This article originally appeared at The Daily Reckoning.
-- If you are wondering why I am drooling and babbling incoherently, one reason could be that that I am pretty sloshed by this time. And I am "in my cups" because Total Fed Credit went down by $4 billion last week. Not overly remarkable in itself, but the growth of TFC, from which springs the excessive creation of money and debt that has been killing America for over 40 years, looks like it really HAS stopped accelerating! Wow! But only time will tell.
As I pour myself another drink of tequila anesthesia at the enormity of this, I note with disgust that Required Reserves in the banks dropped last week to a miniscule $40 billion, which is within a hair's breadth of revisiting the historic lows set in 2001. I almost yawn with the ennui of it all, as this is just more of the typical, and despicable, Federal Reserve crapola.
Then, suddenly, the glass dropped from my hand when my bleary, bloodshot eyes caught the headline "Yuan Gains Most Since Peg Ends as China Allows It to Track Asia", which is the headline of a Aug. 16 Bloomberg news article. It says "The central bank on Aug. 9 said it would allow more 'flexibility' in the new system, which allows the yuan to float with reference to currencies of leading trading partners." Subsequently, "China permitted the biggest gain in the yuan since ending a peg to the dollar in July last year, a day after allowing the largest decline, suggesting the central bank is easing controls over the exchange rate."
In light of the fact that the yuan has only appreciated (so I understand it) about 1.5% in the last year or so since the yuan-dollar peg was ostensibly removed, a sudden, significant move in the dollar-yuan exchange rate has now occurred. How significant? "The yuan rose as much as 0.24 percent against the dollar today, as 13 of 15 leading Asian currencies climbed," the article says. The dollar fell the equivalent of another 16% of its total to-date decline, in one day! One day!
Then it really starts to get bizarre and surreal when we read about the new U.S. Treasury Secretary, Henry Paulson, saying that "a rising yuan would benefit both (America) and China." Hahaha! How things have changed! Up until just this moment, the "official" government policy and mind-numbing mantra has been "A strong dollar is in the best interests of the United States."
But now, suddenly, "A weaker dollar is in the best interests of the United States"? Hahaha! And people are NOT buying gold in panic when they hear such things coming out of the mouth of our Secretary of the Treasury? Maybe they will when they see what is coming out of the mouth of The Mogambo, which is the fabled Mogambo Vomit Of Fear (MVOF), which (in case you were wondering) is like ordinary puke, except with less of an alcohol-tinged after-taste. Some blood, though.
But it gets, thankfully, uproariously funny, as from the same Bloomberg article we hear about how a stronger yuan "would help China slow an economy that grew 11.3 percent in the second quarter from a year earlier, and threatens to ignite inflation." Hahaha! I'm busting a gut here! Hahahaha!
I thought all you had to do to be an economist in America was learn to spell "Economist" and memorize a few buzz-words, and so that is how I became the Famous Mogambo Economist (FME) that I am today. So you can see how my Tiny Mogambo Brain (TMB) would be confused by all of this. So let me see if I can get this straight: Because the yuan gains in strength, imports into China will be cheaper, and thus imported energy will be cheaper, and imported commodities will be cheaper, and this, somehow, is going to slow the booming Chinese economy, where there an unimaginable pent-up demand, where wages are rising at 10% a year, that also uses a fiat currency, that also allows low fractional-reserves via commands from a central bank, and has, in train, massive, massive, massive infrastructure plans for the next few decades? Hahaha! Stop! Please stop! Hahahaha! I'm laughing so hard here that I think I made a little poopie in my pants! Hahaha! How embarrassing!
But my levity is soon dissipated, perhaps because there is a really foul smell around here all of a sudden, or perhaps because the latest reading on inflation, as measured by the Consumer Price Index from the BLS, came in at 4.1%. 4.1% inflation! And trust me when I say that it takes a lot more tranquilizers and anti-depressants than you think it will take before you stop screaming in your sleep about how inflation may well be, as they say, a "silent tax", but all I can hear is the loud munch, munch, munch of invisible monsters eating my financial legs off.
And sure enough, I look down, and there are hostile creditors and enormous, ravenous governments eating my right leg off, and my zombie wife and family are eating my left leg off, and all of them are eerily intoning, in their dull, monotone voices, "More! I must have more money because prices are high! Give me more money!" and all I can think of is how in the hell I am going to play golf without any damned legs, and how I'll have to buy all new, custom-made shorter clubs, and I'll bet those babies are going to cost a fortune! And that means I'll soon be tapping into the last of the money remaining in the children's college funds, and there is going to be hell to pay for that, too, and I am thinking to myself "These people are so low and base that they would pick on a poor crippled man who doesn't have any legs? Screw 'em!"
And then I wake up bathed in a cold sweat. I think it is all a dream. But when I walk out to the kitchen, the family immediately starts whining that they need more money because prices are so high. And can they have some money? And how come we don't have any money? And when are we going to get some money? And why don't I get a real job like other husbands and fathers and make some more damned money?
So, I patiently and kindly explain, as I always do, "Go to hell, you greedy little bastards! I make the same money I made twenty years ago! But somehow it's MY fault that the damned Federal Reserve provided the financing for insane amounts of government spending, and so it's MY fault that all this monetary madness of mountains of money and debt ballooned into price inflation, as it always freaking does?"
Oh, I know by the blank, confused looks on their faces that they will not listen to the Big Stupid Mogambo (BSM), no matter how loudly I yell or how many frozen waffles I throw at them. Or you either. But perhaps you, and they, will listen to Dallas Federal Reserve Bank president Richard Fisher, who has neither a loud voice nor a supply of frozen-waffles-as-missiles handy, but is reported by Reuters to have said that inflation "is a sinister force that has the capacity to charm and romance the heck out of you, but in the end wreaks only havoc." Atlanta Fed President Jack Guynn says that inflation is "poisonous." Exactly so!
Perhaps this is what prompted reader Rebecca I., probably in an oblique reference to my many rat-like qualities, to pen the perfect analogy to Mr. Fisher when she writes "I equate fiat currency like a mouse trap. The easy credit and instant gratification it gives you is the bait. The bar that is sprung when the bait is taken is called inflation. As we munch on the bait, the spring has been sprung and we ignorantly wait for the bar to fall."
Predictably, I am quickly screaming about inflation and how it is going to kill all of us rats, and how it is all the fault of the Federal Reserve, who allowed Congress to spend money, and go into unfathomable debt to get MORE money to spend, like irresponsible, halfwitted children.
Like, for example, the people of Massachusetts in general and Boston in particular, who have turned their state into one composed almost entirely of government employees and government spending, who send the same kind of idiotic ethic to Congress in the forms of the repellent Ted Kennedy and the equally loathsome John Kerry.
Specifically, Boston went massively into debt to build a huge, whopping tunnel and transportation infrastructure project that not only plumbs new depths in the definition of "shoddy, substandard and dangerous" (in that falling concrete is already killing people), but that came in 500% over budget! The damned thing, projected to cost less than a whopping $3 billion, ended up costing almost $15 billion, thanks to their infamous pandemic Leftist stupidity leavened by trashy, low-life corruption. Hahahaha!
And now they will learn the ugly truth about the downside of sudden deluges of government spending. The ugly fact is that the economy of the whole region was malignantly distorted at the instant the first dollar of the project was spent, and it got grossly more so as more horrifically, humongously huge amounts of money were spent, year after year.
Whether they realize it or not (and they probably don't, as they seem to be really stupid), their economy is now totally dependent on somebody continuing to spend that kind of gigantic money. Hahaha! Chumps! But now, not only is there is no more tidal wave of money flowing through those now-customary channels, but there is no new wave of money to even replace it! And this does not even count the perpetual, budget-busting new costs of hugely more maintenance and repairs on the new structures, nor the millions (or billions) it will take to correct the poor workmanship. So what the hell kind of economy prospers when billions of dollars a year in annual spending disappears from the economy, which is also now paying down a backbreaking debt, and is now also saddled with huge, new on-going costs? Welcome to the hell of fiat money and Leftist "build it and they will come" stupidity, Massachusetts!
But this is not about how Boston is going to go bankrupt, or how Kennedy and Kerry will predictably attach a rider to some Congressional legislation to funnel all of our money to Massachusetts to bail them out, or even about how if we really want to help America we would throw Massachusetts out of the damned country, but about fiat money and how the Federal Reserve creating the money to buy all the government debt, including the debt to build this foul Boston Boondoggle, will always produce price inflation and a distorted, moribund economy.
And if you want to know the specific aftermath of such monetary idiocy, then let me quote Bill Bonner at DailyReckoning.com, who says "Booms beget busts, and riches beget rags." Later, he gets less blunt and more, characteristically, transcendentally philosophical when he says that for "every yin there really is a yang, a fit for every start."
-- I was spooked at Andrea Hotter's Commodities Corner in Barron's this week, entitled "Gold's Changing Role." In it, she quotes a guy named Michael Lewis, who is "Deutsche Bank's head of global commodities", as saying "The safe haven-status of gold is somewhat overrated." Huh? Let me get this straight, Lewis, old buddy; gold has performed safe-haven status continuously for the last 6,000 years, and suddenly, on your flippant say-so, it is overrated? Hahahahaha! How in the hell can 100% success be judged "over-rated"? Hahahaha!
But then she quotes James Moore, who is an analyst with TheBullionDesk, who says that "Aside from strong supply-demand fundamentals, there's more potential for higher, rather than lower, gold-price forecasts."
Now, if there is one thing that all people agree on, it is that I am a real stupid guy. So it is not surprising that I did not know that there was ever anything, anywhere, that operated "aside from supply-demand fundamentals." But glossing over that, the important news from Mr. Moore is that even aside from the sheer overwhelming horsepower of supply-demand fundamentals where demand is handily outstripping supply (which is why gold has been rising so much for so long), gold will go higher from here! Probably from the dollar getting weaker.
-- I would be remiss in my duties as loudmouth alarmist if I did not at least comment on the increase in the national debt, which is up $65 billion in the first 19 days of this month! That's $3.4 billion per day! More than $10 for every man, woman and child in America, per freaking day! So a family of four (Mogambo, wife, and two hateful, juvenile-delinquent children) is going to have to pay off a government debt that is growing by another $40 a day, every day.
And since only about a quarter of the nation's men, women and children pay taxes, then the additional debt piled onto a tax-paying family of four is $160 per day!
But working taxpayers and business owners, who are the ones directly paying for this debt, can get their "money back" through increasing their prices to restore their profits or demanding higher wages. Unfortunately, those higher costs of production must then get added into prices, which are the prices that everybody pays, which is the horror of inflation, which makes me stand on the corner of the street and yell at people who are stopped at the traffic light, "It's inflation, you stupid moron! You are going to pay higher and higher prices, all the time rising faster and higher, higher and faster, for the rest of your life because your own stupid Congress let the damned Federal Reserve create too much money and credit! And don't drive away when I am yelling at you! Come back here! I don't care if the light is green, you stupid American halfwit!"
-- From the peak of the S&P500 at about 1540 in April, 2000, to the "bottom" at about 840 in March, 2003, this is a total drop of about 700 points. I think it is spooky that the SP500 has risen enough from that bottom to roughly reach the mysterious and potent Fibonacci ratio (0.619) of that total drop.
Instantaneous Mogambo Assessment (IMA)? The S&P500 is now poised to drop through the freaking floor, signaling the beginning of the long-overdue economic adjustments necessary to purge the system of the stupidity, crushing debts, and suicidal mal-investments that result from allowing the Federal Reserve to create so much, so damned much, so excessively much, so horrifyingly much, so catastrophically much money and credit.
And in case you were wondering, the term "money and credit" is a euphemistic way of saying "money and debt" which is, in turn, just another way of saying "money and so much debt that dozens of surly collection agencies are taking me to court."
-- To show you that the corruption in the American commodities markets are not unique, and to get a taste of some of the things we have in our future, perhaps we can learn something instructive from an August 16 Financial Times article entitled "Nickel steadies after LME intervention." He reports that "The London Metal Exchange, the world's biggest base metals exchange, was forced to make an extraordinary intervention in the nickel market on Wednesday to head off the risk of defaults on trades by speculators as the metal soared to a record high. The LME said that to preserve orderly trade, it would permit traders with 'short' positions, betting on price falls, to defer settlement of their trades." To which I add "And prevent the 'longs' from making the profits they deserve."
Rather than simply screwing the "longs" out of their metal and profits ("Suckers!"), we read that "The exchange also offered some leeway to traders with a short position. It said that from Friday, anyone with a short position who was unable to make physical delivery could postpone delivery at a cost of $300 a tonne per day - equivalent to about 1 per cent of current market prices." I assume that the money is given to the "longs". Big deal.
Further, they decided to rob the people who had laid on some spreads, too, as "The LME imposed a limit in the spread between nickel cash and futures prices of $300 per tonne per day."
The LME "Also suspended rules that require some traders with big long positions - those betting on rising prices - to lend metal to short-sellers who need to settle trades", probably in response to the terror of longs who, already cheated out of their money by the corrupt LME, would be forced to lend their metal to some guys who are bankrupt! What are the chances of getting it back?
Simon Heale, who is the worthless chief executive of the LME, is reported to have said: "Nickel stocks are at historically low levels and we now have a genuine material shortage. Our first priority is to ensure that trading remains orderly and to prevent the risk of settlement defaults." Hahahaha! You would think that Mr. Heale would have a "first priority" to make sure that they don't get into this damned mess in the first place! This irresponsible doofus knew the size of the short positions, he knew the size of physical metal inventory against those short positions, and he knew that nickel was rising in price (and has been rising for months and months). And yet, his only duty, as chief executive of the LME, is to ignore all of that, and merely "ensure trading remains orderly" now that his towering incompetence has resulted in a blowup? Hahaha!
-- In case you have been asleep for the last couple of decades, you probably don't know the current, weird incarnation of Basic Stock Market Principles. It goes like this: If stocks or the economy are going up, then you should buy stocks. If stocks or the economy are going down, on the other hand, then the Federal Reserve will lower interest rates, making everything okay, and so you should buy stocks. Simple!
But before I get too testy about this laughable stupidity, I will admit that, because the dollar is falling, and is destined to fall a lot more in the coming years thanks to the Federal Reserve continuing to create so many dollars, there is a case to be made that the stock market could go up. It is easily conceivable that the Dow Jones Industrial Average could go to 30,000. Or 40,000. Or more!
A hand goes up in the front row, and I note with delight that it is a cute little cub reporter from the local newspaper! I instinctively straighten my tie, and trying to put a hint of romance back into daily life, I lasciviously point to her with my tongue, hoping to convey much, much more than merely indicating that she could ask me a question. Apparently, I succeeded all too well, as she recoiled in horror and started gagging on something, maybe a fish bone, I dunno.
But it doesn't matter because I know what she was going to ask. She was going to ask "How can the Dow Jones Industrial Average, as a proxy for the entire stock market, triple and quadruple from here, when all you do is run your fat, stupid Mogambo mouth (FSMM) about inflation, and how it is caused by the Federal Reserve creating excessive amounts of money and credit, and how this will cause inflation in prices, and how this price inflation causes society and the economy to collapse and everything turns into crap?"
Well, as a guy who has a lot of experience with things turning to crap, like my career, my health, my marriage, my family life, my relationships with my neighbors and my whole freaking life, I understand exactly what she was talking about. So by way of clever explanation, I was going to impress her with a sure-fire Mogambo Senselessly Crude Joke Variant (MSCJV). Portraying a business-news reporter on TV, my powerful and resonant Mogambo voice rings out as I inform her, and the rest of a spellbound audience, "On Wall Street today, all of the stocks in the Dow Jones Industrial Average went up 1.2%, to close at an average of $40,653.45 per share. In other news, the market value of a piece of used toilet paper fished out of an open-ditch sewer reached a new high today, too, also fetching $40,653.45 per sheet."
It's like I always say: Inflation, experienced as a fall in the purchasing power of the currency, is the killer of economies, retirement accounts and civilizations!
On that note, Radley W. has noticed that all the world's central bankers are still stupidly and busily creating excesses of money and credit, and he has a suggestion for the perfect Mogambo Editorial Cartoon (MEC), in that it is both economically chilling and childishly disgusting. He suggests that under the title "Who Fiatted?", I draw central bankers sitting in a secret, closed meeting, all trying to look innocent, while underneath the cartoon would be the question 'Who Hasn't?' " Hahaha! Good one, Radley!
-- From the Gold Council we get some charts of gold prices, using "Monthly gold prices since 1971 in various currencies." The nub of it is that in British pounds per ounce, gold is already at an all-time high, as it also is in Rand, the Australian dollar, and Rupee (where it is up 600% from the price of gold in 1980).
In American dollars, gold hasn't done quite as well, although it has almost reached the all-time high set in 1980. Ditto in Canadian dollars.
Gold is (surprisingly to me) still seriously under-priced in Yen (still 50% below the peak), but much less so in Euros (with the old Deutsche Mark used as a proxy for pre-Euro prices).
The One Big Important Mogambo Fact (OBIMF) to be gleaned here is that gold has been rising in all of these currencies for years. And although the Wall Street sharpies and huckster don't say it anymore now that stocks have started turning to crap and are no longer steadily rising, but the truism is as true as it always was: "The trend is your friend."
-- BigPicture.com notes that a chart revealed by Floyd Norris at the NY Times entitled "Annual change in car dealer sales, adjusted for inflation", that used the Bureau of Census, the Department of Labor Statistics and the National Bureau of Economic Research as sources, shows the "change in sales by new-car dealers over 12-month periods going back to 1968" with each period a comparison with "the 12-month period ended a year earlier, adjusted for inflation in the products and services sold by the dealers."
The graph shows that sales are down by 2.4%. The significance is that "In the past, when such sales have been down 2 percent or more, the economy has either been in a recession or about to enter one." Every time! And the current 2.4% drop, which comes at the end of a few years of steadily dropping, handily beats the criterion "2 percent or more."
The GoldForecaster.com newsletter has reached the same conclusion, by slightly different means, and that "A housing slowdown, high oil prices and high interest rates are set to precipitate a recession." And famous economist Gary Shilling concurs, and he says that the fact that the Fed stopped raising interest rates is proof of it. He says "With only one clear exception in the mid-1990s, central bank ease since the mid-1950s means the economy is in a recession, or will be within a few months."
So, a recession is looming, or is actually here. What to do? Well, in the old days, you would have sold your stocks at the beginning of a recession. But nowadays, with the activist, meddling, loathsome Federal Reserve running loose, who knows what brainless stockholders (or the Fed's Plunge Protection Team) will do?
And also, since inflation is rising, in the old days you would have sold your bonds, as their prices would normally drop (handing you a loss) to reflect the rising debasement of the dollars in which bondholders will be repaid. Or, as BMO Capital Markets opines, "The proper holding period for a long bond in this inflationary environment is the time you hold a hand grenade after you've pulled the pin" and that little safety lever pops off with a "ping!" and The Mogambo screams "Fire in the hole! This is not a drill!" But with the activist, meddling, loathsome Federal Reserve running loose, who knows what brainless bondholders (or the Fed's Plunge Protection Team) will do?
If the last twenty years, or forty years, or ninety years are any clue, it will surely be the wrong, inflationary, thing. Ugh.
****Mogambo sez: Some things never change, and one of them is the Boring Advice Of The Mogambo (BAOTM); buy some gold, some oil, and lots and lots of silver, and you will make a lot of money, or don't and you won't. It doesn't get simpler than that!