IS good news. "It is the longest and biggest cycle of a bull market." Even better!

And, as evidence of the on-going bull market in gold, Richard Schlessel sent me a nice little un-attributed graph of the market performance of gold from ResourceInvestor.com. It showed the prices of gold, the CBOE gold Index, and the Wilshire 5000 and S&P500 stocks indexes. gold kicked stocks' butt continuously since November 2000! Hahahaha!

And why did gold kick stocks' little fanny? Well, consider what Doug Casey, writing for The Daily Reckoning, thinks. He says that "gold is, after all, the crisis commodity. I am more convinced than ever that we're heading for a financial crisis that's going to dwarf what we saw in the '30s."

- The insanity of the central banks is still alive and kicking. According to Reuters, "The credit derivatives market grew by almost 48 percent in the first six months of the year to $12.4 trillion, the International Swaps & Derivatives Association (ISDA) said on Wednesday." Grew by half? In six freaking months? Now you know why I am gobbling these tranquilizers like candy, which may explain why I am the way I am.

- If you think I am pessimistic, get a load of Sorcha Faal from his book that I lost the name of. Looking ahead, he prognosticates that "In the span of less than 3 months: Gasoline prices will rise 500%. The prices of both food and shelter rise over 300%. Unemployment levels reach over 30% and are still climbing. The savings of millions evaporate overnight due to currency devaluation and bank failures. Unrest will begin in the larger cities first, then spreading out into the countryside. Strong and repressive laws are newly enacted as Police and Military forces spread throughout the country to counter all signs of growing rebellion.

"If you are an American reading these words you must understand two things: 1.) This is what is soon to happen to you, and 2.) The description written above applies equally to the United States of 2005, The United States of 1929, The former Soviet Union of 1989, The German Republic of 1924, The Cuba of 1960, Argentina of 1986, Iran of 1979 and the Czarist Russian Empire of 1917, to just name a few."

- The fate of the USA hinges on the dollar, as that is practically the only thing that we produce, and last year we exported $760 billion of them via the trade deficit. In that regard, seeing the writing on the wall, Venezuelan President Hugo Chavez said Venezuela has moved its central bank foreign reserves out of U.S. banks, liquidated its investments in U.S. Treasury securities and placed the funds in Europe. A commie Leftist with smarts! Wow! I never thought I would live long enough to see it!

But this also brings up the point about readers asking "Mogambo, what about foreign stocks?" In reply, I lapse into ridiculous Mogambo mode (RMM), and reply with a universal truism; all things are connected to all things, my darling grasshopper. And all the manufacturing advantages in the world won't mean diddly squat when nobody is buying your stuff. And if the American consumer is going to be forced to cut back, hard times are coming for us all.

Ugh.

***Mogambo sez: President Bush has opened the Strategic Petroleum Reserve in response to high gasoline prices, and thus temporarily driven down the price of oil. But nothing has fundamentally changed, except to get worse. So, Mogambo Tip O' The Day (MTOTD) is to buy oil and oil stocks, as not only is demand still outpacing supply, but Bush has to refill the SPR pretty soon, adding to demand. Ergo, oil prices will shoot back up.

And the gold lease rates on gold have started back down, which usually means that the people that manipulate the price of gold are trying to manufacture a lower gold price. In practice, this means that you can soon buy gold on the cheap. Do so, or suffer the consequences of having your spouse and family laugh at you and say hurtful things like "Hell, even an idiot like The Mogambo knew to buy gold!"

Oct 4, 2005
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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