Buy gold or get clobbered

Richard Daughty
...the angriest guy in economics
The Mogambo Guru
Provided as a courtesy of Agora Publishing & DailyReckoning.com
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Dec 27, 2006

-- The alarms started ringing the instant that the figures for Total Fed Credit hit the airwaves, and in that same instant I was scurrying like a frightened rat-in-a-trap. In my panic, I must have turned on one too many self-defense systems in the Mogambo Bunker Of Mortal Dread (MBOMD), and the newly-installed Mogambo Intruder Pacification System (MIPS) did its job. And while the exact details of who shot the living hell out of who's stupid boat are still in contentious debate, I know exactly who threatened to (and I quote) "Come in there and kick some Nutcase Mogambo Butt (NMB)!", thus constituting a legal case of assault, albeit flimsy, of my own.

In all the hubbub, I forgot about checking Total Fed Credit to see what set off the alarms in the first place, and also in that selfsame hubbub I forgot all about donning, as I usually do, an adult disposable diaper in case it is bad news, economically speaking.

Well, Total Fed Credit was up $7.6 billion, foreign central banks stashed another $11.8 billion at the Fed, the Treasury printed up another $2.4 billion in actual cash, repo activity in the banks last Thursday alone was a staggering $32 billion, and the nation's current-account deficit went through the $880 billion per year mark. Gahhh!

With big numbers like these impacting my fragile nervous system, the rest is history; all spent shell casings reeking of burnt gunpowder, the smell of fresh poop oddly redolent of burritos, the smell of napalm in the morning and smelly people being unpleasant to me, also smelly.

I know, I know; I should feel sorry for the dumb, ignorant bastards who are doomed because their money is doomed because the Federal Reserve is creating so much money and so much credit that we are cruising to a huge inflationary bonfire and the destruction of the American economy, and they don't have any gold to protect themselves and blah blah blah.

Then I remember that they are the same dolts who consistently elected and re-elected collectivist bozos to erect a suffocating, huge, expensive system of governments that not only looked the other way, but encouraged the Federal Reserve to create all that money because everyone wanted inflation in stocks, bonds, the size of government, and (later in the cycle) houses! There was just too much money to be made!

And now we have price inflation in everything, painfully manifested in a dollar that is losing its buying power, just like the Austrian Business Cycle Theory so elegantly, and so confidently, predicts. After this short mental exercise, I naturally deduce "To hell with them AND their stupid boats! And the stupid trailer they had it on, too!"

And it is not just us, either, as the stupid idea of constantly increasing government size, spending and number of people being given money is becoming apparent to the British, as the blaring headline of the Daily Express, "Highest Taxes In History", so dramatically attests. The article notes that things are getting much worse, as "When a crippling barrage of more than 100 stealth taxes is added, workers are paying almost half their earnings" in taxes.

I will note, with an appropriate dose of Snarling Mogambo Outrage (SMO), that paying roughly 50% of income is exactly the proportion of income that Americans pay in total taxes, too, when you include income taxes, Social Security taxes, surtaxes, sales taxes, property taxes, excise taxes, government fees, etc.

And why is all of this happening? Well, in his essay "Monetary Anarchy", Dr. Kurt Richebächer quotes Jean-Baptiste Say from his 1803 "A Treatise on Political Economy." The quote is "The encouragement of mere consumption is no benefit to commerce because the difficulty lies in supplying the means, not in stimulating the desire for consumption; and production alone furnishes those means. Thus, it is the aim of good government to stimulate production, of bad government to encourage consumption."

Well, I got some bad news for Mr. Say, and it is a good thing that he is dead because he would probably croak from a brain explosion if he knew that not only do today's bad governments encourage consumption, but they are actually the country's largest consumer!

And, to compound their folly, they actually give out money to people so that they, too, can consume, or the government provides the services to be consumed, or (as in the case of health care) the government requires that people with insurance and/or wealth pay higher prices for healthcare to cover the bills of those who don't (or won't) pay. This is, for one thing, communism gone freaking insane.

But Americans can handle some degree of insanity, just like my parents, who kept me shackled and locked in the basement all those years and referred to me as Mogambo, Spawn Of Satan (MSOS), but led otherwise perfectly normal lives.

The bad part is 1) one day I am going to get big enough to bust out of this stinking basement to seek my unholy revenge, and 2) that all this money the governments are spending has to come either from taxes, or from borrowing.

The economic ugliness of raising the money via raising taxes is obvious and legendary. But the problems of raising the money by borrowing are not so obvious, which is too bad, because they are worse, as it only postpones the repayment (either in higher taxes or higher inflation).

And, even more egregiously, since there are no savings to be borrowed, all this money that the government needs to borrow and spend is created by the Federal Reserve, which increases the money supply, which causes prices to go even higher, which is what always causes the destruction of economies, and is behind the government's current need for more money! It's a vicious cycle!

They say that consumer spending is what is keeping us afloat, which doesn't explain where the consumer got the money in the first place. In truth, government spending is now so huge that the money (earned or borrowed) came, originally, from the government deficit-spending the money that the Federal Reserve created just for the purpose, year after year, until the debt thus created now totals $8.6 trillion (roughly, a stack of $1,000 bills 540 miles high), which merely means that the government borrowed, and spent, and owes one enormously humongous load of money. The consumer merely ended up with it, just in time to be credited with keeping the economy afloat by spending it.

To show you what I mean, the government budgeted $2.6 trillion, and they spent another $600 billion on top of that, to the tune of $3.2 trillion in cash outlays last year! The GDP of the United States is only $13 trillion, for crying out loud! And the actual, real-life deficit last fiscal year, as reported by the Treasury itself, was $4.6 trillion! 35% of GDP! In one year!

And speaking of the federal budget, if you like your terror mixed with laughter and a huge pile of lying and deceit (and who doesn't?), then I suggest that you visit the gpoaccess.gov/usbudget site to get to the "Overview of the President's 2007 Budget", which is the biggest stinking pile of misleading, distorted, delusional self-congratulatory crap that I ever read, and it embarrasses me to think that foreigners are going to read it and say to their wives "Honey, you should come in here and read the economic stupidity and brazen lies of the United States! These doofus Yank bastards are corrupt to the core! What did The Mogambo say about this? Something about it being a big stinking pile of delusional self-congratulatory crap?" and his wife will answer (if she is anything like my wife or daughters), "Plus the adjectives 'misleading and distorted', you moron! Now, shut up! We're having fun planning your funeral, ya creep!"

So, the official answer is "yes". I actually DID call it a big stinking pile of delusional self-congratulatory crap, plus "misleading" and "distorted". And for good reason, too, starting with the salient fact that the damned thing never actually tells you the size of his proposed 2007 budget! Instead, we have a long litany, sentence after sentence, paragraph after paragraph, of selected distorted statistics and outright lies to show everything is peachy, just freaking peachy, inferring that people should be celebrating the bounty instead of panning to storm the Capitol, dragging them all into the street to be whipped, and installing The Mogambo as Omnipotent Overlord.

But that's not all you get in the President's overview of the 2007 budget! You also get, unbelievably, three - count 'em, three - graphs! Out of all the graphs in the world from which to choose, we get these (pause) three.

One shows "Strong Economic Growth Continues, Percent change in real GDP from year earlier" showing (all projections out to 2011), that economic growth would actually DECREASE steadily until 2009, where it would plateau at a low of 3.1%, lasting through 2011. Hahahaha!

You rub your eyes in absolute disbelief at the absurdity, and, stunned, go on to the second one, which is "Cutting the Deficit in Half, Percent of GDP" which shows the budget deficit apparently bottoming out in 2010 at slightly over 1% of GDP, and then, mysteriously, rising again! Hahaha! It means that the government will never, ever stop deficit-spending, the government will never, ever stop borrowing, and the budget will never, ever be balanced, much less move into surplus, and we will be going farther and farther into debt forever and ever, and the debt payments will increase and increase forever, too! Hahaha! I laugh to keep from crying! What a terrible thing to admit!

But as ludicrous, astonishing and darkly entertaining as it has been so far, it was the third graph of "Actual & Projected Receipts, Dollars in billions" where the real terror is. Specifically, it shows that the President estimates that 2006 government income (taxes, fees, tariffs, etc) to be about $2.3 trillion. In 2011, four years from now, he is projecting government income to rise steadily, linearly, to over $3 trillion!

I scream a long wail of Mogambo Outrage And Anguish (MOAA), "What? What in the hell is going on? A 30% increase in government income in four years? My God!" The thought flashed through my mind that I had thought we were doomed before, but now the sheer horror and anger of eminent destruction activates latent Teutonic heritage coursing in my veins, filling me with such a need to take action that I want to, oh, I dunno, torment France, or invade Poland or something. But realizing that's already been done, I am compelled to merely buy another huuuuuuge freaking cannon for the backyard to cover that thin southern perimeter, because this is scary, scary stuff (SSS)! A 30% increase in federal government revenue in four years!

I am, of course, stupefied and speechless a this revelation. So, instead of asking The Mogambo what all of this means, we go over and try to Google up a single time in history, anybody's history, ever, where taxes going up 30% in four years is associated with a healthy, growing economy. No hits so far!

Now we try to Google up a period in time where taxes increasing by 30% in four years is associated with recessions, depressions, doom, destruction, bankruptcy, misery, suffering and the stench of "hell on earth" permeating almost everything. We get so many hits that a small curl of blue smoke rises from the back of the computer.

But this gigantic increase in government income will be, obviously, spent by Congress, and thus perhaps I can relate all of this to a Danish proverb sent to me by Karl S. that reads "Life is not holding a good hand; Life is playing a poor hand well."

Well, as pithy, clever and optimistic as that is, what he did not include was the rest of that immortal proverb, which (in the original Danish-English translation) reads "Unless you are in government, because then you can deal yourself and your slimy, corrupt little friends a good hand by simply bankrupting the country through constantly deficit-spending, thus creating higher consumption, and encouraging more consumption through debt, the money for it all willingly created by the Federal Reserve, which increases the money supply (monetary inflation), and all this new money chasing a relatively static supply of goods and services must result in price inflation, and then you are really, really, really screwed (RRRS). And none of this would have happened if you had not allowed the Supreme Court to let the government disregard the clear and strict demands of the Constitution, and had adhered to the requirement that money be silver and gold."

As proverbs go, I have to admit it is pretty lengthy, and I can't explain how the Danish are so hip to our Constitution, but there it is, nonetheless.

But this is not about the Danish, but about consumption, and I was saying that as far as encouraging citizens to consume, perhaps not all consumption is final consumption, and there may be a lesson from GoldForecaster.com, as they report "More smaller Chinese investors will soon be able to individually invest in gold bullion, as the previous metal's investment threshold is will fall sharply. The new threshold will be from 16,000 Yuan upwards for a single investor, down from 160,000 Yuan." Wow! A ten-fold drop in the minimum requirement!

As good as that sounds, I suppose, the catch is that "Individual Investors in pure gold must buy a minimum of a thousand grams costing at least 160,000 Yuan." Hahaha!

But if you, as a Chinese government, want to get a lot of gold into the country as a precursor to establishing a gold-exchange standard for your money, then this seems like a good way to do it to me. And it encourages consumption of something, too! Hahaha!

I know what you are thinking. You're thinking "What in the hell has this got to do with anything, and I wonder if he knows his zipper is down?" Well, yes, I actually do know it is down, as I am trying to give you something to look at to keep you from looking out of the window all the time, and maybe you will learn something for a change.

The lesson itself is in two parts. The first is that the Chinese government is, literally, encouraging Chinese people (a third of the world's population) to buy gold, and the second lesson is that you must be some kind of idiot that you did not instinctively run out to buy some more gold to front-run the price run-up that will stem from this government-encouraged demand.

As to what this has to do with anything, it almost certainly has something to do with what Chris Hancock, of The Sleuth, says in his essay "Why the Sun Will Never Set on the Chinese Empire". He says "It's true that when compared to other major industrialized nations, China holds very small gold reserves. For example, it's estimated that China currently holds approximately 19.29 million ounces, or about 600 tons of gold in reserve. Calculated by a spot price of U.S. $624/ounce, the reserve amounts to only 1.2% of China's total foreign reserves."

He also says that most other developed countries have "a good percentage" of their foreign reserves in gold. "As of September 2005, gold as a percentage of foreign reserve in different countries are... U.S.: 63.8%, Italy: 56.7%, France: 56.4%, Germany: 50.5%, and Holland 51.3%."

He then says "I wouldn't be surprised to see China convert some of those dollars to gold. To merely achieve a level of 15 percent of reserves in gold, China would need to consume roughly all of the gold produced in the next two years."

As to why they would do such a thing, perhaps it has something to do with the fact that "A mere 20% increase in the yuan against the dollar would reduce the value of China's estimated $700 billion in U.S. treasuries by $140 billion -- or roughly 6.3% of China's 2005 GDP." So, in this week's Succinct Mogambo Distillation Of The Facts (SMDOTF), buy gold or get clobbered. Which would YOU do?

But maybe concentrating on China is not the smartest thing we ever did, as hinted at by Sol Palha, of the Tactical Investor, who says "Many resource-rich nations are tired of being paid for goods in worthless dollars, and many of them want to do something about it. The only nation in a position to seriously challenge the US in this area is Russia. Even though China is in the midst of a massive military build up, it cannot single-handedly challenge the US. The only nation that has enough firepower to take on the US is Russia."

Now, I am probably a lot like you in many ways, in that I have enough personal firepower and pent-up hostility to take on the local police force and a couple of SWAT teams, but duking it out with imperial Russia is a little out of my league at this point. Fortunately, there is more to geopolitics than bruising, brawling belligerence, and he continues "Note they are the largest producers of oil (they do not hold the biggest reserves) and they have the worlds largest supply of Natural gas. They also control over 70% of the world's Palladium and the list goes on.

"Hence Russia is in a position to challenge the Dominance of the Dollar and actually go out there and start asking for payments in other currencies." And why would they go through such a hassle? He explains that the "cold war between Russia and the United States never ended; it just took a different course. Putin is determined to teach the West a lesson and bring Russia to the forefront of world matters."

So maybe geopolitics actually IS still always about power and the pecking order!

-- Jacques T. sent along a humorous email with witticisms of the aviation industry, and I was struck how so many of them apply to investing and life itself. Such as "Any attempt to stretch fuel is guaranteed to cause a headwind." Man, I've been there! Like last week, for instance, when I thought I had found a clever way to save quite a few bucks in the food budget by merely altering the kids' protein regimen slightly, by substituting a cheap (eight cents a pound) meat-like product in place of the regular (and comparatively expensive) beef, chicken, fish, pork, etc. that you find in a grocery store. It is made by these homeless people down by the park, so their overhead is low, and thus I do a good deed by helping homeless and, in return, they pass the savings on to me! And what savings they are, too!

I don't eat the stuff myself, because it smells terrible, but I figured that the children are all a bunch of underage halfwits who play in filth all day, who never wash their hands and then disgustingly eat with them anyway, so what difference does the quality of food make to these nasty, feral brats?

And so, in attempting to save fuel, what did I encounter? A headwind! The little ingrates all developed some stupid stomach problem, and they now have to eat some "special diet" food, supplements and medicines that I have to pay for! I'm worse off than ever! Headwinds can be real killers!

Another clever aphorism is "The three most useless things to a pilot are the altitude above you, runway behind you, and a tenth of a second ago", which is analogous to the uselessness of "investing or driving by looking into a rear-view mirror."

Another funny one is "Forget all that stuff about thrust and drag, lift and gravity; an aircraft flies because of money and a pilot." This is the same as "Forget fundamentals and go with the trend of where the money is flowing because other people, smarter than you, have already done the work, and now, to make money, you just follow this money-flow trend."

And in speaking of trends, instead of me screeching for you to buy silver because the smart people of the world are already doing it, I thought this quote from SilverForecaster.com said it all. "But of critical significance to Silver was the success of the Silver Trust in its soaring holdings, now over 121 million ounces of silver. We had to double check this number, before we could accept it because last week saw demand for the shares in the Silver Trust rise another 8,971,268, a remarkable performance at a time the silver price fell 7%. Yes, another 279 tonnes of silver."

And speaking of trends, Alan himself, of Alan M. Newman's Stock Market Crosscurrents writes that the mutual funds are looking weak. "Given the trend towards utilizing every penny of available cash, the $232 billion of cash currently sitting in funds could conceivably be sufficient to drive prices even higher. However, vis-à-vis fund assets, inflows have been visibly shrinking for a long time and present a vivid picture of declining demand."

Inflows are shrinking! Demand going down! And you think that the stock market is in bullish mode? Hahaha!

Indeed, he continues "The relative cash levels of mutual funds again contracted to 4.1% in October, one of the lowest levels in history." As to what this could possibly mean, he explains "This clearly illustrates the kind of risk investors are now facing, similar to the stance at the beginning of 1973, before a two year halving of the S&P 500." A halving! A 50% loss! In two years!

And speaking of investment flows, "Thomson Financial's monthly report on insider activity was particularly interesting for November. On second thought, make that shocking. A preliminary tally shows a miniscule $6 million in buys completely swamped by over $4 billion of selling activity, resulting in a sale/buy ratio of 678-1."

He quotes the Daniel HauckBloomberg report on the same subject of insider selling appeared on December 6th, Hauck claimed that "Stock sales by America's corporate chieftains exceeded purchases last month by the widest margin since 1987. Thomson Financial's stats for the first two weeks of December are even more discouraging than November's sell/buy ratio to 34.7 to 1. So far, December's ratio is 55.5 to 1. Insiders can't even wait until January to avoid the tax bite for 2006? What does that tell you?"

And this must be important stuff, as Bob Wood of Kaizen Asset Management is always asking me if I have been paying attention to the published reports of "insider sales" of stock, and I lie and I say that I do, but I really don't, because I figure that there is a very good reason why they are selling so much stock and buying so little; they have all arranged it for themselves to be granted whole bundles of stock, and basket loads of stock options, and soaring bonuses being paid in truck loads of stock, and being given shiploads of stock as incentives, and whole, entire mountain ranges of stock in compensation, and on and on and on. So why should they buy more? But that's just my opinion, but I have no idea what is real anymore.

But I seem to have gotten sidetracked, as this is not about the popular trend of slimy insiders raping the stockholders with impunity, but about cute and clever aviation witticisms. And speaking of that, one that struck me, as a guy looking at the economic thunderstorm approaching and is fearing for my life in a desperate, terrified panic because that is what smart people did in all the rest of the times in history when such a thunderstorm approached, is the one that went "A thunderstorm is never as bad on the inside as it appears on the outside. It's worse." Brrrr! I suddenly feel cold!

Another analogy to investing is the one that went "Weather forecasts are horoscopes with numbers" is analogous to the inaccuracy of most forecasts (like when I predicted that I would retire at 40 and be wealthy, popular, healthy, handsome and happy, but yet here I am, years older than that, now referred to as "Old none-of-the-above"), but especially, especially, especially about economic and financial forecasts.

But the best aphorism of all, because it works on so many levels, including ridiculing the morons who think that the economy can achieve a mythical "soft landing" as immense, pandemic financial bubbles, created by unprecedented oceans of money and credit through the banking system, are bursting, was "There are three simple rules for making a smooth landing. Unfortunately, no-one knows what they are." Hahaha! Excellent!

-- I really had to laugh at the article by Craig Torres on Bloomberg. He writes "Ben S. Bernanke's greatest inflation victory to date may be in deflating the aura of power and influence surrounding his job.

"With his restraint," he writes, "Bernanke is quietly engineering one of the most significant transitions at the U.S. central bank in the past 30 years, economists say. Rather than concentrating authority in the person of the chairman, he wants the Fed's inflation-fighting credibility to reside in the institution, so the public will see that stable prices don't depend on the views and abilities of one individual." Hahaha!

What a stinking little coward! Although wielding absolute, dictatorial power over Federal Reserve monetary policy, he now wants to diffuse the blame for his failures amongst a whole crowd, coming as it does on the heels of the abysmal failure of Alan Greenspan? Hahaha!

How absolutely shameful for him and Princeton, which made this little gutless twerp the head of the economics department, when it is now plainly obvious that his stupid little theories were (like I always bellowed whenever I got the chance) timeless economic truths amalgamated with unbelievable, unforgivable, unmitigated mathematical crap, and, in a word, wrong. And stupid. Stupid and wrong. Now he hasn't got the guts to take the blame that he so richly deserves for the economic horror he and his slimy little Fed friends have caused.

-- If you want another real-life example of a blatant government lie, then the revised GDP deflator is the statistic for you, as it is now revised down to a miniscule 1.9%! Inflation is running at 1.9% a year? Hahaha! How stupid do they think we are?

Ugh.

***Mogambo sez: If it ain't gold or silver, it ain't worth squat. And if you don't get gold and silver soon, you won't be worth squat, either, ditto soon.

Dec 26, 2006
Richard Daughty

email: RichardSmithGroup@verizon.net
Daughty Archives
Provided as a courtesy of Agora Publishing and The Daily Reckoning

Richard Daughty is general partner and C.O.O. for Smith Consultant Group, serving the financial and medical communities, and the writer/publisher of the Mogambo Guru economic newsletter, an avocational exercise the better to heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning and other fine publications.