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At least Mickey tried to stop the brooms

Richard Daughty
...the angriest guy in economics
The Mogambo Guru
Archives
Oct 19, 2005

- The big news, I guess, is that required bank reserves dropped to $42.2 billion, even as bank deposits climbed and new loans/leases dropped. Of course, the Treasury printing up $3.8 billion in actual cash last week was pretty exciting, too. This amount of cash comes to about $27 for everybody in America who has a job. And though it is obviously being used to pay off Iraqis and Halliburton and all kinds of people who would not take a check, it still adds to the world supply of dollars, and after just a couple of transactions will imbed itself in the world economy, ballooning the money supply a little bit more, and the dollar will get just that little bit much weaker.

Of course, it was not just the bankers and the Treasury acting like slimy little toads, as we can usually count on foreigners who have trade surpluses to keep buying our debt, and the other idiotic central banks of the world to keep buying our debt, too. Sure enough, they sank another $3.3 billion into that particular depreciating asset in the last week. What dorks! Imagine going home and explaining to your wife that, thanks to your supreme incompetence, you have lost a LOT of money in nominal terms, and when you adjust those losses for the loss of buying power of the dollar (inflation), then the real losses become so big, so large, so overwhelmingly huge that we are wiped out, and we have to either sell her car or one of the kids, and you know which one I'd pick.

But it is the breadth of the NYSE (cumulative advancing issues less declining issues) versus price which is interesting, as the former spent most of the year rising, and is now falling, while price ain't done squat, and is actually down, too. Hahaha! The dark and deserted hallways of the Mogambo Mansion echo with the eerie Mogambo laugh of contempt (EMLOC) at those who kept buying stocks, kept buying stocks, kept buying stocks in the face of zero gains! And now they are actually down on the year, too! Hahahaha!

- The new bankruptcy laws took effect Oct 17, and so now if you need to declare bankruptcy, then you first have to pay for "credit counseling." Why? So that there will be a lot of people being put to work as credit counselors, doofus! Perhaps this is the fabled "re-education" that everyone, including the current chairman of the loathsome Federal Reserve, thinks is the answer to everything. American jobs being sent overseas? "Retrain the workers!" they all say. But they never answer the question "Retrain them to do what?" Now you know!

And if the housing boom is actually bursting at last, as is indicated by lots of anecdotal evidence and some odd statistical facts, then all those brokers and dealers and banks and intermediaries of every stripe and kind are going to need something to do with their considerable time, too! See how it all fits together? Hahahaha!

- The most interesting thing was that on the Today.Reuters.com site was when we read "A U.S. silver industry nonprofit group opposes the creation of an exchange-traded fund backed by the precious metal amid concerns such an investment product could make silver too expensive or illiquid in the world market." Now, in case this is the first you have heard of an exchange-trade fund (ETF), Reuters helpfully elucidates thusly; "Commodity ETFs are designed to track the price of a specific product or basket of goods, and in the case of silver, one likely would be backed by physically stored metal." In short, some guys start a fund, buy up a lot of silver, and if you want to own silver, you can buy it by buying shares of the fund like an ordinary stock. Easy!

I thought to myself that my eyes were deceiving me, or I had had a stroke or something, because my Sensitive Mogambo Senses (SMS) were tingling like when I hear that something is in danger (be still, my beating heart!) of going higher in price, or what the SUA calls "too expensive or illiquid", because, like most greedy people who want to effortlessly make large amounts of money without actually working, I would like to "Get in on some of that action" (known in the investing biz as GIOSOTA), every time I hear about something getting "too expensive or illiquid."

So I am sitting here with this glazed look in my eyes as the article goes on to report that "The silver Users Association is especially concerned that a new ETF might threaten jobs in the silver industry, as it would require large amounts of metal to be held in vaults and out of reach of the marketplace, a spokesman said on Wednesday." I raised my hand and said "Excuse me, but I am The Mogambo, cub reporter for the Interplanetary Daily News Gazette, and my question is 'Huh?' "

To make sure I got the point, they then trotted out a guy named Paul Miller, representing, so he said, the SUA. Well, he looked me right in the eye, and for a long while we just stared at each other, neither of us blinking. Then, just as I was about to fall to my knees and cry "Uncle!" he abruptly caved in and said "The concern we have is about jobs. That concerns our members greatly." For some reason, this tickled the hell out of me, as it seemed like such an odd thing to say. I figured "Yeah! Their own! Hahahaha!"

Composing myself and trying to show a little dignity for a change, I say "Let me get this straight: silver in an ETF would take silver out of the marketplace and put it in vaults someplace dark and spooky, probably full of vampires and communists or something, whereas the vaults and warehouses that already contain the silver are bright and shiny, and do NOT have any vampires or communists. Is that it? And so the price would go up higher, but still within its historical range, probably somewhere between $30 and $500 per ounce, which is a LOT more accurate as to the true value of silver in the big freaking scheme of things (BFSOT) than its current low, low, low inflation-adjusted price, especially considering the big supply-demand disparity and complete elimination of global stockpiles. So, am I hearing you right, you jerks?"

At these words, the audience begins to become nervous and agitated, as they see that The Mogambo getting worked up, and that has NEVER worked out well if you believe what you read in the newspapers. They cringe in their seats as I, with an increasing fury, continue with a sneering tone of contempt in my voice. "But the SUA thinks that when demand swamps supply, and when the price of this scarce, expensive commodity soars in response, that employment in the silver industry will FALL? Hahahaha!"

I can see their faces contorted in fear as my incessant bellowing reaches a thundering crescendo, "Hell, the miners will be putting on double shifts to mine more silver when the price gets that high! The beleaguered debtor out here will pawn the family silver and get a little breathing room so that he can do a little spending! silver will be speeding around and around the economy! In short, there will be jobs, jobs and more jobs, all over the damned place as a result of the silver ETF, you big stupid morons!" In a blind rage, I leap to ascend to the stage with the idea to grab those SUA guys and slap the hell of him until he stops spouting such gibberish. But they see me coming and take it on the lam out the back door, leaving me alone on the stage. Now I am even MORE mad! Grrrr!

The audience is hushed, frozen in place, waiting to see what happens next. Rising to the theatrical occasion, I drop to one knee, raise my arm towards the heavens, and with a voice revealing a breaking heart, cry "But are there are any limitations as to how much silver a citizen, a simple person like you or me, can buy? No! Is it written that the noble citizen must contain his lust for silver? No! Is there a law that dictates the legal size of my silver holdings? No!" Rising to my feet, I continue breathlessly, "It is therefore perfectly legal for people, individually or collectively, to go out and buy all the silver they want, including the piddly 130 million ounces of silver that this new ETF is supposed to be proposing buying, and you can take the silver home and melt it down and create cute little statues of The Mogambo and put them around the edge of your desk at work if you want to! And who would NOT want to do that?"

But the truth is, I am pretty sure, that the SUA wants to make a silver ETF illegal just because it is too convenient, as it is a Law of the Universe or something that everything that I do has to be the hard way, and nothing is ever easy for the poor old Mogambo. And buying shares of a silver ETF by making a lousy phone call is obviously a LOT easier than waiting for my wife to start talking on the phone and then sneaking around while she is distracted, looking in her purse for some money with which to buy silver, then getting in the car and going out and buy the damned silver, and then, maybe first stopping off for a chili dog and a root beer on the way, take it to the bank to put it into the safe deposit box, all of which is, like I said, a real big hassle.

For another thing, that's how you invest in commodities, you SUA idiots! You buy the commodity, in this case silver, and you store it somewhere, hoping for a higher price in the future, or, if the price drops, making plans to legally harass The Mogambo and his stupid idea to buy silver, because it is all his fault. Either way, you gotta buy it and put it in a safe place, and that is why it is called "storing"! And you don't bring the commodity out and sell it until the price gets so high that the profit is irresistible. When will that happen? It will happen after a period of time where all you do, all day long, is keep multiplying in your stupid little calculator, over and over, how much silver trades for right now in the open market by the number of ounces you have stored down in the basement and that vulnerable safety deposit box at the bank (which you never trusted in the first place, and which is the same snotty little bank that has some sort of "policy" against letting people booby-trap a safe deposit box, even though I am the one paying to rent the damned thing! And don't bother bringing up all those Second Amendment issues, as I have been down that road with them many, many times to no avail).

But this is not about how the Constitution gets no respect, but about all the silver you have, and how it has risen so much in price, and all you can think about is all the fun you can have with all that money, and all the fun things you can buy, lease or rent with all that money, and all the fun places you can go with all that damned money, and all the fun, beautiful people you could hang around with if you had all that much money, instead of being stuck here with your hateful little circle of angry family and neighbors who plot and gang up against you because they are spiteful, horrible little people who want to "get even."

Then, one day, without thinking about it, you involuntarily jump to your feet and sell some silver! And then you have a lot of money, and then you remember that you have to pay income taxes on the gain, and that makes you angry as hell, and you swear that the NEXT time you vote you will show up sober at the polling booth and manage to finally throw these tax-happy moron politicians out on the fat butts. Anyway, this is not about voting, but about how THIS is when you know it is time to sell some silver.

But getting away from this SUA thing for a moment, if you want another reason to sell your own grandmother to get money to buy silver, and lots of it, then listen to what David Bond, associate editor at Free Market News, says. China, he says, has admitted that they have literally run out of silver, and now they need to buy it! A country so big that it has almost five times as many people as ours needs to buy silver, because we, a country that has five times fewer people in it, have used all the silver to get to where we are! I mean, the potential demand for silver staggers the imagination!

So I love the idea that the SUA thinks that a lousy 130 million ounces of silver would drive up prices so much that the government has a vested interest, in the public good, to literally forbid people from buying silver, when it is perfectly legal to do so now. It staggers the mind! These guys are actually suggesting, and notice how I am repeating myself because I cannot believe this is happening, that you must be prevented, by force of law, from conveniently buying and owning silver, although it is perfectly alright for you to otherwise buy and own the identical amount of silver! Gaaaaaaah!

So if you want my stupid Mogambo opinion (SMO) about whether silver is astonishingly cheap in light of these two developments, namely the announcement by China that they were in the market as buyers, and the SUA announcing that a stinking ETF would make silver so scarce that it would drive up the price to crippling levels, then I will take this opportunity to show off. Without a safety net or even checking the facts, I fearlessly announce that I am staking out my claim to financial immortality by loudly proclaiming, in that piercing, girly screech that I call a voice, that silver, at less than eight bucks an ounce, is so freaking cheap that it is also the fabled Mogambo Investment Tip Of The Century (MITOTC), which reads, in its entirety, "Buy silver now! And lots of it!"

- You can almost hear the panic in the voice of Ken Gerbino, of Kenneth J. Gerbino & Company, who writes that "The US Geological Survey states that 'global discoveries of new oil peaked in 1962.' All oil fields face what is called production declines. This is where less oil comes out every year after a production peak is attained. The giant Prudhoe Bay field is now declining at 11% per year and the giant Mexican field Cantarell is expected to decline by 14% annually starting next year. Globally, production declines are present in approximately 80% of the world's oilfields."

I know what you are thinking. You're are thinking that the theory of Peak Oil is true, and it appears to be true, except for one or two oil fields that mysteriously re-filled themselves. He says "Using supply and demand numbers that appear very reasonable, it appears that currently a global oil squeeze has started with little relief in sight. A severe supply shortfall looks possible within 6 years and could have profound social, political and economic consequences."

If you are like me, you don't give a rat's patootie about the stupid social consequences, and ditto the stupid political consequences, and it is the economic consequences that are the interesting part, as this is where money can be made!

So, you raise your hand and ask if he really said the words "severe shortfall", and he says that yes, he did. So you turn and look at me, and innocently say "Mogambo, what are the investment opportunities in something that is going to have a severe shortfall?" The routine Mogambo response is to not say a word, but to knock you out of my way to get someplace to buy whatever in the hell it is that is going to have a "severe shortfall" because, brothers and sisters, I have read too, too many books and too, too many articles in too, too many magazines, journals and newspapers about too, too many guys who were in the right place at the right time, which is defined in the original Mogambo Dictionary of Economic Terms (MDOET) as "Buying low, especially right before a big price rise caused by a supply shortfall, and doubly-especially right before a SEVERE supply shortfall, as the necessary 'buy-low prelude' to 'selling high' at a later time, and thus making one hell of a lot of money in the process. See also Profits, Obscene amounts of."

But we will not go and look this up in the MDOET because we have finely-honed financial instincts, and we instinctively know that buying anything connected with oil is going to be a great idea for, ummmm, checking my watch for the exact time, the rest of your freaking life.

- The alarm bells and klaxons and horns and buzzers all started going off inside the heavily-fortified Mogambo bunker when Bloomberg reported that "Import prices rose 2.3 percent after a 1.2 percent gain in August, the Labor Department said today in Washington. The increase excluding oil was the largest since record-keeping started in January 1989 because of increases in natural gas prices." MarketWatch reports this as "U.S. consumer inflation surged at the fastest pace in more than 25 years"

And thanks for Doug Noland for keeping us current with our commodities inflation indexes. "For the week, the CRB added 0.7%, increasing y-t-d gains to 15.4%. The goldman Sachs Commodities index increased 0.5%, with 2005 gains rising to 43.6%."

I am looking at these increases and am choking on my own fear, but Doug Casey says that "Many people think commodity prices are higher now, but in inflation-adjusted dollars many key commodities are actually cheaper than they were before the last great commodities bull market peaked. For example, the current 'record high' crude oil price of $68 is only $31.63 in 1981 dollars, when oil peaked at $38.34. gold, at $440, is only $185.55 in 1980 dollars, when gold peaked at $850. In fact, at $440 in 2005 dollars, gold is actually lower than it has been in 30 years... save for the 2000-2003 period when it bottomed."

So gold is, when viewed like this, still cheap as hell! And it is not just gold, either! He says "At $1.73, copper today is at about half of the 1980 peak of $1.44. This doesn't mean prices can't temporarily go lower - for the short-term, given my overall pessimism about the U.S. economy, I'm particularly concerned about base metals - but it does paint a bullish picture for commodities for years to come. Long-term, however, the question is not 'if' demand for commodities will grow, but, 'How fast?' "

The next thing I know, Martin Weiss, who has been listening to all of this, is calmly saying "We have the Future Inflation Gauge from the Economic Cycle Research Institute which reports a jump from 120.7 to 122.7 in September, the highest reading in over five years. We have the Conference Board's recent survey, showing the biggest single-month jump in inflationary expectations in 15 years! We have the survey from the Institute of Supply Management, saying its index of prices paid for raw materials has suddenly skyrocketed from 62.5 to 78, also the largest jump in fifteen years. And now we have our own September inflation number, the worst in a quarter-century." And he did not mention Tuesday's release of the Producer Price Index, which jumped 1.9% for the month, also the biggest jump in something like 31 years!

In a separate report, because the Labor Department knows how this stuff affects me when I read it all at once, said that average weekly earnings, after adjusting for inflation, fell 1.2%. Market Watch notes that "Real average hourly earnings are down 2.4% in the past year, while real average weekly earnings are down 2.7%, the biggest drop in 14 years."

Toni Sagami of the Money and Markets newsletter is as gloomy as I am about this when he says "consumers are also getting hit with higher gasoline prices and air fares ... fuel surcharges and price hikes from a long list of energy consuming companies ... higher property taxes ... much higher home insurance premiums ... and higher interest rates, especially on teaser-rate, adjustable mortgages."

He leaves out a lot of other things that have higher prices, like every other freaking thing in the whole damned world except my paycheck, as far as I can tell. But before I stand up and enlighten this guy about how it is out here in the REAL world, and I am talking the REAL world where The Mogambo lives with imaginary friends but with real enemies all around me, waiting to pounce, and who want to steal my stuff like they stole my youth, my health, my hair, my teeth, my hearing, and a lot of other stuff that I don't want to talk about, he continues, "What do you think these sudden jumps in the cost of living will mean to most Americans?"
My immediate response is, of course, "Who in the hell cares what happens to them? I care about what happens to ME, you big stupid moron!" Well, this is what I was THINKING, and I would have said it, too, if he hadn't immediately gone on to say, "I think the answer is simple: Any extra dollars they have to spend on items they have to buy translates into fewer dollars they'll be able to spend at places they want to go visit - like McDonalds, Wal-Mart, or Toys R Us." Well, his guess was pretty close, but he lost points because there were no references to businesses whose marquees advertise "Girls! Girls! Girls!", or "Pizza Pizza Pizza!"

But Mr. Sagami does not want to dignify my gutter-level lifestyle with a reply, but instead keeps talking about what HE wants to talk about, and that is the drop in discretionary income. Not surprisingly, then, he goes on to say "That's exactly what we began to see last month when Wall Street was shocked by the news that the nation's retail sales dropped 2.1% in August, the largest single-month decline in four years."

Perhaps this has something to do with a reader, known only as Steve, who writes "I've been receiving more mail order catalogs than usual here, lots of them, from companies I've never heard of! And I'm suddenly getting stuff from companies & subscription services I haven't done business with for years! All of a sudden, it's like everyone is 'looking' (desperately) for new business!"

Me, too, Steve! I thought that someone, probably somebody I know or the CIA or somebody like that, put my name and address on some list somewhere!

- Greg C. writes that the idea that the size of the bust is proportional to the size of the boom is old hat, and that Valerius Maximus, the Roman historian, once quipped that "Lento quidem gradu ad vindictam divina procedit ira, sed tarditatem supplicii gravitate compensat." He says this translates as, "The divine wrath is slow indeed in vengeance, but it makes up for its tardiness by the severity of the punishment."

- Reader Len C, writes that the actions of the Federal Reserve always making more and more credit and money reminds him of the Disney cartoon, 'The Sorcerer's Apprentice', where "Mickey Mouse sets the brooms in motion carrying water and then didn't know the magic spell to STOP the process." Hahaha! Except that Mickey TRIED to stop the brooms, and Alan Greenspan has never tried at all! Hahahaha!

- One of the reasons that things are so weird, I betcha, is the sheer number of drugs, hormones, antibiotics, vaccines, and God only knows what all in our blood these days.

One of them is (according to the Harper's Index) the miracle of Teflon, which is a non-stick coating put on cookware. The problem with Teflon is that you have to use special plastic utensils when you use a pot or pan coated with Teflon, as metal spoons, whisks, ladles and tongs will scratch away the Teflon. But when you are cooking, there are usually lots and lots of things going on, and sometimes things are boiling over and your spouse is yelling at you to do something about it and you don't want to hunt up the one damned plastic spoon, ("Has anybody seen the damned plastic spoon?"), so you grab a metal spoon, which is real handy because they are all over the damn kitchen, . So you stir with the metal spoon, or dip with the metal ladle, and you inevitably scratch off the Teflon into the food you are cooking.

Well, the actual Harper's Index item was "Percentage of U.S. children who now have one of these nonbiodegradable chemicals in their bloodstreams: 96." I am not sure what effect Teflon has on the human body, if any, but I don't like the adjective "nonbiodegradable" in there, especially when this is only ONE of many non-stick products made with perfluorochemicals that were "introduced" in 1956.

So, the simplest test to see if perfluorochemicals in our bloodstreams is bad for us is to see if there are any differences between pre-1956 people and post-1956 people. And I say, yes, I think I see a LOT of differences! Especially if you get your facts from remembering something you read a longtime ago, or by merely looking at old television shows, which is so handy and entertaining. As an example of the former, I remember reading once that the biggest problem faced by teachers in 1956 or so was the scourge of children chewing gum. That was their number one problem!

As an example of the latter, I will leave that up to you to perform as your research project this year, and I think that body piercing ought to be prominent in your report.

And when you add in the sheer tonnage of other chemicals that are in our blood from our astonishing American intake of prescription drugs, legal drugs, (including alcohol, which is a literal poison, which is why it can be used as a freaking disinfectant, for crying out loud!), all the whole panoply of food additives and preservatives, illegal drugs, things used as drugs (sniffing refrigerant, huffing gasoline, etc) it's a wonder that we don't actually drool when we act so stupid.

- Since we are talking about the Harper's Index, there was one item that showed why we American seem to love conflict so much; "Portion of all U.S. foreign aid that goes to helping the recipients buy U.S.-produced weapons, equipment or services: 1/4."

- Thanks to Mr. Doug Noland for the Mogambo Laugh Of The Week (MLOTW) with this gem from UPI: "China's top central banker says Beijing must find ways to encourage domestic consumption as a way to cut the nation's trade surplus. Zhou Xiaochuan, governor of the People's Bank of China, said the nation's ballooning trade surplus is causing more and more friction with trading partners."

I don't know where in the hell they get this idiotic notion, but nations are usually encouraged to produce like hell, save like crazy, generate enormous surpluses, then go out and buy up the rest of the world that you have economically ruined with the muscles of your economic powerhouse, and then rule the world according to your own whims to the benefit, and rise in the standards of living, of your own people.

But this just proves that the Chinese leaders are not any smarter than our own, and that is why our own two biggest idiots in town (BIIT), Alan Greenspan, the chairman of the Federal Reserve, and John Snow, the Secretary of the Treasury of the United States, are flying to China to meet with those idiots. Only a complete and utter brain-damaged imbecile of a moron could possibly look at the horrifying economic condition of the United States, and then, knowing that these two American weenies are responsible for the bankrupting debacle that they see, even conceive of wanting either of these two clowns to come to China to advise them about anything! So, the good news is that you don't have to be so concerned with China, as they are thus proved to not be any smarter than anybody else with a central bank and a fiat currency. That means that they, too, are screwed in the long run.

- I notice that the index for inflation listed in Barron's as "Rate of inflation, % (annual, unadjusted)" is now 4.7%! Why are you NOT locked away in a fortified bunker somewhere, afraid to answer the door ("Go away! We're not in here!") and clutching a machinegun to your chest in case they don't believe you? That is where you should be, whimpering and hiding in fear, as this is terrible, terrible, terrible news (TTTN).

Now, for a financially savvy person like you, I know that you are taking a look at this 4.7% rate of inflation, and your hat comically flew up in the air off of your head, and now you are scrambling to compare that 4.7% rate of inflation to the yield on the 10-year Treasury bond, which is yielding less than 4.5%, which is less than the rate of inflation. And then you remember that the whole yield is taxable, too, and so the after-tax yield on the 10-year Treasury bond is LOT less than the rate of inflation! And once you do, I know that you will say to yourself "Hey! The Mogambo was right! We're ARE freaking doomed!" Then I hope you will also say to yourself "Maybe I'll send The Mogambo a few bucks to show him my appreciation for pointing that out!"

And because inflation is so high, 80 million Social Security recipients are getting a huge 4.1% increase in their monthly benefits, which is almost enough to put them back to parity with inflation, but their Medicare Part B insurance is going up $10.30 a month and the Medicare Part D benefit, the prescription drug benefit, will cost enrollees another $38 per month.

So inflation is running at 4.7%, the Social Security benefit check is increasing only 4.1% gross, and a LOT less than that after the higher fees! So retirees are suffering a falling standard of living, just like everybody else is suffering a falling standard of living, all thanks to the decline in the value of the dollar, which is manifested in the higher prices of things priced in dollars! Hahaha! Suckers! "Trust us!" the government said. "A fiat currency, unlimited fractional banking and constant governmental deficit-spending producing mal-investments are not inflationary, regardless of what the stupid Mogambo says!" Hahahaha! And you believed them! Hahahaha!

- Rick Ackerman, who does his market magic as Rick's Picks, forecasts that gold will fall in price, too, in a general deflation. The idea is (as I understand it, which I am sure that I don't because I never actually completely understand anything, it turns out) that when so much money has been destroyed, there will not be any money left with which to buy gold, or anything else, for that matter, and so prices for everything will fall, including gold.

Well, several readers asked me to comment. Far be it from me, The Mogambo, whose name, loosely translated from Latin, means "Loud-mouth idiot" with a subtle shading of "heavily-armed paranoid lunatic gold bug", to dare to criticize anything Mr. Ackerman says, and I will say that his analysis probably perfectly applies to the end-state. But there is a LOT of room between now, at these lofty heights, and then, at the depths of the lows. Between those two extremes will be a lot of money moving around, especially when the early sellers actually get most of the money that will be gotten out of the stock market. And then there will be one more guy with a fistful of money thinking to himself, "Things are scary. They are getting scarier. What in the hell do I do with this money so that I don't end up losing it?" And then that guy will run through all the alternatives, reading books, talking to co-workers, sending nervous emails to The Mogambo, saying things like "You are an idiot! So send me your suggestion so that I can do the opposite!" After a considerable stretch time characterized by pacing the floor night after night, wondering and worrying, that guy will, in the end, come to the same conclusion that everyone else has always come to; buy gold.

And so before all the money will have been destroyed, gold will, theoretically, have a lot of money flowing into it. At least, that is the way that history looks to me!

But Jay Taylor, in his gold & Technology Stocks newsletter, writes that he sort of agrees with Mr. Ackerman, in that he thinks that "inflation isn't the looming threat that some believe, but rather that deflation will be impacting the American economy as a general 'unwinding of the debt-pyramid' begins." And what does he think about, ummm, gold? Well, he sees "a general move towards gold as a storage of wealth, and as a result, that it should outperform other commodities in the longer term."

And speaking of gold, Peter Schiff, of Euro Pacific Capital, writes "Twice during the last century the Dow lost over 90% of its value relative to gold. If such declines could occur in an America with a strong industrial economy, ample domestic savings, and a favorable balance of payments, imagine what could happen today. History clearly demonstrates the danger inherent in over-paying for stocks, both relatively to their intrinsic values and the price of gold. Those who bought into the new era nonsense of the 1990's will fare no better than those who judgments were similarly impaired during the 1920's and the 1960's.

"My guess is that in the years ahead the Dow will once again retest its gold-price lows. If we can put in a solid, long-term triple bottom at approximately 1 to 1, (which might be Dow 4,000, gold $4,000 per ounce) stocks would likely be a great buy. Until then the smart money is increasingly moving to gold."

None of this is news to Paul van of Eeden of PaulVanEeden.com, who writes "gold is not only inexpensive relative to oil. When the gold price is compared to the S&P500 we see that there were three stock market bubbles during the past 100 years. In all three cases, the S&P500 rose dramatically relative to gold, and in all cases the ratio collapsed back to unity again."

And what if China and Japan adopted the same policy as the European Union, where gold would constitute 15% of reserves? Mr. Eeden says "then they would need to buy 17,000 tonnes between the two of them. That is more gold than the Bank for International Settlements, the IMF and all the signatories to the Washington agreement own in aggregate, and it would still amount to only petty cash for Japan and China."

- As if things are not bad enough on the inflation front, the October 15 issue of the Economist magazine has an interesting little article entitled "Pricing the Future" about a "dynamic price index", with the acronym DPI, being developed by a Princeton economist named Ricardo Reis. His idea is that the Consumer Price Index, popularly known by its acronym CPI, only measures what things cost today, but you also care very much about what things are going to cost in the future, too.

The upshot? Allow me to quote: "In the fours years to 2004, the average annual rate of inflation according to the DPI was 7.4%, compared with an average increase of only 2.3% in the CPI." Almost three times as much inflation! And notice that they did not even mention the crimes committed again the poor old CPI, which has been mugged and massaged and pounded lower using bizarre theoretical justifications, which results in a lower CPI, which is used to keep us stupid worker bees from getting alarmed about inflation.

Now here is this Princeton guy showing that HIS gauge of future inflation is running at 7.4%, which is double the "official" rate of inflation right freaking now!

Ugh.

***Mogambo sez: Things are getting spookier and spookier, and the weird gyrations of the markets, the result rampant market manipulations by (I assume) the Plunge Protection Team, don't make it any easier to sleep. If there was ever a moment that cried out for the safety of gold, then this, my little darlings, is it.

Oct 18, 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.

Recent Gold/Silver/$$$ essays at 321gold:
Oct 20 Columbus Gold is Giving Free Shares Away  Bob Moriarty 321gold   
Oct 20 Long Term Outlook For Commodities  Morris Hubbartt 321gold   
Oct 20 Silver Stocks Comatose  Adam Hamilton 321gold   
Oct 19 The Novo Riche Get More Data  Bob Moriarty 321gold   
Oct 18 Nothing Lasts Forever  Nell Sloane 321gold   pdf
Oct 17 Amazing Energy Produces from 70,000 Acres in the Permian  Bob Moriarty 321gold   

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