Ship's log, Stardate 652, mark 42
- Although Halloween is over, you wouldn't know it by looking at Total Fed Credit, the scary satanic wellspring of fiat money that is destroying our money, the economy and my sleep as it went up by $9.6 billion last week. If you could see me now you would probably laugh, as I am typing with one hand, clutching my chest in the throes of a painful heart attack with the other, while, in a burst of amazing Mogambo productivity (AMP), also gagging up blood in my outrage and shouting out of the window that our money is being killed, all at the same time. All of this because the Federal Reserve expanded money and credit by almost ten freaking billion dollars, in one freaking week!
Since I am already in a bad mood because of this, it doesn't take much to push me over the edge, and, sure enough, here comes something to make matters worse, as I notice that the Fed continued its practice of greedily gobbling up things for itself, and so the sub-account of the Fed called U.S. Government Securities Bought Outright jumped by $1 billion last week, too. Grrrr.
And, as my aching Mogambo eyeballs (AME) roll comically around in my head, the foreign central banks bought up, at the Fed, another $10 billion of US government debt last week, too! We now owe these foreign bastards, whom I universally despise because I am an American and John Wayne is an American, a cumulative $1.488 trillion, just in this one account alone! So, anyway, I mean, this is getting too, too weird.
And if you don't see the harm in owing a bunch of money to foreigners, then I suggest that you look at history and see what happened when dirtbag debtors stiffed some foreign creditors for some humongous money. Failing to impress you with that, then perhaps the words of Thomas Jefferson himself, warning us that borrowing all money from foreigners means that one day we will wake up homeless in our own county, will impress you.
But money is being created everywhere! Hell, the Treasury spent last week printing up another $5.4 billion in actual cash! Even M3, the measure of the money supply that is so broad that it includes everything that could possibly be considered as "money," jumped $70 billion dollars in the last four stinking weeks! No wonder the banks and the government are not going to report this statistic anymore, as it is proof positive that the dollar is being murdered!
Continuing this terrifying litany of woe, the Gross National Debt also exploded to $8.063 trillion as the Treasury added another $68 billion dollars to the national debt in just the last seventeen days! In seventeen lousy days!
All this money inflation is going to cause price inflation, because that is what must happen. So now let's pull our chairs up and listen to the Aden sisters, who publish the Aden Forecast, as they say that if we are waiting for a pizza to get here, then tough luck, but if we are expecting price inflation to show up, then our wait is over. "Last month, for example," they write, "U.S. consumer prices surged the most in 25 years at a 14.4% annual rate. In the past two months, producer prices soared 22.8% and 8.4% annualized and, along with import prices, both rose the most in 15 years last month. And it's not only in the U.S... inflation moved up in the U.K. in its strongest jump in eight. The main reason why is because energy prices have been soaring and worldwide monetary policies have been loose."
But as frightening and strange as these things are, the thing that REALLY weirded me out is that my wife gets home from a business trip and hands me a copy of USA Today. Naturally, I figure that they have discovered my awful secret, and I am being exposed for the lying and deceitful fraud that I am, and now all is lost and my life is completely ruined. But to my immense relief, it was not about me at all! Instead, on the front page, the headline read "As Social Security surges, and Medicare takes off, the deficit will soar. The Result: 'Fiscal Hurricane.' " The byline showed that it was written by a guy named Richard Wolff. Although both of our names are Richard, we are entirely different people, although I secretly wish MY name was Wolff, only I'd spell it with one "f", so I would be Richard Wolf, mild-mannered reporter for The Mogambo News, and then when people want to know why I am grabbing them by their nasty little throats in my anger about their irritating, aggravating stupidity, I can say "Hell, my name is Wolf! What in the hell did your stupid client THINK was going to happen, you ugly moron?"
Anyway, my wife (who prefers that I refer to her as my "lovely wife", and not "plaintiff"), always gets a free copy of USA Today wherever she stays on one of her "business trips." After all this time, she considers herself somewhat attuned with USA Today and the type of stuff they write about on their front page, and so she says that she was very surprised to see this kind of article on the front page. That's why she was bringing it to me, she says, and NOT because she was hoping that the shock of it would kill me on the spot and then she'd be rid of me once and for all, and how everything would be fine once I was dead, and how much she wishes I was dead, and blah blah blah. But I know what was in her mind.
Now, dramatically, the scene changes. Suddenly I am in this big merry-go-round with the postal carrier, who has a "package" for me. Naturally suspicious of packages, I take cover behind the hedge and make her open it, and that is when I find out that it is just a copy of the Sacramento Bee newspaper! With a sigh of relief, I find also included was a note from Roger of the Rocklin Coin shop, with a cheery "Finally, front page for the first time FISCAL TRAIN WRECK." I know what you are thinking. You are thinking "What? No exclamation points?" and you would be right! Roger must have known that I was going to take points off for NOT concluding with exclamation points, as the subject matter and sentence construction certainly called for it! And look! Notice I how I am using them to great effect right now!
But he, like everybody else, knows that I am easily bribed and have no shame, so he cleverly covers his basses and closed his note with "Have a silver eagle on me!!" Which included two, count 'em, two, exclamation points! And he also enclosed a shiny new silver dollar, too, which I kept and have on my desk right now, which I like very much because it is nice and shiny and bright, providing that essential artistic contrast, since everything else around me is drab and filthy, and full of people who live in a gray gloom and fuchsia fear that I am going to attack them for saying something really, really stupid. And I will, apparently because none of us can help it.
But what a coincidence about this "fiscal hurricane" thing, huh? And beyond these two people delivering hard copy, lots of other people are sending it to me, too, in my email! They want to make sure I saw it. But I would have had to have been freaking blind NOT to see it, because it seemed to be everywhere all over the internet. This is the kind of effect that this unusual front page of USA Today has. And this is how public sentiment is subtly altered, leading to that dramatic moment in the future when you wake up in the middle of the night, drenched in sweat, because you suddenly realize that Something Has Changed.
Or maybe it has something to do with, according to alert reader Eric P., physics. "In chemistry," he says, "there is a term called the eutectic point. This is where a compound can no long remain in its current state due to environment surrounding it. Be it gas, liquid, or solid, it must change due to temperature, pressure, gravity, etc." Relating this to gold, he says "The converging lines only indicate that the conditions which influence the gold price have reached a point where something has happened and the price must change." So, being the dimwitted guy that I am, I meekly ask, "So does this mean I should buy gold?" His thunderous reply? "Damn! There isn't anything else worth owning, but gold!"
But we were not talking about gold, but about this watershed USA Today event. So, what was in this amazing article? Well, not much. The same old stuff about how we are freaking doomed but everybody ignores the poor old Mogambo, ranting like he does, but they will listen to a guy named David Walker, just because he is the comptroller general of the United States. He said, without even a hint of hyperbole, "We face a demographic tsunami" that "will never recede." Mr. Wolff, taking my ideas and twisting them around until they finally make sense, paraphrases Mr. Walker as saying that the United States is like "Rome before the fall of the empire."
Mr. Walker goes on to say "Our financial condition is 'worse than advertised.' " He calmly explains that we face huge deficits in our budget, balance of payments, savings - and "leadership." Man! I heard THAT! Our leadership is so brain dead that they are leading us down the rocky road to ruination and really rough riding, which is today's gratuitous installment of a Mogambo Pointless And Stupid Alliteration (MPASI).
Well, it was the same gloom-and-doom stuff that I have been screaming about for years and years, fearfully explaining to mental health professionals why we are freaking doomed and how they ought to let me go and then we could all go out and buy a lot of gold and make a whole huge pot load of profit when the dollar implodes. But the article does not even mention The Mogambo one damned time. Instead, we read about some guy named Douglas Holtz-Eakin, who is the director of the Congressional Budget Office, and he admits to being "terrified" about the budget deficit in coming decades. Then comes Maya MacGuineas, president of the Committee for a Responsible Federal Budget, who sees a future of "unfunded promises, trade imbalances, too few workers and too many retirees." She figures that the stock market will fall, assets will be lost and we will all suffer a lower standard of living. She mercifully stops short of predicting the ensuing rioting of the desperate people, and the wailing and bellyaching for government help, and cries of "gimme gimme gimme!"
Now you are wondering what she means when she refers to a "lower standard of living." Well, for us old-timers, Stuart Butler of the conservative Heritage Foundation projects that the government has to "renegotiate" the Medicare, Social Security and Medicaid programs, which means smaller checks for everybody, which certainly falls under the heading of "lower standard of living"! This may sound like nothing to you, but let me tell you that once the multiplier takes over, it is going to be a sizable whack to the head to the economy, which is, in German, is probably something like grosse kopfschlag uppensiden ekonomie gewhacken oof!
In case you were wondering, the "fiscal hurricane" phrase came from Isabel Sawhill of the Brookings Institution, who was also the first director of the Congressional Budget Office in 1974, and who says "the growing gulf between what the government spends and takes in to a 'Category 6 fiscal hurricane.' "
- Speaking of wondering about things, in case you were wondering why the dollar, the currency of the world's biggest idiots, could possibly be going up in value, welcome to the club. It mystifies me. But thankfully we have Chuck Butler of the Daily Pfennig patiently explaining that "The repatriation of dollar profits by U.S. corporations is really playing heck with the currencies as we head into the last six to seven weeks of the year, which is when the window closes on the piece of legislature that allows U.S. corporations doing business overseas an amnesty. Yes, they could repatriate their profits that have been held abroad back to the U.S. at a much reduced tax rate, as long as they used it to promote job creation (of course there is no 'tax police' to make certain that's what they do). This repatriation is much bigger than the breadbox I thought it would be, and now with the year winding down, the activity is furious. This is a huge reason the dollar owns a jackhammer right now!"
So if this is true, then starting to accumulate some puts on the dollar might be in order, and I would, too, if I hadn't lost my big fat Mogambo butt (BFMB) too many times playing with options.
- The people at DailyReckoning.com were quoting Dr. Bruce Jacobs, who was talking about the fallacy of "portfolio insurance", by which one tries to protect one's portfolio by trying to "replicate the behavior of a put option by selling short stock index futures," by which you let somebody make a little derivative bet against you, and they pay a little premium for the privilege. If your portfolio goes up, then you deliver it and take the profit. If it goes down, then you have the premium to offset your losses. All it takes is somebody on the other side of the trade willing to take the deal! But as Bonner explains "One investor could hedge his exposure. All could not."
This is known as "the fallacy of composition" which holds that what is good for one company (e.g. firing The Mogambo for smoking something in the restroom, or some other trumped-up charge) is NOT good for the economy when ALL companies do it (i.e. fire the most incompetent bonehead in the place and fire the guy who hired him, too). He goes on to say, "Who would be on the other side of the trade? The more the idea of 'portfolio insurance' took hold, the less insurance there was. In fact, the more people tried to protect themselves from falling prices all at once...the more they suffered losses."
Then, of course, came Black Monday in 1987, and all hell broke loose. As Mr. Bonner says "Sophisticated investment tools did not make the situation better. They made it worse" as everybody tried to sell at the same time, and you can almost hear them shouting "It is the end of the world! Just like The Mogambo predicted! We're freaking doomed!"
With my amazing mental powers, I can see you are asking yourself "Huh? What in the hell does any of this have to do with anything? And besides, does that big idiot, Mogambo, know that his zipper is down? Hahaha! Now I'm laughing at YOU, you big Mogambo Jerk (BMJ)"). Stung, I bravely hold back my bitter tears, and I continue, tragically, "Now, class, relate this to derivatives, which is the exact same thing, only ten times bigger! Hundreds of times bigger! Thousands of times bigger!"
Now stop thinking about it. If you don't stop, you will go crazy. And you can believe me, as you are listening to an Official Mogambo Voice Of Experience (OMVOE) here!
- Out of the blue, I say "Buy gold, and lots of it!" Jim Willie CB, of the Hat Trick Letter, is startled by my sudden outburst. But since I have brought it up, he notes that he has a little more fundamental reason for buying gold, and, oddly enough, it also relates to that derivatives thing we were just talking about. He reports that "The World gold Council recently pointed out a huge disparity between the amount of paper gold outstanding and the amount of physical gold to back up that paper obligation, as required by their charter. The same council noted that the gold market has reached a record number of 78 times as much gold sold through paper instruments as there is physical gold in existence!!! They have therefore issued an investor alert regarding ETF funds."
So some people are net short, and short "naked" to boot, via some derivatives and massive leveraging, 78 times as much gold than exists in the whole freaking world? The Mogambo is galvanized to action! He abruptly shouts "Aha!" Everyone is startled, and turns to see what is bothering me now. I see that quizzical look on their faces, and I chastise them for not realizing immediately that this is known in the business as "a classic squeeze-the-shorts" scenario! These clowns are ripe for picking! As the saying goes, "He who sells what isn't his'n, must buy it back or go to prison." And they are going to have to one day buy 78 times more gold than exists on the planet? Wow! Wow-de-wow-wow!
Bob Chapman, of the International Forecaster, says that gold mining companies, some of which also have large short positions, are abandoning their shorts. Remember that you cover (close out) a short position by buying, which means increasing demand, which means a higher price. He writes "Dehedging by gold mining companies slowed in the third quarter from the second quarter, although the book fell 1.0 million ounces to 52.8 million ounces." This means that they are not selling short anymore, and are covering their previous shorts. And remember that you cover a short by buying gold, which is an increase in demand. "They dehedged 1.3 million ounces in the first quarter and 2.7 million ounces in the second quarter. The leading dehedgers were in the Americas."
And since we are talking about gold, Mr. Chapman figures that this is a good time to bring up the fact that the demand for gold by governments and banks is on the rise, too, meaning more demand, which, as if I have to tell you, drives up the price. "A total of 43 commercial banks have ordered 171 tons of gold from Russian producers. Last year 51 bankers ordered 194.5 tons. Russia only produced 180.5 tons last year. Production fell 7.2% year-on-year to 126.12 tons in January-September this year, and could total 183 tons as a whole."
But getting back to this derivative thing, Mark Lundeen was duly alarmed that last Thursday the Bank for International Settlements said something along the lines of "The use of privately-traded derivatives reached a record in the first half of this year with the notional amount of outstanding trades worth $270,000 billion. The notional amount represents the value of the underlying assets on which the derivatives are based. Based on market value, which reflects the actual cost of replacing the contracts, the market grew by 16 percent to $11,000 billion. Interest rate derivatives remained by far the dominant category of the market, accounting for more than three quarters of the total by notional amount and almost two thirds when based on gross market value."
Mr. Lundeen notes that "In 1985, Barron's had a front page cover and article covering credit derivatives. They were concerned that it was a 185 billion dollar market." Utilizing the amazing Mogambo Calculating Mind (MCM) and a Mogambo Calculating Device (MCD), I quickly discover that 1985 was only twenty short years ago. This may seem like ancient history to the young hotshots you see on TV, but it ain't. And when you are talking about something that is up by an incredible 145,459% in twenty years, Mr. Lundeen goes on to say, "There is only one way to explain this, bad bets are being doubled up in the hopes that on one toss of the dice all will be made well again. I am not counting on it." And remember; this is only counting privately held-derivatives!
For more of the same, Martin Weiss of the Money Report says if you want to talk about derivatives, how about "$82 trillion held by US banks alone, according to the Office of the Comptroller of the Currency (OCC). That's the 'notional' or face amount, which overstates the problem. But it's still far too big - 33 times more than the entire budget of the U.S. government."
And to that I say, "Exactly! And guess what, dude? It's about SEVEN TIMES as much money as the whole freaking Gross Domestic Product, for the entire freaking year, of the whole freaking United States of, and pardon my French, A-freaking-merica! Hell, it's almost three times the total value of the goods and services produced by the entire planet!"
Speaking of precious metals, I interrupt our program, as I see that it is time for an update on silver. First we look at the Mogambo Investment Meter for silver, and we see it is redlined, and that means you should be buying lots and lots of silver because it so freaking cheap that anybody who buys it will almost certainly end up rich rich rich if they buy enough, and not so rich not so rich not so rich if they don't. Anyway, there is an article By Kathryn Cooper on Times Online.com, where she says "The demand for silver from industry and for jewellery and coins has exceeded the supply from mining and recycled scrap since 1990, according to CPM Group, a metals consultancy. Last year, the deficit was an estimated 44.5m ounces. This gap has to be met from inventories - the stocks of silver held by central banks and investors. However, these stocks have declined from an estimated 2.2 billion ounces in 1990 to about 300m today, according to CPM."
This is where I wish I had a bigger brain, because my puny little putz of a brain cannot conceive that in fifteen short years the world has consumed 1.9 billion ounces of silver from inventories, which works out to be a the rate of 126 million ounces a year. And at current rates of deficit, the remaining bit of the entire world inventory of silver will be depleted in less than seven years? My God!
They ignore the way my eyes are glazed over in my stunned incomprehension, and I am wistfully thinking about how high the price of silver will go once this happens, and the greedy side of The Mogambo (GSOTM) takes over, and I am imagining myself standing on top of a mountain of silver, and these beautiful Hollywood starlets are groveling at my feet and saying "Oh, Mogambo! All of this silver has made you rich, and that has finally made you marginally attractive!" So I am smiling to myself and only half-listening when they go on to say that in their 2005 silver report, CPM said, "The amount of silver that remains in inventories is far less than at any time in the past half-century, and in fact since the early 20th century. For the market to rebalance, prices will have to rise enough to stimulate increased supplies from mines or discourage demand."
For some confirmation, we turn to Ted Butler, who 1) knows more about the silver market than anybody else and 2) who once bumped into me in the hall and now knows more about The Mogambo than he ever wanted to know, too, and still feels soiled from the experience. Mr. Butler said, "We are only in the very early stages of a long-term bull cycle for silver. The pace of silver consumption is accelerating, given the growth in the world population and economy. Every new washing machine in India and TV in China guarantees increased silver consumption. But we don't have enough in inventory to subsidize the shortfall in production. We would be lucky if we have 1 billion ounces left above ground, compared with 5 billion of gold. That is why silver is more rare than gold."
And while gold is at $494 per ounce today, which is a hell of a bargain in itself, silver is still about eight lousy bucks an ounce! Eight! Bucks! I am incredulous that you can buy pure silver for only $8 and change an ounce right now! Something that is vitally needed by everyone in the whole world is going to completely run out in seven years, and yet it is still selling at a measly eight bucks and change? Unreal!
- Jim Jubak, who is the MSN Money Markets Editor for TheStreet.com, writes "The global flow of dollars currently goes from real estate-rich U.S. consumers, via gas pumps, to the portfolios of Middle East (and other oil-exporting) nations and then back into U.S. Treasuries. Home prices don't have to fall to reduce the flow of dollars from those sources: The regular flow of dollars from real estate to gas pump to the Treasury market has depended on a constant rise in real estate prices. There's evidence now that price increases are starting to slow in many of the most overheated markets. That will mean fewer dollars for the pipeline and at some point a reduction in demand for U.S. Treasuries." My ears twitch in alarm! A reduction in demand? Yikes! It seems to me that there was something, something, something about the supply/demand dynamic that said, and correct me if I am wrong, when there is a decrease in demand, especially at the same time as an increase in supply, that means that prices will fall. And when bond prices fall, this means that the imputed interest rate rises. And interest rates will have to rise enough to attract buyers, and that probably means rising by a LOT, because what kind of investment bozo would step in front of a nuclear missile and buy something denominated in dollars over the long-term?
But, as strange as it sounds, people are rushing to buy US Treasuries! Why? Who is soOOOoooo damn stupid that they would voluntarily lock up their money at these absurdly low yields, knowing that they will rise one day soon and keep rising for a long, long time, and anybody who is buying bonds now is an absolute idiot?
I don't expect anyone to raise their hands and say "I am that idiot", although there are lots of people who will raise their hands and say "The Mogambo is an idiot!" So instead, let's just look at how stupid they are. Turning to Doug Noland of the PrudentBear.com site, we read that "Five-year government yields fell 5 basis points to 4.43%, and bellwether 10-year yields declined 7 basis points for the week to 4.49%. Long-bond yields dropped 6 basis points to 4.68%."
This crummy yield is at the inflation rate, for crying out loud! And after deducting for commissions, fees and taxes, bond "investors" are making a lot less than simple inflation rate! They are deliberately losing money, by losing buying power! Invest a buck's worth of buying power, get back less than a buck's worth? What morons! This is the state of the world today.
So, we are looking at bonds falling in price. And, given the enormous gigantic huge whopping colossal pile of American Treasury debt issued in the last few decades, losses on bonds will mean one hell of a big loss for a lot of people. A LOT of people. Lots and lots and LOTS of people.
And the blame sits squarely on the head of the Federal Reserve, and it looks like a hat made out of dog poop, which is entirely apropos, because the whole stinking, disgusting mess was created by them, as the Fed pounded rates down by flooding the world with money and credit to pay for it all.
So no wonder gold is soaring! Such monetary imbecility can mean only heartbreak and misery! It's like nobody at the Fed has ever watched a soap opera in the middle of an afternoon! Imbecility ALWAYS causes heartbreak and misery!
And speaking of gold, the gold indexes
hit multi-year highs, and gold soared
today to over $493 an ounce, the highest in 18 years, and it
looks like it is going to power through the $500/oz barrier with
ease. Additionally, the gold indexes
reached new historical highs of one kind or another and the shares
are doing well, too! All in all, it is a great time to be alive
if you are a gold bug. And if you are NOT a gold bug, then what you are watching is the gates
of hell opening to swallow you up.
- Alert reader Zack writes that "I realized that our hoard of old copper pennies are worth more by the pound than by face value." Hahahaha! The money is so worthless that old copper pennies are worth more than a penny! And here's the downside of being a gold bug when gold is rising because things are so freaking crazy like this. He writes "All of a sudden, many people who scoffed at me now want to know, overnight, how to become a gold investor in one easy lesson." I know what you mean, Zack! And although you politely explain that nothing could be simpler, you moron, because the REAL reason they are here is that they do NOT want advice on how to make money by investing in gold, because they ain't got no damned money anyway. What they REALLY want is for me to tell them of some secret, miracle investment that will, in one of those rare instances in financial history, make oodles and oodles of money, and then they always get real testy when I laugh in their faces and insult their intelligence over and over and over and laugh at how their children are all funny-looking little monsters until they yell at me to shut up and leave, which I do. I relate this sad story in case you were thinking of asking for the advice of The Mogambo on this subject matter.
- The PrudentInvestor.blogspot.com reports that Bloomberg TV said that central banks may be behind the rise in the price of gold, as central banks are on the buying side because "demand for the universally accepted currency of the last 6,000 years is rising." I like that use of the 6,000-year thing, as it gives you, as a mathematical certainty, a tipoff as to the near-constancy of gold. Anyway, he goes on to say, "Yesterday the World Gold Council had reported 56% higher demand for bullion and gold ETF's in the 3rd quarter of 2005." To show you that he is not just another pretty face, like so many others, or a raving lunatic like me, he says that "Every week I will be checking the change in the gold position of the ECB in its next weekly statement and will now also check the balance sheet statements of the other major central banks."
This could be very interesting, and I say, "Thanks! I'd LOVE to see it, mostly because I am somewhat of a voyeur, and I would love to watch myself getting richer and richer and richer by sitting on gold! Hahahaha!"
- I am not sure if it means anything, but I notice that the short-term (1-month, 3 month) lease rates on gold and long-term lease rates (6-months, one year) are converging to a point. Weird! "Ship's log, Stardate 652, mark 42. The gold lease rates have achieved a singularity!"
Well, naturally this causes Engineer Scott to freak out, and he rushes to hit his communicator and shouts "Scotty to bridge! Scotty to bridge! What are you, some kind of moron, Jim? Get the hell out of here, or the economic engines will implode!" And the captain of the Enterprise relies, "Oh, yeah? Well, screw you Scotty! We're all going down with the ship! More money! More power! If you don't get your butt in gear, Scotty, I'm sending Bernanke down there! HE'LL give me what I want, even if it kills us all! Bridge out!" On TV, this is where Mr. Spock would put a little Vulcan nerve-pinch on that jackass Kirk, proceed with a little Vulcan mind meld, put Kirk in a coma, take over the ship, and fly us back through time, using a delicate slingshot effect using a black hole. We would emerge back in time, and use a photon torpedo against anybody who advocated going off the gold standard.
In real life, in case you ain't heard, it don't work like dat. In real life, you suffer for your mistakes, and there ain't no Communication's Officer Uhuru prancing around the room in that little miniskirt to take your mind off your troubles. But this still does not answer the Mystery Of The Gold Singularity, if indeed there even IS one. But it is weird. Very weird.
***Mogambo sez: If you needed any more reasons to buy gold, let me quote Gary North of the Reality Check newsletter for another one. "I think a squeeze is coming that will affect the entire banking system," he writes. "The madness of bankers has become unprecedented."
So keep on buying gold and silver and oil. As much as you can carry.
Nov 22, 2005