This article originally appeared at The Daily Reckoning.
-- My hands were shaking as I looked for the latest report of Federal Reserve data, especially Total Fed Credit. This is always an awkward moment for me, as I know that I am going to hate the news, no matter what it is. And my family hates it, too, and that is why they lock themselves in the bathroom in anxious anticipation of this very moment.
If Total Fed Credit is up, then I am angry that the Fed is creating more inflationary credit in the banks. If Total Fed Credit is down, on the other hand, I am not happy either, since this means that credit is NOT being created, which means more money won't be created, which is (as we professional economists refer to it in our scholarly research papers), The Big Freaking Bloodthirsty Horseman Of The Economic Apocalypse (TBFBHOTEA) when you are operating (as we do) a Ponzi economy (financed by inflation in money, prices and debt) and a Ponzi system of governments (financed by increasing debt, size, taxes and spending), based on a derivative currency (electronic digits) that is, in itself, based on a mere fiat/paper currency, with a banking system that allows itself an infinitely low reserve ratio (zero retained cash on hand as reserves against additional deposits or loans).
This brings up the embarrassing fact that in last week's exciting issue of the Mogambo Guru, I made a Big Mogambo Mistake (BMM) as was tactfully pointed out by several readers, which was (as embarrassing as it was), actually a delightful change of pace from the usual emails from readers (e.g. "You're stupid! I hate you!").
Well, what was this big mistake? I inadvertently used figures for loans and deposits of NY banks, and not the total for US banks. The real figures, in December 1996, are bank credit was $2,769 billion, and savings was $2,214 billion. Now, in the here-and-now, July 2006, loans and leases are $5,738 billion and savings is $5,457 billion.
The interesting thing, which was (and is) the whole point, is that also in December 1996, Required Reserves were $48,935 million. Today, ten years later, and with twice as much loans and twice as much deposits in the banks, Required Reserves are only $44,139 million, down about five billion bucks!
This means that every dime of debt and money created by the banks for the last ten years was literally created out of thin air, as there is no fractional-reserve backing (in cash) as a rainy-day fund for one thin dime's worth of the doubling of loans created, or the liability created by doubling of deposits! Zero reserves! In fact, reserves are about 10% less than they were ten years ago!
But this is not about how I make mistakes due to chronic laziness, inattention to details or slovenly work habits, but about Total Fed Credit and how it creates the credit, which creates the debt, which creates the money, that creates the bubbles. And not only bubbles, but actual spending cash, as we learn from Stephen Church of Piscatasquaresearch.com in his essay at PrudentBear.com entitled "Consumer Crunch Update". He writes that "The latest 2005 economic statistics show that consumers depended on new debt for more than 90% of their cash flow during 2005. Most new consumer cash flow now comes from new debt."
Intrigued, I urge him to go on, which he does by saying "Consumer liquidity has resumed its downward trend. Liquidity has fallen to 3 weeks of funds on our preferred measure. Consumer money supply now flows backward."
I'm thinking to myself, "Hmmm! I wonder what this 'money supply now flows backward' thing means? And, more importantly, will I have to do actual work to find out?" Luckily, he immediately went on to explain "Historically, household incomes were sufficient to generate a cash surplus after consumption and debt service. Now, households have a large cash deficit."
But I have stalled looking at Total Fed Credit long enough that, out of the corner of my eye, I can see that my wife and family are timidly peeking around the bathroom door, wondering if it is safe to come out. With a chuckle I fire off a couple of quick shots from my .45 ACP out through the window. They immediately duck back inside, slamming and locking the door, and I can hear them praying to Jesus to protect them. That ought to hold them for another twenty minutes or so.
So imagine my conflicting emotions upon seeing that Total Fed Credit was actually DOWN by $1.1 billion last week. I look at the chart. I note that in 2000, Total Fed Credit, astonishingly, also stopping growing, admittedly for a little longer time than this. But it caused the stock market to crash, and the S&P500 lost about half its value over the next couple of years. And there have been a couple of other short times since 2000 when Total Fed Credit stopped growing, and the stock market was not pleased, but it did not actually crash. Mostly because, I assume, all the other central banks and "investors" were taking up the slack
But things are a lot different now, and there is a growing consensus that global liquidity may be drying up, just like it seems to be doing in our own Federal Reserve.
So, if you have forgotten The Infallible Mogambo Market Indicator (TIMMI), it is that if Total Fed Credit is going up and keeps going up, then stocks and the economy will go up. If Total Fed Credit is not going up and keeps not going up, then stocks will not go up. They will, instead, go down, just like everything else when money is withdrawn from any overheated, highly inflated, grossly overvalued, monstrously over-indebted market.
Now combine that Classic Mogambo Sign (CMS) with the dismal fact that the Fed only bought up a miniscule $52 million in government debt last week. And then combine that with the ugly fact that foreign central banks only put a stinking, piddly $830 million into buying more U.S. government and agency debt.
Money is suddenly disappearing, and this is not good for stock prices, or housing prices, or my wife's natural homicidal belligerence towards me when she realizes that some of her money has, likewise, disappeared from her purse because she stupidly left it unguarded on the hall table. I mean, I was just standing there. I see the purse. I see she is nowhere around. I notice that neither she nor my tattletale daughter can see me. I have no impulse control. So who is the REAL victim here?
But this is not about what my wife believes versus what she can prove, but about how the lack of new money means that the Ponzi stock market, and the Ponzi bond market, and the Ponzi real estate market, and the Ponzi government program market are going to be too, too, too starved for funds to continue rising in price.
Except gold, which will soar when people (by which I mean those whose retirement funds were stupidly entrusted to these markets) will be panicky and desperate to make up for their losses as they realize that all their other stupidly-inflated stock assets, and stupidly-inflated bond assets, and stupidly-inflated real estate assets are almost all destined to fall mightily in price from their current hugely inflated prices.
And everyone will look around for someplace safe to put their money, and they will eventually look at gold and silver, and they will discover, just as all other people have discovered through time and space, that there is no other asset that has ever performed like previous metals, or even close.
Soon, gold and silver are rising, rising, rising because all the rich and smart people are cashing out of stocks, out of bonds and out of real estate to buy gold and silver, making the price rise and rise, month after month, year after year.
And as we slower, intellectually-impaired, low-level, gutter Mogambo-type trash (if you know even who The Mogambo is, that is you) will also look around for someplace, anywhere, anything, to make a lot of money fast, because nobody is hiring. Agonizingly slowly, we real morons out here accidentally get sober enough to realize that we have watched other people constantly making big profits in gold and silver, and now we want in, too. The rush will become a stampede, as the stories of the fortunes made in gold and silver will fill the newspapers, airwaves, newsletters and popular magazines.
And that, my Adorable Mogambo Darling (AMD), is how gold and silver will have a spectacular bull run, and that's why you should buy gold and silver now.
-- In some comical mix up at the offices of the people organizing the July 25-28 Agora Financial Wealth Symposium in Vancouver, I have accidentally been invited to speak at this year's gathering.
If they don't discover and rectify the mistake (which I expect momentarily), I will be speaking at the beginning of the event, on the first day (July 25), which probably means that I will also be charged with handing out nametags to each new arrival (which I will have already filled out to read "Hello! My name is: Smell My Butt") and emptying the spittoons or something.
-- To show you how clueless The Federal Reserve is, the statement released with the latest change in interest rates read "the moderation in the growth of aggregate demand should help to limit inflation pressures over time." Huh? Do these halfwit Federal Reserve twits actually think that the USA is the only engine of growth in the world? Hahaha! While there will certainly be a "moderation" in aggregate demand in the United States, there are many, many, many people in China and India alone who do not have an upscale diet, and a washing machine, and a television, and a microwave, and a computer, and a car, and a central air and heat, and a jet ski, and lots of disposable income, and all of that fun, fun stuff you can buy with money and credit.
But the Fed thinks that their increasing the Fed Funds rate by a quarter-point is going to moderate that kind of overwhelming, new, long-term demand? I laugh in contempt: "Hahahaha!", which is different from a mere chortle of contempt, in that I usually cough more.
-- Perhaps if I use a definition sent by reader KO B., you will comprehend the horror of inflation. "Inflation: Cutting money in half without damaging the paper." Exactly!
Now that you are properly primed, Bloomberg notes that the Commerce Department reported "The three-month rate of increase in the department's gauge of inflation, a measure closely watched by the Fed, matched the biggest in a decade."
Hahaha! Inflation is out of the Fed's "preferred range" only when it is higher than any time in the last ten years? Hahaha!
Reuters, on the other hand, had a slightly different take on it. "U.S. Treasury debt prices pared losses on Friday after May core personal consumption expenditures data came in near expectations, soothing fears of rising inflation." Hahaha! It's the highest inflation in ten years, but this is soothing to the bond market? Hahaha! What idiots bond buyers must be!
So what was the new figure for inflation as measured by the "personal consumption expenditure price index"? You are going to love this: It increased 0.4% in May! Almost five percent annual inflation- and rising! -is "soothing" to a bunch of bondholding idiots who are witlessly locking their money up, for up to 30 years, by buying bonds that yield less than the rate of inflation? Hahaha! And yielding a lot less than the Fed Funds rate, too! Hahaha! So, the next time you see a guy buying bonds, ask him "Hey! How stupid can you get and still wear lace-up shoes?"
Doug Noland, who writes the terrific Credit Bubble Bulletin at PrudentBear.com, refers to a Bloomberg news report with “What started as another winning year for corporate bonds is now a disaster. Investors lost money on everything."
The genius of bond buyers is further reflected in the statistics of Merrill Lynch, which is that "Bonds sold by companies lost 1.3 percent on average this year, including interest payments, the worst since at least 1998." And that is just nominal losses, as the bonds went down in price due to the increasing interest rates. When you add in the losses due to the devaluation of the money, bondholders are taking huge losses! What morons!
So why are interest rates so low? Part of the reason is that the government is frantic about keeping interest rates low, as they cannot afford to have interest rates go up, as we learn from Ned Davis, of Ned Davis Research, who notes that "In the last year the federal government is paying 21% more in net interest than it did a year ago." And it is destined to get worse and worse, as he goes on to say "They have to keep rolling it over and are running deficits on top of that."
He obviously realized that that was horrible and scary enough, so he thoughtfully did not go on to say that this same, sorry, stinking situation is pandemic; almost all the states, counties, cities and people in them are in the same boat! The exact same, sorry, stinking boat!
Perhaps this is why Mr. Davis then says "That tends to be more deflationary than not" as I will prove pretty soon as I, too, am going to be desperately selling assets ("Buy my stocks! Buy my bonds! Buy my house! Buy my children! Make me an offer!"), only to learn that the going price for children hardly makes it worth the effort to have them in the first place; last year they were valuable sweatshop labor. This year, nothing! That's the horror of deflation!
In a related vein, the Chicago purchasing managers index fell to 56.5% in June from 61.5 in May. The scale is figured so that a reading over 50 indicates growth. But I am not sure if an 8% fall in the numbers indicates an 8% fall in growth. But this may be connected with WalMart and GM reporting that sales were bad in June, and the Conference Board's Help Wanted Index was falling.
But I don't have time to think about it, as the alarming surprise was when Bloomberg said that "the prices paid index rose to 89.0% from 76.9% in May. This is the highest level since July 1988."
-- Today, class, we are privileged to get some nice technical analysis stuff. The first is from the famous Stephen Leeb, of The Complete Investor newsletter, who says that in timing the market (defined as the S&P500), "I found that a certain measure of the price of crude oil is the most perfect indicator or long term (12 months) stock prices ever seen."
I am not sure what he means by "a certain measure" of crude oil, but whatever it is, I am pretty damned sure that it will soon be reflected in the price of crude oil, and it is already part of Mogambo Transcendent Market Lore (MTML) that when energy costs go up (as when any costs go up) for production of goods and services, that final goods and services prices will soon go up, too.
And it naturally follows that prices going up is bad because my skimpy paycheck doesn't go as far, and then I have to listen to my family whining about how they don't have any money, and how they need some money, and how they want some money, and can they have some money, and may they please, please, please have some money, and when are we going to get some more money, yammer yammer yammer? It gets so bad that their shrill, whining little voices are usually still ringing in my ears as I am lining up my drive at the first tee.
We are also grateful to Mr. Leeb when he reveals that oil prices tend to get cyclically roiled "roughly every five years", and during that time that "you should get out of the market until oil levels off again (which takes about five months on average)."
Now, I am sure that you will agree with me that this is all interesting as hell and all, and we are grateful for the technical analysis ideas, but the really interesting part is how he makes it a point in his newsletter to stress that he is sure that "By 2010, oil will hit $200 a barrel, pushing inflation well into double digits." That's three and a half short years away!
And anyway, this is even higher than the $170 per barrel I figured would happen by 2010, which was based on a 50% drop in the value of the dollar combined with a 20% increase in price due to increased global demand of 15%.
But it doesn't take a rocket scientist to see that oil almost tripling in price to $170 or $200 per barrel within three years is a very, very, very bad sign (VVVBS).
And very, very, very bad signs are bad news on a credit report, and America has always had a top credit rating. Until now. Ty Andros of Ted's Bits newsletter reports that Standard and Poor, the bond-rating group, has "just issued a warning to the United States government" that their rating of the Treasury bonds issued by the United States will be downgraded to "single A" around 2013 (a short seven years from now), and by 2020 the rating of our creditworthiness will drop to BBB.
In the same vein, he also reprised a classic witticism by P.J. O'Rourke. "Giving money and power to government is like giving whiskey and car keys to teenage boys." Hahaha! Thanks, Ty!
-- Last Thursday there was a hell of a flurry of repo activity, and almost $28 billion in repos went through the Federal Reserve in that one single day! $28 billion! It is a lot. It is a hell of a lot in one day!
And I was very surprised to see that the Bureau of the Public announced that the Gross Public Debt suddenly jumped by an astonishing $80 billion in one day (June 30).
Naturally, the Distrustful And Suspicious Side Of The Mogambo (DASSOTM) naturally assumes shady dealings, as it is all just a little too, too, too coincidental for me that the stock market had a huge rally the day before the end of the quarter (and end of the half year, too). I guess the market riggers figured that anxious investors will be grateful that they were spared a little of the sting delivered by their investing results, as evidenced by the dismal returns recorded in the quarterly statements hitting their mailboxes.
Although he doesn't realize it and would be appalled if he did, Rick Ackerman of the terrific Rick's Picks newsletter agrees with me when he writes "Let me give you the not-ready-for-prime-time explanation: End-of-quarter window-dressing by money managers provided a perfect opportunity for the dirt bags who run what is essentially a rigged game to squeeze the living bejeezus out of shorts."
Deepcaster.com says that a favorite trick is to "run the black boxes", which is to set up a position, and then manipulate the market just enough to "hit" nearby technical analytical milestones and markers (such as "Fibonacci retracement levels") that will cause computer software models to react by automatically buying or selling. In other words, use their own programming against them.
-- Bill Fleckenstein, president of Fleckenstein Capital, hears me talking about market lore, and so he imparts a bit of market lore of his own. "Due to leverage," he says "people who trade futures tend to chase strength and sell weakness, while cash buyers tend to do the opposite. That phenomenon is one reason why people who trade futures usually lose money."
Well, naturally I figure this is one smart guy, so I ask "What about gold?" and without even a hesitation, says "Speaking of gold, I was pleasantly surprised to see two market developments: The gold ETF took in more gold as prices plunged (with total ounces held now at a record). Although the silver ETF saw its ounces drop a bit, they are now just shy of their previous high with silver $4 lower."
Then he looks at me like he expects me to interpret the significance of this, and as usual I have no clue because I am a very, very stupid guy, which he already knows, so who is REALLY the stupid one around here? No one says a word. He stares at me. I stare back at him. After awhile, he gets tired of our little "game" and supplies the answer by saying "What this points out," looking right at me to make sure I get the point, is that "the un-leveraged 'cash-type' buyers are availing themselves of dips in price."
-- Eckart Woertz, at the Gulf Research Center in Dubai/ United Arab Emirates, writing on Gold-Eagle.com, answers the riddle "Why Arab Countries Continue To Embrace The Doomed Dollar." We discover that reason that the dollar has not already collapsed to (using the precise economic term) "squat" in terms of value is that there are so many, many, many dollars and dollar-denominated assets and contracts in the world, but so few, few, few of the currencies of the rest of the world. "Thus, the dollar is illiquid," he says "because there are so many of it. For countries that want to diversify, there are simply not enough assets denominated in other currencies, and the gravity of established contractual obligations and trading platforms denominated in dollars is causing a dollar attraction, which is completely independent of the US economy and its abysmal deficit.
"Thus, with no clear alternative in sight, the financial health of other countries and currencies is heavily dependent on the US dollar Ponzi scheme. If the dollar goes down, they go with it, and as with the prisoner's dilemma, everybody is afraid to make the first move - the first one to abandon the dollar could set off a chain reaction that would backfire and affect them as well. Thus, the dollar's demise might take a bit longer than common sense would suggest, as everybody is trying to evade the unpopular repercussions."
He goes on to say "Nevertheless, it is inevitable, and that is why the GCC (Gulf Cooperation Council) countries need to contemplate a diversification into other currencies and gold sooner rather than later."
As soon as he said that the GCC needs to "contemplate a diversification into other currencies and gold sooner rather than later", my brain went into an infinite loop, and time and space meant nothing to me. I remember thinking, "He just finished telling us that these foreigners should get out of dollars and into gold, and then he tells us that there is not enough sheer volume of other currencies to soak up the mountains of dollars that you want to get out of! That leaves only gold! The guys who are going to be charging $200 a barrel for oil going into gold? Wowee!"
-- Dan Denning, writing at the Whiskey & Gunpowder.com site, quotes a report prepared by Emil W. Henry Jr., who is the assistant secretary for financial institutions at the U.S. Department of the Treasury. "Has it been so long that we have forgotten Fannie Mae's significant financial troubles in the late 1970s and early 1980s? During this time period, Fannie Mae's balance sheet looked a lot like a savings and loan. As interest rates rose, Fannie Mae's cost of funds rose above the interest rate it was earning on its long-term, fixed-rate mortgages. Like many S&Ls, Fannie Mae became insolvent on a mark-to-market basis. It lost hundreds of millions of dollars."
Mr. Denning ominously says "If the same thing happens today, you can replace 'hundreds of millions' with 'trillions.' "
The Mogambo Instant Summary (MIS) is that Fannie Mae is going down, down, down, and because the Fed and the Congress allowed it to get so big, big, big, Fannie Mae is going to take everything else down, down, down with it, too. Ugh.
****Mogambo sez: The way that the gold lease rates have just collapsed tells me that the gold market manipulators are going to try to manufacture a sell-off in gold. Get ready to do some bargain buying! Whoopee!