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Debt and Snakes etc.

Richard Daughty
...the angriest guy in economics
The Mogambo Guru
Oct 11, 2006

-- With a bleary, jaundiced eye, I wearily note that Total Fed Credit was up $4.4 billion, to a total of $829.64 billion, making it look like they are moving back in the "inflation or die!" mode. But maybe not, as (judging by their track record of the last decade), TFC should be up to around $850 or so. Or more. But it ain't.

But this seeming lack of new TFC is important because, if you care to check, you will notice that the Fed stopped increasing TFC in February 2000, clearly coincident with the Crash of 2000, where lots of people lost tons of money. Now, something bad seems to be getting ready to happen again, and if the Fed does not start jamming money down somebody's throat pretty soon and making them spend it, the stock market will soon be toast.

Not surprisingly, then, I also note that foreign central banks put a whopping $13 billion into their accumulated Fed holdings of US securities last week. $13 billion! In one week! After taking out $12 billion the week before! This is the same worrying kind of turbulence that fluid systems exhibit right before breaking up in a chaotic, catastrophic event.

Putting words in the mouth of Sol Palha of the Tactical Investor, he thus notes in his essay "Dow 14660 Has Come And Gone" that the handsome, dashing, charming Mogambo was right, both about how his blue eyes merrily twinkle under the starlight, and about this chaos/ turbulence/ volatility thing, too, when he says, "The next few months are going to be packed with extreme volatility; expect the volatility to increase by a factor of 2 to 3."

-- If you want a real piece of Federal Reserve stupidity, then tune in to Marketwatch.com to read what Fed chief Ben Bernanke said in a speech about the lack of household savings in America: "Unfortunately, many years of concentrated attention on this issue by policymakers and economists have failed to uncover a silver bullet for increasing household saving." Hahaha! What a moron!

I have a Hot Mogambo Tip (HMT) for this Bernanke birdbrain: How about not constantly increasing money and credit, which makes the monetary aggregates go up, which makes prices go up, which strains the family budget so that they have to spend more and more (and thus can save less and less) just to stay at a standard-of-living standstill? How about trying that for a change, you Fed morons?

And as if to underscore my fear, consumers now owe so much money that they are even having a hard time going deeper into debt! As astonishing as that sounds, News@yahoo.com reports that "consumer borrowing rose at an annual rate of 2.6 percent in August, compared to a 4.3 percent rate of increase in July. Borrowing in the category that includes credit cards rose at an annual rate of 4.2 percent in August, following a gain of 4.7 percent in July." Nevertheless, "Total consumer debt rose by $4.99 billion at an annual rate to an all-time high of $2.35 trillion in August."

As proof, all you have to do is stand around my living room for a few minutes and listen to the family whining about how they are hungry and cold because I can't afford food or electricity this week since I went into debt to get a new set of golf clubs. They say they can't understand my "selfishness", and my "conceit", and blah blah blah. In response, I patiently tell them that I did it because, as Russ Winter's xanga.com quotes Gustave Le Bon from his 1896 book "The Crowd", I am sure that my poor golf scores have nothing to do with me, a lack of talent or "complete inability to learn", which is the stupid opinion of so many stupid golf teachers. It is all just a matter of having (pay attention here) the correct equipment, as the salesman assured me with this awesome and convincing sincerity. The actual quote was "The masses have never thirsted after truth. Whoever can supply them with illusions is easily their master; whoever attempts to destroy their illusions is always their victim."

If you are not into hearing loud whining and crying about my sick, self-absorbed obsession with my personal wants and needs at the expense of my family, then you can just read about the general obsession with wants and needs in the essay "AmericaPlease Keep Spending" by Joe Average at LifeToday.com.au site. He reports that "ACNeilsen recently released the results of their Internet survey (of 21,000 people in 40 countries) and announced that Americans had topped the list of 'cash-strapped' consumers who 'Have No Spare Cash'... a whopping 28%! Brazil came 3rd at 23%, Canada came 6th at 19%, and Greece came 10th at 17%."

And one reason that these foreigners are in the debt soup is because prices are up, which is because, as Jim Willie CB of the Hat Trick Letter newsletter reports, "Central banks worldwide have grown the money supply in reckless fashion in the last year. The pace ranges from a seemingly modest 8.5% in European Union, a modest 7.5% in Australia, and roughly 9% in the United States. Check this! Money supply growth is up to 18.4% in China, 19.1% in India, and a whopping 23.2% in South Africa. These are staggering numbers. Without fanfare, Russia has increased its money supply by almost 45%."

And why is this happening? Well, perhaps Bill Bonner at DailyReckoning.com has hit the proverbial nail on the proverbial head when he notes "We did not expect the market to hold up as long as it has. Our error was one of over-estimating the good sense of our fellow man. He is a bigger blockhead than we ever thought. Given the lure of easy credit, ARMs, and 'stated income' lending - he took the bait greedily. Now, he's on the line for more money than any man in history... with no greater income than he had before to pay it off."

He goes on to say "Poor Mr. Typical has not had a wage increase since 1972, according to the U.S. Department of Labor's website. He earned the equivalent of $334.60 a week back 24 years ago. Now, the figure is just $277.96." Hahaha! Welcome to the world of inflation, Mr. and Ms. Typical! What do you think of the Federal Reserve now? Hahahaha! I thought so! Now you are on the path to achieving True Mogambo Enlightenment (TME)!

And when you are paying those outrageous credit-card bills and higher taxes with less real (inflation-adjusted) income, you will more completely understand it when reader Ed informs us that "The word 'usury' in the Hebrew concordance means 'the sting of the serpent' or 'snakebite.'" Thus, he says "The interest on our national debt, our mortgages, and our credit cards are killing us."

But we were not talking about debt or snakes, but about Ben Bernanke and his bizarre economic theories. But, perhaps in another manner of speaking, we ARE speaking of debt and snakes when, for example, Axel Merk, of the Merk Hard Currency Fund, writes "In his research about the Great Depression before becoming Fed Chairman, Bernanke identified the strong dollar as one of the culprits that made the Depression more severe." Hahahaha!

The dollar was gold back then, dork! The inflationary stock market excesses were NOT because of an inflation in a fiat currency, but was, instead, 100% a product of the damnable Federal Reserve, creating outrageous amounts of money and credit, and the attendant outrageous amounts of debt, financing outrageous inflation in the stock market and debt markets during the 1920s, which went bust, which created the Great Depression, which came after only 17 years since the creation of the Federal Reserve!

Or am I supposed to take from this that if only those stupid foreigners had not made the mistake of destroying their entire infrastructure during WWI, and then had not compounded their folly by not letting a bunch of arrogant central bank weenies go crazy with creating excess money and explosive credit to produce their own inflationary Roaring Twenties to bail us out, then everything would have been okay? Hahaha!

But either damned way, this ridiculous bonehead is saying that if the Federal Reserve had been allowed to produce more excess money and credit (to drive the dollar down), to produce even more inflation in the stock market and in the prices of everything else, too, then everything would be okay, and that the Great Depression would never have happened! I leap to my feet and exclaim "This is insaaaaaaaaane! People should be rioting in the streets!"

Well, I thought that was pretty clever and a fair bit of theatre, but Mr. Merk was not amused by my antics, and simply says "He has also praised the Japanese ultra-loose monetary policy to fight deflation." Hahahaha! Another good one! I guess that the dim bulbs in the Japanese central bank are every bit as stupid as our own central bank in believing this monetary-excess stupidity, and so it is no wonder that the Japanese people have not prospered for 15 straight years, that their stock market is still down about 50% from the peak, and real estate is way down, too.

And it is also no wonder that I have as little respect for Japanese morons as I have for us American morons, and for the same reason: Economic stupidity on a grand scale.

But all of this philosophical and vaguely xenophobic rambling aside, Mr. Merk goes on to say that the imbalances in the economy are so severe, thanks to the loathsome Federal Reserve financing the explosion in the size of the government, that "In the absence of an agreement on entitlement reform, the politically most convenient solution is a devaluation of the dollar. In such a scenario, nominal promises can be kept, but the purchasing power of benefits erode. While this is a likely scenario, it is a risky one as side effects may include significant inflation."

Hahaha! Did he really say "may include significant inflation"? I stand tall to tell you the Transcendent Mogambo Truth (MTT)! It WILL be inflationary, as there is no other possible result from all that new money chasing a static supply of goods and services!

And, of course, all this bidding up of prices is the horror of inflation that compels me to hide under the stairs, heavily armed, wearing a tinfoil hat and whimpering in fear, made worse by Richard Russell, of the Dow Theory Letters, when he writes "The current reasonably accurate inflation number is 7 percent. The current estimation of the M-3 money supply is 9 percent. The only thing holding back massive price inflation today is the massive over-supply of goods. So today we have the almost unprecedented situation of too much money confronting too many goods. The result is a highly unstable market with accompanying massive speculation and leverage."

But before I can really get up a good head of steam and vent some hysterical outrage about how massive deflation and roaring inflation will consume all of us in a bonfire of monetary stupidity, it suddenly occurs to me that not only can we smelly, stinky, lowlife peons now look forward to more and more suffering as inflation starts really catching fire, but we are ALREADY suffering, as Justice Litle Outstanding Investments newsletter reports that "US corporations are bursting with cash, but that is because consumers' pockets have been voluntarily emptied. The talking heads have never bothered to examine this curious point: the biggest run of corporate profits in history and the biggest run of consumer borrowing in history happened at the same time. This is another monster imbalance, with ultimately ugly consequence, that doesn't get much press."

-- Greg Ip at the Wall Street Journal writes that the new president of the Federal Reserve Bank of Philadelphia, Charles Plosser, "had once backed the view espoused by Milton Friedman that the ideal inflation rate is actually negative -- that the Fed should have a deflation target, perhaps of 2% to 3% (that is, inflation of minus 2% to minus 3%). The reasons have to do with ensuring the purchasing power of money in your wallet rises at the same rate as that of money in the bank."

Wow! I can't believe my eyes! I love this! As wildly and deliriously joyous as I am to hear this, perhaps we should not celebrate the outbreak of good sense quite yet, as Mr. Ip notes that "In his new job, Mr. Plosser appears to have mellowed on the merits of deflation."

-- There was an article a week or so ago about how ordinary, lunchbox toting, mom-and-pop Japanese citizens are now increasingly day-trading currencies in the Forex market. I didn't think too much about it at the time, knowing that they will soon have their sushi eaten by the big boys/insiders, and then mama-san and papa-san will stop the speculating, and life will go on with another mom-and-pop being a little smarter, a lot more cynical, and probably poorer for the experience.

But the recent, bizarre strengthening of the dollar makes the Easy Money Mogambo (EMM) side of me say "Hmmm! This is wrong, wrong, wrong, and thus it can't last! So how can I, the living epitome of greedy pig in all my Mogambo glory, make some money betting against this 'strong-dollar' stupidity?" And then I think of the Japanese mom-and-pop trading currencies in the Forex market, and, intrigued, I say "Hmmm!"

And then I remember that I don't know anything about that market, and I don't want to be educated because I will, of course, misinterpret things, and the mistakes will cost me a lot of money in losses, and I still won't seem to learn, and then I will give up in disgust, and I will be bitter, and I will hate and distrust the government, and the Federal Reserve, and the Supreme Court, and the school system, and the news media all the more.

And then I remember that I can save myself a lot of hassle, lawsuits and mysterious drive-by shootings by just buying gold and silver to accomplish the same thing, as the price of gold and silver will (ceteris paribus) automatically go up when the dollar falls. How convenient! How sweet! How lucrative! How thoroughly, thoroughly delightful!

-- Jason Furman at CBPP.org is one the guys talking about the rise in the nominal Dow Industrial average, which conveniently neglects to adjust the Dow for the changes in the buying power of the dollar (inflation), or mention the other stock indexes.

Mr. Furman says "The Dow Jones Industrial Average, adjusted for inflation, is down 17 percent from its all-time high on January 14, 2000. It would need to rise another 2,378 points to set a new record, adjusted for inflation. The broader stock market is even further below its 2000 peak. The Dow Jones Wilshire 5000, which tracks more than 5,000 stocks and is the most comprehensive measure of the U.S. Stock Market, is 23 percent below its record close on March 24, 2000, after adjusting for inflation."

Peter Schiff of Euro Pacific Capital notes "Priced in British pounds, Canadian or Australian dollars, or euros, at 11,850 the Dow is still below its 2000 peak by approximately 25%, 26% and 32% respectively."

-- Michael Nystrom at BullNotBull.com is pretty hip to this black-box/computer program trading jazz, and says "So much of today's program-based trading keys off momentum. This creates a positive feedback loop that sends stocks to new highs and buys any dips before they materialize." So "After making a tentative new high on the Dow, phony or not, this market has the potential to move a lot higher." The lesson, he says, is "never argue with new highs! Phony or not, what we have are new highs. If you're a bear, get out of the way."

-- Biz.yahoo.com reports "Congressional estimators" saying that "The federal budget deficit estimate for the fiscal year just completed has dropped to $250 billion." Hahaha! Lies, smoke and mirrors is one thing, so let's take a look at the actual Gross National Debt. Instantly, you notice that we are, as a nation, thanks to Congress, $620 billion deeper in debt over same "fiscal year just completed". Hahaha! How in the hell can you be $620 billion deeper in debt and still say, without your tongue leaping out of your mouth in shame, that the "budget deficit" is only $250? Do you mean that you meant to go into debt by $370 billion, and ended up borrowing $620 billion by accident or something? Hahaha!

But although they spent every dime and borrowed another $620 billion, tax receipts are up $253 billion, a big 12% over last year. But what a lousy return on investment!

The budget is now about $2.7 trillion dollars, and with a population of only 300 million, that comes to $9,000 per man, woman and child in the country. So, for every family of three, the federal government is spending $27,000! And this does not even include how much money each little town, city, county or state is spending per capita by issuing bonds! And somehow we American idiots think that we can continue this stupidity indefinitely? Hahaha! I reiterate "Americans are morons!"

Or, as Bill Buckler of the Privateer newsletter explains, with all the fudging, lying, and outright deceit running rampant today, "We are all in the middle of history's biggest ever 'Potemkin Village' - a prosperous looking facade designed and erected to disguise the financial ruins behind it."

-- For those who had the smarts to load up on gold in the recent downdraft, you did the right thing, as that trend will probably reverse, if I can surmise from Ambrose Evans-Pritchard of the Telegraph UK. He writes "Central banks may have dumped far more gold on the markets over the last three weeks than officially reported, accounting for the sudden plunge in prices that has stunned investors. Barclays Capital said Europe's banks had sold an extra 100 tonnes from reserves in a rush to meet a quota deadline on Sept 26, but had done so by selling through forward contracts that disguised the effect. The huge sales would help explain gold's brutal fall from $640 an ounce in early September to $559 this week, an effect compounded in recent days by hedge fund liquidation."

Philip Klapwijk, chairman of the precious metals group GFMS, has the opinion that bullion would soon resume its five-year bull market. "The game is not over for gold," he said. "We've still got a big dollar devaluation ahead."

Reader Larry J has been connecting dots, too, and says that he thinks that there is something weird involving Toronto Scotia Mocatta Bullion, the Bank of Nova Scotia, and Royal Bank, who are, he says, having a hard time getting, or filling, small investor's orders for silver. "The fact remains that when one of the world's largest bullion banks - on COMEX and the LBMA - cannot supply these small orders, then we can safely say that we are, to all intents and purposes, out of the metal."

-- Roger Wiegand Trader Tracks writes "The American stock markets are peaking for several reasons. First and foremost is the non-confirmation of the transportation index. If transports are lousy, the stuff they normally haul is not being hauled. If goods are not moved, this means no sales as buyers are gone. This is fact, not guessing. CNBS reported this morning Walmart was off 2%. Walmart is a retail sales proxy for all of America as they are the largest in the USA both for employment and retail sales. Trends are screaming stagflation as the economy stagnates while prices of food, energy, real estate taxes and services are racing higher."

-- SafeHaven.com gave us an "Interesting Picture of the US Bond Markets" by Pinank Mehta of Metier Capital Management. He says "The current Long 'Open' Interest in 10-year US treasury bonds is greater than SIX Standard Deviations (12 SIGMA)!!!!!!!" Please note the use of the extremely rare seven exclamation points, a literary device to denote particular emphasis, in this case to alert you to prepare for the next sentence, which was that "The odds of a 6-Sigma event are one in 500 million, or 1.37 million years, so it will be exponentially higher for a 12 Sigma event." I don't know about you, but when I read that, sphincters tightened up.

-- From John William's Shadow Government Statistics we learn that "The broad outlook for a deepening inflationary recession remains in place. Confirming the extremely bleak employment picture, the August help wanted advertising index dropped to 31, from 32 in July, and from 34 in June. The August level is the lowest reading since April 1961." I gasp! 1961?

-- "Risks of recession continuing to rise, economy is slowing, showing warning flags" says Will Deener of the Dallas Morning News. He reports that "new-car sales are down about 5 percent from a year ago. This has happened six times over the past 40 years, and in every instance the economy was either lapsing into recession or already in recession."

In a related story, reader Titus N. writes "I received an email from a friend whose friend works in a credit union and does car loans. She said that they do 15 applications per day on a normal day. Last week they did ZERO."

James Stack, a market historian and editor of InvesTech Research hears us talking about this recession stuff, and adds "Not one recession in the past 50 years was forecast in advance by a major poll of economic forecasters", but that the inversion of the yield curve did, and that "The yield curve shows an 88 percent probability of a recession beginning sometime between now and the end of next year."

-- Ted Butler of Investment Rarities "The total dealer net short position in gold and silver is low by any recent measurement, as the corresponding speculative (gross) long position, particularly in silver, is at lows not seen in years. The concentrated net short position in silver held by the largest dealers has never been greater, relative to the total net dealer short position."

Being kind of stupid and thinking mostly about lunch (I am considering pizza. Maybe tacos), so I can only stare at him blankly. After a few seconds, he tries to clarify things by saying "The latest COT indicated the 4 largest traders still hold almost 97% of the total commercial net short position on the COMEX." Again, I have to just look at him with the same dumbfounded, blank expression on my face. With some increasing exasperation, he helpfully explains "This situation, small total dealer overall short position, but super-extreme dealer concentrated short position is unprecedented."

Again he paused, obviously waiting for something important to sink in, but by this time I am secretly even more confused than ever, and I can actually feel a drop of drool forming in the corner of my mouth. Horrified, Mr. Butler hurriedly says "This short position is so large, relative to real world supplies, that it defies economic justification." Slobber is now running down my chin. "It is so concentrated, that it is impossible for it not to be manipulative!" he screams as he runs from the room.

After awhile, it sank in. Buy silver. Lots of it.


***Mogambo sez: If you have gold already, you will be fine. If you don't own gold already, you will, perhaps soon, and then you will be fine, too. If you don't own gold already, you will, and if not soon, then you will be fine, but not as fine. If you don't own gold already, and you never do, then you are, on the other hand, screwed. It's as simple as that. And that's 6,000 years of history talking.

Oct 10, 2006
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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