E-Economic Newsletter

By: The Mogambo Guru | Wed, Jul 12, 2006
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This article originally appeared at The Daily Reckoning.

-- It was truly cacophonous inside the Mogambo Fortified Bunker Of Pure Fear And Panic (MFBOPFAP), as alarm bells and buzzers and klaxons and horns were all making a hell of a din, adding to the piercing sound of my own screaming. Why? It was last week's $11.5 billion increase in Total Fed Credit by the Federal Reserve last week.

It was only a couple of months ago that Ben Bernanke, chairman of the Federal Reserve, confided to CNBC's Maria Bartiromo that "it's worrisome that people would look at me as dovish and not necessarily an aggressive inflation-fighter." Hahaha! Now we know why people look at him as dovish on inflation! $11.5 billion of brand-new credit in one week! Pure, excessive monetary inflation, which always precedes, and causes, price inflation!

And the unholy Fed is absolutely going bananas with accommodating the repo market. There were $24 billion in repos just last Thursday alone! And, for good measure, the Fed printed up another $5.3 billion in actual cash last week, enough for every man, woman and child in America to get $18 in cash.

And why are they doing this? Jim Willie CB of GoldenJackass.com explains, "The US Fed must get with the program and realize that they cannot fight inflation when that precisely is their reason for being. My disrespectful title for the US Fed Chairman is the Secretary of Inflation. Cutting off price inflation is tantamount to cutting off the foundation legs of the US Economy, namely the housing sector on the tangible side and the stock market on the financial side. Constant, even accelerating, credit supply is essential in order to maintain flat growth within the US Economy."

I fall to my knees, and in my finest cinematic moment, dramatically raise one arm heavenward, and cry out with a voice dripping with anguish and outrage, saying "This is the depths to which the Federal Reserve has sunk!"

-- The Lipper Mutual Fund Performance Index for the first half of the year came out, and gold lead the pack by a long shot. Their 10-fund index was up 27%, and the World Equity Funds Index showed that the 54 gold-oriented funds were up 25% for the last six months, too.

By contrast, when Lipper considers all 12,675 equity funds, the average return was less than 4%. Hahahaha! Official "trust me" government-reported inflation alone is running more than that! And real, old-school-way-of-measuring-inflation is running at least to 9%, being as conservative as I can.

So that means that the average mutual fund holder made 4%, on which a capital gains and income taxes are levied. But even assuming that the mutual fund holder pays no tax at all, he or she is still losing at least 5% a year in spending power! Losing! Losing 5% a year! Which is the optimistic scenario!

You can bet that this interesting statistic is showing up on the screens of all kinds of fund managers, and the screens of all kinds of people who are looking, with an increasing feeling of unease, at their pathetic quarterly statements.

And with the G-7 (or G-8 or whatever they call themselves these days), of which we are a member, continuously agreeing to work together to make the dollar go down in value, that means that domestically-produced commodities will be cheaper on the world market. That will pressure higher-priced foreign competitors to lower their prices in response, but it will also, unfortunately, give domestic producers the leeway to dramatically raise their prices. And they will.

But we were talking about the dollar, and Robert McHugh of Main Line Investors, Inc. has taken a look at the chart of the dollar index and says "the U.S. Dollar has started its descent. It should nestle around the 82 area +/-. All this is the start of a protracted move into the 60's, one that will no doubt be stair-step rather than freefall as Central Banks around the world work in orderly fashion to devalue the Dollar."

Dramatically raising prices is also defined, oddly enough, in the Mogambo Economic Encyclopedia (MEE) as "The stuff of which revolutions are made, and people are rioting because their devaluated money can't buy much anymore, and mobs come rumbling over to The Mogambo's house because he has gold, and he is always hiring people who will track down Alan Greenspan, every economist who ever worked for the Federal Reserve or belonged to the Federal Reserve System, all members of Congress (except Ron Paul, R. Texas), and every living Supreme Court justice, and slap their stupid, traitorous, corrupt, despicable faces."

And then confiscate all their assets as punishment, so that they, too, can experience the pain and horror of utter ruination that they caused.

I was just working myself in to a fit of exasperation about the "pain and horror of utter ruination", when pleading reader asks "Please do a piece on the plight of the retired people in America. Most people I personally know realize this current scenario will not go on indefinitely. They just don't know what to do about it."

I think to myself "Perfect! Now I can illustrate the 'pain and horror of utter ruination' and act surly at the same time! And against people who are smaller and weaker than me!"

Emboldened, I enthusiastically start off by saying "Old people? What a bunch of whiners! It reminds me of my own kids. They know they are reaching the age when I can legally kick them out, and they know that their allowance will stop. Thus they, too, realize that the 'current scenario will not go on indefinitely.' So for both of these groups I am supposed to, I guess, get up off my fat, lazy butt and, oh, I dunno, wave my Magic Mogambo Wand (MMW) around in the air a few times, thus solving their problem of how to keep getting a free lunch? Hahaha! Thanks for the compliment that the stupid Mogambo could fashion a remedy that has evaded the greatest minds of economic history! Hahaha!"

Anyway, there is no need to wave magic wands, which is so old-fashioned. Let's, instead, rely on that infallible source of good advice, the Chinese fortune cookie. After making goo-goo eyes at the pretty waitress at the Chinese restaurant and flirting with her while ordering ("Everything with pork in it, my little Chinese won ton cutie!"), I finally get my food, which I notice she has spit on again, although I don't remember actually ordering "spit sauce." I figure it must be how ethnic Chinese girls flirt with men who are old enough to be their grandfathers.

Anyway, after eating, along with the bill and a lot of burping, we get the fortune cookie. With trembling fingers we crack it open to retrieve that little scrap of paper inside. It says "Get a job, scrimp along for a few years so that you can buy as much gold and silver as you can afford. Then you will take an ocean voyage and gain ten pounds eating like a pig." Sounds about right to me!

The real problem with these old people is that 1) they stupidly believe that Social Security is a retirement fund and they are supposed to be able to live on it, when it is not and never was, and 2) they stupidly believe that inflation nowadays actually measures all of the increases in prices that they pay, and 3) that they stupidly believe that their Social Security checks are going to go up as fast as inflation. (As a caveat to that last point, Social Security checks are actually going up as fast as the "official, government-declared" rate of inflation. It's just that the rate of inflation they use to administer the Cost Of Living Adjustment (COLA) to Social Security checks happens to be a lie which was cooked up by the horrid Alan Greenspan, former chairman of the Federal Reserve, and aided by the equally detestable Michael Boskin, economics professor at Stanford, who got his degrees at Berkeley, which probably explains a lot).

And old people (although they are supposed to be the ones with all the smarts and all, and who proudly call themselves "The Greatest Generation") stupidly believe that a central bank (the Federal Reserve) is not a horror that will destroy their money, a fiat currency is not a horror that will be destroyed, and that fractional-reserve banking is not a horror that combines them into economic Armageddon, contrary to the lessons learned during the entire history of all the countries in all the world ever since cavemen were selling mastodon steaks over the Internet.

In short, old people are the very ones who continuously voted into office the Congressional creeps who perpetuated this disaster (and who picked the members of the Supreme Court who let them get away with it, contrary as it was to the clear strictures of the Constitution), and then stood around with their hands out, joining the growing crowds of people gobbling up more and more cash and benefits. And now that the inevitable inflation in prices, caused by the monstrous increase in the amount of money created by the Federal Reserve to finance all of this largesse is wiping them out, they cry out, piteously, "Help us! We cannot live a comfortable life at public expense anymore!"

And the biggest mistake the old people made is thinking that the government they elected is looking out for them. Ha! As Laurence J. Kotlikoff of the Federal Reserve Bank of St. Louis Fed, in his paper "Is the United States Bankrupt?", said "The most the government can do for the elderly is to set h equal to (1 + r)w/r." Hahahaha!

And speaking of stupidity, my buddy Phil S. sent me a couple of immortal quotes that I think are the root cause of all of our troubles. Norman Douglas said "Education is a state-controlled manufactory of echoes", which means that, after a short while, you get ignorant, trusting buttheads for a citizenry because the guy with the loudest voice is seldom the smartest guy trying to make echoes. Just louder.

The other one that tickled me is from Prof. Irwin Edman, who said "Education is the process of casting false pearls before real swine", which is oddly similar, when you stop to think about it.

And stupidity permeates the majority of American universities, too, as I gather from Dr. Kurt Richebächer's remark that "The folly is in the categorical assumption of American monetarists that sufficient monetary ease can never fail to stimulate sustainable economic growth. With this assumption in mind, they have rewritten the history of America's Great Depression of the 1930s. American monetarists' lack of thinking starts with the absurd assumption that whatever happens during the boom is irrelevant. The one and only thing that matters is swift easing when the economy weakens, essentially implying that proper monetary easing solves any possible problem. It is an absurd view."

And the result of believing in such absurdities is inflation in prices, which the old people are complaining about. And along those lines, George Ure at UrbanSurvival.com notes that "the current three-month running average of CPI inflation pencils out to 8.29% per year."

And, if it is any consolation, it ain't just us, as he reports that the Russians are officially expecting inflation to run around 9% this year, the Philippines are suffering 6.7% annual inflation, and the "(central) Bank of Indonesia has rates pegged around 12.25%". Of course, he is too polite to mention Zimbabwe's 1,200% annual inflation (which is getting worse exponentially), or the fact that inflation is now present in every freaking country in the freaking world, and this inflation is running, on average, about 3%. Every one.

-- Larry J sent remarks of the mysterious Rhody, who remarked "silver lease rates are significantly higher, even as the spreads tighten. I interpret this to mean there is significant liquidity stress in the silver market. This coincides with the beginning of the massive withdrawals from COMEX warehouse stockpiles."

He points our that "My original purpose in sending this message is this: If COMEX is a big lease supply for silver, then just as Central Banks have leased out most of their gold reserves, I strongly suspect that that much of the silver in COMEX vaults is stacks of paper lease contracts. That means, that as deliveries of COMEX silver continue, there will be a default as owners withdraw their metal from the vault. The default should occur first in the lease market, where it will be hidden from public view."

So is silver disappearing? Reader and silver aficionado Bob W. thinks so, and he says "The last figure I could get on the total silver inventory was on Friday, and it was a total of 102.9 Million oz's world wide. Only a month or two ago it was at 127 Million oz's. That's a drop of 24 Million oz's in known inventory world wide."

In a similar vein, the famous Ted Butler writes "The silver ETF is turning into the 'Death Star'. Based upon delays in adding silver and COMEX warehouse movements, I am convinced that they have effectively run out of available silver in London for the ETF and must get it elsewhere. If I'm correct, that is bullish beyond belief."

-- The GoldForecaster newsletter says that the picture is as good with gold. "We are now told," they write, "that the world's top gold producers had only 14 years of gold reserves left, assuming 2005's output of 1440 tonnes per annum." I leap to my feet and exclaim "Wow! In 14 years all the gold will be mined and gone?" Obviously I have, as usual, misunderstood what they said, and they dumb it down for me to clarify "There is a dearth of basic exploration for new gold deposits."

They go on to ask "What does this suggest to us? If correct, we are entering a period of declining production over the next 14 years until new production [5-10 years after established as reserves] appears from new exploration, when it starts in earnest." By this time I have taken out my crayons and am furiously drawing supply/demand graphs in my notebook to see what effect an increasing demand for gold, versus a decreasing supply of gold, will have on the price of, ummm, gold. Marching up to my drab little cubicle, they reach in, crumple up my pathetic little graphs, and say "The implications for the gold price are such that we have no doubt that all gold deposits will be mined for huge profits then."

I cry out "Hey! I need those! I just want to make a lot of money with gold to finance my Mogambo Reign Of Vengeance And Terror (MROVAT) against my enemies, like people who tear up my graphs, for instance!" Being intelligent people, they instantly realize their folly, and (I guess trying to get back on my good side), say that if I really want to make some money, "the best investments have to be the 'Junior' gold and silver mining companies" who do all the exploration and initial mining. But apparently this is not news to a lot of people, as they add "And this sector of the industry is thriving! Financings of junior mining companies totaled $5.5 billion in 2005. But in 2006, this figure has already been surpassed. Junior mining financing activities could top $9.5 billion this year. There has been about $19 billion invested in the junior mining sector during the last three years."

-- The seminal study, "Short-run and Long-run Determinants of the Price of Gold" by Eric J. Levin & Robert E. Wright was published by the World Gold Council. They start off by saying that gold is eternal and the best protector of wealth the world has ever known, and that The Mogambo was right when he screamed in your face to get out of stocks and bonds and into gold, or you are an idiot.

Well, they didn't actually say that in so many words, but they hinted at it when they did say "In 1833 the price of gold was $20.65 per ounce, about $415 in 2005 terms, while in 2005 the actual price of gold was $445 – a very small change in the real price of gold over a period of one hundred and seventy two years."

The summary of their findings is "Three main findings emerge with respect to the analysis of the long-run determinants of the price of gold. First, there is a long-term relationship between the price of gold and the US price level. Second, the US price level and the price of gold move together in a statistically significant long-run relationship supporting the view that a one percent increase in the general US price level leads to a one percent increase in the price of gold. This evidence substantiates the belief that gold is a long-term hedge against inflation. More specifically, a one per cent rise in US inflation raises the long-term price of gold by an estimated one per cent" a statistic that "lies within the 95 percent confidence interval." By which I take it to mean that it does NOT lie within the 99 percent confidence level. If you have ever taken a statistics course, then you realize that this is still damned impressive.

And since gold is a proxy for inflation, how fast does gold react to a shock? They write "in the aftermath of a shock, it typically takes around five years to eliminate two-thirds of the deviation from the long-term relationship between the price of gold and the US price level." Instantly, I have my calculator out, and I'm trying to figure out how much money I will get when gold rises in price by 67% of the difference between the price of gold now ($630) and the price of gold adjusted for inflation (a conservative $1,500) in five years. After awhile, my fingers hurt and I have gotten so many different answers that I am confused. Then I change the estimate for "gold adjusted for inflation" to $1,630, and the difference is $1,000. Divide by 5. Multiply by 0.67. Divide by $630. Roughly a 21% increase this year! Not bad!

But inflation in prices is going to keep on going up and up during those five years, too, and so gold will keep going up and up, right along with it! Suddenly, your "gain" on an ounce of gold is running maybe 30% a year! Or more! Almost certainly more!

Another interesting part is when they get into the coming devaluation of dollar. How big a devaluation will it be? Well, they quote a guy named Jarrett, who lists "fourteen estimates of the dollar depreciation that would be needed to restore the imbalance in the US current account deficit. These estimates range between 12 per cent and 90 per cent."

And if you don't think that a devaluation in the purchasing power of the dollar ranging between 12 percent and 90 percent, to a country that imports damned near everything, is highly inflationary, then you need to go back to Economics 101 and start all over again.

David Morgan of SilverInvestor.com is entirely consistent with this when, in his essay entitled "Social Security- Security or Insecurity?", he writes "Long-term studies of commodity prices have shown that over time, commodities return to their mean."

And he isn't just referring to commodities like wheat and meat, and the aforementioned gold, but silver, too. He writes "In constant dollars, silver's purchasing power averaged $150 per ounce in 1998 dollars for 600 years. This is the average purchasing power for 600 years; obviously, silver has nothing close to that 'value' today, which provides one unbelievable investment opportunity. The question becomes whether silver will ever reach either the $150 nominal value or, better yet, the purchasing equivalent of the 600-year average?"

I jump to my feet, hoping to impress everyone, and I shout out "I know! Mr. Morgan! I know the answer to that! The price of silver will rise higher until it again reaches its mean value compared to the general price level, which will be higher, too!" Well, instead of the expected cheers from the class and admiring looks (instead of the usual look of loathing) from the adorable Monica, everyone shouts out "It was a rhetorical question, you stupid moron!" and then they laughed at me. And then Monica intoned, "And creepy, too!" and everyone laughed again.

Shaking with silent rage, I think to myself "When gold and silver shoot to the moon, we shall see who laughs last, my little pretties!"

-- Larry Edelson of MoneyAndMarkets.com asks "Where's oil headed next?" I thought he was going to ask "Hey! What thieving little bastard stole my last taco?" and I was so surprised at the question that I could not think of a quick answer. But it did not matter, as he immediately went on to say "I think it's going to at least $100 a barrel by the end of this year. And unleaded gas could hit $4 a gallon. In my view, the combination of strong economic growth around the globe plus the most recent plunge in the value of the U.S. dollar -- virtually guarantees it. In 2007, I expect even more upside for oil and gas: $120 a barrel for crude (perhaps even higher), and $5 a gallon at the pump." And that sounds right to me, too. Maybe higher.

-- George Ure at UrbanSurvival.com notes that the a subset of the Unemployment Report, U-6, which is "total unemployed, plus all marginally attached workers, plus total employed part for economic reasons, as a percent of the civilian population plus all marginally attached workers" which is, I might add in my own nasty Mogambo sardonic way (NMSW), means "the few guys we admit don't have a jobs, plus all the other people who don't have jobs", is now up to 8.7%, which is "up from May's creative 7.9%", which is, in one month, a 10% increase in real unemployment.

And it gets worse, as Mr. Ure reminds us that the government insists that "unemployed people stop being counted as 'unemployed' when their benefits run out."

-- From the Daily Reckoning we learn that "According to the Economic Cycle Research Institute, nominal prices for houses nationwide are going down for the first time in history. Which means, if you bought your house last year, you've probably lost money." For a country that has existed on the high-octane fuel of low-interest refi cash-outs for years, this is terrible news.

-- Steve Sjuggerud for the Daily Reckoning writes that the time for commodities to once again shine is now. "It's a pattern where every seventeen years or so, the investing generation switches. One investment rises by triple digits, while the other loses money. The simple idea here is that we're into a new investment generation now. If the last investment generation ended around 1999 - and the pattern holds, then we could see stocks do poorly for about 17 years...or until 2016."

-- If you want to hear something that will scare the hell out of you, then the essay by Chris Laird of PrudentSquirrel.com entitled "What Would Happen if the USD Collapsed?" is just what you are looking for. He writes "If the USD collapsed to zero tomorrow, the entire world economy would stop cold, and the total loss to world wealth would be something like $2,200 trillion over a period of ten years. I think this is a low estimate actually."

Agog, I can only stammer out "How much money is that?" He says "It would take the US with a GDP of $14 trillion a year 157 years to replace all that wealth. It would take the world with a GDP of about $50 trillion a year 44 years."

Now, stepping back from the extreme, try the above again, but this time with only a 50% loss in the value of the dollar, which is guaranteed. It's still very, very, very scary (VVVS).

-- Bill McLaren of the Stock Market: CNBC Report, posted on SafeHaven.com, writes "If there are any extremes in interest rates it will not occur for decades but we can anticipate interest costs possibly doubling within the next seven to ten years, and the up trend in rates to last at least 25 years. I feel confidant in saying there is now a 60-year cycle low to low in place and rates will advance for the next 25 years."

And speaking of inflation and interest rates, Stephen Church, at Piscataquaresearch.com, had his essay, "Real Inflation", reprinted at PrudentBear.com. He writes "During the last 6 years, short interest rates have averaged 5% per year less than real inflation!" Note his use of the exclamation point, which indicates particular emphasis. "It appears that real inflation has been close to 8% per year during the last few years. Real interest rates based on real inflation have been lower during the last 7 years than at any other time during the last 50 years. This observation helps to explain why debt levels have risen as high and as fast as they have during the last few years."

-- J.A.D sent a posting by Raymond Nize entitled "Foreclosures Will Be Different This Time." The message read "The Orange County register delivers the bad news: Homeowners with little of their own money in their homes may think they will do what strapped homeowners in the '90s did: turn over the keys to their lender if things get really bad and walk away.

"But...financial experts warn that things may be different this time because so many people have refinanced. The difference is the recourse loan. In California, refinanced loans, second trust deeds and home equity lines of credit are generally considered recourse loans. In these cases, a lender can file suit and go after almost any of the borrower's assets once they obtain a court judgment. They can literally go after everything you have."

"Oh yeah, and don't forget about the IRS: A foreclosure may mean a big tax bill from the IRS for any shortfall between what the bank gets for the sale of the owner's home and the value of the loan. 'This is going to become a hot topic,' predicts Bradford L. Hall, managing director of Hall & Co., CPAs in Irvine."

And let's not forget those who took out reverse-mortgages, who will owe the bank the difference between the value of the house at the time the reverse-mortgage was taken out (which was the basis used to figure out the monthly check that the "homeowner" received), versus its market value at the end of the contract. Owing money on a house you don't own or even live in! Not to mention more money to pay to the IRS if you don't. Ugh.

****Mogambo sez: Like a yakkity parrot, I say keep saying over and over, "Buy gold, silver and oil! Buy gold, silver and oil!" And remember that while a yakkity parrot isn't smart enough to think of smart things, it can be trained to say smart things. "Buy gold, silver and oil! Awwwk! Polly wants a cracker! And Mogambo wants a pizza loaded with yummy pork products!"



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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