E-Economic Newsletter

By: The Mogambo Guru | Wed, May 24, 2006
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-- I hope that you receive this copy of the Mogambo guru newsletter, as I am in Mogambo Security Lock-Down Mode (MSLDM) at Security Level Three here at the bunker, and I am busily reviewing Mogambo Procedure Manual (MPM), trying to fix it in my mind, fix it in my mind, fix it in my mind that it is "Ask QUESTIONS first, THEN shoot", and not the other way around. Yet.

The reason for the heightened level of frightened paranoia probably has something to do with Total Fed Credit increasing by only $1million last week, which means that the banks ain't creating more credit with which borrowers make more money.

And it certainly has a lot to do with how Alan Greenspan, former chairman of the Federal Reserve for 18 years, announced (trumpets blaring "taa-daaa!") that the housing market is heading to the bust stage of the "boom and bust" cycle! A bust is coming! A bust!

This is the very same Federal Reserve chairman who has repeatedly, and loudly, said that there is no bubble in housing, even as he was creating the money that paid for the housing bubble! Now, out of nowhere, he has now done a complete turnaround, and (again, to make sure you get the point) out of nowhere he announces that the bubble, that never existed, has burst! An invisible bubble has burst!

I jump to my feet and announce "Your honor, I would like to have this entered into evidence in my case that Alan Greenspan is the worst central banker in US history, and is also probably the worst government financier/lackey in ALL of history!"

And this will not be just any old ordinary bust! No, sir! This bust will be one that involves untold trillions of dollars, and will directly affect the value of every house in America, because if you think that YOUR charming house will retain its over-inflated value while, all around you, house prices are falling and people are crying and wailing "The Mogambo was right! We're freaking doomed!", then you obviously do not understand the first damned thing about economics or real estate, and I feel sorry for you.

Mr. Greenspan's exact words, in case you were wondering because he is renowned for being obscure, were "The boom is over, and you can say that with a fairly strong degree of confidence." Wow! Such clarity! This, according to my wife, is where I yelled "Yikes!", jumped to my feet, hit the Mogambo Family Emergency Alarm (MFEA) button, and ran, as fast as I could, to the famed Mogambo Bunker Of Surly Intransigence (MBOSI) with a cacophony of warning bells ringing in my ears.

Anyway, I was saddened to include in the official report that none of the family made it to the bunker in time, like it is so damned important that they keep blabbing on the phone with their worthless, idiot friends, yammer yammer, yammer, or they were not even here, as they were off gleefully gallivanting at "school" or "work", like that's all MY problem or something.

You will instantly stop caring about the fate of my sluggish wife and kids when you comprehend the meaning of his message, which should not take long, as it is brief and chillingly clear, for once in his life. This unexpected "No Mo' Boom" (NMB) means that prices for houses will not continue to go up. And if I understand the concept of "boom-bust cycle", housing prices will now go down. A lot. That's why they call it a "bust."

What's the worst news? Well, it all depends on your perspective, my Inquisitive Mogambo Larvae (IML). If you are the government, for instance, that relies on the receipt of property taxes, sales taxes, taxes on gains, and all the documentary stamps and endless, expensive rigamarole involved with buying (and then again when selling) property, not to mention the income of realtors and title companies and lawyers and banks and mortgage companies and on and on and on, then THAT'S the bad news.

If, on the other hand, NMB also means less borrowing against the increased equity in your house, because there is not going to BE any more appreciation in the value of your house. This means aggregate, economy-wide spending of borrowed money will decrease, and the American economy will slow. By how much? Well, last year, GDP was boosted by something like $600 billion or so of additional spending, thanks to people increasing their mortgage debt. Hahahaha!

This means THAT particular stupid, childish, immediate-gratification insanity will soon stop, too. So, if you are a person whose standard of living depends on constantly extracting equity from the apparent appreciation in the "value" of your house during a seemingly-endless inflation in prices, then oops! Hahaha! The cruel joke's on you! This is how Father Nature takes care of the business side of life. Mother Nature, his wife, takes care of all that gardening, environmental and touchy-feely "love and caring" crap, and it is up to the stern dad to hand out the, as we say in the South, whuppin' as the required punishment for acting so irresponsible and stupid. And even if you aren't that kind of person, your business will be affected as they stop spending.

Equity withdrawal is, in bare essence, nothing more than increasing the absolute level of your mortgage debt and negating the entire gain in your equity. Hahaha! They ought to give the Anti-Nobel Prize for Sheer Economic Stupidity for these people, but there isn't one.

So, to remedy this oversight, I have officially founded the Mogambo Monument Of Economic Stupidity (MMOES), which has the names of really stupid people, and some particularly nasty commentary, (by me) about why there names are there.

The idea came to me as I was curled up behind the couch, pretending that I don't hear the police pounding on the door, demanding that I stop screaming and cursing so loud. It all started when I had the TV on. With my wife out of town, see, I get to watch whatever I want on TV, instead of watching what she wants, which is "Divorce Court" where she takes lots of notes and always urges the judge to give the wife everything and sentence the husband to death.

So Wednesday afternoon I caught the CNBC show "Kudlow and Cramer." There is, apparently, a regular feature where Robert Reich, former Labor Secretary or something under Clinton, and here, representing the Democrat perspective, debates a Republican about issues of the day or something.

First off, I admit that there is something about Mr. Reich that I cannot stand. I don't know why. I just hate his face, I hate his voice, I hate the way he dresses, which all probably stems from the fact that I get physically ill that he parades his stupefying ignorance with such smarmy, oily and unctuous arrogance, like he is the only adult in the room, and he is patiently explaining "how things work" to us little children or something, when it is blindingly obvious that he has no idea what in the hell he is talking about.

As a little insight into Mr. Reich, he thinks, for one thing, that the government should stop paying billions and billions of dollars in "corporate welfare" to pharmaceutical companies. Fair enough.

He does not say WHY the government gives them all that money. And the reason is that the greedy American electorate wants more new drugs, new medical devices and new techniques that will cure or ameliorate whatever afflicts them, their parents, their children, their relatives and their friends, or is ever likely to. And they want it all served up on a platter (not of silver, but made of paper currency!), and all for free! And the idiotic federal government, democratically elected by the moron voters to do that very thing, tries to give it to them by paying the pharmaceutical companies to invent these new drugs, devices and techniques! Giving out free lunches is all that government does anymore!

And in that regard, reader Felix R. writes "When Milton Friedman was in Jerusalem, the reporters asked him if he could tell them the whole Torah of economics while standing on one foot (an allusion to a famous Talmudic story). He told them that there is no such thing as a free lunch, and all the rest is merely an explanation."

Perfectly correct, profound, and humorously put, all at once! Fabulous! I can almost envision Jackie Mason reciting the line in one of his comedy acts! Hahaha! Or Krusty the Clown!

Anyway, it is not as funny to hear Mr. Reich yammering away in his usual gibberish, mixing real economic concepts and theory with wild jumps to the world of Economic Bizarro Land. He wants, as do we all, to have cheaper medicines and drugs. His idea for accomplishing this worthy goal is to have the government, somehow, persuade the drug companies to lower their prices for their pills. A laudable goal.

So there he was, railing against the pharmaceutical companies for their high prices and high profits, and explaining that if they dare refuse to lower their prices, he suggests passing legislation requiring them to do it! Hahaha! More regulating and taxing, which is the entire Democrat philosophy towards everything! Hahaha!

The Republican in the discussion, to his credit, did not jump over the dais and grab Reich by the neck in contempt, and attempt to slap some sense into him, although you can bet that The Mogambo was cheering loudly for him to do that very thing.

Let me ask one question: Who owns the pharmaceutical companies? Answer: The shareholders of the pharmaceutical companies. And who are these shareholders? You! Us! We! Take a look at the retirement plans of American workers, and see what assets are in there. And so taking money away from the drug companies is, literally, taking money away from our own retirement plans! Hahahaha!

But this is just standard "government in action" stupidity, especially Democrat government in action stupidity, so he does not get the award simply for that. He earned the distinction of inclusion on the Mogambo Monument Of Economic Stupidity when he uttered the one perfect, idiotic Leftist phrase that deserved immortalization. He said, (and I am, unfortunately, quoting from memory), that it was time we "unleashed the free market by getting government involved"! Hahahaha! "Unleash the free market by getting the government involved!" Hahaha! I can't stop laughing!

-- Other entries in the logbook of Starship Mogambo reveal that the shields suddenly came up at the same time as Bloomberg.com reported that the Labor Department said that the Consumer Price Index was up a lot! "The 0.6 percent rise in the consumer price index," Bloomberg reported, "followed a 0.4 percent increase in March. Not counting food and energy, so-called core prices rose a larger-than-forecast 0.3 percent for a second month."

Being a real lazy guy, I simply take April's 0.6% inflation and multiply by twelve months, yielding an annual rate of inflation of 7.2%, which should lower your body temperature as your blood freezes in stark, raving fear.

But relax. Nobody listens to The Mogambo. And to prove it, with a slightly different take, Reuters analyzed this as "Consumer prices were up 3.5 percent for the 12 months ended in April compared with a 3.4 percent year-over-year gain the previous month. Core prices were 2.3 percent higher, the biggest year-over-year gain since March 2005, compared with a 2.1 percent 12-month gain a month earlier."

Yahoo.com, taking another angle, said "So far this year, consumer prices are rising at an annual rate of 5.1 percent, much faster than the 3.4 percent increase registered for all of 2005", and "compared with a 4.6 percent pace in the same four months last year."

And it is actually all much worse than this, as George Ure of UrbanSurvival.com says that in a different index the news is even worse. "Consumer Price inflation for All Urban Consumers popped up 0.9% in April according to figures out this morning. This pencils out to an annualized rate of 11.35% or 12.68% if you use the more honest 'old weights' for your calculations."

No matter who you listen to, price inflation is roaring, regardless of the eerie calmness with which this horrifying news is being greeted.

Perhaps everyone still harbors the last, lingering hope that a "services economy" is some pathway to Nirvana. Perhaps they figure that services will be our salvation! If so, then again I am sorry to carry the bad news that "Service prices rose 0.2 percent and are up 3.7 percent over the last year."

Desperate for good news, perhaps people think "Maybe I'll get a raise at work!" Well, if you think that making more money will offset these higher prices, think again, my foolish young one! The report went on to report that "Average weekly earnings adjusted for inflation rose 0.2 percent in April and are up 4.1 percent over the last 12 months."

This, in particular, makes me crazy with anger, because these earnings are "conveniently" adjusted for inflation using the lowest measure of inflation that they can find. If they used the higher, real-life figure, which is about 9%-12% inflation, then real wages are actually going down by about 5% a year!

And to make it much, much worse, this does not adjust for taxes. This is nominal earnings, and the poor wage-earner has to first pay incomes taxes on the money, and then pay the rising costs of benefits that the worker now has to pay out of this after-tax, after-inflation pathetic paycheck, which makes it into a bigger loss in terms of buying power! Are you starting to see why revolutions happen when the starving class, which is increasing faster and faster by increasingly affecting the middle class, too, riots as inflation devours them alive?

But disinformation and outright lying (or conspicuous stupidity) is still the coin of the government realm, as Bloomberg.com reveals when they report "A survey, released yesterday, of economists by the Federal Reserve Bank of Philadelphia found little evidence of rising expectations for inflation."

Hahaha! This is great! Thus, it is child's play to declare that my latest Official Mogambo Survey (OMS) shows that 100% of everybody in town thinks I am perfectly normal, a real peach of a guy, and probably (as I have steadfastly claimed from the start) actually from this planet you call Earth. So, congratulations, Federal Reserve Bank of Philadelphia! Congratulations, Mogambo!

-- The AP reports "Facing its first annual loss in decades, the International Monetary Fund on Thursday turned to a group of international financial heavyweights to figure out how to pay its bills." Hahaha! Another group of fiat currency-loving, ultra-national communist morons wants somebody to please, please, please bail it out from its own stinking mess! Hahaha! Some things never change!

Their problem is that so damned much money has been created all over the globe that constant inflation has allowed the people, to whom the IMF loaned money, to pay the loans off with cheap money. Now the IMF has nothing to do, nobody to boss around, and they are just another sleazy, short-sighted bank that is paying the price of creating monetary inflation.

Their latest idea is to invest the IMF's money (which is money that we loaned them), denominated in (I assume) Special Drawing Rights, into various bond markets, if you can believe the audacity of even suggesting such a blatantly inflationary, market-rigging thing. This is the loathsome, stinking, despicable, corrupt depths to which we, and the IMF, have now sunk.

-- And it doesn't look like it is going to get any better, as the Conference Board said "The index of leading economic indicators fell 0.1% in April, with three of the 10 indicators improving: Vendor performance, stock prices and interest rates", which is, you gotta agree, not the most bullish group of three reasons why things are improving, especially when two of the three are up because they are being directly targeted by the Federal Reserve as part of their Plunge Protection Team duties.

In case you were wondering, the Coincident Index (which roughly measures current business activity) rose 0.2%, while the Lagging Index (which measures inflation pressures) rose 0.3%.

Oddly enough, the Wall Street Journal reports that the Lagging Indicator was actually down by 0.1. Hmmm!

In a separate report, the Labor Department said "initial jobless claims rose by 42,000 to 367,000." This is stunningly high, and is not a good thing, either.

-- If you want someone to sum it up, the absolute best line I have read in a long, long time is by Brian Hunt of DailyWealth.com. He wrote "The VIX is surging higher. Commodity markets are roiled and stock markets everywhere are declining. Goldilocks may be dead."

Hahaha! "Goldilocks is dead!" Hahaha! As Larry the Cable Guy says "I don't care who you are; THAT'S funny!"

And this "dead" theme also shows up in the commentary by Peter Grandich of the Grandich Letter, who says "I urge long-term gold bulls to realize that if we're to get to a four-digit gold price, we're going to need one major economic event -- the U.S. Dollar Index breaking below (and staying there) 80. I believe that's only a question of when, not if, because the only party that doesn't know the U.S. Dollar is dead is the U.S. Dollar."

In case you were wondering, the dollar is dancing around 84 now, up from a recent dip to 83, and down from about 92 in December.

If this is true, then a lot of people are going to suffer when the stock market goes down, as Cross-currents.net reports "Margin debt is back to the same level as it was at the end of January 2000, only six weeks before the final peak. The bubble is in stocks. The bubble is still in stocks."

Now stop. Sit back. Relax. Ignore the pounding of your heart, and listen with your inner mind. What is that sound you hear in the distance? Hooves! Hooves of the horses ridden by the bloodthirsty Horsemen of the Apocalypse, beating on the cobblestones of the Road to Hell, throwing off sparks, and they are coming to destroy you! Hahaha! How's the pounding of your heart now? Hahaha!

-- John Snow, the Secretary of the Treasury, said that it is now, beyond a provable certainty, and accepted as Economic Law, that (paraphrasing) "reducing taxes is consistent with increasing tax revenue." Hahaha! And this is the Secretary of the Treasury talking, whom you would think would know better! Hahaha!

This means that, surprising the hell out of everyone, you eventually get to the situation where zero taxation results in infinite tax revenues! Hahahaha! I mean, where in the hell do they GET these crazy ideas?

-- And it isn't just gold that is the only precious metal getting ready to shine, if you will forgive the pun. David Bond of SilverMiners.com says "Our Europe friends, meantime, are taking an interest in silver unseen since before the Great Depression and the collapse of the Weimar Mark." Now call me old-fashioned, but that seems bullish to me!

-- Bill Bonner at DR "you may want to neither borrower nor lender be, but if you have to make a choice, it is better to be owed than to owe. But who will turn out to be the greater fool, the one who buys what he can't afford, or the one who lends what won't be repaid?"

He also noted "Americans, consciously or unconsciously, are betting on inflation. They are hoping their favorite swindlers at the central bank will continue to engineer a gradual devaluation of the dollar so as to ruin their creditors rather than themselves. The dollar lost half its value during the Greenspan years alone. And now, the Bush administration is adding more debt than all the other administrations in U.S. history combined. Inflation looks like a sure bet...a 'done deal.'"

In this exact same vein, I was asked, "To what extent would the dollar have to decline in order to make the debt manageable?" Well, I have some bad news for you; the debt can never be made "manageable", as the money necessary to pay the debt has to be borrowed, too, and at the higher interest rate that caused the old debt to fall in price! Hahahaha! "Getting bigger is to get more manageable!" Hahaha!

Perhaps Richard Russell of the Dow Theory Letters says it best when he writes "There's no way all this debt can ever be paid off or even carried by stable economic systems. Forget that. This debt must be carried, handled, by ever increasing amounts of paper. That alone is a basis for perma-inflation. Maybe we've got a new word here -- "permaflation."

And, what's worse, is that we have an economic system where the definition of debt = money, then thus less debt= less money. This is not so chilling until you realize that less money = losses.

But the decline in the value of the dollar is currently being met with an equal, and off-setting, infusion of credit into the banking system. The idea is (and follow along closely here), that this new credit will be borrowed, used to buy stocks and bonds and dollars, which drives their prices higher (thanks to the new demand), and this increase in money-wealth offsets your losses in real wealth (inflation-adjusted dollars) plus the cost of the new debt! Hahahaha! They actually believe this! Hahaha!

This mind-blowing sop to the owners of assets is at the inflationary expense of those who cannot afford to live day to day as it is, much less accumulate assets, is the cause of the huge disparity of wealth evident in the world.

And the only way to correct this imbalance is for either the rich to make less (not a popular option for the rich, who are few in number), or else the poor must make more, (which is really popular with the poor, who are huge freaking gobs of mobs of people). You think, "Hmmm!" Then you ask yourself, "Which will it be?"

Grabbing a statistic out of the air that I just made up, I can now authoritatively declare that there has never been a successful, peaceful resolution to wealth disparity by which the poor made more and the rich made less. Never.

And as I look out of the periscope of the Mogambo Bunker Of Ultimate Refuge (MBOUR), I see that the new tax bill being send to President Bush will give the average Mogambo-type guy, working like an over-worked, under-paid slave and trying to keep his hateful family off his back for one lousy hour, a tax reduction of $17! Hahahaha!

The owners of wealth, however, will get tens of thousands of dollars in refunds, which they will have to invest somewhere. And, just by coincidence, because the government has voluntarily reduced its own tax revenue by lowering taxes, but refused to spend less, they are going to need to issue more government bonds to borrow the money needed to cover the resulting spending overrun!

And now, magically, here are a lot of higher earners waking up with, suddenly, tens of thousands more dollars in their pockets! Hahaha! What a scam!

-- A personal note to people who call me on the phone and leave a message on my answering machine. Unless I know you, I will not call you back. I never do.

And while we are on the subject, if you write an email to me, and my response comes back to me because I am not one of your "approved" senders unless I fill out some form to identify myself, I just delete your email and my response.

And if you write me actual letters, I will almost certainly not write you back, either.

I use this as a lead-in to the heartbreaking stories I have gotten on my machine from people begging me to tell them what to do, because they used futures or options (both of which use "low, low money down!" leverage), or borrowed again their house, and had some nifty scheme whereby gold would keep going up in a straight line, see, and they would sell of some of the gold along the way to pay off the borrowed money, and get spending money, too, as they would always sell at a higher price than they bought it. Gold as a cash cow! But the huge, unexpected downdraft went against them, and now they are desperate.

I know that these people screwed up, and I have no pity for them. If they had used proper money management, then they would be rejoicing (rejoicing, I tells ya!) that the price of gold went down, as it gave them a chance to buy more, cheaply! They get to take advantage of a temporary bargain!

How to do that? Easy! Use Dollar-Cost Averaging, which produces, automatically, almost optimal results! Here's how it works: You calculate how many dollars you can, on average, sneak out of your wife's purse every month, or your husband's wallet every month, or (my personal favorite) out of the kid's piggy bank every month, that you want to invest in gold.

Then do it! This automatically means that you will be buying fewer ounces of gold when prices are high, but more ounces of gold when prices are low. You automatically take advantage of bargains! And that is exactly what you want to do!

Over the long-term, of course, you have to increase your monthly petty larceny against your grumbling and increasingly-suspicious family members, to offset the loss of buying power in the rising inflation. So if you had been buying gold at the rate of a steady $100 per month, then (because inflation is about 10%), you will steadily increase your monthly buying to $110.

That's how it works, my Darling Little Mogambo Cherubs (DLMC)! Your long-term success is guaranteed (provided that gold does, indeed, continue to go up for years and years), and almost as optimally profitable as possible, too! Congratulations! You are a successful investor!

But going overboard with buying, with lots of leverage, is taking a risk, however large or small. And it is a Mogambo Economic Truism (MET) that you don't have to study statistics very long before you suddenly realize that repeatedly taking a small risk, time after time after time, actually increases the risk to almost 100% after a surprisingly few number of trials. And the higher the risk, the faster it gets there.

And when you add into the calculation the inevitability of catastrophic chaos in the system as the time horizon reaches just a few days or weeks, you realize that you acted like an idiot, and Father Nature whacked you for it, as he should, and as you deserve.

Nevertheless, I am 100% confident that gold will go much higher, given the current economic situation of the world, because if it did not, then it would be the first time in all of history when it did not when the economic scene got this bad. And I really like those odds.

-- On 321Gold.com, they posted a timeless quote by Lew Welch in his book "The Basic Con". He writes "Those who can't find anything to live for, always invent something to die for. Then they want the rest of us to die for it, too." Bravo! And while he is seemingly talking about war, it is the exact same thing with economics and monetary policy, as the smarty-pants hotshots are not content to merely live their lives knowing economics, but the want to create new economic theory so that they will achieve fame and immortality. But there isn't one, and there never will be. And now we are going to die for it. Ugh.

****Mogambo sez: Money supplies around the world are rising alarmingly, as each country tries to prevent deflation, which is defined in your Mogambo Junior Economist Handbook (MJEH) as "money supply falling and asset prices falling." They are doing this by creating inflation in new credit (monetary policy) to create inflation in prices. Hahaha!

So, my Sweet Mogambo Cuties (SMCs), keep buying gold and silver, as they will rise in price for years and years and years to come.



The Mogambo Guru

Author: The Mogambo Guru

Richard Daughty, the angriest guy in economics
The Mogambo Guru

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.

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