 008: Licence to Rant
Richard Daughty
...the angriest guy in economics
The Mogambo
Guru
Archives
April 27, 2005
- The world is slowly coming apart, and the big news, for me,
is that some yahoo high up in the Chinese banking world, Zhou
Xiaochuan, who is the governor of the People's Bank of China,
admits that they may be prodded along by international pressure
to more quickly allow their currency to appreciate against ours.
How much? Well, I have no idea, but the Financial Times newspaper
noted that the futures market was "betting on an exchange
rate of Rmb7.818 to the dollar in 12 months' time,"
down from the current peg of about currency 8.3 to the dollar.
So, in answer to your question, the dollar will suffer a 6% devaluation,
give or take, in twelve months. Since there is nothing that says
that the devaluation will stop there, perhaps you had better
count on a 12% devaluation in twenty-four month's time, too.
This implies that, ceteris paribus (which is a Latin phrase that
I use to try and impress somebody, since it seems classier than
saying "all other things remaining the same") imports
from China will cost 6% more, twelve months from now, and you
can call the Federal Reserve all day long to try and find somebody
who will say that paying 6% more is a lot of inflation in prices,
but you won't find anybody. What you WILL find, however, is a
lot of people (maybe even Greenspan himself!) who will tell you
that inflation is low, lower than low, very low, extremely low,
so low they can hardly see it, and even when you DO see it, after
and you deflate that 6% rise in prices by the fact that you don't
have to haul as much stuff home (which saves you gas and wear
and tear on your car), and you don't have to rent a place to
put all your stuff because you won't have so much stuff (saving
you rental money), and when you add all of these hedonic adjustments--
and more! --to the raw inflation numbers, you can make inflation
magically disappear! So therefore, there is no inflation!
But you can call the Mogambo, day or night, and I will tell you
the first damn time the phone rings that 6% higher prices is
a LOT of inflation and it is bad, bad news. And for you doubting
Thomases, here is actual video footage to help you change your
mind. The room goes dark, and suddenly the screen is filled with
the scene of the reception area of the swanky offices
of the chairman of Mogambo Enterprises, a man both hated and
feared, but mostly hated. You notice that I am keeping James
Bond waiting, and he is one of Her Majesty's Secret Service guys
and is a big, big movie star, too, so obviously I must be a Real
Important Guy (RIG) to keep a guy like him cooling his heels,
him and his snotty little 007 License to Kill, which are almost
impossible to get unless you "know somebody,"
and all the people I know hate and fear me, but mostly hate me,
and so they usually aren't in the mood to do The Mogambo any
favors.
Anyway, the camera moves through the big oak door with the reinforced
gun portholes, past the security guard who demands you keep your
hands where he can see them and then nobody will get hurt, and
into a lavishly decorated office, then out the back door, down
the hall, around the corner, and next to the janitor's closet
is the cramped little dingy office of The Mogambo himself. Suddenly,
the phone is ringing! Perhaps it is a world leader, asking for
advice! Perhaps it is a national bank, begging for help! Maybe
it is Mrs. Kravitz, yelling about how she saw me throw that dog
crap over the fence into her yard!
But without even checking his Caller ID, The Mogambo picks up
the phone on the first ring, and yells into the receiver, "That's
a hell of a lot of inflation, dude!"
So, given this demonstrated difference in level of service, who
you gonna trust, me or the Federal Reserve?
Now before you answer, let me tell you that the Cleveland Fed
President, Sandra Pianalto, has joined a number of other despicable,
lowlife, lying pieces of Federal Open Market Committee garbage,
in that she has come out as supporting a Fed inflation target,
which translates into her and those other Rabid Monsters From
Monetary Hell (RMFMH), actually wanting the Federal Reserve to
maintain a constant, simmering inflation! And yet the Congress,
always sticking their noses into everything and are always calling
witnesses and inviting testimony and strutting around like they
are such hot stuff, are forgetting that the damn private banks
who have all banded together and called themselves the Federal
Reserve are given the responsibility to achieve "price stability"
as part of their damn mission! That is one of their expressed
and explicit duties! That is why they are supposed to do! And
yet here are these Fed morons actually saying they want to do
the one thing that is guaranteed to cause suffering; create inflation!
I know that you are incredulous, and could not imagine anyone
connected with the Federal Reserve, or claiming to know the first
thing about economics, would actually admit that they are so
insane or stupid that they want to purposely create inflation.
I was ready for you skepticism! Here are her very own words.
"My view," and notice that she says it without
the least bit of shame in her voice, "is that the rate of
inflation should average about 1.5 percent as measured by the
Personal Consumption Expenditure index, over periods of about
three to five years." See? That's her talking! She's actually
saying it! If the American people were not so ignorant, thanks
to the abysmal and manipulated school system, about the horrors
of inflation (and how what you really want is gently falling
prices because then everyone would have a rising standard of
living, and that is the whole freaking point), they would be
brandishing flaming torches and storming the Cleveland Federal
Reserve Bank, running this Pianalto bozo and all her creepy little
cronies out of town, and then spending the rest of the day leaning
out of the windows, waving to the adoring crowds, and having
a big party, now that they are National Heroes and they have
saved our money from a planned 1.5% per year loss in buying power!
The crowd goes wild! Yayyyyyy!
But if Ms. Pianalto gets her way, and you better hope that she
does not, then you better start kissing-up to your bosses in
a more unctuous and toady way (and I recommend "Gee, Mogambo!
All your ideas are swell! You are not as stupid as everyone says!"
and "I'm not going to finish this chocolate donut. Do you
want it the rest of it, Mogambo?"), as you have to find
a method to increase your income by at least 3% a year just to
stay even with the rise in prices, as you buy stuff with after-tax
dollars, and so you need at least 1.5% more after-tax money to
pay the higher prices.
But while I am not sure how we digressed, I am sure that we started
off talking about the coming devaluation of the dollar and how
my mind is screaming in fear and my whole life is flashing in
front of my eyes as I clearly see our destruction looming, looming,
looming before us. For one thing, ceteris paribus again, oil
ought to cost 6% more, or about 13 cents more per gallon.
The reality is that to move the peg to Rmb7.8 to the dollar from
8.3 means that they are raising prices to the world's best customer!
And not only that, but the gigantic hoard of American debt and
assets, that the Chinese government and the Chinese citizens
now own, will be worth 6% less yuan in one year! I know what
you are thinking. You are laughing and going "hahahaha"
at the Chinese idiots who thought that buying all that American
debt and equities was such a smart move! And if you REALLY want
a big laugh, then if interest rates also rise in the year, they
will lose an additional big chunk of change on top of that, as
their American bonds will go down in price! Hahahaha! They could
easily be looking at a 50% loss on their investments that totals
to a huge, whopping huge, gigantically huge loss of wealth! Hahahaha!
Chinese chumps!
Bill Bonner of the Daily Reckoning says he already knows that
1) we have inflation in the USA and almost everywhere in the
world, and that 2) the Chinese are going to suffer losses due
to a devaluation of the dollar, and 3) he certainly doesn't need
a nitwit like me to call him up to tell him either of those things.
Then I innocently ask "Then what DO you need a nitwit to
call you up about?" But instead of answering me, he sums
up the inflation and dollar-devaluation thing with the pithy
"U.S. standards of living must fall; foreign lenders must
get stiffed."
- Market Nugget.com notes that the allure of gold
in these uncertain times not quite unique to America, as you
have no doubt erroneously heard. They say, "Since 2001 gold has increased in value against the US dollar,
the Euro, the Yen, the Canadian dollar, the Pound, and the Swiss
Franc. Gold now appears to also be starting to
strengthen against the South African Rand, previously the strongest
currency." Now, I can hear you saying to yourself, "This
is all well and good, but tell me, mighty Mogambo (MM), how does
that affect me, the American homeowner with an SUV, 1.5 kids,
debt out the wazoo, a monster mortgage that could choke a pelican,
and a serious drinking and drug problem?" I'm glad you asked!
This is the perfect time to introduce a lesson in values. If
you had accumulated gold all these last few years, especially
back when it was actually under $270 an ounce, see, instead of
accumulating an SUV, 1.5 kids and a crippling mortgage, you would
be sitting on a HUGE pile of gold, and
thus a HUGE pile of capital gains, and then you could afford
to buy a house outright, and have lots of money left over, which
would give you a lot of spare time, which you could use to produce
the 1.5 children in your palatial master bedroom, instead of
in the backseat of your parent's car. And it gets even better
for people who own gold, or are anticipating owning some,
when he says, "Although the price of gold
in the different currencies has fluctuated, the long term trend
is still up."
- Speaking of gold, in one of the more unusual bits of
news of late is that the United States Mint announced
that it will manufacture pure gold, 24-karat,
un-circulated, "gold bullion investment" coins. They
hope to get this thing up and going sometime in, so they say,
early 2006. This will be, according to various articles, the
first time that the United States Mint has ever produced 24-karat
gold coins.
This fits in perfectly with a lot of the email I am getting lately,
where the prospect of the US government again confiscating everybody's
gold looms heavy on their minds. Some say
yes, some say no, some (me) say it is only a matter of time before
those who say "no" start saying "yes,"
because if there is one thing that I know for a fact, it is that
the Constitution-shredding, lying, despicable FDR was not an
aberration, but is emblematic of everything horrible about government,
and they will stop at nothing to keep their Big Government socialist
system from collapsing under its own bankrupting weight. And
the idea of the government getting into such desperate shape
that they declare a national emergency of some kind, and that
they own everything, especially gold,
is almost certain.
But they have to give you dollars for the gold,
so they can make the argument that they aren't screwing you out
of anything, although they are making you take dollars in exchange
for your gold, and then the government goes on debasing
the dollars. So in the end, they ARE screwing you! See? I TOLD
you that they are out to get us!
So, is this the scenario? The government starts flooding the
world with these new gold bullion coins, created from the gold that they are still holding from FDR's confiscation?
Which drives down the price of gold? Which
gives them cover for their own inflationary ambitions, because
they can now say "There is no inflation! If there was, then
gold would be rising! But look! It is not!"?
Plus, they make a few bucks on the deal? Then, one day, they
stop, thus driving up the price of gold?
Which they then confiscate again? And then you are supposed to
use those dollars you got in the exchange to resuscitate the
economy by spending it? Sounds about right to me!
- The trade deficit over the last twelve months (to February)
has ballooned to $693 billion, which almost certainly means that
we will be going over the 700-billion mark pretty soon, if not
already. This is a hell of a lot of stuff! This is about $2,400
for every freaking man, woman and child in the whole country!
What's worse, this is about $7,000 for everybody who has a freaking
non-government job in the whole country! All of these people
are going off to their boring, horrible little jobs and working
eight, nine or ten hours a day, every damn day, alongside horrible
little co-workers who are always accusing you of stealing their
lunch from the refrigerator, but who won't lend you any money
to go buy any lunch of your own, so who is REALLY the victim
here? But they have to pay their higher taxes, and their higher
housing costs, and buy higher-priced food, and pay for the depreciating
cars, and pay, pay, pay for every damn thing in the whole damn
world out of one lousy little paycheck. And after all of THAT,
they are supposed to STILL have $7,000 left over to buy imports?
But it is going to get worse and worse for these people, as the
Washington Post notes "Treasury Secretary John W. Snow called
on China to stop pegging its currency to the dollar, a reform
intended to allow the Chinese currency to rise, easing the flood
of cheap exports that contributes to the record U.S. trade deficit."
So how does the Chinese not pegging its money to the dollar ease
the flood of imports, and thus reduce the level of imports? I
leap to my feet and wave my hand enthusiastically in the air!
This is an easy question! Call on me! Let me answer this one!
So the teacher calls on me, and everybody groans. I rise to my
feet in my best John Wayne impersonation, and I drawl "Because
everything will cost more, pilgrim! So while you are still spending
the whole $7,000, you get less stuff!" The teacher's jaw
dropped open, and the whole class breaks into spontaneous applause
because The Mogambo finally got one damn question right! Even
though we are spending just as much money (all of it), we are
getting less stuff, and so our standard of living has fallen.
Damn! No wonder I am real sullen here lately.
But to show you that he was just kidding, Mr. Snow then says,
"at the same time" according to the article, "promised
cuts in the U.S. budget deficit." Hahahaha! Somebody in
the Bush White House is saying that the budget deficit will be
cut? Hahahaha! Anyway, he figures that cutting the budget deficit
"would reduce the nation's consumption, including the consumption
of imports." And although he does not say it, and the Post
does not say it, this cutting of the deficit would necessarily
be accomplished by, obviously, cutting people's incomes, as all
of that deficit is actually somebody's current income. And so
these people would be forced to consume a LOT less stuff, both
because their incomes are lower and because things cost more
at the same time, including things like food and gasoline and
donations to the Mogambo Oil For Food program (modeled on the
famous United Nations program which was a bonanza for insiders),
and then I would have to declare bankruptcy and fire everybody
and skip out of town in the middle of the night with all the
money. Again.
Mr. Snow, and remember that he is the Secretary of the Treasury,
so you would think he would comprehend this stuff, thinks that
Japan and the European Union should be urged to "promote
growth, which would suck in U.S. exports." And hopefully
suck in the current level of exports that the USA will no longer
be importing with heretofore gusto, because if we ain't buying,
then somebody has to.
And that is one hell of a lot of stuff to suddenly buy! It is
so much stuff that you could fill up a line of shopping baskets
so long that could reach out of the supermarket, down the street,
all the way to Disney World, down to South Beach in Miami to
gawk at the freaks, up to Daytona beach for a couple of beers,
then back across to Tampa, across the bridge, down to 54th, up
the street, into my driveway, and still scratch my car.
So who is going to buy all of this stuff? Hell, the entire euro
area is only showing a trade surplus of $82 billion, and this
is with Germany, the worlds largest trade-surplus nation, showing
a whopping $198 billion surplus all by itself. Japan and China
-- combined! -- only show a surplus of less than
$200 billion. So who in the hell is going to step up their economies
to even start to absorb even a tiny fraction of the amount of
the $700 billion of stuff that we Americans now import? Hahahaha!
And then, on top of that, they are going to also suck up increased
American exports, too? Stop! Stop! My sides hurt from laughing!
- E.R. Maybury, in the Mar-Apr 2005 issue of his Early Warning
Report, notes that "Every major war Washington has ever
gotten into has produced inflationary trends. This means, for
speculators, wartime is as close as it gets to a no-brainer."
So the way to make a few bucks on this is to invest in those
areas that benefit from inflation? A nice piece of investment
advice! And the good news is that you don't even have to be in
a hurry, because you have all the time in the world to get your
money invested in things that will benefit from inflation, as
he concludes that "The 1990s were the decade of high tech.
Next, I am afraid, will be the decade of war." And thus,
I assume, the decade of inflation. And profits from owning the
stocks of companies that make war materiel, too.
- The Bureau of Labor Statistics has released the Consumer Price
Index (CPI) report. From Bloomberg we read "Overall U.S.
consumer prices rose 0.6 percent last month, the Labor Department
said in Washington. Core prices, which subtract food and energy,
rose 0.4 percent."
Yahoo! News did a little research, and noted that the
"worrisome" 0.4 percent rise in the core rate of inflation
was "the largest jump in 2 1/2 years."
Couple this inflation news with the stagnant economy, and it
is no wonder that we read two back-to-back paragraphs from AP
about stagflation. "Economists said the new inflation report
was likely to raise worries at the Federal Reserve because of
price pressures becoming evident outside of the energy area"
and "The higher inflation pressures are coming at a time
when a number of reports in recent weeks have shown economic
weakness, from a disappointing employment rise in March to lower-than-expected
retail sales."
Then AP provides a quote from a guy from the old school of economics,
David Wyss, chief economist at Standard & Poor's in New York,
who says "We are getting slower growth and higher inflation
numbers. The Fed would like to keep interest rates low to keep
the economy moving but on the other hand they have to fight against
inflation."
See how this is so old school? The Fed does NOT have to fight
against inflation any more! In fact, as this Pianalto butthead
has said, she and other jackasses in the Federal Reserve WANT
inflation!
George Ure takes us a little farther into the report when he
says. "Buried further into the news release is word that
health care for the first three months of this year was increasing
at a 10.3% clip and energy commodities, like gasoline, were up
39.6%"
Okay, now what happened? I mean, here is the government, which
is doing everything it can to disguise and deny inflation, and
yet their best efforts STILL resulted in inflation that made
the poor Mogambo (TPM) run screaming into his little steel-reinforced
concrete bunker, put on that stupid aluminum-foil hat, and start
feverishly loading fresh ammo into the Mogambo Self-Defense System
(MSDS), which is centered around firepower that emphasizes caliber,
as in "large," and I am not going to get into
any of that whole Freudian thing about how, deep down inside,
this is my pathetic way of trying to compensate for my feelings
of inadequacy because, although it is true, I just don't like
discussing it, and I would rather talk about how I was raised
by wolves, who do not have any firepower at all, putting them
at a severe disadvantage that exists to this day, and there is
a Mogambo Lesson In Nature (MLIN) in there, if you take the time
to look.
But we were not talking about any of that, but we were talking
about was how the inflation report came out, and it was horrible.
But, like some mondo bizzarro mass hysteria, bonds went up in
price! Guys were bidding up the price of bonds in some insane
buying frenzy! I can close my eyes and imagine them climbing
all over each other to buy bonds, driving up their prices, which
gives them a lower yield, at the same time, no, make that at
the EXACT SAME FREAKING TIME as the inflation report shows that
every dollar in existence will buy less! They are deliberately
losing wealth to inflation!
Suppose that a bond costs a hundred dollars, and it gives you
4% interest. So, at the end of each year, the bond issuer will
pay you the four bucks, in cash. Hey! Neat! So, after waiting
an entire year, you can buy four bucks worth of stuff and you
(theoretically) still have your original hundred bucks! Buy yourself
something nice! I recommend something fried, like a nice juicy
hamburger. In fact, make it a double! And the good news is that
you can get a Big Double-Chubby Combo burger-- with fries! --down
at Eddies Easy Greasy Grub ("High-class chow!") for
four bucks! This is going to be soooOOOOoooo sweet!
Now, continuing our happy tale, after the year is up, which you
spent moaning and groaning because you spent the hundred bucks
on that damn bond and if that interest check doesn't get here
soon I am going to go wring my four bucks out of somebody's neck
because I really could use a little cash right now. But every
day, it's the same thing; you meet the mail carrier at the mailbox.
There is no check. You accuse her of stealing your check. She
denies it. I tell her she is a filthy lying thief. She sprays
me with Mace, and the next thing I know she is storming off in
a huff. So I brightly say after her "See you tomorrow!"
and she makes a rude hand gesture, showing everyone that postal
workers are a rude bunch of people.
But then, one day, your ears prick up at that unmistakable sound
of something dropping into your mailbox! You run out! She sees
you coming and she takes off, trying to spray Mace at you over
her shoulder! Tears of joy come to your burning eyes and you
drop to your knees in grateful thankfulness, because there, right
there in the mailbox, sitting on top of all those "Final
Notice" and "Payment Overdue" letters, is the
check! The money came!
So, quick as a bunny, you jump in the car and make a high-speed
run down to the bank and cash the check. Four bucks! In cash!
Yahoo! Running out to your car, you drive like some demented
demon from hell to get something to eat, and then it strikes
you "That double hamburger that The Mogambo recommended
sounds mighty, mighty tasty!" So swerving to take the 42nd
Street exit, you go down Hoffner to 66th Street, though the alley,
hang a left, go two blocks, and it's there on your left! You
can't miss it!
Sure enough, suddenly, there it is! Eddie's Easy Greasy Grub
restaurant! Yanking the steering wheel over, you screech into
the parking lot with tires squealing, motor racing, and pedestrians
scampering. You park, run to the counter and declare to the cashier,
"Gimme a Big Double-Chubby Combo with everything!"
"Fine!" she says. "That will be five bucks, please."
"Five bucks?" you scream. "When the hell did a
Big Double-Chubby Combo cost five bucks? They cost four bucks
just last year!" and she says, all snotty like (and to tell
you the truth I don't understand what Eddie sees in her), "We
had to raise prices in the last year, and now the Big Double-Chubby
Combo is five bucks. You want it or not, jerk?" and I say
"Yes I want it, you stupid fat cow, that's why I came down
here and ordered one! But I only have four bucks!" and so
she laughs in my face, and that makes me so mad that it takes
every bit of Mighty Mogambo Willpower (MMW) I can muster to keep
myself from reaching out and slapping her smirking little face,
and not because I am averse to slapping the old bag, but because
she'd jump over that counter and beat the hell out of me again,
which is embarrassing and painful. Mostly painful. She says that
I can still get a lousy Big Double-Chubby sandwich for four bucks,
but no fries.
So what have we learned? We have learned that if you are going
to loan money, then the smart thing to do would be to make sure
that you at least charge enough interest so that you can stay
ahead of inflation. And if you want to be really smart about
it, you charge enough interest so that you not only stay up with
inflation, but maybe make a little extra, so that when you get
that annual interest check in the mail, you can stroll into Eddie's
Easy Greasy and order not only a Big Double-Chubby Combo, but
also get a nice Biggie Beverage, and still have enough left over
to leave her a tip, which you won't, because you hate her guts
and she hates yours.
But these "investment professionals" that are supposed
to be so smart (and that is why you are letting them manage your
retirement account), are doing the exact opposite of this! As
prices rise, as the purchasing power of the dollar falls, they
are locking themselves into getting less money by buying bonds
at these lower yields! Of course, all this buying makes the price
of bonds go up, but it does not affect you, since you bought
your bond last year. But if interest rates rise in response to
this rise in prices, your bond, which you bought for a hundred
dollars, will now be only worth $80 or so! Hahahaha! Chump! And
your income stream will still be that same four lousy bucks a
year, for the next thirty years! Hahahaha! Pretty soon you won't
even be able to afford a lousy bag of fries, which will rise
and rise in price until THEY cost four bucks, all by themselves!
Hahahaha! Welcome to the world of inflation, dude!
And yet here are these people, and I again use the phrase "investment
professionals" in a decidedly derogatory fashion, are financially
killing you faster by doing the exact opposite of what rational
people, people who actually know what they are doing, do! It's
astonishing! And yet, there it was, right in front of my eyes,
as I watched in rapt fascination, munching on, as if you had
to guess, a Double-Chubby hamburger, watching these guys purposely
lose wealth. What a weird world!
- The National Legal Debt Centers notes that the rise in inflation
and interest rates are not such good news, as "Interest
rates are starting to increase and many homeowners are finding
themselves falling behind with their mortgage payments."
This is reflected in the number of people who can't make their
mortgage payments, which, according to Foreclosure.com, is up,
as the number of "Foreclosure listings nationwide went up
50% from February to march 2005." Numbers-wise, they say,
"over one million Americans were late on their mortgage
payment last month and half went into foreclosure."
Part of the explanation for this may be found in an interesting
essay entitled "Riotous
Real Estate"
by Mike Davis, "The great American housing bubble, like
its obese counterparts in the United Kingdom, Ireland, the Netherlands,
Spain and Australia, is a classical zero-sum game. Without generating
an atom of new wealth, land inflation ruthlessly redistributes
wealth from asset-seekers to asset-holders, reinforcing divisions
within as well as between social classes." So, buying over-priced
houses does not create any new wealth, but only new debt? And
this is NOT going to end badly? Hahahaha! Where in the hell have
I been all these years not to have learned this? Hahahaha!
- Richard Russell offered
"One more tidbit -- How much does the public love gold? Central
Gold Trust of Canada is
now selling at a 4.5% DISCOUNT from its actual gold
holdings. That will change, count on it." Shares of a gold fund are selling at a discount to actual gold holdings, and his whole 40-plus years of career
in being mostly right about the market is telling you that "this
will change" and you are NOT buying shares of Central Gold Trust of Canada to lock in what must be a profit?
Why not? Oh, right! Like me, you don't have any money. But if
you HAD some money, you'd buy the shares, right? Me, too!
- An interesting bit of information comes from the Turov On Timing
newsletter, where he has looked at what happened when the stock
market in other Januaries have been down, and there have been
six of them since 1953. "In all six
cases, the SP500 has declined over the remaining eleven months,
for an average decline of 9.21%." Now, I am probably
not like you, because you are brave and fearless, but when something
happens every time, a little bell goes off in my head, and I
just can't shake the idea that the same thing will happen again.
- I watched some of Alan Greenspan's testimony
before the Senate Budget Committee last Thursday, and if you
want proof that these people are morons, I can sum the entire
thing up for you: They have no clue. They think that they can,
by careful questioning, tease out of Greenspan some fabled middle
ground, where taxes are not raised, yet spending is increased,
and everything will work out just fine. Like I said; morons.
- The housing market, as it eventually had to, is perhaps showing
signs of cooling off, as evidenced by housing starts falling
by 17.6% in March. But untold hundreds of billions and trillions
of dollars have been created out of thin air and washed into
the economy via being spent on houses, and the sellers got some
and spent some, and the mortgage brokers got some and spent some,
and the real estate agents got some and spent some, and everybody
got a little piece of the action, and the excess eventually worked
its way into the stock and bond markets, creating inflation in
those assets, too. In the end, people who were up to their eyeballs
in debt are now up to their eyebrows in debt, but the aggregate
spending level of the whole country was artificially held up
for awhile.
In the same housing vein, on the Economist.com site we got the
report entitled "Will the Walls Come Falling Down?"
which is a kind of a play on words or something, I guess, since
it has to do with houses, which have walls, but I don't know,
as I was never any good at that kind of literary symbolism thing,
if that IS what it was. But then again, I don't know, because,
as I have already admitted, I was not very good at that kind
of thing, so why in the hell don't you just leave me alone and
quit picking at me, always picking, picking, picking at me about
it? Are you looking for a fight or something? Is that what you
want? Huh? You want a piece of The Mogambo? Is that what you
want, punk?
But that is not what they wanted, thank God! They wanted to tell
us about how houses affect the GDP of a country. They write,
"It is probably not a coincidence that Germany, one of the
few European countries where house prices have not been rising,
fared far worse during the slowdown than its neighbours or America.
Unfortunately, when housing markets decline, the same process
works in reverse: consumers have to cut back their spending and
save more to compensate for lost home equity. Lower consumer
demand generally means a slowdown in GDP. The sharper the correction,
the greater the effect on the overall economy."
If that was not enough to scare you, the article went on to say
"An IMF study on asset bubbles estimates that 40% of housing
booms are followed by housing busts, which last for an average
of four years and see an average decline of roughly 30% in home
values." And what happened to the other 60% of housing booms?
Well, obviously they just petered out. So the lesson is clear
that in 100% of housing booms, a few people made money, but most
people either lost money or did not make any money. And you call
this "investing?" Hahahaha!
And speaking of bubbles, let's not forget that the Nasdaq bubble
stands at only 60% of its peak value five years ago! A dollar
invested at the top is now only worth forty cents! Hahahaha!
The Dow and The SP500 are also off from their peaks of years
ago, too. And now they think that housing will be the bubble
that never bursts? Hahahaha! I can't help myself! I gotta laugh!
Hahahaha!
There may be many reasons why the real estate market and continual
profligate consumption that defines America has not collapsed
in flames, but one of them is not because of rising wages, as
wages have been lagging price inflation for at least a year now.
In fact, the Labor Department said that "average real weekly
earnings fell 0.3% in March and 0.5% in the past 12 months. Increases
in average hourly pay for 80% of U.S. workers have not matched
the increase in prices." Now, anybody who knows me knows
that I am probably the biggest idiot on the planet, and that
is why I am not able to comprehend how it is that some fabulous
robust economic growth is going to happen when people are only
able to buy less and less stuff. Maybe magic or something, and
my uncle James is going to pull a quarter out of somebody's ear
or something.
- I heard that the CEO from Annaly Mortgage Management Inc (NLY)
was on CNBC, and what he said reverberated around the net. He
apparently said: "We are witnessing a slow motion car wreck
in credit. GM was just the first to go through the windshield."
Hahahaha! But the bigger joke is that General Motors is going
to throw itself a lifeline by tapping the $6 billion in the retirement
fund of employees.
- From MarketNugget.com we get a nice tip on how to play the
technical timing game. They says that the glossary on the Stockcharts.com
site describes the VIX as "The Market Volatility Index (VIX)
measures the volatility of the market. Traders use the VIX as
a general inverse indicator of market volatility and sentiment.
High numbers mean that there's excess bearishness, and low numbers
indicate excess bullishness."
Well, as good as this is, it gets better. "Extreme lows
in the VIX are often followed by periods of increased volatility
and some corrective action in stock prices." So, what we
want to do, as I understand it, is wait for these of "extreme
lows" in the VIX, and then go short the market! So where
are we now? They say we are there! "Recent readings in the
11-12 range can be considered extreme lows."
And apparently you can even use the VIX to time whipsaw action
in the markets, as they explain "In periods when stock prices
go one way and the action is not confirmed by the opposite direction
in the VIX, it often means stock prices will reverse."
- I had a few frequent-flyer miles from an airline, I forget
which one, but I DO remember that all the damn airlines seem
to have some "policy" against letting drunk and abusive
passengers get MORE drunk and abusive, and it always involves
the co-pilot coming back to my seat and kicking me in the groin
for some reason, although NONE of them is able to show me where
it actually says that in writing. But the miles had gone bad,
see, now that I don't fly much, not that I don't want to, you
understand, but if YOU think it is easy getting on an airplane
with one of these Justice Department ankle-monitor alarms beeping
like crazy and people supervising my Community Service sentence
are screaming "Stop that man!" then you
must be a rookie to the system. But instead of just cheating
me out of my frequent-flyer miles, I was offered the opportunity
to subscribe, absolutely free, to some magazines for, apparently,
about six months.
So you can imagine my delight when I got, in the mail, Money
magazine, because on the cover is a photo of two people, one
standing, one sitting, on either 1) a beige shag rug that is
covering something, or 2) a congealed mound of puffed rice or
wheat or something, I'm not sure which. But there is no explanation
or hint of it anywhere in the magazine, and I know because I
looked.
But this is not about how Money magazine is covering up some
dreadful secret with an old rug, almost surely in violation of
some little-known provision of the Patriot Act, and it wouldn't
surprise me a bit to learn that the Homeland Security Department
is already on the case. But this is about these two people posing
on the cover. One is a pretty young Asian-American woman and
the other is a handsome Hispanic-American male, ditto on the
young side, for which I am both jealous and hateful, as MY youth
is far behind me and these two complete strangers are showing
off how they are still young and beautiful and apparently rich!
It's not fair! They are, I assume, the pictorial representation
of the magazine's feature article, "Getting rich in America.
The strategies that work now. P 98."
You can imagine my excitement as my trembling fingers scrambled
to turn to page 98. "Getting rich in America"! Man!
These guys are talking my language! I am already IN America,
so I already have something going for me as I save those transportation
costs! This is going to be so great! Upon reaching page 98, I
quickly scan the article. I scan it because, although I would
certainly like to be rich, I'm an American, and as such I don't
want to waste ten whole minutes of my valuable time actually
reading some dumb article. I want it now! I want everything now!
But I quickly find out that if I want to be rich, (and you might
want to write this down, because it was the thrust of the featured
article in the magazine, so it must be important!), I should
get more education, speculate in houses, and start my own business.
Man! That IS easy! Golly! Thanks, Money magazine!
But although the advice was mere pedestrian fluff, towards the
end of it, we get this interesting paragraph. "So does that
1999 way of getting rich, the stock market, matter anymore? Yes,
but definitely not as a quick way to wealth. One of the reasons
that people thought you could get rich in a hurry buying stocks
a few years ago was that many people did. The S&P500
returned about 28% a year for the five years that ended in 1999.
That party, of course, is long over."
Wow! This is Money magazine declaring, as an apparently a commonly-acknowledged
fact (as I glean from their use of the phrase "That party,
of course, is long over"), that the stock market is a loser,
as a way of getting rich quickly, anyway. But if you take the
speculative money out of the market, what is left to cause the
froth that sends prices up so high? And how can they be held
at these heights without that speculative money?
- A guy named Sam Vaknin, Ph.D. has written "The
Bursting Asset Bubbles - Introduction (Part 1)" on the
GlobalPolitician.com site, and it is a nice essay about how bubbles
in assets are not new, they always burst, and many other bad
things about bubbles, and that is why you never read of anybody
but central bankers waxing ecstatic about bubble economies and
how they love to foster bubble economies, and that is why they
cannot recognize that a bubble is a bubble (and that is why they
continue financing them) until after it bursts (when they will
step up their financing of them to prevent "deflation"
of the bubble).
He says as much when he notes "Ponzi and pyramid schemes
have been a fixture of Western civilization at least since the
middle Renaissance." To prove it, he notes that the famous
tulip-mania happened in 1634.
And these get-rich-quick schemes are still happening, and one
of them was in Israel, as "More than one fifth of the population
of 1983 Israel were involved in a banking scandal of Albanian
proportions. It was a classic pyramid scheme. All the banks,
bar one, promised to gullible investors ever increasing returns
on the banks' own publicly-traded shares. "These explicit
and incredible promises were included in prospectuses of the
banks' public offerings and won the implicit acquiescence and
collaboration of successive Israeli governments. The banks used
deposits, their capital, retained earnings and funds illegally
borrowed through shady offshore subsidiaries to try to keep their
impossible and unhealthy promises. Everyone knew what was going
on and everyone was involved. It lasted 7 years. The prices of
some shares increased by 1-2 percent daily."
So people were getting rich, and a fifth of the population was
now involved in it, all of them trying to get rich. Then, "On
October 6, 1983, the entire banking sector of Israel crumbled.
Faced with ominously mounting civil unrest, the government was
forced to compensate shareholders. It offered them an elaborate
share buyback plan over 9 years. The cost of this plan was pegged
at $6 billion - almost 15 percent of Israel's annual GDP. The
indirect damage remains unknown."
This is not about how Israel is full of people who will fall
for a Ponzi scheme, as EVERY country is full of people who will
fall for a Ponzi scheme. Why do they do this, you ask? Search
me, but the author concludes that "People know that they
are likelier to lose all or part of their money as time passes.
But they convince themselves that they can outwit the organizers
of the pyramid, or that their withdrawals of profits or interest
payments prior to the inevitable collapse will more than amply
compensate them for the loss of their money. Many believe that
they will succeed to accurately time the extraction of their
original investment based on - mostly useless and superstitious
- 'warning signs.'"
But it is more than people acting like idiots. He goes on to
say that "Investments by households are only one of the
engines of this first kind of asset bubbles. A lot of the money
that pours into pyramid schemes and stock exchange booms is laundered,
the fruits of illicit pursuits. The laundering of tax-evaded
money or the proceeds of criminal activities, mainly drugs, is
effected through regular banking channels. The money changes
ownership a few times to obscure its trail and the identities
of the true owners." People are laundering money in these
schemes, too!
But this is not about Ponzi schemes and how people are so stupid
that they fall for these idiotic scams time after time and never
seem to learn, or how criminals are laundering money, nor is
this about how governments using a fiat currency is the biggest
Ponzi scam of all, and how we never seem to learn from this either,
although it is obvious that every other idiot government in the
history of idiotic governments have always started spending too
much, and they all resorted to one currency-debasement scheme
or another in their dire desperation, that they thus destroyed
the currency, and then that destroyed their country.
No, the REAL lesson that I wanted to note was that the government
stepped in to bail them out! The winners won, and the government
paid back the losers! Which unleashed not only inflation, as
the money supply rose, but more stupidities, too!
And speaking of government stupidities that are unleashing more
idiocies, United Airlines in unloading its busted pension fund,
and sticking it in the PBGC (Pension Benefits Guarantee Corporation),
even though the PBGC is itself already $23 billion in the hole
from the OTHER busted pension funds that it absorbed! Part of
the pain will be felt by the people covered by the plan, as their
total promised benefits will be cut by almost a third ($3 billion),
but the rest of it will, theoretically, be borne by everybody,
as the government sells bonds to pay the retirees through the
PBGC, which drives up the money supply, which makes inflation
rise, which makes everything worse for everybody. Especially
when the other airlines find they cannot compete with the deadweight
of THEIR retirement plans.
Ugh.
*** The Mogambo Sez: One of the new heroes is John Ruiz
Dempsey, who has filed a class action lawsuit against banks "on
behalf of the People of Canada alleging the financial system
creates money out of 'thin air'." The lawsuit argues, according
to FreeMarketNews.com, that "financial institutions illegally
charged interest on money that was loaned to borrowers,"
as "Banks and credit unions did not actually have the capital
that it gave as loans, and didn't have the right to loan depositors'
money without obtaining consent. Furthermore, the lawsuit claims
that money was counterfeited by digitally creating money that
never existed."
He is right, of course. Likewise, his suit will fail, of course,
as he does not have a prayer in trying to keep the banks and
the government from having as much money as they want, to spend
and play with as they want.
Richard Daughty
email: RichardSmithGroup@verizon.net
 Daughty
Archives
Provided as a courtesy of Agora Publishing and The
Daily Reckoning
Richard Daughty
is general partner and C.O.O. for Smith Consultant Group, serving
the financial and medical communities, and the writer/publisher
of the Mogambo Guru economic newsletter, an avocational exercise
the better to heap disrespect on those who desperately deserve
it. The Mogambo Guru is quoted frequently in Barron's, The
Daily Reckoning
and other fine publications.
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