This article originally appeared at The Daily Reckoning.
-- I creep out from behind the couch and nervously peek between the tightly-drawn curtains in the living room. I darkly note that, ominously, things are getting really spooky out there, and I am not a happy dude when I am spooked. Dangerous and homicidal maybe, but not happy. Perhaps even a marked tendency towards loud, hysterical outrage, but definitely not happy.
For instance, how about the spookiness of almost no increase in Total Fed Credit last week? $1.1 billion was almost nothing! Even Currency in Circulation is holding steady.
Of course, we can always count on foreign central banks, which put another $4.6 billion into increasing the clotted hoard of over-priced, low-yielding American government and agency debt in their custodial accounts at the Fed. As an aside, I hear that if you stand downwind of the Federal Reserve, you can actually smell the stench.
But even all that foreign central bank stuff may be coming to an end very soon, as we read on Bloomberg.com that "Bank of Japan Governor Toshihiko Fukui said Japan needs to adjust rates from near zero percent 'without delay' to prevent companies from investing excessively and the economy from overheating."
So this is getting to be serious business here, because new money has to always (homework assignment: Underline the word "always" and meditate on its significance) be coming from somewhere, more and more all the time, as that is the whole point of a Ponzi finance scheme. It's the only thing that makes it work: You either come up with more money, always, all the time, forever, or prices of some things go down. Or the prices of most things go down. Or the prices of all things go down. I dunno; I never was good at multiple-choice questions, and I am not going to try and answer this one, either.
But the world's governments and central banks are deathly afraid that the Ponzi-finance schemes that produced the bubbles in stocks, bonds and real estate will go bust, as all Ponzi schemes do. It's not that they feel bad for you (because believe me when I tell you that the government does not give a rat's patootie about you), but because the governments have their OWN outrageous Ponzi-schemes, such as Medicare, Social Security and myriad other welfare/transfer/government programs. Not to mention all the graft and corruption. Perhaps that is why Sprott Asset Management says "Nary has a crash ever occurred in these areas without the central banks turning on the spigots. We highly doubt it will be any different this time."
So, these things WILL go down in price unless, unless, unless more money gets created (by the simple expedient of somebody going deeper into debt) to buy out the current owners of those assets, handing them a profit that is taxable. It's that simple.
One thing I am very, very, VERY sure about, though, is that gold and silver will be fabulous assets that will undergo a huge inflation in price. Another thing that I am sure about is that one day in the not-too-distant future, your grandchildren, with the advantage of 20/20 hindsight, will be able to prove that in 2006, with gold and silver selling at less than $700 an ounce and $13 an ounce respectively, precious metals were the Mogambo Freaking Bargain Of The Century (MFBOTC), and your grandchildren will laugh at you ("Hahaha!") because you did not buy gold and silver then, proving that you were so stupid that whereas even newborn babies can see that the MGBOTC was right in front of your damned eyes the whole time, you, perversely, kept all your money (and even put more money!) into the Ponzi stock market, and the Ponzi bond market, and the Ponzi government economy, and the Ponzi real estate market! Hahahaha! Now you are forced to eat weeds and bugs because all of your money is gone and the song was right; "Nobody loves you when you're down and out.".
Don't think it can happen? Well, pull up a chair and let me tell you about Zimbabwe, the most grossly, insanely-mismanaged economy in the history of the world; they confiscated the assets of the only profitable businesses in the country and they printed money. For perspective, a decade ago the Zimbabwe dollar was roughly equal to the U.S. dollar.
Anyway, according to a woman known only as Cathy, who actually lives in Zimbabwe and gets paid in Zimbabwe dollars, "Petrol was 260 thousand dollars a litre three weeks ago. Last week it rose to 360 thousand a litre and this week it galloped to 500 thousand dollars a litre and then disappeared altogether." Disappeared!
I am thinking to myself "Big deal! Not being able to afford gasoline just means that you have to send your whining wife and/or kids walking to the store to buy bread, frozen pizza, and some of those little chocolate donuts that I love so, so much and too, too much to share with hateful, ungrateful family members."
But perhaps I was too hasty, and there is more to this than meets the eye! Sure enough, she goes on to write "In complete contrast to the realities of four-figure inflation, this week a dramatic crisis arose with bread. Bakers put the price up, the government ordered them to put it back down. At the price stipulated by government, bakers said they were operating at a loss and putting twenty thousand jobs at risk." What to do? Well, in their own defense, the "Bakers took out a full page advert in the press detailing the increases of everything from flour and yeast to wages, packaging and delivery."
The result? Hahaha! The same in Zimbabwe as everywhere else, my darling Mogambo cherub (DMC)! For instance, our own American government calculates that there is almost no inflation, and so price increases are, therefore, proof of price gouging, for which you can be fined and sent to prison! She says almost the same thing about the comparable idiocy of the Zimbabwe government when she writes "The government refused to allow the price increases and called in the police. In a week over 280 bakers and shop assistants have been fined for overcharging."
Now that we have the predictable government response out of the way, let's now turn our attention to the predictable economic response. She writes "As the bread war continued all week, the obvious happened, and fewer and fewer shops had bread on their shelves as less and less loaves were baked." It disappeared, just like the gasoline that disappeared! This is proof- proof! -of a Martian invasion to take our resources and women back to Mars with them on their flying saucers!
It is strange that she doesn't even mention this manifest Martian menace, but instead she summarizes it as "It has been an absurd but now familiar case of denial by the government." At this, I laugh! I say "Welcome to the club, lady!" All of this is no less absurd, and no less familiar, as the denial and suppression by our own American government, the irresponsible American press, the calumny of the mainstream universities, and the horrid, insane Federal Reserve about our monetary and price inflations, which differ from Zimbabwe only in degree. Only in degree!
But this is not about how Zimbabweans can't afford bread and are now forced to eat weeds and bugs. Instead, the point I was painfully belaboring is that since all of the money and assets in America are now debt ("putting equity to work!"), and since interest rates are still hovering around the lowest in history and thus destined to rise significantly, that this lack of increase in Total Fed Credit is frightening, sort of like when I came down to breakfast and my wife is standing there wearing a hockey mask and holding a chainsaw. As she yanks the handle, cranking it to roaring life, she lunges at me with it, screaming "You're going down, you sick bastard!" and my daughter is yelling encouragement "Get him, mom!"
But I'm not here to talk about Father's Day this year. The point is that this lack of new credit is THAT kind of spooky: It leaves an impression on you!
Perhaps we should, instead, listen to the calm, steady and rational voice of Hans Sennholz, who says "As soon as goods prices and wage rates begin to rise, businessmen need additional funds. As long as the Fed provides them, the boom can continue and even accelerate. It comes to an end when the Fed ceases to throw new funds on the loan market or the quantity launched no longer suffices to feed the boom. At that time, the readjustment, that is, the recession, begins."
And I assume that it will manifested as described by the folks at DailyReckoning.com, who write "The feds spared the nation a serious correction in 2001. But they did it at the expense of America's working classes, who were lured deep into debt in order to keep spending. Now that rates are rising, they find it impossible to continue."
If I was writing that, I would have finished the sentence"...they find it impossible to continue" with "eating real food, and they had to eat weeds and bugs, and they lived in their cars, and then the government turned this excess population of weed eaters and bug suckers into Soylent Green, a nutritious food supplement that we used to buy oil."
Anyway, this is actually about how most assets will deflate in price, and there will be a simultaneous inflation in some other asset. Choose wrong, and your living standards fall to the point where you are, again, eating weeds and bugs, but choose correctly and you can do anything you want to do and strut around like you own the place because you probably do. And if not, you can hire so many lawyers that you can destroy anybody who says you don't or can't.
Putting words into the mouth of Captain Hook, of TreasureChests.info, I note that economic history is always boom-bust, therefore it is cyclic, and it therefore it always repeats itself. He writes "we would like to point out that like Rome, where it was not outside forces that finally caused its demise, but the rot from within, sooner or later price managers / bankers / politicos will have wrung as much speculation out of the current population as possible, and stock markets (most equities) will ultimately collapse in price."
-- Bloomberg reports that the Conference Board announced that their Leading Economic Indicator fell in May, registering a goodly-sized drop from 138.9 to 137.9. Keep it in mind that this is known as their "leading indicator" because it tends to anticipate future business activity, generally agreed as three, to six, to (sometimes) nine months or so into the future.
Seven of the leading index's ten indicators "are known before the report is released: jobless claims, consumer expectations, the yield curve, building permits, stock prices, supplier delivery times and factory hours." The three missing ones are the measures for money supply adjusted for inflation, new orders for consumer goods and business equipment. The Conference Board overcomes this serious obstacle by estimating them.
But the sudden lack of growth in M2, reflected in the lack of growth in Total Fed Credit, is reflected in their lowering their estimate of the "money supply adjusted for inflation". This is an important component, as it is "the component with the greatest weighting in the leading economic indicators index." Even so, this stagnation in the money supply subtracted just a teensy, weensy, tiny amount (0.14%) from the leading index.
Saying goodbye to the leading indicator, Bloomberg went on to say "The Conference Board's index of coincident indicators, a gauge of current economic activity, rose 0.1 percent in May after rising 0.2 percent in April. The index tracks payrolls, incomes, sales and projections." Note that they make sure that you understand that this is a measure of what is happening right now.
Oddly, this contrasts slightly with a new report from the Census Bureau, which announced that "New orders for manufactured durable goods in May decreased $0.6 billion or 0.3 percent to $208.7 billion. This is the second consecutive monthly decrease and follows a 4.7 percent April decrease."
Bllomberg.com is not quite so explanatory when it comes to the lagging indicator. Instead, we must turn to The Mogambo Guide To The Indicators (TMGTTI), where we learn that that "The Lagging Indicator is essentially a measure of inflation and inflationary pressures." Bloomberg does add, helpfully, that the lagging index "measures business lending, length of unemployment, services prices and ratios of labor costs, inventories and consumer credit", so you can kind of figure it out for yourself The important thing is that the lagging indicator, this indicator of inflation, "rose 0.2 percent for a third month."
-- If I take a look at the chart of the yield for US Treasury Bonds, I open one bleary eye and casually note that beginning in 1981, just after Volcker finished raising interest rates to cripplingly high levels to combat inflation, yields have been falling in a nice little zig-zaggy channel ever since. The interesting things is that every time the yield declined to the bottom of the interest-rate channel, there was an immediate spike, usually up to the top of the channel (or soon thereafter). Then it meanders down, slowly, month after month. Over the next two, or three, or five, or seven or so years of this slow, fitful decline in interest rates, yields would one day again hit the bottom of the channel before immediately rallying.
This means to me that a lot, and I mean a LOT, of people use charts and technical analysis to time their entries and exits. It's too supernatural and spooky otherwise.
I bring this up because this time rates did NOT touch the lower end of the channel before hitting new highs! It looks like they only dropped to halfway down the channel! And then, and then, and then, building and building and building the suspense until you want to scream, and then interest rates bounced up, and out, of the channel, penetrating the upper boundary of the channel!
If you know anything at all about charts, then you are saying to yourself "Hey! This Mogambo idiot is right! This is big stuff! Maybe I was being a little too rough on him when I said he was a worthless, know-nothing, stinking, low-life moron!" Ordinarily, I would try and find something in that rude description to disagree with, but I am too shook up about interest rates penetrating-the-upper-channel-boundary thing. And as a guy who is already very paranoid, scared and edgy, my Keen Mogambo Senses (KMS) are acutely attuned, nervous and rat-like in nature, to anything that is suddenly different in the environment, as it usually signals danger. Danger, I tells ya!
And if you think that rising interest rates are not dangerous, then prepare for an important lesson in economics!
-- I love the way Ahmed Amr, editor of NileMedia.com, sums up our uniquely Federal Reserve/mainstream-university economics and monetary policy idiocy when he says "We have become a currency exporting economy -- a new economic phenomenon that undermines every economic theory postulated since Adam Smith." Hahaha! Exactly!
-- Alert reader Jeffery K. sent an advertisement for a satirical Ben Bernanke Action Figure, which shows a bearded plastic doll sitting in a yellow plastic helicopter, throwing hundred-dollar bills out into the air. "Now YOU can drop money out of a helicopter!!" the package triumphantly declares in big, bold letters.
The funniest part was the legal disclaimer at the bottom, in tiny print: "Warning: cannot really prevent a severe recession." Hahahaha! Excellent!
-- Tony Cherniawski of The Practical Investor newsletter cites an article in Today's CNNMoney that states "Hedge fund transactions now make up 30 percent of all trades in the nation's stock exchanges, and they can have a major impact on the markets. The funds control an estimated $1.2 trillion in assets, according to the report."
He asks the burning question "Could it be that a few too many hedge funds are caught on the wrong side of their trades?" Without even waiting for me to hazard a guess, he immediately goes on to say "Next week will tell, since most hedge funds must provide their investors a liquidity option at the end of every quarter. Since things are not going well for the markets, those exercising their options may cause what is known as a 'crowded trade.' As the Wall Street Journal puts it in yesterday's article, 'Hedge funds are vulnerable to 'runs on the bank,' where investors worried about their investments demand (too many) withdrawals all at once. Thus, a string of difficulties in the market can quickly evolve into a crisis for a hedge fund as managers sell more and more losing investment positions to satisfy those seeking to withdraw their money.'"
-- I have always maintained that investing in the stock market, over the long term, is a net-loss game, and it should never be considered a part of saving for retirement. And I say this because the stock market must be, in the long run, a net-loss to the average investor. How could it NOT be? Where did the money come from to pay Wall Street hustlers trillions of dollars, and also pay all the people who heretofore "made money" from this type of investing, if not from you and me and other investors? And it actually DOES come from you and me and other investors, as the clever Bill Bonner at DailyReckoning.com puts it, "In order for markets to function as they do, most investors must be wrong most of the time."
The majority of funds (12,678) tracked, summarized by Lipper as "All Equity Funds", averaged 0.83% gain this year! Hahaha! Less than one percent! When inflation is running at 4.5%! Hahahaha! Chumps!
But it is not all bad news, of course. Even after all the supposed "carnage" in the gold market, so you hear, the latest Lipper averages show that gold-oriented mutual funds are actually up 13.21% since January 1. This glittering performance is beating the living snot out of almost every other category of funds, almost all of which are seriously lagging inflation.
The exception was, of course, China-oriented funds, which are up 15.48%.
With a little longer view, being the sneaky little creep that I am, I take the words of George Ure, of URbanSurvival.com and twist them to my advantage, and thus having him saying the exact same thing when he reports "Consider that the Dow closed this week at 10,989. You could have purchased the Dow on May 7th, 1999 for 11,031. In other words, you could have made an investment in the Dow 7-years ago, held it as so many 'advisors' have told you, and you would have lost money."
I rudely interrupt to note that this is nominal gains, too! When you adjust for the huge devaluation of the dollar in that time (inflation), it was a net-loss! Just like I said!
But Mr. Ure sneers at me in contempt for my rude interruption, and concludes, independently, that "Thanks to incipient inflation, your Dow today would need to be 13,408.76 - just to have kept even with inflation."
The class laughs at me because Mr. Ure's sneered at me. The ice broken, he continues "In fact buying the Dow in April of 1998 would just break even with inflation - and 8 year ride for - nothing - on an inflation adjusted basis using the government's figures - which as I've pointed out (I don't know how many times) under-report real experiences of price inflation."
As an aside, I included this little "investing in the stock market as a retirement plan" nugget in my latest regular report to the High Command for this sector of the galaxy. Apparently, it was a big hit around the universe, as it was forwarded like a virus around the 'net, and I started getting tons of email that went "Hahaha! Making a profit by investing for the long term? Hahaha! And earth creatures actually believe that silly crap? Hahahaha!"
Anyway, the point is that this has spurred a lot of economic activity in the intergalactic travel industry, as creatures from all over the cosmos now want to come and see you puny Earthlings believing these things, and maybe get some nice pictures of you actually investing your retirement money in the stock market. They are snapping up intergalactic travel packages and renting flying saucers like crazy! It's a boom!
-- For anyone who still thinks that ethanol or hydrogen will solve the energy crisis, I cleverly hide my laughter by unexpectedly stuffing a whole taco into my mouth with one hand. With the other hand, I direct your attention to Robert Rapier, of R-Squared Blogspot, who reports that "a barrel of ethanol contains approximately 3.5 million BTUs, and a barrel of oil contains approximately 6 million BTUs." So, using Advanced Mogambo Mathematics (AMM), I quickly calculate that you will need to use almost twice as many units of ethanol to produce the same work and one unit of oil! And when you consider the energy necessary to produce ethanol from seeds, to plants, to harvest, to process- whew! -what a loser!
And while I do not have the figures for hydrogen, I am sure that they are a LOT lower than that, as at least ethanol contains powerful carbon-carbon bonds like oil, so that when you break the bonds you get a lot of energy. Hydrogen merely combines with itself and oxygen in a low-yield way. Big deal.
And the energy available from solar power, in total BTUs per square foot, is actually miniscule to the point where the energy used to manufacture solar cells is more than you will ever get back out from the solar cell as usable energy.
There are no easy, pleasant ways to correct monetary problems, nor the problem of energy over-usage and dependence, and it always comes back to the maxim "There ain't no such thing as a free lunch." Ugh.
****Mogambo sez: You can almost smell the fear in the gold and silver shorts, as more and more people are waking up to the fact, without elaboration, that every time in the entire course of history that a government committed these kinds of monetary sins, it was gold and silver that saved the day for those wise enough to buy and hold them. And it was curtains for everyone else.
And the pertinent lesson is not just that the people who bought gold and silver prospered, but that the people who bought early in the cycle made the most money when gold and silver rose.