This article originally appeared at The Daily Reckoning.
-- The Federal Reserve spent last week lowering Total Fed Credit by $5.6 billion, which means that, apparently, they are, indeed, pausing in their long-running concerted efforts to destroy the defenseless dollar by continual over-issuance of more money and credit. And, on top of that, the Treasury engineered a $2.3 billion drop in actual cash from the economy last week, too. Not, I hasten to add, the things from which economic paradise is made, but its polar opposite, which is economic hell, which may partially explain my glum expression and sour disposition.
But the lack of monetary stimulus apparently has little effect, as the stock market and the bond market found money to invest from someplace else, and both are (paradoxically at odds with economic indicators), back up to nosebleed levels of over-valuation again.
And so it is painfully obvious that everyone fully expects a falling economy, and they expect the Federal Reserve to predictably lower interest rates dramatically in response, and thus everything will be wonderful, wonderful, wonderful from here on out.
Thus, it makes a sort of sick sense to buy bonds, and bear the brunt of Undisguised Mogambo Disdain (UMD) for looking like an idiot by accepting a bond yield that is less than the rate of inflation. I know it sounds bizarre, but the way they say it works is that when the Fed lowers the Fed Funds interest rate, other interest rate things bounce around and around, ending up with your old bond (paying a higher rate than is available from buying new bonds) going up in price! You lose money on the yield in the short run, anticipating that you make it up on the price rise because the economy is going into the crapper, by speculating on the Fed always lowering interest rates in desperation, making existing bond prices rise.
And thus is makes a similar sick sort of sense to buy stocks at the beginning of an economic decline, too, as all this new money causes the economy (or parts of it) to perk up, and people start showing profits as these new buyers, flush with all this new cash, buy things from the present owners at higher prices. And the paltry, laughably low dividend paid by stocks looks somewhat less paltry (but still laughably low), compared to such low interest rates, too.
This thinking, while appropriate at some part of the cycle (the start, currently referred to as "the distant past"), is wildly inappropriate in some other part of the cycle (the end, which is composed of the remaining two parts, Now and the Future), which we shall soon discover the hard way, again.
And if you want to know why, then all you have to do is read an excellent piece that explains the rationale behind the entire Austrian Business Cycle Theory, aka the Austrian school of economics, that the kind folks at DailyReckoning.com site posted for you. The remarkable essay is entitled "The Virtues and Alleged Shortcomings of the Gold Standard", and is from Chapter 21 of Ludwig von Mises' book, "The Theory of Money and Credit".
I recommend it highly, so that in the future when the bankrupted world holds its battered head in its hands, and your filthy, scrawny little ragamuffin children and grandchildren look up from rooting around in the dirt for bugs to eat, to ask "What in the hell happened to the money?", you can tell them.
-- Perhaps one big reason that gold has been down lately comes from Reuters, who report "Europe's central banks have stepped up sales of gold as the deadline for the current phase of an agreement limiting bullion sales approaches."
In response to this impending dumping of gold onto the market, I think gold has done VERY well in price, because without this continual, huge glut of gold being dumped on the market by (at the source) governments, the price of gold would be soaring, soaring, soaring from the latest news about how to calculate inflation.
The idea is to convert back to the old way of calculating inflation, as measured by the Consumer Price Index (CPI), which is a theoretical market basket of goods, supposedly representing what people routinely buy, and used to calculate inflation by noting the changes in the prices of each item from month to month. Seems simple enough.
For the last quarter of a century, however, the CPI has "conveniently" left out the costs of energy and food. But now, thanks to public outrage, things may soon change, and the much-abused-and-viciously-contorted CPI may be replaced by the "trimmed mean PCE", as explained by Dallas Fed's top dog Harvey Rosenblum, who said "The Federal Reserve should move away from using inflation measures that exclude food and energy since they make the central bank seem aloof from the reality of rising costs faced by Americans. Excluding food and energy angers many people. It makes the Fed seem out of touch."
And why are food and energy excluded from modern calculations of inflation in the first place? To lie, my naïve little darling! Why else does the government change anything? Hahahaha! They don't see it that way, of course, and instead rationalize it as "Food and energy costs were originally excluded from the inflationary equation in the late 1970s," he says, "when prices in those sectors were particularly volatile." He admits that "the measure is now outdated and does not capture the full scope of underlying price shifts."
Reuters goes on to say "Indeed, the gap between inflation readings that make the headlines and those used by policy-makers is considerable."
How "considerable?" They continue, "The overall Consumer Price Index for July jumped 4.1 percent compared with the same month last year. In contrast, the core CPI rose just 2.4 percent."
Hahaha! So real inflation, the kind we proletariat worker-bee trash have to pay out of our pathetically small incomes, our spilled financial blood lubricating the cogs of the soulless machinery of government and bank-induced inflation, is actually 71% higher than the stupid "core" inflation rate that we are having crammed down our throats? Hahaha! We Americans are such trusting, gullible morons! No wonder people laugh at us! And no wonder we are so doomed!
Reuters puts it more tactfully than that, and soothingly says "Importantly for markets though, such a 'trimmed mean PCE' yields a more disturbing picture of price growth currently filtering through the economy than that presumed by analysts."
This is causing tremors of fear throughout the Fed and the Congress, not to mention people who have been buying and selling US bonds on the basis of the old, too-low inflation figures. This means that their bonds are already grossly overpriced, according to the pricing model that incorporates inflation! Yikes!
And the mood will get more sour because of the trend of growth in GDP, which was, not long ago, piddling along with 5% GDP trend of growth, then trending down to 3.5% growth, and now, in the second quarter, trending down to a measly 2.9% growth in GDP.
A hand goes up in the front row. The snotty little reporter from the Times asks "Why is this so bad? GDP is forecast to have positive growth, and so how can that be bad, you stupid Mogambo idiot (SMI)? Or is your economic analysis as stupid as you look?"
Instantly, at the sound of the insult, my hand instinctively reaches under my jacket, clawing for my trusty Klingon blaster, or a Romulan disrupter, or even an Earth pistol, hopefully one with big, hollow-point slugs so this Earthling's head will make a big splash of an explosion as an object lesson to all the other reporters! I laugh maniacally "Hahahaha! You want a little Mogambo jihad, you little bastards? You got it!" Suddenly, my hand coming up empty, I am horrified to find that, for some reason, I am completely unarmed!
Scrambling for another course of action, I quickly feign cool nonchalance, and politely, but icily, say "Because, butthead, raw GDP is the way they measure GDP, which is the total of money made from final sales. Some of that is, of course, the result of higher prices, or are you too stupid to realize that?"
Then, to make sure that he got the point, I threw a chair at him, screamed death threats at them all, and the place exploded in pandemonium. If he had not been so rude to me, I would have explained that the reason that this is so important is that, by example, if last year the raw GDP number came from selling one widget for a buck (a $1 GDP), and this year raw GDP was one widget sold for two bucks (a $2 GDP), the economy looks like it doubled! GDP went from $1 to $2! But in reality, it did not actually grow; only one lousy widget was made and sold! The only thing that changed was the price of the widget, which is inflation itself.
So if you want to know how the REAL economy is going in the exciting world of GDP and widget-making, you have to reduce the raw GDP figure by the rate of inflation.
Uh-oh!! Those of you familiar with the Mogambo Theory Of Soundtracks (MTOS) recognize the sense of foreboding doom as, suddenly, the soundtrack is filled with low, rumbling horns making screechy, horrible, dis-chords, and the penetrating sound of doomed souls wailing in economic and financial despair. Obviously, this is where it gets very interesting!
See, if the rate of inflation that you use to deflate the raw GDP number is too low (like it is now!), then the estimate of real, inflation-adjusted GDP is too high! The economy looks like it is going great, but it is, obviously, not. It's just that prices are rising!
So, if GDP is predicted to grow only 2.9%, with the assumption that inflation is only 3%, then the error is huuuUUUuuge when you use the 3% inflation to go back to get the raw GDP number, and then deflate by the actual rate of inflation (probably somewhere between 4.1% and 10%).
When you do that, you get a result that is so horrible, so terrifying to see that, like looking at a Gorgon, my brain is literally turning to stone, and all I can do is claw at my own head and cry out in anguish, "Not only are we in recession, as real GDP growth is actually negative, but we have been in one for years and years! Gaaahhh!"
To repeat: We are, and have been, in a recession, according to the new inflation number!
And if being in a recession is not bad enough, stocks and bonds and housing were going up in price all those years, even though we were actually in a recession, and they should have gone down, so they are now insanely over-priced! We're all freaking doooooomed!
The government is alarmed at this, because this is exactly the kind of thing that sets The Mogambo off, and pretty soon there is bound to be another "Unfortunate Mogambo Incident (UMI)", meaning that the elected halfwits have NOT solved "The Mogambo Problem" as they promised in campaign speeches.
And another reason that the government is alarmed about this "trimmed mean PCE" inflation thing is that, as Doug Noland reports in his Credit Bubble Bulletin column at PrudentBear.com, "Total Spending is running 7.6% ahead of last year, with Social Security up 4.7%, National Defense 6%, Medicare 13.7%, Interest 22.2%, and Health 1.5%."
Note with dread, my Precious Mogambo Darling (PMD), that Interest Expense is the fastest growing item in the budget, multiplying at 22% a year! What was it that I said earlier? Oh, yeah, I remember now! "We're all freaking doooooooooomed!"
And with inflation rising, and since (theoretically) interest rates will rise in response, this 22% rise in Interest Expense will soon seem like chicken feed when combined with the magnitude of new government deficit-spending necessary to extend the stock market boom, and the bond market boom, and the housing boom, and the boom in government spending from these absurdly elevated levels!
And (as you can tell by the way my voice is tragically breaking), it gets worse and worse, as all this new money will show up as a further rise in prices, where already it is getting bad, as we learn from Bloomberg.com by reading that the Labor Department said "Prices of goods imported into the U.S. rose more than expected in August, led by increases in oil, natural gas and metals." The ugly specifics were that "Last month's 0.8 percent increase in import prices followed a revised 1 percent gain in July."
Not unexpectedly, "A Commerce Department report on Sept. 12 showed the U.S. trade deficit unexpectedly surged to a record $68 billion in July as imports increased and exports declined."
The increase in these imports, and the decline in exports, can be explained simply by the fall in the U.S. dollar, which is falling because the despicable Federal Reserve keeps on creating more money and credit with every gasp of its fetid breath. Thus, things that we buy from foreigners cost more, simply because the each dollar buys less!
And because imports were up in price, we can conclude that foreigners are saying, in a literal translation, "Bah! No need-um American dollars be paid in, him guaranteed down in value to go, and so I would be taking a big stupid risk of taking a big stupid loss between the time I got paid in dollars and the time I got rid of that dollar crap! So I'm charging you a higher price, American swine, on top of the higher price due to the change in the exchange rate as your ridiculous dollar falls in value!"
Then we see why food is more expensive, too, as they report that while "Prices of U.S. exports rose 0.4 percent for a second month," which is bad enough, the salient point was that "Prices for farm exports rose 1.0 percent, while those for non-farm exports rose 0.4 percent." One percent! In one month! 12% annual inflation in food prices? Yow!
So how much has the dollar fallen? They continue "The U.S. dollar has fallen 2.9 percent this year against a trade-weighted basket of currencies of trading partners. From a year earlier, prices of imported goods rose 6.6 percent, compared with a 7.2 percent increase in July."
7.2% annual fall in purchasing power of the dollar! People should be rioting in the streets! This is the worst news you could imagine! Worse than learning that The Mogambo is moving in next door!
It is this horrifying, terrifying increasing price inflation thing that has, oddly enough, resulted in my being apprehended by the local Gestapo squad for merely running down the street. The police, on the other hand, have this bogus story full of lies that I was picked up for "disturbing the peace" at 2 a.m.
They base their whole flimsy case on "evidence" provided by my hateful neighbors in a vile, vast conspiracy, as they submitted audio tapes of someone, who sounds something like me, screaming "Wake up and prepare to be destroyed by inflation, you fat, stupid idiots! Inflation is soaring! And yet you are not buying gold and silver? What kind of stupid, moronic, halfwitted, dim-bulb piece of ignorant trash are you anyway? And yeah, I'm talking about you, too, Bob!"
It was, alas, the videotapes that made me change my defense strategy in mid-gallop. I now claim that it is protected speech, and I am, actually, a patriotic hero! Like Paul Revere, when he rode through the streets of Concord at 2 a.m. yelling "Wake up and prepare to be destroyed by the Redcoats, who are coming, you stupid, fat idiots! What kind of stupid, moronic, halfwitted, dim-bulb piece of ignorant trash are you anyway? And yeah, I'm talking about you, too, Bob!"
My whole legal strategy hinges on the crucial fact that the history books are actually quite vague on exactly WHAT Paul Revere said. But this is not about my legal troubles, but about inflation in prices and why you should be out buying as much silver and gold as you can. And if you are not, then you are an idiot. And yes, I'm talking about you, too, Bob.
Another reason that gold is not yet soaring to the moon and beyond, going where no ounce has gone before, may be that it takes a certain kind of bravery to fight the last-ditch, desperate, deliberate dis-hoarding of gold by the central banks of the world, as we find in an essay by the ResourceInvestor.com, with the headline "European Gold Agreement (EGA) To Hit The Quota By September 26".
This EGA is the agreement where the central banks all want to sell their own nation's gold, to get some money, but they agree that a mass dumping of gold would not be a good thing, as the price would collapse in the face of such a glut of supply. So they agreed to do it gradually. And now "As of September 1, the 15 EGA central banks have reportedly sold roughly 340 tonnes. In order to hit the maximum amount of gold permitted by the agreement, the banks would have to sell about 160 tonnes in just under a month to hit the yearly quota of 500 tonnes by the deadline."
But since governments and central banks are always wrong in the long run, my feelings correspond exactly to those of reader Wayne, who says about gold, "Be long or be wrong!!!!" And he must be right because, I'm sure you noted, he tips his hand when he utilizes the extremely-rare "quadruple exclamation point" that we've always heard about, but few have actually seen. And no surer proof of certitude exists, unless there is a "gold bear" out there who says "Go long and be wrong!!!!!" with the awesome appearance of the fabled quintuple exclamation point. But if someone did say it, I haven't read it. Lesson: go long gold. The exclamation points are never wrong!
-- Reader John D. writes that The Mogambo was absolutely right that people who have to pay higher prices (and thus have less buying power to spend) will try to scrimp a little bit on all of their disgusting habits, rather than just eliminating anything altogether. Well, he didn't actually say that, but he might as well have, when he said "The last time I filled my sedan ($35), there were totals on the 5 other pumps as follows: $20, $10, $10, $5 and $10. The $5 was for 1.9 gallons of regular. Where can you drive an SUV on that amount of gas?"
Excellent observation and excellent question! Theoretically, John, far enough to buy a little less food, have a few less drinks at the bar, buy a few less lottery tickets, buy a little less clothes and shoes, have a few less pizzas delivered, go out to lunch a few less times, over and over and over as inflation nibbles away larger and larger chunks of your spending power, month after month, year after year, and finally you end up broke and spending a lot more time at home, listening to the wife and family whining and complaining, wanting me to either give them more money or give them some of my blood for some weird voodoo spell or something, and I give it to them, hoping that it works because I am sick, sick, sick of living like this.
This, then, is the true horror of inflation.
-- If you want more proof that the idiocy of trying to buy your way out of problems, caused by trying to buy your way out of problems, is now not only irrational and stupid but pandemic and international, from a Bloomberg.com article entitled "IMF Identifies Risk of 'Disorderly' U.S. Dollar Drop" we read that the dollar is going to drop, which is okay with the IMF, but that "A 'disorderly' drop in the dollar is the biggest risk to world financial markets, the International Monetary Fund said, urging policy makers to" and here is the point at which your skin should crawl in horror, "prepare and act quickly when asset prices slump."
I leap to my feet, putting my Mogambo propeller beanie (MPB) on my head to keep my overheating brain from melting in sheer wattage of outrage, and loudly exclaim "Hold it right there, pinhead! I laugh at you and your monetary and fiscal insanities, as it is those same old idiocies that got us to this point, you stupid moron!"
As a clever, indirect way of saying "Get a load of this!", the Bloomberg article said "Investors are buying U.S. bonds under the assumption that the dollar won't slide, and a drop in the currency might turn into a rout as foreign investors and central banks move to cut losses."
You may be interested to know that thanks to my Mogambo Junior Detective Kit (MJDK) and a little expert snooping in dumpsters outside the IMF offices, I was able to obtain not only a dozen perfectly good donuts, but also the actual first draft of this very news release! The brave, heroic Mogambo Inter-Galactic News Service scooped the world and broke the story that the memo originally read "Investors are buying U.S. bonds under the abysmally stupid assumption that the dollar won't slide, and we are laughing our big fat IMF butts off about their unbelievable stupidity. And the guaranteed drop in the ridiculously over-valued dollar will almost certainly turn into a rout sooner or later as foreign investors and central banks move to cut losses that are so huge, so monstrously huge, so impossibly huge, that they will bankrupt this entire sector of the freaking solar system when the grotesquely bloated, misshapen, cancerous, malignant debt-addled economy implodes, as it must."
And perhaps I am not altogether crazy in predicting the end of the world, as Ike Iossof, of Aegean Capital Group, writes in his Market Wrap Up at FinancialSense.com that there are ominous divergences "in the McClellan Oscillator, in the New Highs/New Lows ratio, and also notice that the VIX is at the bottom of its range. Readings like these have never accompanied the beginning of a major up-leg. There is always 'a first time' for everything, but would you like to bet on that 'first time' with your money? Probably not!"
-- If you like theater of the absurd, then you will love "Everyone Loves A Parade!" by Rob Kirby of Kirby Analytics. He writes "J.P. Morgan Chase's derivatives book grew from 48.26 Trillion notional at Q4/05 to 53.76 Trillion at Q1/06. That's RECORD new growth of 5.5 TRILLION notional, folks!"
Note the clever use of capitalization to indicate emphasis, which makes the ending exclamation point seem almost, umm, understated. Seizing my red "Editor's pencil", I change it to read "...$5.5 TRILLION notional, folks!!" with the more powerful double exclamation point, which seems better suited to convey the significance of it all.
But, if you are like me, then your eyes immediately glazed over at the shock of learning that this is somehow vitally important but we have no idea what or why, made more mysterious and scary by the sheer incomprehensibility of the creation of $5.5 trillion in new derivatives in one quarter.
Mr. Kirby, wise to the ways of The Mogambo, sees that first little bit of Stunned-Mogambo Drool (SMD) coming out of the corner of my mouth, and instantly realizing his mistake, quickly backtracks by saying "Let's first try to quantify just how much a $5.5 trillion build in a derivatives trading book over a three month period really is, shall we?"
My mind is charmed by his use of the word "we", as we both know he means "him", as I am far, far, far too stupid to participate in building anything (unless you define "making of mess of everything I touch" as "building", except maybe in a Schumpeterian "creative destruction" kind of way), and sure enough he goes on without me, saying "The first quarter of 2006 contained 65 business days [64 excluding Presidents Day]. $5.5 Trillion divided by 65 equals $84.6 Billion per day in NEW BUSINESS - forgetting rollover of existing business which, in itself, must be massive."
Someone is creating $84 billion, per day, in new derivatives contracts? I leap to my feet and shout "One day? In one day? In one freaking day?" I am stunned. I am scared. I may have peed in my pants. Ugh.
****Mogambo sez: I thought I would like watching the collapse of the economic world as this monetary and fiscal insanity played itself out. I don't.
I thought I would like watching gold and silver go up as a result of the collapse of the economic world as this monetary and fiscal insanity played itself out. I do.
Perhaps there is a lesson in there for you, too!