 We're freaking
doomed, dude
Richard Daughty
...the angriest guy in economics
The Mogambo
Guru
Archives
May 12, 2005
- Not much happened last week that you could put a finger on,
as then perhaps you could understand why I am in such a foul
mood. I dunno why. I just am. And then I remember that I am The
Mogambo, bearing the crushing weight of the world on my brawny
Mogambo shoulders (BMS). There is no other way to feel.
Debt problems worsened, of
course, but only to the usual degree of the average monthly increases
in that particular bad news category (BNC), such as outstanding
consumer credit increasing by $5.5 billion in March, which means
that the consumer's debt load is rising at an annual rate of
somewhere between 3% to 4.5% or so, and is already at $2.12 trillion,
which is a tidy $15,193 per every freaking worker in this whole
freaking country (140 million of them) who has a damn job. And
the interest rate is rising on that debt, or is getting ready
to rise, because interest rates are rising. And if lenders DON'T
start raising their interest rates on credit balances, then their
own bottom line (which is where profits would be found, if any)
will suffer, and then somebody's cushy executive job will be
on the line, since they did not produce results that "benefit
the shareholders", and then they get laid off, and then
after awhile they start coming around here and wanting me to
pay them back the money I borrowed from them five years ago.
And then that bums me out. And then THEY get bummed out when
I laugh in their faces at the very thought of me even having
any money, and if I DID have any money I certainly wouldn't give
it to him, as I had him in my crosshairs from the moment he turned
the corner.
Maybe it was that foreign custody
holdings at the Fed increased by $8.1 billion last week, which
is, again, towards the top of its range, and is worrying to me,
mostly because I am the worrying type. And I worry because I
believe that the Austrian Business Cycle Theory school of economics
is correct, and Mises and Rothbard were very explicit about what
happens when a government has acted as irresponsible as ours,
and especially when you have a central bank that has actually
eclipsed Congress in pushing the envelope of the bizarre, hewing,
as they are, to some lunatic economic theory that can be conveniently
modeled on computers, which means that things are permanently
linked, and which is why their dumb-ass theory starts out with
the proposition that lowering interest rates always causes an
increase in economic activity which is, on its face, such a stupid
statement that you marvel that educated adults would say something
so damned insane, especially when Japan is the living proof that
it is NOT true, because they are limping along at interest rates
that are almost literally zero, and have been for almost fifteen
freaking years in a row (how do you say "Nice job of investing
there, morons!" in Japanese? Answer: Mogambo him say Hahahahaha!"),
and it is only an export surplus that is keeping them alive.
For fifteen years bond holders make nothing, and shareholders
make ditto.
That things are heading for
doom was even at the meeting of the Berkshire Hathaway people
in Omaha, which produced this memorable quote from Buffett's
sidekick, Munger, who said "The present era has no comparable
referent in the past history of capitalism. We have a higher
percentage of the intelligentsia engaged in buying and selling
pieces of paper and promoting trading activity than in any past
era. A lot of what I see now reminds me of Sodom and Gomorrah.
You get activity feeding on itself, envy and imitation. It has
happened in the past that there came bad consequences."
So there are lots of people
who are cognizant of the facts. Big deal. But now, the moment
you have been waiting for! Now comes the reward for those who
have not already stopped reading and said hurtful things like
"This is really stupid! What kind of idiot reads this Mogambo
crap?" which, although it is true, hurts my feelings nonetheless.
So, without further ado, here
is the real reason The Mogambo is so forlorn (TRRTMISF): The
general trend of the last seven years, since 1998, is that the
Federal Reserve started creating money and credit in earnest
, creating credit like something out of a nightmare that just
doesn't end, like my wife hitting me on the forehead with a hammer,
but I can't move and I cannot pass out, and I have to go to the
bathroom real, real bad, and she is yelling "Maybe THIS
will knock a little sense into your thick, stupid head!"
But it doesn't! It doesn't teach me anything except that I think
toilets should be closer to the bed, and then I feel worse and
worse. But this tidal wave of fresh, new credit, as measured
by Total Fed Credit, is reflected in a concomitant rise in debt
that passed the point of being "un-payable" years and
years ago. And given the lack of press coverage, apparently it
is all a non-event, even though I am right there, every morning,
under the 49th-street overpass, standing in the shade so that
the harsh morning sun does not hurt the sensitive eyes of the
Mogambo (SEOTM), holding up my sign, "Prepare to meet thy
doom! The Federal Reserve and the world's central banks are killing
our money! And everybody else's money, too!"
I also have another sign that
says "Free kittens to good home" and a new sign that
reads "Homemade cookies, $1.00". But (and here is a
little business tip that they don't teach you in those fancy-schmancy
business schools), it turns out that very few people want to
buy a home-made cookie from a crazy man standing on the curb.
Not that I am complaining, because I made them out of stuff I
found in a dumpster, so it's not like I have a lot of money invested
in the Great Mogambo Cookie Venture (GMCV). But with the price
of ingredients so low, I figured that if I sold any at all, the
profit margin was at infinity! Wow! What a business model!
But this is not about how a
plucky young entrepreneur tried and failed to make a successful
business in the cutthroat world of cookies, and how they all
laughed at me for trying to sell a cookie that tasted worse than
it smelled, and how I told them that it is not about smell or
taste, but about PRICE! But explorations into that fascinating
bit of marketing lore will have to wait for another day, as I
am much too busy preparing the release of the seldom-issued Mogambo
Market Move Memo (MMMM). We cut to the inside of the Mogambo
Bunker Of Impenetrable Gloom And Homicidal Despair About Global
Monetary Policy (MBOIGAHDAGMP), where our scene opens with me
taking a long pull on a bottle of bourbon, chain-smoking unfiltered
Luckies and glancing nervously over my shoulder. Using a .45
automatic as a pointer, I gruffly refer to several charts fastened
to the walls with stiletto daggers, mostly for the effect, as
it looks so cool. I use the barrel of the gun to point to one
of the charts, where we see the slowdown in Total Fed Credit
over the last month or so, as compared to 1) the whole history
of Fed Credit since 1913, and 2) since 1998.
For you Mogambo fans, this
next part is going to be on the Mogambo Bloopers and Outtakes
Show, showing where I accidentally pulled the trigger and the
gun fired and that damn bullet started ricocheting off the wall,
going ping! plang! whing! and, if I remember my Batman correctly,
where Adam West, as Batman, is being fired upon by various criminal
elements in comical attire, ker-plewie! Subsequently, I have
amended the Mogambo Bunker Policies and Procedures Manual (MBPAPM)
to include the requirement "Fingers off the trigger! Off!
Until such time as it is immediately obvious that something or
somebody needs a big ol' healing dose of Dr. Leadplugger."
But since we no longer have
one of the charts, thanks to the little accident, I motion for
you to move your seat closer to me, right up close, so that you
can look into the fiery eyes of The Mogambo (FEOTM) as I tell
you, with words, hand gestures, facial expressions and ESP, what
I was planning to show you, but now I can't. But you would have
loved it, because it so graphically illustrated the point that
you would look at the charts, instinctively clasp your hands
together and excitedly exclaim, "Oh, Mogambo! You have made
me see the light! We're freaking doomed, dude!"
So pay attention, because here
it is (H I I). The last time a slowdown in credit creation happened,
and you can tell by the way I have kettle drums and discordant
brass instruments in the sound track, was in the year 2000. Clash
of cymbals! Lightning flashes outside the window! Wolves howl
in the distance!
Now you know why your hands
are clasped in, to use the popular phrase, shock and awe. And
you also know why we are doomed. And you know why the Mogambo
is holed up in that filthy little rat hole of his, hiding out
in the backyard, crying and shaking in fear, bristling with so
many heavy weapons and ammunition that he cannot even get up
to walk. And yet, unbelievably, when he politely applies to have
one of those do-gooder departments of the damned government to
supply him with a lousy electric scooter to get around, and maybe
help me move some cases of munitions, they say "no!"
Real snotty, like. "No!" Then I go home with their
rude laughter ringing in my ears and the salty bitterness of
my tears on my trembling lips, and after awhile I get tired of
plotting my revenge, and turn on the TV, where I see these commercials
where all these other people get electric wheelchair carts! It
is just another example of how they are all out to get me, the
bastards. And now people want to know why I am resentful, and
snarling, and hateful, and sometimes all three at once, and all
the people around me are snarling and hateful, but then I remember
that they are just family and neighbors, so who the hell cares
what they think? Screw 'em.
In short, the dysfunctional
idiocy known as the New American Economy, based entirely on debt-fueled
consumption and trading financial securities and borrowing against
the bubble-created value of our houses and assets, needs ever-more
debt to just stay where it is. And that creation of debt has,
suddenly, not been increasing anymore. Just like in 2000. Ergo,
big freaking problems are coming soon (BFPACS). The headline
in tomorrow's newspaper in your hometown, and in hometowns all
across America, will read "Mogambo Says Big Freaking Problems
Soon!" and if it is NOT the headline, then you know that
your newspaper is ALSO out to get me, the bastards, and lie to
you, which is worse.
But if the perfect revenge
is to make money and flaunt it in front of them until they die
of jealousy and envy , this would seem to be a very, very good
time to buy a put option or two on the OEX. The optimum strike
price is, the way I figure it, at-the-money. If I am right, we
will all make a lot of money when the SP100 falls a long way.
If I am wrong, well, I have been so wrong about so many things,
for so long, that you were stupid to listen to my advice, and
now you have nobody to blame but yourself, and even I sneer in
disgust and disrespect at your gullible stupidity.
- The credit rating of General
Motors and Ford were downgraded to junk status, which means it
carries a higher risk of default. An ominous sign of some kind.
We'll see how it turns out, but I am betting on lower share prices,
a threat of bankruptcy, an emergency government bailout, the
foisting of their retirement plans onto the government pension
bailout safety net, the PBGC, and a resurgent share price, making
Wall Street a bunch of money both on the way down and the way
back up.
- Antal Fekete, "goldbug Variations V" on the Freemarketnews.com
talking about the decision by Nixon in 1971 to take the dollar
off the gold standard, essentially defaulting in
the worth of the US dollar. "We must remember that the financial
annals do not record a single case in which a default has not
been followed by a progressive increase in the discount on the
paper of the defaulting banker, until it reached 100 percent
- possibly several years or even decades later." Mogambo
Instant Translation (MIT): the purchasing power of the currency
went to squat, which makes everything cost more. "Obviously,
the defaulting banker would try to slow down the process by hook
or crook. However, ultimately economic law was to prevail and
the remaining value of the dishonored paper would be wiped out."
Now, because you are reading this, I know that there is something
wrong with you, as only people who have something seriously wrong
with them would stoop to reading the Mogambo Guru, and so you
are saying to yourself "What in the hell does this have
to do with me making some money and amassing incredible power
through the sheer bulk of my money, so that I can stride as a
colossus across the financial and social landscape, and all will
tremble at the sound of my name?" Well, I was getting to
that, in my peculiar Mogambo way (PMW), but first the grasshopper
must learn to place his consciousness in a garden of serenity
whereby one can grasp the transcendent wisdom about to befall
him. But now I am not in the mood anymore, thank s to someone
interrupting my train of thought.
So, instead, we will hear from Mr. Ankete himself, he declares
"There is no reason to believe that the dollar default will
end differently." Then he sits back down. Obviously, that
phone call he got earlier was when he found out that my check
has bounced. Bounding up (Just like that damned neighbor's kid
who accidentally backed into the electric-fence section of the
Mogambo Bunker Perimeter Security System last week. You should
have seen the look on his face! Hahahaha!), I go on to fill the
sudden silence by asking "The value of the dollar will fall,
a money backed by nothing and therefore can be created out of
nothing, until so damn much money has been created through the
creation of debt, that the country and the world are going to
be affected, and in a bad, bad way (BBW)? Hahahaha!"
Mogambo scholars immediately run to their dog-eared copies of
the Mogambo Dictionary (MD), and look up BBW. The entry is "BBW.
Acronym for Bad Bad Way. Indicative of worsening pain and suffering
of one kind or another, and if it is used in conjunction with
economic or financial subject matter, it implies the certitude
of ruination and starvation and misery on a grand scale, and
then one bad thing will lead to another bad thing, and after
awhile people will get tired of ruination and starvation and
misery, and they will rise up in the street, crying out 'Save
us, Mogambo! Save us!' but I will be too busy counting my wealth
because I had seen it all coming, plain as day, and bought gold, but I will ultimately be convinced to seize
the reins of power by shallow flattery and cheap bribes of one
kind or another, which will lead to a deepening sewer of depravity
and corruption, a period known to historians as 'The Mogambo
Reign of Terror'."
Seeing that The Mogambo is getting all the attention with this
ridiculous fantasy about ruling the world and how if I do, there
are going to be some BIG changes made, Mr. Ankete gets up, walks
over to the podium, and stands right beside me. I am pretty sure
that he crossed his eyes and graphically indicated that I am
crazy by making little circles with his finger alongside his
head. But I can't get mad at him, as it is such a good impersonation
of me. I step aside, and he immediately steps to the microphone
and says "As the discount on the dollar approaches 100 percent,
the dollar price of gold will approach infinity. To assert
that the dollar is going to escape this fate is tantamount to
asserting that the laws of economics and logic have been turned
upside down, and the penalty for default has been replaced by
reward in perpetuity."
If the dollar falls in value, then the "dollar price of
gold will approach infinity"? Wow!
For those of you who want me to give you tips on what the "small
investor" should do, here is a tip: Buy an asset whose value,
in dollars, will go to infinity. If you are not familiar with
the subtleties of an infinite amount of dollars, it is more than
a jillion dollars, it is more than a gazillion dollars, it is
more than a trillion, zillion, bazillion flabgobble splendillion
dollars and, as such, represents one hell of a large chunk of
money, and I cannot imagine the size of a wallet needed to carry
that much money, so don't get me started thinking about it.
And the good thing is that it is also worth a lot of money all
over the world! Perfect safety! Huge gains! All at $435 per ounce!
What more could you ask for in an investment? And at the same
price as the large investor would pay, too!
And while Mr. Ankete does not come right out and say it, I am
sure that he is thinking it, and instead of trying to coax it
out of him, or wheedle it out of him, or demanding that he tell
me, or threatening to beat it out of him and if he knows what
it good for him he had better start talking, I will tell you
myself. Buy gold and/or silver.
Besides the bad news that we are doomed, and how we are all going
to die a horrible, painful economic death, he also notes that
"A reliable measure of destruction is the so-called 'notional'
size of the derivatives market trading interest-rate futures,
options, and swaps. It now stands at a quarter of a quadrillion
dollars and is increasing at an accelerating pace." Now
this, in American terms, is $250 trillion, which is about nine
times the value of global GDP, which means it is ten times as
big as all the goods and services produced by everybody and every
company on the face of the earth.
This is not news to John Mackenzie, who wrote the essay entitled
"M2- Debt and the Delusionals", as he has been looking
at the most current Settlements Data on Derivatives, assembled
by the Bank of International (BIS).
He notes that the BIS figures that Exchange Traded Derivatives
now total $279 trillion, and OTC derivatives now total $220 trillion,
which add up to, and I am going to take his word for this, as
I cannot reliably add $279 plus $220, almost $500 trillion, which
is almost HALF a quadrillion!
The good news, if there is any, is that the banks also figure
that not all of that $499 Trillion in combined Derivatives is
at risk. Whew! The banks decided that only somewhere between
$25 trillion and $35 trillion of that total amount of derivatives
is, as they say, "at risk." Hey! Now I feel a LOT better!
The amount "at risk" is only the total value of all
the freaking goods and services produced in the whole freaking
world in an entire freaking ear! I feel MUCH better now!
This is where I was supposed
to get up and make some stupid comment about how these are big,
BIG numbers, but I could not handle the stress, and the mere
mention of those mountains of big bets (MOBB) caused my brain
to seize up in a spasm. Always the trooper, Mr. Mackenzie bounded
up out of his seat, grabbed the microphone out of my lifeless
hands, and said "These figures are simply staggering."
A faint smile crosses my face, and with a Herculean effort I
manage to waggle my little finger to indicate that I agree with
him. And it is probably a lot worse than that, as he goes on
to say "It is important to note that although Exchange Traded
Derivatives are regulated, OTC derivatives are not and in fact
many OTC derivatives can go unreported. Essentially, the $220
Trillion figure in the BIS release does not account for non-reporting,
and is therefore low."
- Steven Lagavulin has written
"The
Most Important Thing You Don't Know About 'Peak Oil' at the
Deconsumption.typepad.com site, which is the idea that
we have already passed the point where we can get more and more
oil out of the ground, and from now on there will be dwindling
supplies because we have used up so damned much of it. He sees,
naturally, a feeding frenzy for oil. "If this scenario sounds
over-dramatic," he writes "keep in mind that what I'm
talking about is a dawning recognition of something that many
analysts have already come to realize: that the 'oil grab' is
in fact already on, that it's not a temporary 'bottleneck' or
passing 'shock', and that the losers in this game will not survive."
And since we are talking about
oil, let me give you the Mogambo Investment Tip Of The Day (MITOTD).
I smile as I gently and confidently forecast that the current
fall in the price of oil is a big chance for you to buy oil-related
stocks, and oil futures if you have the inclination, because
there is not one instance in all of history when a rising demand,
a falling supply, coupled with the devaluation of the currency,
resulted in lower-priced oil for that stupid country that so
debased its currency. Never. And it never will happen, either.
Ever.
And it is not just oil, as
Addison Wiggin of the DailyReckoning.com notes
that there is a new interest in coal and coal-fired energy.
He first notes that "The Chinese plan to replace 10% of
their oil imports with liquid coal by 2013. And it will also
have huge advantages for running power plants that Chinese trains
and trucks can't get to as easily or regularly", and then
he brings it all home when he goes on to say "Over the last
12 months, energy companies in the United States announced plans
to build over $100 billion worth of new coal-fired power plants."
So, investing in companies
that build these things seems to be a no-brainer, which is the
kind I like, as not having any brains makes it hard to understand
any other kind.
- I, like a lot of people,
am continually pondering the "inflation or deflation"
debate, mostly so that I can place some investment bets on it
and make a big pile of money and then maybe I'll get a little
respect around here. Mostly I get a headache from the confusion,
because and I gotta say that both sides make good arguments.
On the one hand, the deflationist camp is right that if all those
derivatives go bad, and houses deflate in price, and stocks deflate
in price, and bonds deflate in price, and debts are bankrupted,
then money will simply disappear. The reason is that all our
money comes from debt; and when you go to the bank to borrow
some money, the bank creates the money out of thin air. But if
I bankrupt out of the debt, doesn't the money disappear, too?
And a falling money supply is the actual definition of deflation.
So, therefore, we should have deflation.
The other side of the debate,
the inflation side, is (for one thing) that in all other post-inflation
busts, asset prices DID fall, just as in the deflationist camp
said they would, and the economy suffered. But not all prices
went down. Many of them went up, including food and fuel. And
inflation can happen with surprising suddenness. In Germany in
1919, the most recent example of a large, modern economy going
bust, the exchange rate was nine German marks to one US dollar.
In November 1923, four lousy years later, the exchange rate was
4,200,000,000,000 (4.2 trillion) German marks to the US dollar.
But food and fuel and other necessities became so damned expensive
that the suffering was unimaginable, and that is why Germany,
desperate for someone to "do something", elected Adolf
Hitler, which didn't turn out to be such a hot idea in the long
run.
So the values of things they
owned, and their whole economy, were in tatters, but food and
all the things you need to stay alive and warm were so expensive
that they were unattainable. So, now, YOU answer the question:
Did they have deflation or inflation?
- Julian Phillips and Peter
Spina of goldForecaster take a look at how a falling
dollar against the Chinese yuan might work out. They ask us to
"Imagine all those holding Yuan waiting for the revaluation.
They are looking for the Yuan to fall to around Yuan 5.90 to
6.00 to the US$. In Yuan, then, a gold
price of $426 stands at Yuan 3780 at present. After a revaluation
of 40%, it should trade at around 2703. Suddenly, the Chinese
gold holders are sitting on a 40% loss,
that's true. But there are not so many of them. But you can be
sure that many, many Chinese will see it not as a drop, but as
a tremendous buying opportunity if this happens. This could set
of quite a demand across China."
Ken Gerbino has also looked
at what a devaluation of the dollar could mean to the Chinese.
"If the Chinese revalue the RMB, the very next day after
a 5-10% revaluation (and this could be very soon) every Chinese
saver will be able to go out and buy 5-10% more gold for the exact amount of cash from the day before."
Messrs. Spina and Philips are
through talking about gold, and
want to get back to the subject of interest rates and inflation.
"The Fed is caught in a cleft stick," they say, "knowing
that if they don't raise interest rates, inflation will grow.
If they do raise interest rates, growth in the economy could
wither and reverse. The balance is so delicate now that whatever
they do may be wrong." This just shows you what optimistic
guys Spina and Philips are, because The Mogambo says that whatever
they do WILL be wrong, as there is no way out of this damned
mess, and that is why it is so crucial that we not get into this
damn mess in the first damn place.
But that does not answer the
question "So what will the Fed do?" Spina and Philips
figure that they will err on the side of growth, and keep interest
rates so low for as long as it takes for The Mogambo go out of
his mind and end up in custody somewhere, cursing and kicking
and vowing revenge on Alan Greenspan. Mr. Willie thinks the same
thing, and writes "We reiterate that the Fed will place
continuing growth of the economy above the curtailing of inflation".
The Fed, for its part, hopes that nobody notices that the main
damn purpose of the Federal Reserve is to achieve price stability.
Part of the demand for gold is coming from India, and they note that "Indian
buyers are in the market in force. Below $430 they are rapacious,
above it they are still there, but somewhat cautious, hoping
for a pullback. The demand is so strong that they will not stand
back for long."
The news is not so good for
platinum, as some news from the world of nanotechnology says
that work with nickel has "advanced to the point where nickel
can be substituted for platinum in catalytic exhausts."
- "gold
Mining Stocks: What is Happening Now" by Kenneth J.
Gerbino is not about gold, per se, but about how everyone is
going to wake up every morning and find that inflation is gnawing
their feet off, and the reason is that all the world's governments
are now peopled exclusively by morons who are creating more and
more money with every breath. "Inflation in the U.S is 3.5%
and rising. Globally this number is 4.3%. My investment management
firm monitors 61 foreign countries that report regularly on money
supply statistics. In the last 12 months these 61 foreign countries
have increased their basic money supplies by an average of 15.2%.
Most people with savings in these countries will try and protect
themselves from inflation that is surely looming and will most
likely be buying gold. The Chinese basic money supply from
1998 has averaged an annual increase of 13% for 7 solid years.
Inflation is coming to China - and that means plenty of gold buying."
This bring up John St. George, the guy who is the terrific voice
and quick-on-his-feet host of on FreeMarketNews.com., who was
interviewing me on the phone, which was, I regret, not so much
of an "interview" as it was my screeching in my usual
whining, hysterical little sissy-boy way, when he suddenly distracted
me by graciously remarking that he thought I had finally, after
all these years of trying, constructed a memorable sentence.
I was as surprised as you are, since I seem to specialize in
forgettable prose that is also stupid. He was referring to how
I wrote that the money that the Federal Reserve creates to sustain
the economy is a bad thing, because "All that new money
will, because it always does, show up as inflation in prices,
since there is nowhere for the money to go except into buying
something, and with all that new demand, prices rise."
Okay, now that I look at it, I see that this St. George guy was
either puffing my ego or pulling my leg, because after the big
introduction, now I look like an idiot again, and everybody is
laughing at me, giggling and pointing like when someone has taped
a paper onto my back that reads, "I am a big stupid idiot".
So I went to a mirror and checked, and was relieved to find that
I do not. I DID have one stuck on the back of my coat that says
"I am a filthy pervert", but it was an old one; I have
mixed feelings about the free publicity, and it doesn't take
up much room, so I just leave it there.
But, to give myself a little credit that Mr. St. George tried
to give me, the sentence is banal but unassailably true, and
the curse of inflation is why normal countries and normal people
do not inflate their money supplies.
- A few people have taken notice of how undervalued gold is right now. One of them was cornered by Tom
Dyson, writing on the Daily Reckoning Rude Awakening column.
He quotes Steven Jon Kaplan, who is "author of a free website
called the True Contrarian [www.truecontrarian.com], and student
of the precious metal markets since the 1970s." Mr. Kaplan
says "The key to knowing good buying and selling opportunities
in gold mining shares is to track the spread
between the price of spot gold and
HUI, the Amex gold Bugs Index" which he calculates
by subtracting the HUI from the spot price of gold.
"As a general rule, a high spread indicates pessimism toward
gold mining shares, so you want to buy
these stocks when the spread is starting to reverse lower from
a major high point." So where is it now? "This past
Friday, April 29, 2005, the spread reached 257, an all-time record
high. The record low was 148 on December 2, 2003, when HUI was
at 258.60." Yow! According to this, we are at an historic
opportunity to buy gold mining shares? Great!
Another guy is Bill Murphy of LeMetropoleCafe.com, who was quoted
by John Hussman as saying pretty much the same thing, only using
the XAU in comparison to the spot price of gold.
"Probably the simplest way to emphasize conditions in the
precious metals shares is to examine a simple valuation indicator
that is, surprisingly, nearly as useful as much more sophisticated
indicators: the ratio of the spot price of gold
to the Philadelphia XAU Index. On Friday, spot gold
closed at 434.39, while the XAU closed at 83.51. That put the
gold/XAU ratio at 5.20."
Now, if you are like me, then
numbers come and numbers go, mostly in reference to things like
neighbors standing out in my front yard, yelling things like
"You are number one on our list of people we hate!"
and it is only when we consider the exact meaning of numbers
do we understand. To this end, they go on to say, "To put
some historical context on this measure, since 1974, the gold/XAU ratio has been greater than 5.0 about 15%
of the time. When the ratio has been this high, the XAU has followed
with annualized gains of 89.6%, on average a figure that
remains high even if the data is split into multiple samples.
When the ratio has been greater than 4.0, the XAU has followed
with average annualized gains of 27.4% (though the finer profile
of returns has been sensitive to other conditions such as interest
rates, economic trends, and inflation)."
Wow! This is great! If you
would loan me some money, I would buy some gold
mining shares right away! But not all is beer and chili dos,
as that is what I would really do with the money if you were
so stupid as to loan me some, as he notes when he goes on to
say "In contrast, when the ratio has been less than 3.0
(meaning that the gold stocks are very elevated relative
to the actual metal), the XAU has declined at an annualized rate
of -36.6%, on average."
Now that we know all about
the relevance of the numbers, we re-read the part where 1) the
ratio is at 5.20, and then 2) we skip down to the part where
he says "When the ratio has been this high, the XAU has
followed with annualized gains of 89.6%."
And let's not forget to mention
Bob
Hoye, who is "a market historian and editor of Institutional
Advisors", and hope he is correct when he says "According
to thorough technical analysis, the gold
sector seems to have reached a significant low." But he
notes that this is not particularly news to him, as "Every
era of financial bubbles is eventually followed by a severe credit
contraction. Since the advent of modern financial markets by
around 1700, there have been five examples prior to the blowout
in 1Q2000."
And that is not all, especially
as pertains to gold. "Also typically, the post-bubble
rise in gold ran for 20+ years. With varying degrees
of intensity and success, the record is complete back to the
1690s' depression bottom, which recorded the 'Oro Preto' mania
in Brazil."
Bull markets in commodities
typically run for more than 20 years, and "They start from
a depression bottom and end in the era of bubbles never
the other way around."
So all we need is for the weird
markets to roll over to get this thing started? Apparently so,
as he writes "This recovery in stocks, business, and credit
markets is showing some of the classic signs of topping at the
same time as the gold side of the equation is indicating
downside capitulation. In which case, the second cyclical bull
market, whereby gold will outperform most commodities as
well as most financial assets, is about to get underway."
And what will happen when it
does get underway? "The first one out of the collapse of
the tech bubble launched a remarkable drive to acquire millions
of ounces of gold. This one will launch an even more
remarkable drive to discover millions of ounces of gold. Exploration companies with outstanding field
abilities and portfolios of identified properties will be outstanding
performers." Ergo, acquire both physical gold
and gold stocks.
- I was sitting here thinking
about how to convince people that investing in the stock market
is NOT a place where a lot of people make money. The stock market
IS, on the other hand, a place where lots of people put their
money, THINKING they are going to make money, only to see it
wither away. But the more I thought about it, the more beer I
drank, and the more confused I got, and , fortunately, ran across
the essay, "Bear's Shadow Falls Over Financial Markets",
by Jeffrey L Ferguson in the Asia Times which saves me a lot
of thinking time that could be drinking time. He writes "The
second secular bear growled its way through the 1970s and it
was truly secular in nature. Contrary to a common belief, equities
didn't simply trend sideways through the 1970s before moving
to new highs with the great bull market starting in 1982. This
illusion is caused by inflation that plagued the period. Deflating
the S&P 500 with the CPI reveals that the market peaked in
1969, not 1973, before falling 64% over the subsequent 13 years,
ultimately bottoming out in 1982."
It gets worse. "Stock
prices failed to exceed the 1969 peak until 1993, 24 years later,
and didn't move convincingly through the 1969 level until 1995.
At this point, the weary, and rather aged, investor still faced
capital gains taxes on a phantom 300% gain wholly due to inflation.
Covering this tax liability likely extended the true recovery
period to within shouting distance of the bear market in stocks
beginning in 2000, the most recent peak in equity markets."
I short, nobody made any money,
in the real, inflation-adjusted sense, until just before the
swoon in the stock market in 2000, and then, of course, they
are back underwater again. In other words, if you had not bought
a new car in 1969, but had, instead, invested the money in the
stock market, in 2000 you would have enough to, after taxes,
buy a new car. You call that investing? Hahahaha! If you do,
then you are the product of the American public school system!
Hahahaha!
And it won't get any better
for the rest of your life, according to Captain Hook, of Treasure
Chests, who says that "we are of the opinion true highs
(Grand Super Cycle Degree) in the broadest sense of the word
were not put in until last month, as presented above in the S&P
500 Equal Weighted Index." And, in case you can't gather
from the phrase "Grand Super Cycle Degree", it means
that you will be dead and gone before the next bull market in
shares starts.
- David Bond, the man behind
the annual silver Summit, has announced on the site
thesilverPennies.com that it will be "the
rock'n'roll concert of the investment conferences this year.
Literally." The Whole Hollywood Story is that Steve Doré,
who is a terrific boogie-woogie piano player, has written a song
about the wonders of silver, and will be performing it live and
in person. To elevate the event, there is also an educational
component, as I will help him out by simultaneously demonstrating
1) why there are no boogie-woogie fiddle players, and 2) why
my career in music was an even bigger failure than everything
else I tried and failed.
The silver
Summit will also celebrate Wallace's international recognition
as Center of the Universe, as represented by a year-old marker,
"a manhole cover of incredible detail and quality."
[click].
- The subject of this week's
Newsweek magazine is "Special report: China's Century."
For the last twenty-five years, they have had 9% economic growth,
which is, according to the magazine, "the fastest growth
rate for a major economy in recorded history", quadrupling
the average income and bringing about a quarter of the entire
population "out of poverty." Pretty impressive.
Now, the more thoughtful among
you may sit back, stroke your chins, and calmly ask yourself,
"What in the hell is this idiot writing about now?"
Ah, grasshopper! If you had waited just a moment longer, my impetuous
and impatient one, I would have eventually gotten to the point,
probably after a long and tiresome diatribe about the Federal
Reserve and how they are, predictably, out to kill us all by
killing our money, and I won't even mention how they are out
to get me personally, maybe to turn us into slaves for some alien
invader from someplace like Mars or something, or maybe another
dimension or something. I dunno.
But this is not about how money
and capital has poured out of this country, thanks to the aforementioned
Federal Reserve policy of creating money out of zipola. But it
is the next sentence that shows how the modern neo-Keynesian/
Supply-Side monster grows and gains legitimacy. They write "The
Chinese leadership has to be given credit for this historic achievement."
Well, duh!
But it has come at a cost,
as they report in the very next paragraph which echoes my sentiments
exactly, although in a style that is MUCH different than you
get from the hysterical Mogambo (THM). They write, "There
are many who criticize China's economic path. They argue that
the numbers are fudged, that corruption is rampant, that its
banks are teetering on the edge, that regional tensions will
explode, that inequality is rising dangerously and that things
are coming to a head. For a decade now they have been predicting,
'This cannot last, China will crash, it cannot keep this up'
So far, at least, none of these prognoses have come true."
Well! If we are going to get snippy, let me point out that the
snotty little author, whose name is Fareed Zakaria, doesn't actually
mention me, The Mogambo, by name. But if you carefully read between
the lines of what he actually wrote, you can plainly see that
he is saying "Mogambo is a big, fat idiot, and everybody
hates the Mogambo, and that is why we 'arranged' to have his
lawn sprinkler bite the dust last week, and that ought to teach
him a lesson!"
Well, yes and no. I learned,
on the one hand, that this Zakaria guy hates my guts, and so
I am going to make a note to myself to put this guy's name on
the Mogambo Official List Of Known Enemies (MOLOKE).
On the other hand, I haven't
learned a damned thing, because we did NOT say that a government
creating gigantic amounts of money in the banking system and
spending vast amounts of money on government projects, using
government-favored businesses, would not work. Nobody EVER said
it would not work! It WILL work! It will ALWAYS work! What we
REALLY said is that this cannot LAST! This stupid non-self-sustaining
spending and rampant creation of money will not last because
it cannot last, and it cannot last because of the one thing that
they CANNOT control: inflation. Inflation in the prices of various
things will always keep rising until all the money is accounted
for, and it will be a long and ugly process the entire trip.
It will be driven towards balance and equilibtation, if you believe
in that kind of thing.
But isn't the damn point of
the thing that economies are supposed to LAST? Aren't we supposed
to be looking for some way to make economic prosperity last a
long time, so that there is nothing but gently rising prosperity,
as scarce resources are put to their best use, and therefore
put to their most economic use, which brings up standards of
living because things generally get cheaper and cheaper as firms
compete in the markets, using differences in price versus perceived
value paid by the final consumer in the open marketplace to let
those customers in the open marketplace decide whose products
are good and whose are bad? And then, after awhile, the bad firms
go under, victims of relentless competition, and bankers and
foolishly-trusting people for miles around learn not to ever
trust a guy named Mogambo selling stock certificates of Mogambo
World-Wide Enterprises, which he had by the crate in the trunk
of his car, and now all that money is gone, and so are their
whole pathetic lives, boo hoo hoo?
We, by which I mean me and
the Austrian school of economics, ALWAYS said that is entirely
possible to achieve miraculous growth if you create as much money
and credit, and accommodating tax laws, and corruption, as you
are capable of creating! My God! Do you think that we are so
stupid that we believe that creating huge demand (by deficit-spending)
and also supplying the money (Federal Reserve policy) to pay
for it all would NOT create a boom? Hahahaha! How stupid do you
think we are? Gimme some credit here!
So I am here to tell you that
China, like the USA, like a lot of countries, is on the path
to ruination, too, because they are ramping up their own money
supply in reckless fashion, too.
- By the way, John S. a reader
from Canada, wonders why no-one at the US mint ever thought of
investigating the success of the Canadian one-dollar "Looney"
coin, which complies with the basic, non-stupid criteria of the
Mighty Mogambo (BNCOTMM) by being made LARGER than a quarter
(He notes that "of course, a dime is smaller than a nickel,
but that's because it used to actually be made of silver"). He goes on to say "We
poor backward Canucks also have a two dollar coin we affectionately
call the "Two-nie" (hahaha -- get it? We kill us!)
Guess what, it's bigger than the Looney, and even has different
edges, so that you can tell them apart without even taking your
hand out of your pocket ... which has led to the popular Canadian
gibe: 'Are you counting your change, or are you just glad to
see me?' OK, I made that last part up. And our beer's stronger,
too!"
- From American Banker, we
read Rob Blackwell who writes" "Fannie Mae has announced
that it will begin purchasing 40-year fixed-rate loans from lenders,
saying that doing so could help borrowers in areas where home
prices are high It said that such loans reduce monthly payments
and make it easier for borrowers to get approved."
Well, duh! Let me get this
straight; your stupid teenager suddenly says that she is moving
out and she is going to get as far away from you as possible,
and it is right on the beach, probably a large penthouse of some
kind, and if you ever try to find her or bother her in any way,
she will come after you with a knife and "cut you bad",
and you say "Oh, yeah?" and she says "Yeah!"
and you say "Oh, yeah? Who's going to loan you the money,
miss smarty-pants thinks she's got it all figured out?"
and she says because she afford to buy a house that not even
YOU can afford, because the length of the loan is extended out
by 33%! Your eyes suddenly have that blank look of incomprehension,
and your mouth is hanging open. The total amount of money she
will owe, and eventually pay back, will be monstrously bigger,
but the monthly payment is lower, and the monthly payment is
lower because she will be paying it, month after month after
month, for an additional 20% of her adult life? What can you
say except "Stop the madness!"?
Ugh.
****The Mogambo Sez: This looks like the beginning of the
end (TBOTE) to me. But relax, as I am scared enough for the both
of us.
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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