E-Economic Newsletter

By: The Mogambo Guru | Wed, Sep 13, 2006
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-- My sense of humor is gone, joining my hair and youth in Mogambo Heaven, replaced by a sense of panic, and I'm really, really, really starting to get freaked out here. Today, for example, I am freaked because this housing bubble has stopped expanding, because that means less profits are being made, just like all the other times when all the other bubbles deflated.

But perhaps you will understand my Mogambo Screeching Hysteria (MSH) when Richard Russell, of the Dow Theory Letters, writes "The latest Economist magazine includes an article entitled, 'What's That Hissing Sound?' A paragraph from the article runs as follows; 'The boom has lifted the (US) economy in three ways: it has boosted residential construction: it has made people feel wealthier and so encouraged them to spend more; and it has allowed homes-owners to use their property as a gigantic cash machine, taking out money by borrowing against their capital gains. Merrill Lynch estimates that the three together accounted for more than half of America's total GDP growth since last year.'" Half! Half!! Half!!!

And a Reuters article sports the headline "Risk of U.S. recession growing: HSBC". The article reveals that "Investment bank HSBC has revised downward its forecast for 2007 economic growth and cautioned that the risk of an outright recession is growing as a retreat in housing threatens household balance sheets."

Then, I guess to "leave 'em laughing", they quote two economists named Stephen King and Ian Morris. While these guys may be real hotshots about modern economics as they know it, they don't know squat about modern economics as I know it, as they prove when the article continues "In the last recession, a massive round of tax cuts and a super-loose monetary policy helped the economy get a second wind. Americans will have no such luck this time around, King and Morris warn." Hahahaha! The American government can't have another round of tax cuts and super-loose monetary policy to juice the economy? Hahaha! Who's going to stop them? You? Hahahaha!

This is also probably pretty funny to Chris Laird, of the Prudent Squirrel newsletter, who writes "As financial markets start to show big stress, the central banks and plunge protection teams are going to spend a gigantic sum of money trying to support them. Previous economic collapses have not had the present battery of coordinated central banks and programs such as plunge protection teams to manage their crashes. We now are in a situation where, the next time we have major stock drops, these CB's and PPT's are going to pull out all stops to try and stop a stock panic."

Mr. Laird, proving that he is not quite the gold bear that people think, says that there is an upside to all of this, as "Of course, gold will find any major monetization of financial markets extremely bullish. In this case, gold could easily rocket to $2000 once a consensus was reached by financial markets that such monetization of falling stock markets was under way. I view gold as the most secure way to protect ones wealth, given the fact that there are horrendous financial fundamentals in the world, the emergence of huge credit bubbles that are on the verge of collapsing, and the collapse of the housing bubble that is going to take all the other bubbles down with it."

Bill Bonner of the DailyReckoning.com hears us wailing about this housing bubble stuff, and, instead of coming out into the hall and demanding "for the last time" that I get my ugly, stupid butt off the premises and quit pestering the secretaries, surprisingly joins in and quotes that "it would take a 22% drop in residential real estate prices to bring house prices back to their long-term trendlines. Other experts have predicted a 40% retreat."

Mr. Bonner continues "The anecdotal evidence is not too thin to conclude that the housing market is not just liable to a mild 5% decline, which would wipe $1 trillion from household wealth. Rather, it is likely to see a full-scale retreat, in which the bids disappear altogether. Some experts are predicting as much as a 20% to 40% collapse in prices, which would be as much as $8 trillion in 'wealth' knocked off homeowners' balance sheets" As if that is not enough, he finishes with an extrapolation that "A 40% drop would probably set the economy back about as much as the Great Depression."

-- And, since we are talking about trendlines, Justice Litle of Outstanding Investments makes the bullish case for gold when he writes "In oil terms, gold is the one investment that's still very cheap. Historically, gold averaged a cost on par with 15 barrels of oil. Right now, it takes just over eight barrels of oil to buy an ounce of gold."

The good news is that powerful medications I am gobbling by the handful are now speeding to wherever in the hell they go, and are starting to take effect. Hopefully, we will not have a full-blown Mogambo Episode Of Outrage And Vengeance (MEOOAV). Indeed, my spirits are buoyed by the sweet, secure, satisfying knowledge that gold will protect my wealth. And if you don't think so, and you are not putting money into gold and silver and the shares of gold and silver mining companies (and oil, lest I forget to mention it), then I know that you were not a good student in school. To be fair, neither was I, as my whole day seemed to be filled with beating up guys smaller than I and getting beat up by guys who were bigger. And to tell you the truth, that seemed to be a full-time job in itself, on top of the strain of being raised by mere Earthling parents.

And I am also cheered by the "Elliott Wave Gold Update VIII" by Alf Field, which contains the immortal observation that "people who generally buy and hold gold do so because they understand the concept that it is the ultimate store of wealth and that gold provides protection against the inevitable demise of our existing world wide fiat currency system."

And if you were wondering why gold and silver have had such big declines recently, Bill Murphy, of LemetropoleCafé.com, elucidates. "One of my fears was, because of the desperation of those in power in Washington ahead of the coming elections, that they might bomb gold. It seems that was the plan."

And apparently the other central banks are in on the plan, as the ever-affable Chuck Butler, president of EverBank World Markets, reports that he saw a Reuters news item that "Portugal's central bank sold 15 tons of gold in July and 20 tons in August." He follows this up with the perfect example of central bank stupidity when he writes "You might recall that central banks all signed an agreement about 6 years ago that allows them to sell 'X amount of gold each year. Most central banks have stopped selling gold as the price rose." Hahaha! They sell when it is cheap, and they stop selling when they could get more money per ounce! Hahahaha! This is too, too rich! Thanks, Chuck!

And since everybody seems to have a plan, the Big Mogambo Plan (BMP) is to take advantage of this, and buy more gold and silver at these artificially low prices, capitalizing on the corruption and stupidity of the government when this criminal manipulation scheme goes bust, as it must, because that is always the fate of these kinds of lowlife government corruption.

But on the other hand, thanks to all the stress, my nerves are sharp to the point of almost snapping, and the reflexes in my trigger-finger are like greased lightning. The least little thing, and "Blam blam blam!" bullets are suddenly everywhere, although I then have to sit through another hysterical-but-boring "gun safety" lecture from the wife and kids, who aren't even armed, so how in the hell can they know anything about gun safety to lecture me like that?

And besides, I take my cue from the police, like last week around here when some weirdo in a car allegedly smacked his weirdo girlfriend (also in the car) upside the head, and (so they say) threatened her with a gun. Bad enough.

But what happened next is the lesson in economics. At last count, from what I could see on the TV, traffic was snarled for miles, for the entire afternoon, as at least 30 policemen and nine squad cars surrounded this car, now stopped on the side of the highway, plus at least 5 SWAT team members in full commando armor and with two vehicles of their own, and AN ARMORED FREAKING CAR! Were you asking where all that government spending went? There is a bunch of it, right there, dude! The decades-long bubble in the size of government produced, as bubbles always do, grotesque mal-investments and distortions in the economy. This is merely one of them. An ugly, fascist one at that.

And it is not just America where this kind of idiocy runs rampant, as we learn from Bloomberg.com "Venezuelan vehicle sales rose to a record in August as President Hugo Chavez used surging oil revenue to increase government spending."

I note with a mix of relief and horror that the governments may be getting a discount for cash to buy all of this police equipment, plus the regular upgrades and new technologies, like CD players in their armored cars, and that is perhaps why the Fed literally printed up another $4,979 million in actual cash last week, which I round off to $5 billion, bringing total dollars of Cash in Circulation to $798.573 billion.

I know what you are thinking. That sharp Mogambo-honed brain (SMHB) of yours is saying "Hmmm! I am perplexed by the fact that there is only $798 billion in actual cash in existence, and my wonderful SMHB wonders how that little bit of money can produce an $11 trillion economy, a national debt of $9 trillion, consumer indebtedness that is over $30 trillion, $80 trillion in accrued federal government liabilities, $450 trillion in derivatives, a $600 billion annual federal budget deficit, and an $800 billion trade/current account deficit. How is this possible? Or is The Mogambo just an idiot like everyone says?"

I shall answer your questions in reverse order. Firstly, yes, I am an idiot like everyone says. That is why my wife wears a T-shirt that has an arrow pointing to the right that says "I'm with stupid", and I have to wear a T-shirt that has an arrow pointing left and saying "I'm the stupid one she is with". She says that it is funnier for her than it is embarrassing for me, and so, she says with an enviable, air-tight economic logic, the shirts maximize that kind of utility. Alas, when she's right, she's right. Bitch.

But the good news is that, being a now-identified moron, I can scratch my fat butt anytime I want when we are at the mall, and people leave me alone (which is mostly the whole point), and they have pity on my wife, which is what she thinks she deserves anyway. So, it really IS a win-win situation! Who knew?

Secondly, I smile in satisfaction at your wisdom about the monetary insanity, and, putting the last piece of the puzzle into place, merely remark, in typical Mogambo melodrama, "Hear me, doomed ones! It all came from debt, which comes from Federal Reserve credit, from which springs multiplication by fractional-reserve banking, which creates the debt and the money, which is how money now comes into existence! And the fractional-reserve ratio at the banks is so insane that it has financed a debt so huge, so freaking huge, so un-payably huge, so insanely, monstrously huge that no scale created by man can weigh it!"

Taking a question from the audience, "How ridiculous is the fractional-reserve ratio?" I laugh derisively and say "It can only be crudely estimated by the difference between a paltry $798 billion in cash, and the sum total of everything else! Zillions of dollars in assets, created by an equivalent debt! Hahaha! We're freaking doomed! Doomed! Hahaha! Welcome to the insane hell of fractional-reserve banking!"

Apparently, both the Federal Reserve and their fellow American morons missed the significance of the Modigliani Lifetime Income Hypothesis, which holds that, in the particular and in the aggregate, people cannot spend more over a lifetime than they make over a lifetime. If you try to, through assuming debt and then cleverly dying before you have to pay it back, then the loss incurred by creditors will be the offset to THEIR lifetime income, proving Modigliani's original hypothesis.

If, however, you make the big mistake of taking on more debt and then NOT dying, then you will doubtlessly notice that your future consumption will be, by the necessity of the Modigliani's hypothesis, reduced because of your excessive current consumption.

Maybe this is why consumer credit grew at only a 2.8% annual rate, or by $5.5 billion, in July, slowing markedly from June. I dunno.

But nevertheless, it is the inflation in prices that makes me crazy with fear, and sure enough, on Bloomberg.com we read that "Labor costs rose 4.9 percent in the second quarter compared with the 4 percent gain economists expected. Productivity rose at an annual rate of 1.6 percent after a 4.3 percent pace in the previous quarter."

And if you have done your economics homework (which I doubt), then you know that the word "inflation" refers to a growing amount of money in existence, which only later shows up in higher prices. In that regard, Addison Wiggin, co-author of the best selling book "Empire of Debt ", remarks that "If we were to measure economic health by credit expansion, the United States has the worst inflation in history."

And as far as actual price inflation is concerned, TheInternationalForecaster.com estimates that inflation is actually running at 10.8%!

-- Alert read Martin L. writes that my hyperventilating about how Congress authorized the new Pension Protection Act and its slimy provision for money to be automatically deducted from your paycheck to invest in stocks (in order to boost the stock market) is already old-school, and that I might "be interested in an article entitled 'Oz Finds it's Pot of Gold' that the FT UK today ran in a special report on Australia. Australia. With a 1.56% share of global GDP, it has the fourth largest pool of funds under management, thanks largely to a compulsory employee contributions scheme (called superannuation). Funds under management recently reached Au$1000bn for the first time, and are predicted to reach Au$2500bn by 2015. It's all got to go somewhere. A precedent for the US, no doubt."

-- On a personal note, I am looking forward to appearing at the Silver Summit again this year, now that I have been assured, thanks to the darling Shauna, that nobody will be allowed to throw things at me, no matter how much everyone thinks I "deserve" it for being such a disagreeable idiot, unlike the sorry situation here at home. We'll see!

-- I am always depressed when I read about San Francisco Federal Reserve Bank President Janet Yellen. And there was, I am sorry to say, a new item about her on Bloomberg.com, where she "defended the central bank's pause from two years of interest-rate increases and said inflation may decline 'faster than many forecasters expect.'", and that "it appears that the current stance of policy will move inflation gradually back to the comfort zone while giving due consideration to the risks to economic activity."

My less-than-charitable interpretation is that the Federal Reserve, as exemplified by this horrid woman, is not interested in the welfare of anybody who cannot offset inflation by raising wages or prices. If I call her Janet "Marie Antoinette" Yellen, is she not saying, "The poor, the unemployed, those on fixed incomes? Let them eat cake!"? Or, less satirically, "The poor, the unemployed, those on fixed incomes? The pain of inflation will rise over the coming years, worse and worse every year, but hopefully it will one day stop getting worse and more painful, and so inflation now is okay."

This philosophy does not, in case you were wondering, work at my house, as I found out when I tried to offset the higher greens fees at the golf course by cutting my family's one-bucketful-per-day ration of inexpensive ("It's tastes like crap! That's why it's cheap!") gruel by a lousy pint (about 2%), even though I told them that as soon as I start making the Big Golf Bucks on the PGA tour, they would eat better food.

This, of course, brought up their inevitable observation that I am a dismal failure as a father, husband and human being, which I defended by noting that the Federal Reserve has completely failed in its mission, too, which is to achieve "stable prices." And we are both (in case you are keeping score) still failing, as inflation is heating up and I cut their damned gruel rations by TWO pints!

The article goes on to say "In her last speech, eight days before the Aug. 8 Fed meeting, Yellen said the current fed funds rate was 'in a vicinity that is roughly appropriate' to temper inflation pressures without choking off economic growth." Hahaha! In short, she says that they are homing in on the mythical Holy Grail of economics! Hahahaha! What an idiot!

On the other hand, this is great, great news, as now I know that the Federal Reserve will believe ridiculous fairy tales and fantasies, like finding an interest rate that will "temper inflationary pressures without choking off economic growth." I say this because I have a Fabulous Mogambo Magic Amulet (FMMA) that I can sell (for top dollar) to the Fed that will not "temper inflationary pressures without choking off economic growth", in case that interest rate thing, you know, doesn't work this time like it has never, ever worked in the past, either.

The article notes that "New research by John C. Williams, an economist at Yellen's bank, shows less evidence of the 'persistence' of inflation over the past 10 years." One of her toadying underlings finds "less evidence" that inflation is "persistent"? Hahaha! Either it is, or it isn't, dude! And the real answer is that it is, and that the Fed has been a miserable, persistent failure for at least "the past 10 years."

But my eyes bug out in stunned disbelief as she uses this idiocy to say "Inflation has tended to revert to its long-run average, which, over that period, is within my comfort zone." Hahaha! What a despicable, loathsome woman! Not only is she an ignorant twit about statistics (in that ALL things have to revert to their long-term averages, unless it IS the average, as that is how the simple mathematics of averaging work), but even beyond that she is saying "Inflation may be killing you now, and getting worse, but I don't care because over the next ten years it will come back down!" Hahahaha!

In "Marie Antoinette speak", that means she is "comfortable" with causing more misery, per year, every year, for those who cannot offset inflation with higher wages or prices because of some mathematical oddity. This is exactly the despicable kind of trashy people who are running the Federal Reserve banking system. And they are, I am extremely sorry to say, all just like that.

To prove it, I have to merely point to a Bloomberg.com news report by Kathleen Hays and Scott Lanman, who write that St. Louis Fed President William Poole said that "The Federal Reserve can be 'patient' in considering whether to raise interest rates again, even while inflation stands above the comfort level of policy makers." His actual remark was "If we believe that we're headed off in the right direction, then we can be patient and sit there and not create a disturbance in the economy." Hahaha! What a (to quote Daffy Duck) maroon! Eliminating inflation, that he and his filthy Fed friends have wrought, might create a "disturbance" if they stopped creating inflation? Hahaha!

Or how about Boston Federal Reserve President Cathy Minehan, who bizarrely thinks that inflation comes from oil or something, and not from her and her precious Federal Reserve creating excessive amounts of money and credit. According to Reuters, she actually said "If energy prices stabilize as is indicated in futures markets, then core inflation will subside." Hahaha! Morons!

To illustrate how even "low" inflation of 3% is a terror, Money Morning newsletter writes "Over the last 7 years, living under 'benign' inflation as the Bank of England has the cheek to call it, your wealth has evaporated at the rate of more than 3% every year... turning £100 into just £79.60 by January 2005."

And don't get the bright idea that you can just go down there with your shiny Mogambo Ranger Badge (MRB) and gun to arrest them for treason, because bitter experience has shown that bigger guys with bigger badges and bigger guns will come and take them back, and then put ME in jail, like I'm the one that has done something wrong!

-- Bloomberg is also the source for the despondent news of a speech by Chinese Finance Minister Jin Renqing. The article says "China, responding to criticism from the U.S. and Europe that the yuan is artificially weak, said it will be 'more proactive and progressive' in letting the market set the currency's value", which means, of course, that the government will be doing more meddling, as that is the definition of "proactive", to make the dollar weaker, as that is the definition of "the yuan is artificially weak."

The article goes on to announce that, sure enough, "The yuan this week reached its strongest against the dollar since China ended its peg to the U.S. currency in July 2005, after the central bank on Aug. 9 said it would use exchange-rate policy to help cool export-led economic growth."

I think I speak for all Americans when I say that my natural reaction is "Screw China and their booming export-led economic growth! How does this affect me, me, me?" The answer is simplicity itself; imports from China will cost more because the dollar will buy less.

Thus, I weep as my worst fears are confirmed. My days of consuming mass quantities (thank you, Beldar Conehead) of cheap stuff are over. Now all I have to do is, like you, figure out a way to consume mass quantities of expensive stuff! Hahahaha!

And the decline of the dollar is elsewhere in the news, and even Money Morning newsletter talks about the "collapsing US dollar." They write that "It has lost over nearly 40% against the Euro since 2001."

And if you want to see the effect of a weaker dollar, then go take a look at the Stockmarkets table in the back of the Economist magazine. You will notice that while ALL of the mature stock markets (ex Japan) have shown gains since December 30, 2005 when measured in "local currency", in terms of dollars they have made HUGE gains! In fact, when measured in dollar terms, even Japan is showing a gain!

And how will a weaker dollar affect us? Alert reader Ajit V. notes that "What most people forget is that the dollar is worthless and the price of oil vis a vis the dollar is not unreasonable."

This is, I think, not only very true, but is also my rebuttal to anybody who thinks that oil and commodities will not rise and rise in price as we go through the years; demand will be up, supply will not keep up, and the dollar will have less buying power as the Federal Reserve keeps creating more and more dollars, credit and debt. Ergo, oil will rise and rise in price.

Perhaps Mike Shedlock of GlobalEconomicAnalysis.blogspot.com puts it better when he says, "In the face of a global economy, anyone that expects the Fed to be able to control the global demand for commodities via interest rate policies without causing a worldwide depression is simply nuts."

-- At the end of a terrific George Carlin skit on MySpace.com about the loathsome economic system that has developed, he says "They call it 'The American Dream' because you have to be asleep to believe it." Hahaha! Ugh.

****Mogambo sez: I am almost giddy with glee that gold and silver are being manipulated down like this, as it means "bargains galore!" Whee!



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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