This article originally appeared at The Daily Reckoning.
-- I don't know if it was because Total Fed Credit was down again by $3.7 billion last week, or that foreign central banks pulled out $12 billion from their account at the Fed, or that my wife is getting suspicious about something, or what, but something unnerving is in the air. And at times like these I think of the lyrics of the song "Ghost Busters" that goes something like "Something strange in the neighborhood. Something weird, and it don't look good!" And if you saw the movie, you know he was exactly right!
The sensitive economic nose of The Mogambo goes "sniff, sniff, sniff", and I triumphantly announce that the stench is not my feet, as is commonly assumed, but the rotting, bloated, inflationary, gangrenous body of the economy, and it portends the dismal, bankrupted, angry, cataclysmic end of the stock/bond/real estate/debt/government bubble, but (sniff, sniff, sniff) apparently covered over with gravy and chocolate sauce.
Michael A. Nystrom, in his essay at BullNotBull.com titled "Dow Manipulation" seems to agree with me. He notes that the litany of bad news is overwhelming when he lists "The yield curve has remained inverted for months; we had the first negative reading in the Philly Fed index in three years; national housing sales have plunged and prices are showing their first declines since 1993. The index of leading economic indicators has declined for seven straight months. Online advertising revenue is down; newspaper advertising revenue is down; the help wanted index is down. Across the board the economic news is terrible - everything is pointing to a recession."
So why are the stock and bond markets rallying? Government manipulation! "It makes me consider," he says, "that the only thing standing between this market and a crash are the November elections." Then he says the one thing guaranteed to send The Mogambo into a fit of panic and screaming, namely that inflation is soaring. "Under normal circumstances," he says, "today's inflation report - the highest inflation reading in 11 years - would have absolutely creamed the market. There is, to put it mildly, something fishy about this market."
And when something is "fishy", it means that it will get older, stinkier and more "fishy", as it always does, until it rots away. And that lugubrious day may be coming sooner than any of us realizes, as Susan Albright has an article posted on IndiaDay.com titled "US Stock market showing huge divergence - a sure sign of a coming multi-year bear market." In particular, the Russell 2000 versus the Dow is behaving strangely, although she did not mention the divergences between the Industrials and the Transports, as does Richard Russell of the Dow Theory Letters. She writes, as does Mr. Russell in the final analysis, that these huge divergences are "a sure sign of a coming multi-year bear market", and that these kinds of anomalies are a "technical analysis tool for calling major bear markets."
Her analysis? "The prospect of the economy going into recession is high. The growth prospects are low. The liquidity driven market may have already seen its best days."
In a related note, the trade deficit is now greater than the current account deficit, meaning that we are importing more and more stuff from overseas, but we are not "exporting" as much services, and/or foreigners are not plowing their money into the USA, with customary reckless abandon. So where in the hell all this money is coming from to keep the stock and bond markets elevated is beyond me. But somebody is in for a shock.
And in that regard, Bryon W. King of Daily Reckoning writes that in following the definition of "financial crisis" defined by "the great analyst Charles Kindleberger", then "Financial crises are 'associated with changed expectations that lead owners of wealth to try to shift quickly out of one type of asset into another, with resulting falls in prices of the first type of asset, and, frequently, bankruptcy."
He profoundly goes on to write, "Thus, financial crises are a product of sudden alterations of expectations, rooted in reality or imagination. If you are looking for a way to avoid financial disaster, this is the key level of understanding."
I was surprised that he did NOT immediately go into a Patented Mogambo Tirade (PMT) about gold, which I would certainly have done, as in one short sentence he combines "financial disaster" with "a way to avoid"! Fabulous!
I leap to my feet, knocking the plate of nachos I had in my lap to the floor, which unfortunately makes them gritty and hard to chew, and I shout "And what other way IS there, except by buying gold? Financial crises and disasters, created by governments and bankers, ARE what propel all of history!" Unbeknownst to me, the security guards, in undercover mode, were sitting right next to me, and instantly I was being manhandled and hustled out of the room. But they had foolishly forgotten to bring the gag with them, so as I was being dragged out I was yelling "Gold! In all of the crises in history, nothing has ever combined 'financial disaster' with 'a way to avoid' like gold! Gold has always treated its owners very, very well! Usually when everything else (and everybody, like your neighbors and family) treated you badly! Like your nasty little goon squad here!"
The good news is that this "changed expectations" is classic "alternative energy" at its finest, in that the poisonous gaseous vapors of the rotting economy are the high-octane fuel for the coming Great Gold Rally, where the world is divided into two camps. In one camp are desperate, panicky people selling everything in their stock/bond/real estate/debt/government portfolios to buy gold and silver and hard assets.
And in the other camp are the people who already own gold and silver, and are watching themselves getting rich, richer, richest as the price climbs, climbers, climbests, week after week, month after month, year after year! And all without lifting a finger! A finger! In fact, as will be indicated in your permanent file, that is what you gave your boss a long time ago because of the riches you made in silver. And now we are all retired, having the time of our lives, since I assume the wife and family will take half of everything and finally leave, since I am sure that I will have become completely insufferable, and I will fondly remember how I called out after them "I hate all of you!" and they will have yelled back, as they motored away, "We hate you, too, dad!" which completely rules out any slim, slim, slim chance of reconciliation. So get more silver now!
We may be getting evidence of this sort from alert reader Matthew C, who notes that "the once plentiful supply of 'junk silver' available on eBay seems have almost completely dried up." And alert reader Frank says "suddenly now very little gold or silver for sale on eBay."
And speaking of silver, something big is coming, as we gather from David Bond at the Wallace Street Journal, who got it from Peter Spina at Goldseek.com, who got it from Ted Butler at InvestmentRarities.com, that" Barclay's iShares filed Securities and Exchange Commission S-1 to acquire another 168 million ounces of silver." Mr. Bond helpfully notes that "That would be 11,525,000 pounds, or 5,232,452 kilos, of the stuff", which is roughly "one-tenth of the entire output of the Coeur d'Alene Mining District since the 1880s."
Supposedly, this is more than the entire stock of silver in the Comex warehouses!
-- Alert reader Arthur K forwarded a summary of "USA Personal Income and Its Disposition" with the source of the data being "USA Department of Commerce Bureau of Economic Analysis since 1953" from bea.gov. The salient point was that, in all that time, the personal savings rate had never dipped below 7% (and was usually comfortably higher than that). People saved money.
Did you notice how, suddenly, everything got all gloomy and dark? That is because I now reveal that this positive level of saving only persisted until 1987, the year that the horrid Alan Greenspan befouled the Federal Reserve and started creating money and credit like it was going out of style.
By 1993, only six years later, he had so devalued the dollar so much that prices were progressively higher, so that people were only able to save 5.8% of income. And since then, thirteen years later, it has gotten so progressively bad that not only are people now saving nothing, zero, zip, zilch, squat, but they have to constantly go deeper and deeper into debt! Every month! The actual number that should make you gag on your own vomit was that savings have hit a new low; a minus 0.9% of income!
Does THIS sound like the behavior of a rational, educated people who should be trusted with nuclear weapons? Of course not! No wonder the world hates and fears us! Well, maybe it's because we routinely kill so many of them, but it's worth thinking about!
Part of the explanation may be that "Americans Becoming Increasingly House Poor", as said a headline from the Associated Press at msnbc.com. It goes on to say that housing costs (defined as mortgage payments, taxes, insurance and utilities) are "excessive if they top 30 percent of household income. Nationally, 34.5 percent of homeowners with a mortgage had housing costs that topped that benchmark in 2005, an increase from 26.7 percent in 1999. Nearly half of California homeowners -- 48 percent -- spent more than 30 percent of their incomes on housing last year."
And for renters the news is as bad, according to the Census Bureau's American Community Survey, which said that last year almost 46% of all renters paid 30% or more of their gross income on housing.
-- Reader George W suggest that we update our "official lexicon" by changing the spelling of the phrase "health insurance", as it is more accurately "replaced with the identical-sounding 'hellth insurance', in order to more accurately convey the dual misery dealt to my body and my wallet."
And since we are talking about health insurance, it is in "crisis" because the socialist/communist morons in Congress spent half their time over the last couple of decades passing law after law requiring that healthcare providers give first-class treatment to anybody who showed up, regardless of ability or even intention to pay, and the other half of their time passing law after law requiring insurers to cover more and more things. And since somebody has to pay for it all, the "healthcare crisis" is more aptly named "Congressional-induced inflation crisis in the cost of healthcare."
-- If you want a job that will surely end in disaster, thus saving you a lot of time and energy spending 80 hours a week trying to do a good job and then still failing miserably, then you are in luck. Doug Noland quotes Richard McGregor in the Financial Times as writing "Within the next few weeks, China's reserves are due to top $1,000bn - a record for any country, let alone a developing nation like China. 'One trillion is a big amount, but it is also a hot potato,' says Ha Jiming, chief economist at China International Capital Corp. 'If it is not well managed, any erosion of value will be a source of shame for whoever is responsible for it.'"
-- To show you that governments tinkering with the economic statistics to disguise its egregious failings and stupidities is now universal, from the Financial Times we read "Greece suddenly found itself 25 per cent richer yesterday after a surprise upward revision of its gross domestic product, the fruit of a change to national accounts designed to capture better a fast-growing service sector - including parts of the black economy such as prostitution and money laundering." Hahaha! The government of Greece has been spending and spending so much that their public debt, "already among the highest in the eurozone", but thanks to this trick, it would "shrink at a stroke to 85 per cent of GDP from 107.5 per cent."
This sick, slimy sleight-of-hand means that the Greek budget deficit, now exceeding the 2% limits set by the European Union, "would fall well below the EU's limit, from 2.1 per cent to 1.9 per cent of GDP."
The news is not all good, however, as "Among the snags of becoming so much richer, Greece will have to contribute more to the EU budget and could lose €470m (£318m) a year in EU funds earmarked for poor countries." Hahahaha! They thought they were so smart, and shot themselves in the foot: They haven't increased tax revenues by a lousy drachma, but they will get less from the EU in "welfare"! And have to pay more to the EU, too! Hahaha! Nice move, morons!
-- Doug Noland has thoughtfully provided, in his Credit Bubble Bulletin, the Mogambo Laugh Of The Week (MLOTW) by transcribing The Women's Economic Round Table forum attended by "New York Federal Reserve Bank President Timothy Geithner, former NY Fed President and FOMC Chairman Paul Volcker, former NY Fed chief and FOMC vice-chairman Gerald Corrigan, and former NY Fed President William McDonough."
One immediate topic was the legendary Fed "bailout" of Long-Term Capital Management, which had set up some complicated bets to the tune of $125 billion, of which $120 billion was borrowed.
We fast-forward to a question by Heidi Miller. "And I wonder if, in retrospect, Mr. Corrigan, you think that intervening in Long-Term Capital was a wise decision and if so, do you think it made any difference long-term in the evolution of the hedge fund market?"
Gerald Corrigan replies: "First of all, I would take exception with the term 'intervention' or 'intervening.'" William McDonough chimes in with "Bravo." The Mogambo leaps up with "Hahahaha!"
Mr. Corrigan explains that they are all just a bunch of swell guys sitting around shooting the bull. "If every time I called a meeting, to bring together at 33 Liberty Street (NY Fed offices) a bunch of chief executive officers of financial institutions, that had been defined as intervention, I would've made Attila the Hun look like a pacifist." What? What? What? Attila the Hun? What in the hell kind of insane, bizarre analogy is that? And why in the hell are you always calling these powerful people to your offices, anyway? And why do they come? What in the hell is going on here?
He does not explain, but blithely goes on to say that the Fed merely provided "a setting within which a broad cross section of leaders from the private sector were able to sit down in the presence of each other, and sort out what they collectively thought was in their best interest and in the best public interest to stabilize what potentially could have been a very, very, very nasty situation."
Note that he said "In their best interest"! Aha! What he means is "banks", as some idiot bankers had stupidly loaned a lot of money to a bunch of arrogant, conceited men, and were going to have to lose money for being so impossibly stupid, and that keeping them from eating their own mess was "in the public interest", although it is not, apparently, in the "public interest" to keep some moron banker from loaning so much money to them in the first place.
William McDonough, seeing Mr. Corrigan get all the attention, pipes up with the more insanely bizarre quip that "I'm the public servant. The psychic income of serving the nation as a patriot is mine." What? I can't believe I am hearing this crap! "Public servant"? "Psychic income"? "Patriot"? What in the hell is this lunatic talking about?
For one thing, he is NOT a "public servant", but is, instead, the exact opposite of that; he is a private citizen, working in the private economy as a banker, in a private bank! And he was a major part of the Federal Reserve destroying the buying power of the currency, and eventually destroying the country, by empowering banks to create enormous amounts of money by making an enormous number of loans, with no reserves at all, and he now has the nerve to call himself a patriot? I am beyond livid!
But this kind of idiocy is par for the government course, and if you were surprised to see the price of oil and its products comes down, then so was Doug Casey of Casey Research, which publishes the International Speculator, as he reveals in his essay "Who's Keeping Oil Down?" He asks "might the Republicans be trying to bring down oil prices (and therefore gasoline costs) in an attempt to cull favor at the polls?"
I am here to tell you that the answer is "yes," as I am 100% sure that they are doing everything they can, by coercing everyone they can, to keep down the prices of everything they can, so that people will not be grumpy when they vote, and then (they hope) maybe the loathsome Republicans and the equally despicable Democrats in Congress won't be thrown out of office as they so richly, richly deserve.
Indeed, the view of the Deepcaster newsletter is that "we are now witnessing interventions massive in their degree and scope - - that is, we are witnessing The Mother of all Interventions."
In the particular case of oil, Mr. Casey notes that the "crack spread", which is "the difference between the price that oil refiners pay for crude and the price they receive for the gasoline they produce", is, "in the words of the U.S. Energy Information Administration", at "unusually low levels." Why is this noteworthy?
He notes that the crack spread is "the profit margin that refiners make on their products. This means that refiners are selling gasoline for little more than the cost of the oil they purchase", and that "This makes no sense from a business perspective", as "generally in such a situation, refiners would simply up the sales price of their gasoline, improving their margins. However, it does make sense if the refiners are purposely attempting to keep a lid on prices."
He admits that "Of course, there's no way to prove this. But for energy investors, it's worth considering. If gasoline prices are being artificially depressed, we can expect a rebound during the last few weeks of the year. Which -- judging from the historical relationship between gasoline and crude -- would lift oil prices, and therefore oil stocks. If such case does present itself, now might be the time to buy oil producers, many of which are selling at fire sale prices."
And I am here to tell you that while Mr. Casey may not have a wildly foolish and arrogant certitude, I definitely do, and there is no doubt whatsoever in my Puny Mogambo Mind (PMM) that the recent surprising fall in the price of oil has nothing to do with the supply/demand dynamic, but about the desperation of massive governmental extortion and bribery, and that oil will soon rebound and keep going higher and higher for a long, long time.
But it won't necessarily show up in inflation statistics, as the NYTimes.com site reports that "Goldman Sachs, which runs the largest commodity index, the G.S.C.I., said in early August that it was reducing the index's weighting in gasoline futures significantly." Why are they doing this? Well, if you are the government, and you had lots and lots of giveaway programs that were required to increase monthly payments in response to inflation, you had issued lots and lots of bonds with inflation protection provisions and saw a looming need for massive amounts of borrowing in the future, you would want to ignore things that are going up in price, too, so that inflation (and the interest rates that they have to pay) would stay artificially low.
And I am sure that I needn't remind you of the apparent cozy, incestuous relationship between Goldman Sachs and the government, and how Henry Paulson (erstwhile Goldman Sachs biggie) is the new Treasury Secretary of the United States, who will have to handle the mess, and desperately needs interest rates to stay low.
-- "Dow 1170 and Other World Indices" is an excerpt from an essay by Sol Palha of Tactical Investor. He writes "Every single high the Dow has put in the last 60-72 months has been illusory in nature." The reason is that the dollar, in which these stocks are priced, has fallen so much that the Dow would have to rise to a gain of "30% plus from the highs it put back in 2000 to compensate for the currency devaluation."
In short, long-term investors haven't made any real (inflation-adjusted) increases in wealth in 6 long, long years. If you figured to work forty years and have your "investments" make you enough money to retire on, you have now lost 15% of your time and not made a dime, and that Tennessee Ernie Ford was right when he sang "Another day older and deeper in debt."
And it is not going to get any better, as according to final estimates recently released by the Bureau of Economic Analysis, real GDP is increasing at only 2.9%. And this is the estimate of GDP using an absurdly-low estimate of inflation, which means that GDP is grossly overstated at that. But even using these silly BEA numbers, real GDP increased 5.6% in the first quarter, which means that there has been a 48% drop in GDP growth!
They also report, as if you had to be told, that growth in personal income is decelerating, too, and is up only 1.7% in the second quarter. And when you deflate that little bit of growth in personal income by the real inflation that is roaring around us, income growth is, I am sorry to say, decidedly negative.
As if to say "You were right, Mogambo! You are not as stupid as you sound or look!", the Bureau released the worse news that inflation, as measured by the always-tame PCE (Personal Consumption Expenditure), accelerated up to 1.0%.
From another perspective on inflation, from Harper's Index we read "Percentage change since 1991 in the average fee charged by smugglers of illegal Chinese immigrants into the United States: +100".
Let's see, according to the old HP 12C, taking 15 years to double in price is (hold on, as it seems that using a calculator is a lot harder when you are very, very drunk) 4.7% annual inflation, compounded. Yep, sounds about right!
-- There seems to be a lot of anger rising all over the place. "Who's to blame for the things we're so angry about? Who's to blame for uprisings, downsizings and the drought? Who's to blame for the end of the good old days? Who's to blame for that backwards-cap-wearing craze?" ask the Austin Lounge Lizards band. The answer is, of course, that "Somebody must have changed the rules of the game." What to do? Again, the Lounge Lizards reveal how these things usually go; "So we've found a convenient scapegoat we can blame." According to the band, the scapegoat is "Teenage immigrant welfare mothers on drugs." Hahahaha!
Well, as much as I love clever and witty lyrics in powerful, heavy beat, banjo-driven, multi-harmony music on a simple 1-4-5 chord structure, I have to admit that the Lizards are, alas, wrong about the ultimate source of our misery.
Instead, the true answer is provided by the troubadour of the hard-money set, Steve Dore, who has an album entitled "Inflation Nation". Stripping aside Mr. Dore's infectious, toe-tapping, driving, boogie-woogie piano and clever lyrics, our problems are caused by, as he sings, "300 now, 200 then, what might it be tomorrow, purchase power goes down the drain. No wonder we all got to borrow, purchase power, purchase power, losing more each day. A little bit here, a little more there, inflation steals it away. Nobody ever wants to see their money disappear. Losing purchase power is something we all should fear."
And as a guy who is very afraid of everything that I can't get a bead on with some kind of powerful weapon, preferably a big damned cannon of some kind, I am here to tell you that the fear of "losing purchase power" is only one of the stages of shock.
The first stage of shock is denial ("Stock market/real estate market falling in price? Inflation in consumer prices are rising as the Fed keeps increasing money and credit? Nonsense! Keep buying!"), then fear and anger show up for awhile, constantly jostling for attention, and only THEN does the government look for a scapegoat, as in teenage immigrant welfare mothers on drugs. But more probably Iran, which we will get us into a world-wide war with Muslims, which will bring on stage four of shock (bargaining) so that the government can easily impose a Patriot Tax, or a Save America Tax, or a Defend America Tax, or an Anti-Terrorism Tax and they can force people to buy Patriot Bonds, or Save America Bonds, or Defend America bonds, or Anti-Terrorism bonds, and use the money to spend, spend, spend our way to Utopia.
The final stage of shock is acceptance, ("The idiot Mogambo was right after all!"), and this is when you get questions like this one from quizzical reader Rob H, who asks "After the world economy collapses, which is the correct good way to speak English: 1) I now live in a shack, 2) I now live in a shanty, or 3) I now live in a hovel. I just want to know so I don't sound all dumb like." My first answer is, of course, "Like, you know, whatever, dude!"
The more thoughtful answer is "We live under a bridge." Ugh.
****Mogambo sez: If you are not buying more gold and silver at these ridiculously-low manipulated prices, then you are making the biggest mistake of your life. And that egregious mistake is why the rest of your life will be spent reading investment commentary, like the stupid Mogambo Guru, instead of drinking champagne at a fabulous luxury resort and hanging out with your rich friends.