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Out comes the funny-looking rubber chicken

Richard Daughty

The Daily Reckoning
...the angriest guy in economics
The Mogambo Guru
November 4, 2004

- The dollar resumed its inexorable decline to its intrinsic worth, namely zero. Foreigners decided either 1) that they like losing money, or 2) have so much invested already that what's another few billion here and there? So they all popped another Prozac and resumed their buying of Treasury debt, knowing full well that they will certainly lose money on it, too.

And speaking of the dollar, according to an article in 11/1/04 issue of the Wall Street Journal entitled "Fed Ponders Oil Price and Dollar," the Federal Reserve thinks that "an abrupt run on the dollar and sudden jump in interest rates" is a concern to "policy makers around the world," because the American current-account gap is so wide, and getting wider, which means that we are pumping dollars by the $600-billion a year boatload out of the USA and into the hands of foreigners who probably do NOT have our best interests at heart, which I surmise by the lackluster response I get to my emails to them that plead "Dear Foreign Sir or Madam, May I please borrow some money?" and they respond, if they respond at all, with what I assume are rude colloquialisms (e.g. "Go glagny yourself, you blampherous glackney porgler.").

But ever the smiling optimists, "Though Fed officials believe such a crisis is unlikely," they "appear to broadly agree the dollar will have to fall to narrow the gap." Let me get this absolutely straight in my tiny little mind: A crisis is only "unlikely"? Unlikely? How in the hell did we get to a place (to which I cleverly allude by comically pointing to my watch and shouting "Right here and now, you freaking bozo!" and hitting you over the head with this funny-looking rubber chicken) where such a crisis is only "unlikely?"

The cashier at the supermarket was stunned when I whirled around and jumped up on the conveyer belt, leaned over and said "The whole damn problem is that if the dollar goes down, then imports have to cost more! Things costing more is inflation! Or else those foreign devils will have to make less! One or the other! And these foreign devils are all guys whose nasty butts we have kicked in wars in the past, some of them numerous times! And you can take it from me that they are still carrying grudges. And the reason that I bring this up is that I don't think that they are going to be too keen on the idea of taking losses, in real terms, i.e. adjusted for inflation, for years and years and years into the future so that we can continue living beyond our means!"

Even the bozos at the Fed "appear to broadly agree the dollar will have to fall to narrow the gap"! And filling a $600 billion per year gap is a HUGE gap, and it would have to be filled with an equally large chunk of change!

And THAT is the part that is causing panic around here, mostly because the Mogambo Inflation Alert System (MIAS) is springing into action at all hours of the day and night, and it is unnerving to have sirens constantly blaring and horns blaring and alarms blaring and everything just blaring blaring blaring, and the loudspeaker is continuously advising the neighbors "Warning! Warning! The Mogambo Self-Defense System (MSDS) is now activated! Do not leave your homes until further notice! Resistance is futile!" and now they are all snippy to me about their alleged lack of sleep and the fall in their property values and blah blah blah. I mean, I can't win around here! No matter how hard I try!

But then we read "Officials stress that they aren't trying to influence the dollar, a job they leave to the Treasury. So I have taken this to mean that I can take my wife's car and drive it like a maniac around town, smashing into mailboxes and across flowerbeds, ramming it into parked cars and careening at those school-crossing guards with their stupid orange vests and their stupid little whistles going "Tweet tweet tweet!" like it was MY job to keep those little brats out of the street or something. And when my wife goes out in the morning, takes a look at her beat-up car and screams "What in the hell have you done to my car, you horrid little jerk?" I can smugly say "Hey! I am not trying to influence the value of the car! That is the Treasury's job. I mean, that's YOUR job!"

But is not only the foreigners who are morons about buying US government debt, as the corporate bond arena also blasted to new highs, driving yields to new lows. This may be partially explained by the banks gobbling up $13 billion in "Other Securities" last week, which is the catch-all category for things other than "U.S. Government Debt." Or it may be that Doug Noland's analysis is correct in that "with performance suffering, many bond mangers have unwound interest-rate hedges and, in the process, supported bond prices and systemic Liquidity."

- Personal consumption exploded up another few notches to a new record of $7.659 trillion, up a whopping $258 billion since this time last year, which works out to almost $1,000 for every man, woman and child in America, although MY personal consumption certainly did NOT increase by a thousand dollars, and so that means that one of you greedy little people are getting twice as much as me! Meanwhile, incomes are up 0.2%, while spending is up 0.6%!

- A Prudent Bear site Guest Commentary entitled "Oil demand - Why so strong?" was written by Andrew McKillop, who is, so he says, "the founder of the Asian Chapter, International Assoc. of Energy Economists and Former Expert-Policy and programming, Divn A ­ Policy, DG XVII-Energy, European Commission," and I am wondering how he got all of that on his business card.

But that is not important. What IS important is when he says "What counts for the near-term and mid-term, the next 3 ­ 5 years, is that world oil supply will almost inevitably trail world oil demand. That is, growth of world supply after increasingly difficult and costly compensation for annual depletion losses now running at about 1.25 ­ 1.5 Mbd, and set to increase, will be unable to satisfy the essentially inelastic and accelerating growth of demand. This will continue until and unless oil prices rise well above 75 USD/bbl, or an intense, worldwide economic recession is triggered through indiscriminate use of the 'interest rate weapon' in the OECD."

Well, I am here to tell you and this Mr. McKillop that anytime supply trails demand, the price will go up. Whether or not the $75 per barrel is the price where the world's economic system gags on the price, I dunno. Sounds about right, though, I guess.

"Targets for oil saving will likely have to be at 5% or more reduction of oil demand per year. In the USA, we can note, current oil demand growth trends, and declining domestic oil production, result in oil import demand growing at about 5% - 6%/year. Oil saving programmes would therefore need to target annual reductions in oil demand well above 5%." Americans cut demand? Hahahaha! Hey, moron! We're Americans! We consume as much as we want, of everything we want! We're Americans! That's what we do! And if prices get too high, the government will give us money!

But the price of oil declined to less than $50 a barrel Monday, and that was the inspiration for one of the most stupid things I have ever seen on the Bloomberg.com site, and I am going to quote it verbatim: "Crude oil futures fell below $50 a barrel in New York for the first time since Oct. 5 on speculation that growth in demand will ease as supplies increase." Hahahaha! Demand stops growing as supply increases? Hahahaha! Stop it! My sides are hurting from this laughing! Hahahaha!

The Mogambo turned his face to the camera. Audiences world-wide laugh in delight to see the look of perplexed exasperation on my comically expressive face. "Supply more of something and the demand goes DOWN?" I ask incredulously, my bow tie spinning around with a whizzing sound. "If gasoline goes down in price, I will drive less? Wow! This is ALL news to me!" I abruptly fall to my knees, my hands clasped as if in prayer, beseeching you to have mercy on me! With a voice dripping with heart-breaking pathos and utter, mortal despair, I say "Forgive me! I feel like a fool! How could I have been so wrong? I beg you; please forgive me! I did not know that if you increase the supply of something, that the demand will go down!"

But you will notice that my eyes gleamed like cold steel with a fierce light, as secretly I am saying to myself "And oil fell on the world market because of THAT? Ha! Idiots!" And suddenly I remember a scene from the movie "Butch Cassidy and the Sundance Kid," where Strother Martin has hired the two heroes to guard a payroll that they have to pick up in La Paz in South America, and they are imagining ambushes at every turn in the road. Strother finally says to them "Nobody is going to rob us going DOWN the mountain! We don't have the money when we are going DOWN the mountain!" And then he exclaims, talking to himself in a loud voice containing large quantities of sarcasm and disrespect, "Morons! I've got morons on my team!"

But it is not just the price of oil. Mr. McKillop goes on to say "Overall, and in the OECD bloc the inflationary impact of higher oil and energy prices is more than compensated by 'structural' deflationary trends. The demographic and social impacts include rapidly aging populations (Europe and Japan) leading to a fast increase in non-working populations, lower real incomes, for example through longer work weeks and falling unionization of labour, increasing 'structural' unemployment, impoverishment and marginalisation of ever larger groups within 'postindustrial' society." In short, he figures that the number of people who cannot afford to buy oil or anything else is growing, and it is these people slowly starving to death that will keep a lid on inflation, because the few dollars that they possess have such low buying power, and so they will buy less and less, and as demand goes down and down, then prices will go down and down, too, and that misery will be inflicted on ever-larger and larger sub-populations of Americans! Wow! Ain't economics fun? Don't you just love this stuff?

Mr. McKillop goes on to say "It is therefore the older, aging societies of the North and not the fast industrialising countries, nor the poorest, vastly less oil-intensive economies and societies of low and lower income countries that will be first and hardest hit by rising oil prices." He is talking about, and my eyes briefly scan the room, you, which doesn't bother me too much because that's the kind of selfish little bastard I am and how everything is about me, me, me, but it bothers me that he is also talking about me, because that is a bummer, and it REALLY bothers the hell out of me that he is also talking about my wife, because she knows EXACTLY whose fault it is that the economy of the USA is collapsing and thus caused her suffering. She blames me, because all things that happen in her life that are bad are my fault, and by God, I am going to suffer for it every hour, of every day, of my life.

But I, personally, do not blame me. I blame the Federal Reserve, because this is exactly what you always get when you have a loose central bank, a fiat currency and a spendthrift government that grows, via deficit-spending, like a cancer both in sheer size and in grasp, which can be easily measured by the handy metric known as the Mogambo Hands Around Your Neck Number (MHAYNN), which indicates how many government agencies have their hands around your neck and are choking money (measured in dollars and cents) and/or services (measured in sheer hours of required compliance) out of you. The latest estimate is that there are eighty pairs of hands around my neck. So to get MHAYNN, we multiply "pairs of hands" by two, to give (and this is the answer to Question Number 12 in last night's homework), MHAYNN = 160.

- The stupid Cuban communists (and anybody that thinks that a communist economy is viable is stupid), have now passed a law that requires dollars held by Cuban citizens to be converted into Cuban pesos. Apparently, there will be a 10% charge on the exchange. Ten percent! Thus, another fascist/commie/socialist government grinds its population to dust.

But you can call it taxes, or you can call it fees, or you can call it Ray, or you can call it Jay, but the bottom line is that another grubby dirtbag government is taking money away from some, or all, of the citizens, making the citizens poorer.

- Jonathan Clements, who writes the Getting Going column for the WSJ, has had an epiphany of sorts. He say that after ten years, his optimism "has taken a beating. Yes, I still believe it is possible for ordinary investors to make decent money on Wall Street, but it has become increasingly clear to me that the odds are stacked against us."

He has finally gotten around to looking at the historical record like the Mogambo has taken a look at it, and he admits "I don't like what I see." While the record of the stock market since 1925 is impressive he says, he also notes that "A significant part of that gain, however, came from both rich dividend yields and rising price/earnings multiples. Today, with dividend yields so low and P/E ratios so high, long-run returns will almost certainly be lower- even assuming robust economic growth."

Not only that, but he notes that to compound the misery of paltry gains in the decades ahead, "the gains may all but disappear after figuring in investment costs, taxes and inflation." He makes the case that your returns are going to be eaten up, "leaving you with no real return."

And as gloomy as this sounds, he is still more sanguine than I, because my Official Mogambo Outlook is much more bleak, especially when you consider that the most optimistic forecast of either of us (him) is "no real return," which is merely breaking even. The more pessimistic of us, (me) sees horrors too awful to describe in front of children because it gives them nightmares, because I predict that we will not only lose almost all of everything we own, but we will soon die screaming in the gutter, consumed by bankruptcy and misery and self-loathing and realizing too late the utter profundity of what "Your vote counts!" means, and as the scene fades to black we will look at what the boneheads we voted for have done for us, and we will cry out in anguish, and I blame Democrats, mostly, but Bush is no prize, either.

Then he says that he has reached the conclusion: "You need to save like crazy." And I am here to tell you that history has shown that you need to save a month's pay now to have a month's income when you are retired. That's the hard lesson of long-term, simmering inflation. And if you don't believe me, then the next time you are looking at some of those old sit-coms from the 60's and 70's and 80's, pay attention to the prices for food you sometimes see on supermarket walls. Then compare that to what that same item costs today. Compute the inflation. It always works out somewhere between 3 to 6 percent a year.

Now, sit back in your chair and put your hands behind your head. Close your tired eyes and picture yourself retired, getting up late, having a nice breakfast and then having fun all day playing with your hoodlum friends. Now think how much money you would need, per month, to retire right now. Then think about how much people made, per month, back then. Compute the inflation. It works out, again, to 3 to 6 percent a year.

Ergo, to have a month's worth of income in the future, you have to save a month's worth of income now. So, you wanna be retired for 20 years? Then you need to save 100% of your income for 20 years. And since you can only work about 50 years before your back gives out and you finally get fed up with all the crap and the stupid bosses you have to put up with, and then one day you say "Screw this! I'm retiring!," you will need to save, every month, 20/50th, or roughly 40% of everything you make, every month! Welcome to the joy of inflation!

He has also had his eyes opened the low IQ level of ordinary people. "Unfortunately, during the past decade, my confidence in the investment acumen of ordinary investors has been shaken." And that is one of the main reasons why he figures that the privatization of Social Security "will be a disaster."

- Asia Times presented Henry C K Liu, who is chairman of the New York-based Liu Investment Group, who has written a very good article that explains the problem, the dilemma, and the looming disaster with China, entitled "Part 1: Follies of Fiddling with the Yuan". After tracing the history of Chinese exchange rate policy, he notes that "In China, eight reductions over a period of eight years since 1994 halved the benchmark yuan one-year lending rate to 5.31%. The yuan one-year deposit rate is now 1.98%. China's consumer price index rose 5.3% in the year through July, meaning that borrowers now enjoy near interest-free loans after adjusting for inflation."

Interest-free loans! Just like here! And you are think China's growth is going to slow? Hahahaha! He goes on to say "Industrial prices climbed 14% in the first seven months of 2004, making real interest rates negative by a wide margin in industrial sectors." Negative interest rates! Yow! "Yuan bank deposits at 1.98% now suffer erosion of principal to inflation at the rate of 3.32% a year, which then as bank loans goes to support a built-in 8.69% annual profit for those who borrow at 5.31% to speculate in the industrial sectors with 14% inflation." Just like here, the banks are screwing over us little dirtbag depositors! If you listen carefully you can hear them laughing and spitting on us lowlife depositor trash, and with my Super Mogambo Hearing (SMH) I can actually hear them saying "Depositors? Hahaha! I spit on the lowly depositors!" which confirms your earlier reports of laughing and spitting.

"International money flow is closely linked to interest rate differentials between economies, in the direction of the higher rate. Speculative hot money poured into China for the past two years as the Fed cut (the Fed Funds Rate) to 1%." So, here in America, the Fed cut rates, and the money poured into China! Hahaha! The jokes on us, huh? Old folks with their Certificates of Deposit paying squat, and bank depositors getting squat for their savings, all got screwed, so that money could flow into China! He goes on to say "Ample liquidity triggered an investment boom in China that exacerbated inflation. The resulting negative real interest rate amplified investment demand and caused a speculative bubble."

If you want to argue that China's economy can't grow, you can quote Mr. Liu when he says that China, "Despite spectacularly rapid growth, still accounts for only an insignificant 3.5% of the global GDP, a pathetic figure for a nation with one fifth of the world's population. Yet China now accounts for 60% of the growth in world trade."

Then he touches on "recent calls from US officials for China to simultaneously raise both the yuan exchange rate to the dollar, and yuan interest rates further above dollar interest rates are ill advised. Such moves will cause an upward spiral of interest rates and inflation in the US, China, Asia and the rest of the world." The Mogambo Inflation Detector (MID) is clicking like crazy!

Apparently this Liu guy is unaware that the reason that I am on the floor, twitching and gagging in fear, is this inflation thing. Then, without warning, as if to kick me in the guts, he gets into this issue of the Fed hedonic massaging of inflation statistics so as to disguise it. "As this measuring technique is being extended to a growing number of goods, it has become a most important factor in reducing the US inflation rate, and intrinsically raises nominal GDP growth while the real GDP may actually decline.

"All this suggests two important things: first, that the reported new paradigm increases in real GDP and productivity growth have been exaggerated by a statistical illusion; and second, that real interest rates have been far too low in relation to real inflation, which also explains the most rampant money and credit creation that the US has ever seen in recent history."

He then quotes the heroic Bill Gross of PIMCO, who wrote: "The CPI inaccurately calculates Americans' cost of living. Since social security and pension benefits as well as the level of wage hikes are predicated upon the specific number and/or the perception of annual increases, Americans are being in effect conned by their government and falling behind the inflationary eight ball year after year."

Mr. Liu continues "With every passing day, more market watchers are joining the ranks of those predicting looming financial crisis in US markets from excessive debt, particularly external debt." Unfortunately, he says "This danger cannot possibly be defused by China, regardless of what monetary policy it adopts.

"But the longer the Fed takes to bring (the Fed Funds rate) back to neutral or restraining levels," he says "the bloodier will be the crash of the bond market when it happens. And it will happen. Reality does not stop merely because some short-sellers lost money. Borrowing short-term to finance long-term bets is a deadly game that cannot be made safe by hedging, no matter how sophisticated the strategy. Hedging does not eliminate risk; it only transmits unit risk onto systemic risk."

And no truer words were ever spoken, even though neither the Federal Reserve, nor the banks sucking money, vampire-like, out of the system, nor the SEC, or Wall Street, nor the government, nor the armies of clueless university economics professor morons, nor any of the stock touts on TV believe a word of it. To the contrary, they all believe, for reasons that they cannot enunciate, that financial derivatives in quantities that swamp global GDP will prove to be some bizarre economic savior or another. But one day, when the whole derivative mess collapses in a huge stinking heap, they will rise as one and say "The Mogambo was right! We are all a bunch of idiots! All hail The Mogambo!"

- "Beige Book Shows Growth, Despite Energy Tab," says the CBS.MarketWatch. com article by Rex Nutting. He says "The higher prices weren't feeding inflation, the report suggested." This is the last thing I remember reading before "it" happened. The official theory is that this sentence was so self-contradictory that my mind seized up, the first victim of a new syndrome called Mogambo Cognitive Dissonance Seizure Syndrome (MCDSS). I still marvel at it: Higher prices don't feed inflation. Hmmmm. And when I say "marvel," I mean that I sit here, immobile, minute after minute, staring at the sentence, trying to wrap my tiny little brain around such a concept. Higher prices ARE inflation, and yet (and here is where I get lost), they don't feed inflation. So where did the price inflation come from? Even today I get the willies when I read that sentence, and this is after intensive therapy by highly-trained professionals using state-of-the-art techniques and sophisticated equipment that is just a little too overly-reliant on administering electrical shocks to suit me, if you want my opinion.

Well, this is so weird that I decided to go to the Fed Report myself, and see if this Nutting character was pulling my leg. When I access the report itself, I read "Five of the 12 districts reported more factory jobs, while none reported a decline." The Fed report actually said "Manufacturing activity increased further since the last Beige Book."

Well, perhaps this has something to do with the government changing the definition of "manufacturing." Now, it seems, people who make hamburgers are "manufacturers." As far as I am able to discern, if somebody takes several items and combines them, then that is "manufacturing." So if a waitress takes a knife, a fork and a spoon, and wraps them up with a napkin, would THAT be manufacturing? Apparently yes, if I understand the whole concept, and the chances are that I don't, but that is the way it seems to me.

The Fed report also stated "Firms across the nation also expressed concern about higher input costs, particularly for energy and petroleum-based products, metals, and construction materials." Aren't these the things that China is buying?

And speaking of China, didja see how the media morons actually believed the Wall Street story that China increasing the interest rate is going to slow them down? And that this will be good for us somehow? Well, they will be slowed all the way down from growing six times faster than us, to only growing three times as fast as us. And this "improvement" will take a few years, so if that is your definition of good news, then yes, it was good news.

But to all of this I say "Hahahaha!" and by now you know, if you are hip to the various idiosyncrasies of The Mogambo, that I am laughing in that mirthless way that I have, and that means that from here on out, things will spiral slowly out of control, and later on tonight the police will be calling on the phone, wanting to know if my wife wants to come downtown and arrange my bail, and she will laugh in their faces with that mirthless laugh of HERS about how I can stay there until I rot for all she cares, and I'd probably be there still if the other prisoners hadn't pooled their own money to bail me out just so I would get the hell away from them, because apparently (and I did not previously know this) criminals do not like to be informed about monetary and fiscal policy and how we are being economically murdered and how they ought to invest in gold and silver and commodities.

The Fed report went on to say "Six of the twelve District reports suggested that trucking firms were able to pass along most, if not all, of the cost increases to their customers." And so the customers of the truckers had their prices go up, but they were at least able to pass along SOME of that higher cost to THEIR customers. And who are these customers? You and me, Bub, if you don't mind me calling you Bub, but seeing as we are in this together and it looks like it's inflationary curtains for us, it seems only natural that we be informal.

- David Bond is editor of the Silver Valley Mining Journal, and is a guy I know personally, and I am happy to report that he is one of the people I know who do NOT want to punch my lights out or get their money back, so I have THAT going for me. Well, it seems that Mr. Bond went to China on a fact-finding visit, and he apparently didn't have time to buy me a present or even send me a lousy postcard or call me long distance and say "Hey! Mogambo! Guess where I am!"

But perhaps this is because Mr. Bond is one of those guys who apparently attends strictly to business, and with his keen insight notices things, and he is mightily impressed with them. Little things. Things that I have never heard before, especially since the government is censoring my mail and messing with my computer, so I am the last to find out about everything. In keeping with this attention to important detail, Mr. Bond reports that "there's not a lawyer amongst the upper echelon of the Chinese government. To a man and woman, they are engineers."

A light went on-- bink! -- in my head. They have engineers. We have lawyers. Engineers make things work, while lawyers make things NOT work. And while we are fabulous Americans, I was always told that the Chinese were just bunch of guys running along pulling picturesque rickshaws down quaint little slums where people are selling opium and weird herbs to each other, and everybody is smiling and saying "Ah, so!" and telling "Confucius says" jokes to each other in these happy little sing-song voices, and they like to work in Chinese laundries, and work on railroads, and run Chinese restaurants, where they eat fried rice, which they pronounce "flied lice."

But they have engineers as politicians, while we have lawyers. I may have been misinformed about these Chinese guys!

- "An Austrian Analysis of U.S. Inflation" by Krassimir Petrov on the PrudentBear site is also thinking along my lines where he writes "Therefore, we must expect more inflation for the next 6-10 years."

So what does one do if one wanted to 1) protect himself, or herself, or itself from the fallout of our monetary and debt insanity, and 2) maybe make a few bucks on the deal? Because this is the Mogambo Optimal Outcome (MOO), and if there is one thing that I like about MOO, it is that you can't do any better than optimal. I know what I personally think is a good plan, but let's query Mr. Petrov. So I yell out, "Hey! Krassimir! What assets do you recommend if I want to make some money on this deal?"

Well, without missing a beat, he says, "The obvious choices are hard assets (precious metals, industrial commodities, real estate) and strong foreign currencies." No sooner had the words come out of his mouth than I was up out of my seat, and out of the corner of his eye he sees me dashing across the stage to grab the microphone to try and hog a little glory. But before I could get there, and this is the weird part, he actually reads my mind, and says the exact word that I was going to use! He says, and this is so spooky, "Personally, I have my doubts about real estate. As a student of speculative manias, there is no doubt in my mind that real estate is in a bubble of historic proportions that is destined to burst." Then he turns around and grins at me. I stand there with my mouth hanging open. How did he read my mind? Finally, I turn around and go back to my seat and sit down in a huff, all grumpy and all, looking like an idiot, muttering under my breath about microphone-hogging Russkie bastards, grumble grumble grumble.

Then I think about commodities in general! Again, I leap out of my seat and lunge for the microphone! And again, before I can even get there, he again reads my mind, and quickly says "Yet demand for commodities is dependent on a strong worldwide economy. A worldwide depression will hardly prove bullish for commodities. In such an environment, commodities and energy may no longer be expected to be safe and profitable bets. Only precious metals will provide the ultimate safe-haven in such an environment." Looking at me sideways, I can see him laughing at me and I can hear him thinking to himself "Stupid Mogambo!" He goes on to say "Even though gold is the ultimate choice, I believe that over the next decade, silver will outperform all investments, whether boom or bust, inflation or deflation; for more on silver, I refer the reader to the excellent work of Dave Morgan and Ted Butler."

For those of you who are naturally lazy, like me, I will save you the trouble of bothering either of these two guys, who are probably real busy advising their rich Hollywood and international jet-set friends and haven't got time for slobs like you and me anyway, and will tell you what they would say if you could get through to them. Buy silver. And lots of it. And then when the wife wants to know why you hocked her jewelry to buy silver, you don't have to get into this long explanation about demand continuously outstripping supply, and how silver has literally disappeared by being used up, and how it is undervalued by any historical metric, and blah blah blah, which is a literary device that means you are wasting your time because she stopped listening hours ago. Now you can simply say, "Because The Mogambo told me to," and then she will say "Who in the hell is The Mogambo?" and then you can say "A heavily armed lunatic who knows where we live. Let's just do as he says, and maybe he will leave us alone." That usually shuts them up, and you end up with a bunch of silver, to boot. Everybody wins!

- I got a letter from James Korman, who seems like a real nice guy, and he keeps his letter mercifully brief. He wanted to comment how Fannie Mae is "going to extend mortgages to 40 years," which I already knew, and am as upset about as he is, but also that the Bush Administration is going to guarantee the value of a home! And it is going to do this wonderful thing by charging 1% at the time of closing!

Now, personally, I never heard this one, so if you have a problem with the report, talk to this Korman guy, and not me, since my only responsibility is to whine and complain and pass along rumors as if they were fact and make up horrible lies about my enemies and write nasty things about them in public restrooms wherever I go, sometimes in limerick form. (Example: "A guy named Alan Greenspan who is a big butthead and is chairman of the Federal Reserve came from Nantucket")

But this making implicit guarantees sounds like something government would do, especially if they wanted to shore up the real estate market to make sure that the slimy corrupt colossus known as Fannie Mae does not go bankrupt like it should. But if it is true, what do they do with the money, this 1% of the mortgage, that they collect at closing? Do they store it away somewhere? Do they save it? No! They spend it!

So with this one brilliant stroke, the government gets more money to spend, AND they put a floor under the real estate market to bail out another bankrupt bunch of jerks whose only salvation is that they have grown "too big to fail"! Nobody will ever lose money on real estate again! You can only make money or, at worst, break even!

If true, and I have no reason to doubt that it is true because it has to sound irresistible to a government, it's just another gimmick that will come back to haunt us, because it can't work and it will not work. And if you think that it CAN work, then please contact me immediately, as I have several proposals for perpetual motion machines that need funding, and they have the exact same probability of success.

- To illustrate that the Europeans are as stupid as the rest of us, the EU signed their ridiculous Constitution. One guy, Silvio Berlusconi, the Italian premier, said "The seeming madness of our founding fathers has become a splendid reality. Never in history have we seen an example of nations voluntarily deciding to exercise their sovereign powers jointly in the exclusive interests of their peoples, thus overcoming age-old impulses of rivalry and distrust."

No, Mr. Berlusconi, the FATHERS of your founding fathers were right when they said "It cannot work" and that is why they never did it. But your founding fathers, who say the exact opposite, are wrong, because I am here to tell you, and you can quote me on this, that you can get all the countries in the whole freaking world together and sign anything you want, but when you have the European Union central bank dictating a uniform, EU-wide monetary policy, but every country has its own fiscal policy, there is going to be Big Freaking Trouble In Euro-Land (BFTIE-L). And this Berlusconi moron tells you why, even though he apparently doesn't recognize it, when he said that the countries will "exercise their sovereign powers in the exclusive interests of their peoples." That is exactly right! And that is why the EU is doomed to failure. Each country will try to "exercise their sovereign powers in the exclusive interests of their peoples," which is just another way of stating Bastiat's maxim about "Everyone trying to live at the expense of everyone else," and that is why it cannot, and will not, work. It never has. It never will.

And if you want an example of "overcoming age-old impulses of rivalry and distrust" then I can confidently point that there has NEVER been an example of anyone overcoming "age-old impulses of rivalry and distrust." The Jews are still angry about the Egyptian pharaohs, the Christians are still grumpy with Pontius Pilate and the Jews, the Arabs are still testy about the Crusades, witches are still grumpy about being burned at the stake, blacks in this country are still whining about slavery before 1865, The Mogambo is still angry about the Supreme Court letting FDR declare war on the American Constitution, and the Palestinians are still grumpy about Israel being founded in 1947, all of which proves that nobody ever forgets age-old grudges.

- As usual, Doug Noland keeps trotting out these statistics that he knows are probably going to kill me, but he doesn't care that I could plotz right here. He says things like, for example, "Bank Credit added $3.9 billion for the week of October 20 to $6.71 Trillion. Bank Credit has expanded $440 billion during the first 42 weeks of the year, or 8.7% annualized. For comparison, Bank Credit expanded by about $420 billion during all of 2003." Take a look at my EKG! See how my heart went "urrkk!" when he wrote that?

Or how about when he writes things like "This week's ABS issuance came to $13 billion (from JPMorgan)"? Urrkk! Or how about "Total year-to-date issuance of $523 billion is 40% ahead of comparable 2003"? Urrkk!

And if that is not enough, how about a little "2004 home equity ABS issuance of $333 billion is running 84% ahead of last year's record pace"? Urrkk! Urrkk!

- "Inflation-Induced Valuation Errors in the Stock Market" is an essay by Kevin J. Lansing, who is Senior Economist at the Federal Reserve Bank in San Francisco. The title pretty much says it all, but it was a graph of the Price/Earnings ratio that caught my eye. Up until we idiot Americans really started going crazy with this stupid stock mania in the 90's, the average historical P/E ratio was around 10 or so. In fact, no other generation of American boneheads ever bid stocks up to these ridiculous levels, so the P/E hardly ever even GOT to 15! And if it did, then it sure as hell did not stay there very long! But the recent insanity of bidding stocks so high has increased the P/E, and increased it for so long, that the "average" historical P/E ratio is now 15.7! That is how much we are distorting historical measures with our speculative mania!

- Paul Krugman, economist gadfly for the New York Times, has also begun to see the light, and he finally sees Alan Greenspan for what he is; a real jerk. He writes "Now his record as a monetary leader has been called into question, and his judgment on fiscal policy has been proved disastrously wrong. Worse, he seems to have abandoned the long tradition that places the Fed above the political fray." Exactly!


** The Mogambo Sez: These recent declines in oil and gold are temporary, and it is a gift to you, allowing you to buy them at low, low, insanely-low prices. Back up the truck and start loading up!

November 3, 2004
Richard Daughty

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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