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July 19, 2006

E-Economic Newsletter
by The Mogambo Guru

This article originally appeared at The Daily Reckoning.

-- The policeman was yelling through the megaphone, "What are you so mad about, Mogambo? Come out of the famed Mogambo Bunker (MB), nice and quiet, with your hands up, and let's talk about it!"

So I fire off another burst of machinegun fire over their heads to recapture their attention, and shout through the gun port, "Don't pretend you don't know about how the Federal Reserve reversed course from their previous outsized $11 billion injection of credit into the banking system, you stinking lying cop! So don't insult me by acting like you were completely unaware that Total Fed Credit fell by $6 billion last week!"

As I am jamming home a fresh clip of ammo, I shout "And what about Japan finally raising interest rates from zero to 0.25%? Rates have been zero for six years, you idiot Gestapo pig!" I squeeze of another long burst.

How could I explain to this government goon squad about the strange and scary perturbations in the flow of economics? Can they even be made aware of such things as the frightening levels of activity in the bank repo market, where $11 billion per day is now expected! With spikes into the high $20's of billions! Per day!

Then I realize how to connect with them! I shout "What about oil, you nasty bastards? The price per barrel is up around $75 a barrel, and the price zooms up and down by a buck and a half a day sometimes!"

And it is not just the money, but that such sudden, wild fluctuations are completely out of character for stable systems. And the terrifying thing about breakdowns in smooth, laminar flows is that a chaotic, catastrophic breakdown soon appears.

At this point everything became confused and chaotic, as suddenly my wife and children were, for some reason, there in the bunker with me, bathed in a strange, wavering light, urging me to heroically shoot it out with the fascist goons and die like a proud martyr to Austrian economics and the gold standard. Suddenly, I awoke!

It turns out that I was only dreaming the whole thing! Whew! But the statistics, my panic and the bullet holes in the walls of my neighbor's houses are all too real, as are their vicious, lizard-like lawyers.

But the slimy schemes of the Federal Reserve are one thing, the paranoid hallucinations of The Mogambo are another, while actual inflation is yet a third thing altogether, making, in all, three. And on that note, and because I don't want you to miss so much as a single syllable, I pick up my Mogambo High-Powered Megaphone (MHPM) and fairly scream through it "The JOC-ECRI Industrial Price Index jumped in July, rising to 130.17 from 128.18! That one-month gain of 1.6% in prices is a lot of inflation in one month! What is even more interesting, if you think that being eaten alive by inflation is 'interesting', is that the index is up from 108.95 a year ago at this time, which is an inflation rate of 19.5%!"

In an odd, almost tangential way, Frank Holmes, CEO and Chief Investment Officer of U.S. Global Investors, has a few words in the annual report, entitled "The Rise of The Chinese Consumer". He writes "China's energy consumption is expected to be 69 percent higher in 2010 than in 2002, according to the Federal Energy Information Administration. That growth rate is five times higher than the estimate for the United States and more than 15 times higher than Europe. China, in the midst of a massive infrastructure build-out, used half of the world's cement and 40 percent of the world's steel last year, according to government statistics."

Now, as a pop quiz, take out a clean sheet of paper. After paying particular notice to his use of the phrase "in the midst of a massive infrastructure build-out", combine that with the statistic that China, alone, was responsible for half the world's consumption of cement and steel (and a lot of other things, too!) last year, to derive the longitudinal extrapolation of this exponential trend to arrive at probable price predictions (PPP) for various assets, upon which we could make a big pile of money (MABPOM) by investing in them.

Congratulations to those of you who demonstrated True Mogambo Attitude (TMA) and contemptuously said "Screw that!" As luck would have it, Mr. Holmes immediately went on to give the answer to that very problem when he said "But because of years of low commodity prices and other factors, exploration and development of these now-coveted resources have not kept pace with global population and GDP growth. That has created an Economics 101 scenario - demand is greater than supply, so prices climb."

And if you are not content with merely owning gold and silver to participate in the general rise of prices, but want the excitement of daily wheeling and dealing and trading to make the Big Money Fast (BMF), then Mr. Holmes has the perfect investment philosophy for you: "Whatever China needs, get long, and whatever they have as surplus, get it out of the way, because China will just dump it."

I can personally testify to this last point. Mogambo Money-Grubbing Enterprises, Inc. (MMGEI) has the distinction of being the only stock in the world that actually has a negative worth, as even one share of this despicable company is considered too many, and people actually take a loss to pay other people to take the stock off their hands. Well, the story is that last week one lousy share of this toxic stock accidentally got misfiled in the portfolio of a Chinese woman, see, and desperate to get rid of it, her hand moved so fast throwing it out that it went through the time barrier! Talk about being dumped! Hahaha! The rest of the story is, with her hand in the future like that, that she can scratch her own butt before she knows it itches! Hahaha! How handy!

But Mr. Holmes is apparently not remotely interested in old women scratching their butts or how despicable both my corrupt company and I personally seem to him (and apparently) everybody else, and although I agree with him about the butt scratching thing, he calmly goes on to note that the continued gobbling of resources by China for years to come is written in stone, as "China plans to build 14 express highways, six railways and a dozen new seaport facilities before 2010." In three years!

And it is not only China, but he also says that "India invests 3.5 percent of its GDP on power plants, roads and other infrastructure and the government there is financing 'industrial townships' to promote more manufacturing. Even Bangladesh, one of the world's poorest countries, is building hundreds of miles of highways, as well as schools, water systems and the like."

I jump up and say "Hey! Mr. Holmes! Hey dude! How about an analogy so that we can, you know, like, get a taste of the economic results?" He looks at me with the usual disgust and revulsion, and with a voice dripping sarcasm, asks "Do you even know what an analogy is?" and I say "No, but that was not my question! So do you have an analogy, yes or no, and why are you motioning to the security guards like that?"

Without even pausing for a moment's reflection, he says "A good example of this is when the U.S. built interstate highways in the 1950s. This construction work absorbed more than half of the world's commodities." Yow! What an amazing statistic! And what a nice economy it produced, too! I was so stunned by this that I reacted too slowly to the sound of someone yelling "Get him, boys!" and I was soon unceremoniously hustled toward, and dumped into, the hallway outside.

And a good thing, too, as down the hall I heard Stephen Roach, of Morgan Stanley, saying that China "has a central bank that was reorganized in 1998 along the lines of America's Federal Reserve System." And they have a fiat currency! In other words, China is screwed, too!

I laugh contemptuously ("Hahaha!") at these Chinese doofuses for their incompetence and stupidity for copying the same stupid mistakes in monetary policy that everyone else made, namely listening to America when we, slopping around in our stupidity and greed, extolled the siren-song virtues of a fiat currency and the powerful currency derivative of electronic digits in bank computers, all multiplied by an extraordinarily lax fractional-reserve banking system. Morons! Just like the rest of us! Morons!

That means that China and India will also experience the horrifying inflation in prices, too. And so the next time you hear me say "We're all freaking doomed!", remember that the category "we" includes the Chinese.

And while I am not sure if this is directly related, Doug Hornig at KitcoCasey.com caused my heart to spasm when he reported that "Nickel remains the story, as inventories dropped precipitously. The LME reported a decline of nearly 500 tons (5.5%). Stocks are down a cumulative 76% on the year." Supplies of nickel are down by more than three-quarters? Wow!

-- Reader Pete K., familiar with buying and selling on eBay, recently went to see what things were like, and thinks it is unmistakable that sales and bids are down. "Only the finest collectibles (unlike my junk) had any bids on them at all. The rest was all just sitting there, like dead bugs on the floor."

From this he gathers that "the money that has been gushing through eBay, washing all sorts of junk into people's pockets, has stopped." Oops! Another spigot of liquidity is now drying up!

And if that news about inflation was not bad enough, the Aden sisters, who publish the eponymous Aden Forecast, write "Barring an accident, there's little question that inflation will ultimately be the dominant economic force and that's why metals prices will continue to rise, and stocks and bonds won't, looking out to the years ahead."

In the exact same vein concerning prices of stocks and bonds, Mark Faber writes "Whenever central banks create excess liquidity, symptoms of inflation will show up somewhere." Exactly! And the big question is always "Where will this inflation show up?" He says "Sometimes wages and consumer prices will react the most to expansionary monetary policies (for example, the 1960s and 1970s), but in today's world where, given the low wages in China and India, an almost unlimited labour arbitrage can take place, easy monetary policies drive asset prices such as homes, commodities, equities, art, and so on, higher, while wages and consumer prices rise only with a lengthy time lag (once commodity prices begin to be passed on in the prices of finished manufactured goods). Therefore, it should come as no surprise that, when liquidity growth is slowing down, asset prices begin to cave in first."

-- From AP we learn "The Labor Department said Thursday that applications for jobless benefits totaled 332,000 last week, an increase of 19,000 from the previous week, exceeding market expectations. The four-week moving average for claims increased to 317,250 from 308,500 in the previous week." Remember that it was recently considered conventional wisdom that if that number stayed comfortably below 300,000, then there was nothing to worry about!

And I guess that is why you never hear about unemployment from the talking heads of the world, or why you never hear the old adage "Three steps and a stumble" anymore, which is the Wall Street folklore that if the Federal Reserve raised interest rates three times in a row, then the stock market would fall. Now that the Fed has raised interest rates 17 times in a row, things are, apparently, different.

-- Reader Stephen G. writes to say that people who take out reverse-mortgages will not necessarily be on the hook when, at the end of the reverse-mortgage when you sell the house, for any drop in the value of the house, and he included several sites that explain the whole deal.

Thus we learn that while the explanation of the contract explicitly says that "When you sell your home or no longer use it for your primary residence, you or your estate will repay the cash you received from the reverse mortgage, plus interest and other fees, to the lender."

If you read carefully, you will notice that the money that you get every month sounds suspiciously like nothing more than an increasing-balance, home-equity loan to you, upon which the bank charges interest. So while it is called a "reverse-mortgage" loan, it is actually just another run-of-the-mill equity financing scheme with a new name.

So, if you got a total of $100,000 in payments, but you can only sell the house for $40,000, won't you have to repay $60,000? Yes and no, it turns out: These are, as Mr. G. points out, Home Equity Conversion Mortgages, and are non-recourse, meaning that the bank can't come after you for the sixty grand, even though you owe it to them. How to reconcile the two?

Well, for one thing, the bank makes you buy an insurance policy to cover any shortage in the value of the house! "Borrow some money and buy an insurance policy, making us the beneficiary!" Hahaha! Thanks for clearing that up, Stephen!

And, of course, since you are "selling" your house piecemeal, I'm sure that they can (and will) cut you off before things get to that point.

-- Bill Bryan of MarketPulses.com probably wonders how a complete buffoon like me could come up with the winning investment strategy of accumulating gold, silver and oil. But since he is too polite to actually accuse me of stealing someone else's idea, he merely adds "A few words on Gold, Silver and Oil. While we maintain our core positions in each, we continue to view the climate as a secular bull with much, much further to go."

How much farther to go? He figures "Gold= $1,500; Silver=$40; Oil=$100-125 minimum 3-Year targets", but that "perhaps some further consolidation will be necessary before the next major up leg ensues. Nonetheless, for those seeking protection from the machinations of the US Fed and central banks worldwide, pullbacks may provide wonderful long-term buying opportunities."

-- Anthony M. Cherniawski, of The Practical Investor newsletter, has an interesting technical trading tip. He writes "Lowry's has already told us that the month of June contained the highest intraday market volatility that they have recorded in 55 years. The VIX is simply telling us that volatility may be coming back in spades. In this case, the bottoming of the VIX pattern may be considered an inverse signal for the market since, in more cases than not, a rising volatility index often spells trouble for the stock indexes. Do I hear growling nearby?"

The famous Bill Bonner of the equally famous DailyReckoning.com has another bit of immortal technical analysis for you, too, as he writes "We remind you, dear reader, of an Essentialist Economic Principle: A slump is opposite and equal to the fraud that preceded it. The recession of the '70s was the worst one since the Great Depression."

And although Mr. Bonner is too refined to mention it, our current economic excesses and imbalances now dwarf anything the world has ever seen, and far, far worse than what preceded the Great Depression!

-- To illustrate the bizarre, simplistic thinking of the Wall Street Journal, I quote from their July 12 editorial "Soaking the Rich", where they wax enthusiastic about the falling budget deficit, which was reduced by about $115 billion stinking dollars, thanks to an unexpected increase in tax remittances. We still had a deficit of $300 billion, but somehow this reduction from a deficit of over $400 billion is supposed to be such terrific news or something. Hahaha!

The WSJ crows "The real news, and where the policy credit belongs, is with the 2003 tax cuts." Hahahaha! They admit that "Monetary policy has also fueled this expansion, but the tax cuts were perfectly targeted to improve the incentives to take risks among businesses."

The Economist magazine, to its credit and to the embarrassment of the Wall Street Journal, came up with several other alternative reasons why an extra $115 billion in tax revenues could show up, including the fact that wages have been weak, and the savings showed up as profits to corporations, and indeed, capital gains and dividends have soared, which are taxable. Or maybe it was that a bunch of tax breaks for investments expired at the end of 2004, and now those investment expenses are taxable.

Or perhaps it was the unusually big profits of small businesses are taxed at the individual level. Or maybe it was the growing income inequality and the progressive tax system, where the rich got richer (but paid more taxes) and the poor got poorer (but paid the same level of taxes). Or any of a lot of things.

But nobody but the true patriots at Radio Free Mogambo (PFM) made the connection that, for 2005, total credit (debt) expanded by $3.34 trillion. To get a lousy $125 billion in extra taxes out of a $3.34 trillion increase in debt, which increased tax revenues by a miniscule 3.4% of this amount, is hardly a ringing endorsement of the Laffer Curve, as the Wall Street Journal editorial presumed when they said that the cuts "succeeded even beyond Art Laffer's dreams." Hahaha! In YOUR dreams, Wall Street Journal!

To those unfamiliar with the Laffer Curve, it is the idea that for every level of tax revenues, there are two tax rates that will produce them. One is very high, and the other is very low. The high rate produces the tax revenue directly, and the low one increases economic activity so much that more tax revenue is produced. The morons of the world immediately and consistently misinterpret this to mean that every time you reduce taxes, you will always get more tax revenue! Hahahaha!

So pardon me if I do not break out the party hats and balloons to learn that in America, in total, at least $3,400 billion was borrowed and spent last year, and the government got a piddly $115 billion in "extra" tax revenue out of it. Hell, looking only at the government's budget, the national debt went up by $569 billion in the last twelve months, exploding to $8,408 billion, all to satisfy the government's insatiable, insane, bankrupting, ravenous craving for spending. Thus the national debt increased by $7.3% in the last twelve months. Hahaha!

And besides, the Economist magazine also said that profits everywhere around the world had unusual growth and gains, too.

-- Reader Adrian S. alerted me to a January 2005 issue of the Richebächer Letter that contains probably the only other point where I disagree with the famous Dr. Kurt Richebächer about anything. As serious scholars of the Life Of The Mogambo (LOTM) know, the first thing we disagreed about was that that he thinks that I am the most worthless economist and human being in the world, and I, in strident rebuttal, think that there is probably someone, somewhere, more worthless than me, although I can't think of anyone right now.

Anyway, our second disagreement took place recently when he was asked "What do you think of gold?" Dr. Richebächer replied "I do not really like to talk about gold. Of course, some of my best friends are gold bugs. And while I respect their opinions, I do not agree with them. They say gold is the only real money. No, it is not the real money. The term 'real money' for me is something irrelevant. The money you pay with is fiat money. Call it fiat money or not." I think to myself, "Jeez! Talk about taking theory to the extreme!"

"Yes," he admits "the system was better under the gold standard. But the gold bugs are missing the point." Missing the point? I may shoot at your hat and miss the point to the dismay of your haberdasher and your next of kin, but as a raving gold bug myself, I am suddenly insulted! Naturally I leap to my feet, stick my finger right at his face and shout, like I do when I am talking to crying babies, "Shut up! Shut up! Shut the hell up! Maybe YOU are missing the point, old man!"

He doesn't say anything, but calmly and coolly continues as if I wasn't there, which further infuriates the hell out of me. He says "The key component of the gold standard was not the gold. It was the fact that the rules of the gold standard did not allow credit excess. It was the rules tied to the gold, not the gold itself."

Suddenly, I am thinking to myself, "Uh-oh! He's right and I am wrong! He's going to make me look like an idiot!" I felt a little better after I remembered how many times a damned day, every day, other people effortlessly make me look like an idiot, just because I am an idiot, and how it is almost like they take some weird, perverse pride in picking on a poor, pathetic mental cripple like me. And that is why I hate them all so much, and that is also why I punish them by stealing food out of their lunches when they are not looking.

But this is not about how the world is cruel to me or that most people pack terrible lunches, but that he is right: It was the strictures on the creation of money and credit that gold placed on banks that was the magic. It prevented the banks from creating more money!

So, I am standing there ready to apologize for getting in his face like that and losing my temper, and I was going to offer, by way of an apology, to give him the one thing that he is always asking for: For me to go away and never call him, write him, mention his name, or even think about him for the rest of my nasty, wasted, stupid Mogambo life (NWSML).

But before I could make my generous offer, he set me off again when he said "So the truth is there is no serious economic argument for gold. It is all psychology." The fact that gold has held its value for millennia apparently means nothing to this guy!

So I grow increasingly hostile as he winds up with the phrase "But I find it interesting that so many people in America are looking at gold. I believe they realize that Fed policy is irresponsibly inflationary. And they believe gold is the obvious and only alternative. They do not think about foreign currencies."

Well, by this time, steam was coming out of my ears as a terrific rebuttal immediately flowed fully-formed into my Tiny Mogambo Brain (TMB), but before I could say it, the door slammed shut right in my face! Wham! As I stand there, stunned, through the closed door I can hear his muffled voice screaming, over and over, "Release the attack dogs! Release the dogs now!" and I took off running.

But as I bounced along, I was thinking "Yes, Dr. Richebächer, we gold bugs 'realize that Fed policy is irresponsibly inflationary' and we also know that gold always, always, always holds its purchasing-power value in any inflation, in perfect safety, too, and that is why we are buying it!"

I also remember that I had a lot more to say, a lot of it real snotty, too, including my disdain for foreign currencies, since those other countries are also doing that same stupid damned inflationary thing of creating more and more money and credit, which causes inflation in the money supply, which causes inflation in prices, which is registered as a loss in purchasing power. I was even intending to say "It's bad enough with the dollar and Americans, but buying foreign currencies is a really stupid thing to do, too."

And besides, I would rather deal with Americans and our dollar, as I can understand Americans when they speak, and they can understand me ("Up yours, too, you ugly little troll!"). So why compound my misery by including foreigners and their stupid inflations, and the losses in purchasing power I would sustain by holding their stupid-looking money?

But after furiously running like a lithe Olympic sprinter at top speed for (I estimate) about ten feet, I was completely exhausted, my heart was pounding and I was gasping for air. But you get the drift.

In the end, in any currency, inflation means that you spend your time fending off 1) governments who want to increase your taxes, and 2) desperate, dirty people who are frantic to get some money because they are being slowly starved to death by the horror of inflation, when dealing with my own hateful family is plenty bad enough. In short, who needs the aggravation when I can prevent it all by merely owning gold and sufficient firepower?

-- The latest issue of the St. Louis Federal Reserve Bank of St. Louis Review, July/August 2006, 88(4), pp. 235-49, has caused a real stir, especially the article by Laurence J. Kotlikoff entitled "Is the United States Bankrupt?" In fact, Edmund Conway, Economics Editor for the Telegraph.co.uk, called it "an extraordinary paper published by one of the key members of the country's central bank."

And extraordinary it is! I have seen many references to this article popping up all over the place, but nobody but the vicious Mogambo tried to satirize the government's unconcern for elderly people by using his innocent quote "The most the government can do for the elderly is to set h equal to (1 + r)w/r." I still think it is funny!

But there is more than that. He goes on to write "Let's assume the government does this. In this case, the government impoverishes each generation of young from time 0 onward in order to satisfy the claims of time-0 oldsters. In the words of the Oxford English Dictionary, we have a country at the end of its resources. It's exhausted, stripped bare, destitute, bereft, wanting in property, and wrecked (at least in terms of its consumption and borrowing capacity) in consequence of failure to pay its creditors. In short, the country is bankrupt and is forced to reorganize its operations by paying its creditors (the oldsters) less than they were promised."

So if you were asking about the future of Social Security, this is it. You will get less than promised. A lot less.

As to the bankruptcy question posed in the title, Prof Kotlikoff said: "The United States has experienced high rates of inflation in the past and appears to be running the same type of fiscal policies that engendered hyperinflations in 20 countries over the past century."

It all stems from our long-term "fiscal gap", namely the difference between all promised future government/retirement spending and all future receipts. The shortfall will grow very wide, especially as spending soars as the Baby Boomer generation retires. How big is this gap right now? About $65.9 trillion! Prof Kotlikoff said: "This figure is more than five times US GDP and almost twice the size of national wealth."

Almost as a Theater of the Absurd, he hypothesizes that "One way to wrap one's head around $65.9trillion is to ask what fiscal adjustments are needed to eliminate this red hole. The answers are terrifying."

And he wasn't kidding! Being forced to rely exclusively on the budget process yields truly terrifying results. "One solution is an immediate and permanent doubling of personal and corporate income taxes. Another is an immediate and permanent two-thirds cut in Social Security and Medicare benefits. A third alternative, were it feasible, would be to immediately and permanently cut all federal discretionary spending by 143pc." Hahahaha!

So a budget solution is out of the question. Now it is up to Ben Bernanke and the Federal Reserve to destroy the currency instead. In short, yes, my Darling Mogambo Junior Rangers (DMJR), we are bankrupt, and everything else soon will be, too. Ugh.

****Mogambo sez: There will not be a Mogambo Guru newsletter next week, due to a confluence of an unforeseen family situation and my appearance at the Agora Financial Wealth Symposium in Vancouver. But this issue of the MoGu was extra long.

And don't look for one of those filler "Best Of" substitutes by publishers, because they have all looked, and there isn't a single issue that ever rose above the level of "awful and stupid", which I think says something more ugly about the people who publish or read the Mogambo Guru newsletter than it does about me.

So use the time wisely: Buy more silver and gold.

Richard Daughty, the angriest guy in economics
The Mogambo Guru

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

Copyright © 2005-2009 Richard Daughty

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