E-Economic Newsletter

By: The Mogambo Guru | Wed, Jun 7, 2006
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This article originally appeared at The Daily Reckoning.

-- Things are getting back to normal, and by the alarm bells ringing in the Mogambo Stinking Hole Of Fear (MSHOF) in the backyard, I know that the Federal Reserve is back increasing Total Fed Credit. Sure enough, I quickly find out that they created another $4.1 billion last week. This was at the same time as the Treasury printed up, in actual cash, another $4.3 billion, which is fourteen bucks for every man, woman and child in America.

For good measure (I suppose), the Fed bought up $2 billion in government debt last week, too, blatantly committing the ultimate fraud; creating money to buy government debt for itself, which is then (supposedly) turned over to the Treasury.

I am cursing under my breath at all of this monstrous, malignant monetary madness (which is this week's installment of gratuitous alliteration for no particular reason), when I suddenly realize "Hey! I haven't said something nasty about somebody in government, Wall Street or the banks!" To correct that grievous error and to get my bodily humours and biles back in sync, I can cover them all by noting that everybody seems to think that Hank Paulson from Goldman Sachs taking over as the new Secretary of the Treasury is such great stuff, but the fascination escapes me. He is just some smiling suit who made his money by successfully hustling up clients and cash for Goldman Sachs to manage and rake off some big fees, so apparently that is what his duties at the Treasury will be, too.

After all, what in the hell can the Secretary of the Treasury do? He is just a laborer. The Congress proposes to spend, the President signs every spending bill laid in front of him, then the Treasury Department issues bonds to finance the spending. That's how it works. And, somehow, some big shot from Goldman Sachs as Secretary of the Treasury can affect any of this by juggling the books? Hahahaha!

In turn, of course, the loathsome Federal Reserve creates additional credit, so that somebody can borrow the credit (turning it into money) which is used to buy the Treasury bonds ("going into debt to buy debt!").

In short, my Suspicious Mogambo Mind (SMM) immediately comes up with a million terrific conspiracy theories about how Paulson was obviously placed there to benefit Goldman Sachs, which (I note with sarcasm) is a major shareholder in the Federal Reserve, and, I assume, is now to create new secret accounts everywhere so that his actions (at the behest of Goldman Sachs, the White House and the Federal Reserve) can be hidden from view. This is exactly the kind of desperate, despicable, degenerate thing you see at the end of long booms.

And I am sure that it does not surprise Christopher Galakoutis, of CMI Ventures, whose essay "Out of Bullets" was posted on SafeHaven.com. He writes "Speaking of successions, it was just announced that Henry Paulson of Goldman Sachs will replace John Snow at Treasury. This to me is further proof that everything within reach of our bankers and politicians will be utilized to keep the US's 'prosperity' game going. You just don't bring in a Wall Street heavyweight when you are about to cripple the economy with tougher Fed action."

Peter Schiff, of Euro Pacific Capital, does not suggest that Mr. Paulson was nominated for anything underhanded, but perhaps because "In today's style over substance economy, the job of Treasury Secretary has devolved into a pitch man for the government's economic disinformation campaign."

And let's remember that Lloyd Bentson disgustedly quit the job of Treasury Secretary, and Paul O'Neill was fired for being too curious (and for being too honest about what he found). We ended up with John Snow, who is, apparently, none of these things.

As to why Mr. Paulson, perhaps this is a good time to quote the new interview of Jim Rogers by Jonathan Laing in Barron's magazine, where Mr. Laing writes "According to Rogers, new Fed Chairman Ben Bernanke is 'an amateur with no knowledge of markets' whose academic work revolved around how nations could avoid depressions by printing more money." Hahaha! Exactly!

The rub is that you can make money available at low rates, but you can't make anyone borrow and spend it. I figure that this is where the new Treasury honcho comes into the picture.

And since we are talking about the Jim Rogers interview, he is pretty adamant about the coming boom in commodities. And let's be sure that we completely comprehend all the ramifications of the phrase "Add to (American consumption) 1.3 billion Chinese and 1.1 Indians- all walled off from the global economy during the last commodities boom- joining the global scrum for natural resources." This additional 2.4 billion people represents, in case you were wondering, a full third of the world's population.

Once you take the time to meditate on that mathematical fact, it is then but child's play to instantly agree with Mr. Rogers' view, namely that "it's delusional to deny that competition for commodities will continue to heat up as a result of China's pell-mell rush from a peasant economy to economic giant."

As a fun "rainy day" activity, get out your Mogambo Junior Economist Machine (MJEM), enter the two variables "chronic, gigantically rising levels of demand" and "lagging supplies in a finite world", and then crank the handle a few times. If your shiny, new MJEM is not past the end of the 2-hour warranty period (and therefore not just another broken piece of Mogambo Enterprises crap (BPOMEC)), you will probably notice that demand and supply for commodities will equilibrate at a higher price. And "higher prices" is a prerequisite for "profit" in a "buy low/sell high" kind of way.

But if you are stupid enough to buy a Mogambo Junior Economist Machine from Mogambo Enterprises (our motto: "Our business is profits, not quality!") then you probably did NOT notice that chronic, gigantically rising demand for commodities and lagging supply in a finite world equilibrate at a higher price. In that case, take just my word for it.

And now, looking out into the misty future, we see that wisely including the word "chronic" in defining a rising level of demand means that this bull market in commodities will last another 10-15 years, just like all the other commodity booms in history seem to have done.

"Well," you might well note, "if there is a rush to buy commodities, then the increase of demand (constrained by sluggish supply) should be reflected in a rise in the prices of commodities." Good point, young grasshopper! So we take a look at look the CRB Group Index futures, and we can't help but be impressed that they are up 26% over last year's prices. The industrials are up 63%, grains/oils up 12%, energy up 23% and precious metals up 51% from last year, too. Livestock, the sole exception, went nowhere.

Now let's look at the commodity price index in the Economist magazine. Sure enough, that's what you see there, too! The Dollar Index item labeled as the inclusive "All Items" is up in price by 36% in the last year. With the Sterling Index, All Items are up 31.6%, the All Items Euro Index up 30.2% and the All Items Yen Index up 41.3%! Oil is up 39.2% over this time last year, and gold is up 58.9%.

So if you think that inflation is low, then you are truly insane.

In keeping with this "Everybody is insane" theme, bonds actually rose in price as clueless "investors" snapped up bonds, locking in yields so low that I laugh in contempt, as I find it quite unbelievable that anyone would buy a bond at these prices! Hell, even 30-year bonds are priced so high that they are yielding roughly the same as the Fed Funds rate! And in fact, the yield curve actually inverted today, so that long rates are less than short rates! Hahaha! What morons!

Of even greater news, however, is that the website of the Bank of Japan reports that Japan's monetary base in May was, suddenly, 66% smaller than a year ago. Something has caused it to fall off a cliff.

Commenting on all of this, ContraryInvestor.com writes "What took maybe three years to build in terms of the Japanese monetary base from early 2003 to present, has been reversed in a few short months."

At the same time, they also report that the Japanese Current Account balance is in 53% deficit over last year, and the change is so sudden that the Economist magazine still shows Japan sporting a Current Account surplus of $166 billion!

I don't know if this has anything to do with the recent Japanese announcement that they were going to discontinue their zero interest-rate policy (ZIRP) and quantitative easing, but I figure it does.

What will happen? Well, Chris Laird of PrudentSquirrel.com asks, provocatively, "World Markets about to Crash Together?" He first defines the problem as "The US is considering a pause in its interest rate hikes of late. The interest rate differential the US holds over Japan and Europe is as much as 3%. If that differential is not maintained, trillions of dollars of US denominated financial investments are going to be unloaded on the world markets."

So what is the upshot of this unloading? "A combination of unwinding the Yen carry trade and a serious drop in the value of the USD will just simply pull the rug out from under every major financial market that has benefited from the cheap USD and Yen." I'm going to go out on a small limb and say we are looking right now at a gigantic world stock collapse."

Almost as an afterthought, he says "Oh, did I mention that we are seeing the highest insider selling of stocks since about 2000?" And you remember what happened in 2000.

So it is the sudden, huge collapse of the Current Account that, alongside the fall in Japan's monetary base, is the Big Freaking News That Screams Danger! Danger! Danger! To The Mogambo (TBFNTMD!D!D!TTM).

Perhaps I am not the only one that thinks this is shouting Danger! Danger! Danger, and this has something to do with why Rick Ackerman of Rick's Picks at GoldSeek.com writes "I've long doubted the usefulness of head-and-shoulders patterns, since they tend to be everywhere you look for them. Still, there's no denying that the one the Dow Industrial Average has been carving out since early March is quite a looker. Yeah, it needs a little more development on the right shoulder to give it proper symmetry. But otherwise, it looks good to go for an 800-point plunge. Does that sound bearish enough? Maybe to you, it does -- but not to me. For if this market is about to unravel the way I expect it to, a 3000-point leg down sounds about right. But a measly 800 points? That wouldn't begin to discount some of the more problematical trends that are in the pipeline already, including a real estate collapse and a run on the dollar."

Even Dennis Gartman of the Gartman Letter is looking at a recession, and has found a close correlation between recessions and the ratio of the coincident to lagging indicators. "The Ratio of the Coincident to Lagging Indicators topped out months ago." So what does this mean to you and me, looking to make a few bucks? "The US economy shall reach its peak and move into a quiet recession sometime in the last 3rd quarter or early 4th quarter of this year."

-- Even the clueless touts on CNBC are starting to chatter about stagflation, which is the phenomenon of falling economic growth and rising inflation, which are not supposed to coexist according to the idiotic mainstream economic theory with which America (and, sadly, most of the world) is currently saddled.

But if you are asking "Mogambo, are we having stagflation?" Well, the Institute of Supply Management came out with manufacturing data was much lower, again. And inflation is higher, again. So I will answer "yes."

And who is to blame? The damned Federal Reserve! And this seems like a good place to bring up the odd happenstance that I received my new homeowner's insurance statement on the same day as I got the new prospectus for one of my money-market funds.

Their little chart shows that the U.S. Treasury fund yielded 5.4% in 2000, and comfortably over 4.3% since 1996. Then the stock market bubble popped in 2000, thanks to the Federal Reserve first creating the money so that people could bid up the price of stocks in a stock-market bubble and a bond-market bubble.

That's when the Fed, ever the evil bastion of hurting everyone to make up for their own incompetence and mistakes, pounded interest rates down and down, so much so that the money-market fund finally bottomed out at a yield of 0.49% in 2003. Less than one-half of one percent! It is now back up to the princely 2.36%, which is still 33% less than their own stated rate of inflation, for crying out loud! And with REAL inflation running north of 9%, people who try and save a little money are really getting screwed by the Fed. And to make it worse, I still have to pay income tax on the nominal gain, putting me farther into the hole!

But it is the insurance companies that get really hurt, as they have to invest the premiums they receive from the policyholders. But, again thanks to the damned Federal Reserve, nowadays they don't get a yield that allows them to make a profit, especially now that the value of the insured assets (in this case, our houses) have been inflated.

So now we, as homeowners, have to pay higher property taxes and higher property insurance premiums, all thanks to the damned Federal Reserve creating the housing bubble.

-- If you were thinking that maybe The Mogambo was wrong about this gold bull market thing. You probably figured that just because I look stupid, and sound stupid, that maybe I really AM stupid, and you were right. But you forgot to allow for luck! Perhaps it IS just luck that I am pounding the table for gold and silver at the same time as alert reader J.A.D sent the news clip from Telegraph.co.uk, headlined "Russia leading global 'stealth demand' for gold", which is an article written by Ambrose Evans-Pritchard.

The article starts off "The world's big money brigade is snapping up gold bullion at eight times the rate originally thought, according to a report by UBS, the world's biggest gold trader." Instantly, my sensitive nose twitches as my Mogambo Olfactory Profit Sense (MOPS) detects the delicate and enticing aroma of a way to make some big money pretty damned soon, which is, if you are into making money, the best kind!

Intrigued and now slavering, I read on, and learn that "The Swiss bank said information from its trading floor suggested that funds and investors were allocating 20pc of their commodity portfolios to precious metals. This is far more than the index tracking funds run by Goldman Sachs, Dow Jones-AIG, and others, typically taken to be a guide to overall investment flows."

Twenty percent of the portfolios moving in gold? Wow! Wow! Talk about rising demand! My MOPS was right!

The audience is suddenly abuzz, as The Mogambo seems to actually be right about something for a change, and that is Big News On Campus indeed! Amid catcalls from disbelievers, shouting "Impossible!", "The fix is in!" and "God is dead!", I smile knowingly to myself and, with a mere hand gesture, motion to Mr. Evans-Pritchard to quote Ross Norman, director of the BullionDesk.com, who happily opines "It is slow steady investment by pension funds and long-term buyers. Anybody who thinks this market is about to head sharply lower is reading it badly,"

My detractors somewhat stilled, Mr. Evans-Pritchard's next words must have pierced their cold hearts, as he writes "President Vladimir Putin, a frequent critic of dollar hegemony, has ordered the Russian central bank to raise the gold share of foreign reserves from 5pc to 10pc." Now, doubling something that already exists is usually a lot, but it is much more bullish than that, because he goes on to report "Russia's reserves have surged to $237bn - the world's fourth biggest - after rising 61pc in 2004 and 40pc in 2005." Well, being a real linear kind of guy, I figure that Russia in on track to take in, at a 30% rise, another $71 billion this year, of which $7 billion will be used to buy gold.

Another way of looking at this is provided, at no extra charge, by Mr. Evans-Pritchard, when he writes "With a current account surplus of 10pc of GDP, it must sweep up a big chunk of global gold output just to stop its bullion share of reserves from falling."

But I continue to be very impressed with the way gold and silver keep going down in price, when normally (and by that I mean in the entire rest of economic history since the first true fungi used protein strands as money), gold goes UP in price in economic situations like this. Up. Not down. Up.

This is an anomaly. And if there is one Gigantic Mogambo Truism (GMT), it is that anomalies do not last, such as the anomaly about how a woman as pretty as my wife would marry a creep like me. And sure enough, halfway through the first night of the honeymoon she, too, is calling me a "disgusting, depraved pervert." Thus, another anomaly reversed, and things are back to normal.

But the nice thing about anomalies is that people who bet against them continuing much longer therefore have a lock on a guaranteed profit if they can hold out long enough. And to profit on an investment, you usually need to buy something first. And in this case, buy gold and silver.

So what does one do when one wants to buy gold, but has spent all of one's money? A thorny and perpetual worry! The Mogambo Way (TMW) is to volunteer as a guard at a school-crossing, and then, twice a day, you can charge the damned snot-faced school kids a small fee to cross the street. And if they don't pay, well, then maybe they will "accidentally" fall in front of a car, which works out great because not only does the kid learn a valuable lesson, but maybe you can get a few bucks out of the terrified driver for yourself, too!

Anyway, the point is that you somehow get some money, and then you use this money to buy more gold and silver, as these price declines in gold and silver are a gift, because nothing that has been causing gold to go up in price has changed, except to get worse. A lot worse. Making the case for gold more compelling, as if that were even possible.

As an example of bullishness about gold, read the essay "I Knew I Should Have Bought Gold" by I. M. Vronsky, of Gold-Eagle.com. First he notes that "The Brazilian currency (called the "real") price of gold soared nearly 80% in a two-week period in January 1999." Then he follows that up by saying "I believe the US dollar price rise of gold will be equally dramatic, violent and without notice sometime next year."

George Ure of UrbanSurvival.com has a different take on the recent downdraft in gold "It's so that the gold suppression crowd can clear their hedge books of shorts because they know inflation is coming - a euphemism for the purchasing power of the US dollar is going to tank. Down comes the price and the big boys load up on the long side."

-- Analytical reader Tom L. notes that "silver has a density of 655.515 LB/cubic foot." Keeping with English measurements, that means that "16 OZ/LB = 10,488 OZ/cubic foot of metal." So, at $13 an ounce, a cubic foot of silver will cost about $136,000 and crush your foot if you drop it on your toes.

-- The Last Contango in Washington by Antal E. Fekete writes "People from around the world keep asking me what advance warning for the collapse of our international monetary system, based as it is on irredeemable promises to pay, they should be looking for. My answer invariably is: "watch for the last contango in silver".

"It takes a little bit of explaining what this cryptic message means. Contango is that condition whereby more distant futures prices are at a premium over the nearby." I interrupt to add that contango is the usual spread for futures contracts. Instead of thanking me for clarifying that important point, he breezily went on "The opposite is called backwardation which obtains when the nearby futures sell at a premium and the more distant futures are at a discount."

What the hell does this have to do with making money with silver? I raise my hand to ask, and I know that he sees me, but instead of calling on me, he elects to flip to the last page of his notes and hurriedly concludes "When contango gives way to backwardation in all contract spreads, never again to return, it is a foolproof indication that no deliverable monetary silver exists. People with inside information have snapped it up in anticipation of an imminent monetary crisis."

-- If you were wondering why we Americans seem so intent on picking fights, perhaps the essay "The System in Crisis" by Peter Montague on Counterpunch.com will answer that question. "Defense is the only national industrial policy that almost everyone will agree to, or at least acquiesce to, perhaps for fear of being labeled unpatriotic. Foreign enemies are the ultimate consumers of our military preparations, so in the face of flagging demand for toasters and SUVs our economy now arguably requires a growing supply of foreign enemies." Ugh

****Mogambo sez: The gold and silver market manipulators are handing themselves and their friends a gift, as they know that gold and silver are going to boom any minute now, as they always have when economic conditions got like this.

If you want some, and you should, then all you have to do is walk over and pick it up!

 


 

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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