E-Economic Newsletter

By: The Mogambo Guru | Wed, Jun 14, 2006
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This article originally appeared at The Daily Reckoning.

-- Last Friday, after gobbling a handful of assorted tranquilizers washed down with coffee, my wife tied me to a chair before looking in the Wall Street Journal to see the report of new Total Reserve Bank Credit on page C 12. Cinching the last of the knots, she picks up the paper and reports "It says here that it's up $2,460."

I breathe a sigh of some relief. Two and a half billion bucks ain't too bad for one week. Even a little on the low side, maybe! Suddenly she throws the newspaper at me and starts to walk out, and I say "Hey! How about looking up U.S. Gov't Securities: Bought Outright?" I hear only scorn in her voice as she says "Look it up yourself, jerk!"

So I ask, "Well, how about untying me so that I CAN read it myself?", but she was gone, although I could hear her muttering to herself as she walked down the hall, "Hahaha! Screw you, creep!"

After awhile I get tired of alternately begging for help and screaming death threats at her, so I decide to try and find out on my own. I finally manage to loosen one corner of the strip of duct tape that she put over my eyes, and I could use my Amazing Mogambo Super Vision (AMSV) to read "U.S. Gov't Securities: Bought Outright" next to the number $1,423" which means the evil Federal Reserve bought up $1.423 billion dollars in government bonds last week, after first creating the money to do so.

What a racket! This is the ultimate in fiscal fraud and they all should all go to prison for it. And if the American government was not filled with (being as nice as I can manage) stupid, ignorant, untrustworthy, lying, corrupt, cheating bastards and whores, that's where they would all go.

But if I dare to show up at the Federal Reserve to make a citizen's arrest, dressed for the occasion in my best Rambo outfit, complete with headband and .30 caliber, belt-fed, air-cooled machine gun under my brawny, manly Mogambo arm (BMMA), the cops come roaring up with sirens blaring, not help me round up the economic terrorists that have taken over the Federal Reserve, but to arrest ME! Like I'M the one guilty of something!

But those vainglorious days seem now over, and I am stuck here, ignominiously tied to a chair, peeking out from under a blindfold. Then I notice that Required Reserves in the banks dropped back to the insignificant $42.459 billion.

What fraud! What audacity! What an embarrassment that the self-important nitwits at the nation's universities see nothing wrong with not only an out-of-control fractional-reserve banking system, but one where there are literally no freaking reserves at all (NFRAA)! Money is literally created out of thin air, with no backing from deposits whatsoever! This level of risk and multiplication of the money supply is insane! This is beyond insane! And yet, there it is!

I also noticed that custody Foreign Holdings of government debt rose $11.4 billion in the last week, too, and so I amused myself with laughing at foreigners while I struggled at the ropes.

-- Chuck Butler of EverBank notes that the G-8 finance ministers are meeting again and he reports that Brad Setser of Roubini Global Economics said that the ministers are promising not only more action, but "vigorous" action, regarding the global economic imbalances. Yow!

"Vigorous" action ought to produce a lot of fireworks, including a rise in the dollar price of a barrel of oil. And if you have not been out shopping for oil-related stock lately, then I strongly suggest that you chug down the rest of that morning "eye-opener" can of beer and buy some. Pronto.

And this suggestion that you load up on oil is because the dollar is going to go down in purchasing power, which is the whole point of the G-8 promising "vigorous" action.

You will, theoretically, seemingly make a lot of money on this oil trade, but that is just an example of "money illusion"; you THINK that you made money because you bought low and sold high, but remember; it is still only a damned barrel of oil! And now the "money" you think you "made" only offsets the loss in buying power that your money has suffered. And to make it worse, you are actually a loser, since you have to pay taxes on your nominal "gain"!

And to make it worse yet, you have to pay higher prices for gasoline when you gas up the car to go pick up the profits and mail the check to the IRS! Hahahaha! Welcome to the world of inflation! And it will get worse, as evidenced by Barclays Capital estimating that global inflation is increasing at the "fastest pace in a decade."

-- If you are panicking about the swoon in gold lately, then I pity you, because I know that you have not achieved True Mogambo Enlightenment (TME), and thus I further I know that you will be, to your dismay, repeating my again course next year. And while I may be seeing your happy little face again next term, we will obviously not be seeing Jim Otis, aka The Optimist, who demonstrates flawless TME when he addresses the "near certainty that inflation and world tensions will continue to get worse, so an opportunity to buy silver and gold at temporarily reduced prices is truly wonderful and positive news."

And the reason that he has the apt moniker "The Optimist" is that he hedges his bet about inflation with the phrase "near certainty" about price inflation, hoping for, I suppose, a chance that a miracle of some kind will occur.

Tired of being referred to in the press as "local obnoxious halfwit", I seize this opportunity to re-invent myself to become (insert trumpet fanfare "taa-daa!") "The Pessimist", because I am 100% sure that we are going to get price inflation. Lots of it. I am so sure, so very sure, so very, very sure that price inflation is coming because it has always, always, always followed monetary inflation.

As proof of monetary inflation, David Tice of the Prudent Bear Funds, in his semi-annual report, notes that "Across the world, domestic credit systems are firing on all cylinders. Double-digit credit growth now blankets the economies and asset markets of the U.S., the Eurozone, the United Kingdom, Scandinavia, China, Russia, India, Australia, throughout non-Japan Asia, and elsewhere. To be sure, global monetary conditions have never been so loose."

And when you have, like we do right freaking now, lots and lots and lots of growth in the global monetary base, especially after whole decades of it, you eventually run out of bubbles in the stock market, bubbles in the bond market, bubbles in the size, scope and cost of government, and bubbles in the housing market. That's when you finally get around to bubbles in commodities. Gold is a commodity, AND it is a store of wealth.

And if you believe that there are such things as "lessons of history", then as price inflation heats up and up, as the value of the dollar goes down and down, gold will go up and up, just like it has all the other times in history when somebody's stupid government caused too much money to be created. And especially those times when the "too much money" created is not just by literally printing up cash with paper and ink, but creating the money from debt! Hahaha! But now, this one time in history, you think gold is going to go down as a result? Hahahaha!

-- The losses suffered in markets around the world, raging from 5% to over 50%, have given me a reason to moan. Stocks. Houses. Bonds. Precious metals. Everything. In stocks alone, Bloomberg reports $1.85 trillion in market value has been lost, worldwide, this month.

It makes me wonder about the so-called "wealth effect", which is the phenomenon that you spend more money (giving GDP a boost) when you feel rich. Dr. Kurt Richebächer notes that "It has been calculated that the 'wealth effects' on consumption have raised real GDP growth by 1.5 percentage points a year for the past five years. With nothing in sight to replace this monstrous asset and credit bubble, a sharp downturn of the U.S. economy is the most obvious conclusion."

Now add in that $1.85 trillion of "wealth" lost this month and then tell me your new updated GDP estimate!

-- But Americans are as optimistic as they are ignorant and greedy, and to prove it, the Federal Reserve reported that consumer borrowing rose by $10.6 billion in April, which works out to an annual rate of increase of 5.9%. Total consumer credit is now a record $2.17 trillion.

My wife was behind a woman in line at the grocery store, and she was saying as how "We owe $12,000 on our credit card and we don't know how we are going to meet the minimum payment"! And how did she pay for the groceries? With a credit card! Hahahaha!

It was from these humble, humble beginnings that the new Fabulous Mogambo Editorial Cartoon (FMEC) was born, and it is not only sure to go down as an Historical Mogambo Milestone (HMM) of some kind, but hopefully also win some kind of prize or award or something that I can turn into some cash, and pronto.

Anyway, the new Mogambo cartoon is a delightful series of similar vignettes, starting with a woman at the grocery store checkout counter paying with a credit card, and then, in successive panels, to City Hall paying with a credit card, to the county paying with a credit card, to the state paying with a credit card, and finally to Congress paying with a credit card, all saying the same thing: "Goodness me! I don't know how we are going to make the minimum payment on the credit card this month!"

-- The Labor Department said that the U.S. April trade deficit widened 2.5% to $63.4 billion. The prices of imported goods was up 1.6 percent for the month. The month!

This increase came on the heels of a 2.1% surge in April. MarketWatch.com took a look at the report and noted that excluding all fuels, import prices rose 0.7% last month. Non-agricultural exports rose 0.6%. Export prices were up 3.4% in the past year. Prices for imported food rose 1.3% in May. Anywhere you look, inflation is rising.

-- Richard T. Williams reports that "Of the mortgages written in the last year, approximately worth $3 trillion, upwards of 29% have no equity in their homes. For almost a third of recent mortgages to be underwater suggests that potentially well over $1 trillion worth of homes could come to market as homeowners turn in the keys to banks and walk away from their failed investments."

This must not come as big news to the DailyReckoning.com folks, as they report "the housing bubble is over. Mortgage activity is at a four-year low. Nationwide, foreclosures rose 75% during the first quarter, over a year ago."

Miko reports from Florida's south central west coast that one big builder has had sales drop 97% from the same period a year ago, and another has had "A 100% decrease in sales."

-- If you want another reason to be bullish about silver, then Ted Butler's essay at Investment Rarities.com is what you should read. He first starts of with the snide remark, "CFTC doesn't even bother to analyze the data it monitors and publishes", and then seamlessly goes on to say "According to the COT, for positions as of May 30, 2006, the 4 or less large traders in COMEX silver have a net short position that is more concentrated than at any time in history." I can sense that you are salivating at the potent of a short squeeze. Me, too! I make a note to myself on my saliva-soaked notebook, "Buy more silver!"

Mr. Butler is obviously repelled at all this salivating, what with dribbling down my chin and all. So he quickly goes on "It is far more lopsided in concentrated shorts compared to concentrated longs than any other major market. This short position is not only 3.5 times greater than the concentrated net position of the 4 or less largest long traders, it is also more concentrated and larger than any position held by the Hunt Brothers in the great silver manipulation of 1980. In the silver market, the concentrated short position towers over the concentrated long position to an extent not found anywhere."

"An extent not found anywhere." Oops! More salivating! I wipe my chin with my sleeve and underline my "Buy more silver!" note as Mr. Butler goes on to say "The actual numbers state that the 4 or less largest traders are net short the equivalent of 181,584,000 ounces, while the 4 or less largest traders are net long 52,506,000 ounces. To put this short amount into perspective, it is more than is produced annually on the largest silver producing continent, North America (Mexico, US and Canada). It's larger than the combined total holdings in the COMEX warehouses and the silver ETF (SLV)."

How to sum up? He does it easily when he says "The concentrated net short position is staggering in size."

And speaking of silver, alert reader CBIP sent the news that "The 2006 Silver Survey claims that at the end of 2005 worldwide silver bullion stocks (government, COMEX, European traders, etc.) were approximately 600 million ounces. The CFTC data indicates that the largest four (or less) traders currently have a net short position of 187 million ounces, equal to more than 30% of all the silver bullion that exists in the entire world!!" Note the use of the rare double exclamation point!

He writes "Four (or less) traders short an amount equal to nearly 1/3 of the bullion that exists in the entire world, possibly a naked short, and the CFTC has let this situation develop under their very noses. Spooky, eh?" he asks.

-- From Bloomberg we learn "Corn prices may gain for a third week and soybeans may reach a six-month high on speculation that hot, dry Midwest weather will damage the two biggest U.S. crops. Fields from southern Texas to Iowa got about half the normal precipitation over the last six months, creating soil conditions ranging from abnormally dry to extreme drought."

It seems like it was just a few months ago that I reported that in the warm El Nino/La Nina region of water off the Pacific coast was not only (if memory serves) larger and warmer than at any time in the last, oh, zillion years or so, but it has appeared earlier in the year than it ever has before, too. The lesson was that the rain patterns were going to be disrupted to the extent that it will rain where it normally does not rain, and it will not rain where it normally rains. And, if I understand it correctly, most farmers plant their crops where it normally rains.

Perhaps all this has something to do with Jeff Wilson, writing at Bloomberg.com, reporting that the government said "The U.S. winter-wheat crop will be 4.5 percent smaller than forecast in May as unusually hot, dry weather last month from Texas to South Dakota damaged the crop."

BusinessWeek.com reports that the Agriculture Department revised its Kansas winter wheat estimate to 291.4 million bushels, 23% less than last year, and that about 50% of the state's wheat is in poor condition, 30% in "fair" condition. 18% was "good' and 2% was "excellent" shape.

As a nation, the Agriculture Department revised their winter wheat estimate to be 1.26 billion bushels, a whopping 16% less than last year.

George Kleinman, the Editor of Commodities Trends, writes "Due to bone-dry growing conditions in the Great Plains this spring, the hard winter wheat crop was a disaster--the second-smallest yield in 30 years. Texas and Oklahoma combined will produce their smallest wheat crop in 50 years. And wheat production on a global basis is slated to fall sharply in the coming 12 months."

And with China and India, a third of the world's population, getting bigger, and whose middle classes are getting bigger, and whose economies are getting bigger, and who will all want to consume commodities, do you still wonder why I am bullish on commodities?

And it is not just me, either! The famous Jim Rogers says "Most commodities now are somewhere between 80% and 90% below their all-time high, especially adjusted for inflation."

-- Many people wrote to say that last week the stupid MoGu contained a figure for the weight/volume (mass) of silver that used 16 ounces to the pound, and not the 12 troy ounces. My point was that it was about mass (weight and volume). So 16 to the pound or 12 to the pound, it is still a pound.

But that was not good enough for the pickier Mogambo larva (PML) among you. To address these concerns, I use the note sent to me from Alert reader Mike A, as his was one of the few whose email did not address me as "moron" or "defendant."

He writes "Just wanted to give a quick correction with regards to troy vs avoirdupois measurements. A troy pound is 5760 grains (about 373.24 g), while an avoirdupois pound is 7000 grains (about 453.59 g), so one troy oz = 31.103477 grams. With the density of silver being 10.49 g/cm^3, this means a cubic foot of silver would be 297045.5 g which when divided by 31.103477g = 9550.23 troy ounces. At 13 bucks a shot, that's 124,153 bucks a block."

-- If you have any doubts that idiots infest the world of investments, then a headline from Bloomberg ought to dispel them. "Treasuries Rise as Investors Seek Haven While Rates Increase" it read. Hahahaha! Bond prices go down when rates increase, and yet these morons are going to buy Treasuries as a "haven"? Hahaha!

-- One of the peculiar things about anti-psychotic drugs is called Metabolic Syndrome. What happens is that there are a couple of long-term ugly side effects, the first of which is steadily-increasing obesity, which leads to diabetes and obesity-related problems, and the other side effect is steadily-increasing elevated triglycerides and cholesterol, which leads to cardiac disease, high blood pressure, and the tripling of the risk of strokes and coronary heart disease.

So the tradeoff is to choose between taming schizophrenia, or having a heart attack while you are on your way to have the last bit of your legs amputated. Interesting choice!

Anyway, this whole unpleasant business is a Mogambo Medical Metaphor (MMM) for the actions of the Federal Reserve, which is always administering "medicine" to the warped, bizarre monetary schizophrenic idiocy of Americans.

Sure, with the constant administration of the "medicine" of lower interest rates, new debt and new money, the Fed "cures" a slow economy temporarily. But the Metabolic Syndrome of it is that you get a bloated, fat-clogged, diabetic basket-case that needs constant injections of more monetary medicine, and an early death.

-- Bill Bonner of DailyReckoning.com conjures up the excesses of the French Revolution when he writes "When the lumps figure out what has happened to them, they are likely to have revenge on their minds...and a rope in their hands." And truer words were never spoken, as history is completely devoid of any example of bankrupted, destitute, desperate people NOT taking violent action against somebody or something.

-- Remember how Bernanke was saying that inflation in "non-market" costs were not included in inflation? Well, I was at a little shop here recently, and I noticed a sign that read "We no longer accept credit cards or debit cards." I was kind of surprised, and asked the owner about it. "Does this mean you will take only cash or checks?" I casually remarked, and he said "Yes."

And so, curious, I asked the next obvious question, "What are you, some kind of idiot or something?" He answered "No, you rude, creepy bastard. Most of my sales are for small amounts of cash anyway." Eager to ask him another question and noting his British accent, I queried "Then why don't you accept credit cards, you stupid Limey trash?"

He reached under the counter, took out his latest statement from the people who process his credit card and debit card transactions, and shoved it into my face, saying "Because the fees are so high I lose money with every sale, you despicable American bit of stinking dog crap."

Taking the statement in hand, I see that since he stopped taking credit and debit cards he has accrued $162.51 in credit/debit sales, and for that he paid a total $42.94 in fees and charges. There were a total of six mysterious fees, which are batch closure fee, authorization fee, settlement statement fee, credit batch settlement fee, customer service fee, a mc/visa minimum fee, plus a 2.2% "service charge" on the total amount of each sale! This works out to 26.4% of gross sales!

But his gross profit on each sale only ranges from 6-20%! So if he sells an item where his gross markup is only 6%, then if he accepts a credit card in payment, he will lose 20.4% on each sale! His best-case scenario is if he sells, on credit, an item with a 20% markup, because he only loses 6.4% for each one of those he sells!

This prompts the Mogambo Essay Question Of The Day (MEQOTD): "How long do you stay in business if you lose money every time you make a sale?" You will get extra credit if you can possibly work "Make it up on volume" into your answer and somehow make it funny again.

And you want to hear something else? You know those credit cards where they give you, the card holder, "up to 5% cash back" for each time you use the credit card? Well, guess what? They charge the 5% cash back to the retailer!

And, in the real world, just to keep from going bankrupt the retailer has to start charging higher prices, which we common, scumbag, hateful little Mogambo-type people (CSHLM-TP) immediately recognize as price inflation. The thing that has always destroyed currencies, people, economies and countries.

Suddenly, I throw back my head and laugh demonically, startling everyone in the store, my loud, obnoxious voice eerily echoing as if resounding from the depths of hell. "Welcome to the ugliness of price inflation, you stupid earthlings! Price inflation! Hahahaha! The inevitable consequence of monetary inflation by the Federal Reserve! And what inevitably follows price inflation is a horror that only befits a country so foolish, so insane, so deliberately stupid, so typically American as to disregard its own Constitutional requirement that money be only of silver and gold! Hahahaha!"

And as I walked out, he was screaming at me "And next time, I want to see a green card!"

Tony Straka on his PrudentInvestor.blogspot.com site has juxtaposed two quotes. "EXCERPT FROM THE US CONSTITUTION, Article I, section 10: No State shall ... coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts." And the other contrasting quote posted right under it was "FROM THE US TREASURY WEBSITE: 'Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything. The notes have no value for themselves, but for what they will buy.'" Ugh.

****Mogambo sez: To all of those whose selling made the price of gold and silver fall, I send a Hearty Mogambo Thank You (HMTY)! Now those whose education is more extensive, and can thus see the folly in selling, can buy those metals at bargain prices! HMTY!



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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