E-Economic Newsletter

By: The Mogambo Guru | Wed, Nov 29, 2006
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Provided as a courtesy of Agora Publishing and DailyReckoning.com.

-- I spent most of last week turning off alarms in the Formidable Mogambo Bunker (FMB), as the plunge of the dollar set off all kinds of the damned things, all blanging and clanging and ringing and buzzing, including the alarms that I installed as backups to the primary alarms in case they failed, and now who in the hell knows where the switches are to turn them all off? Not me, it turns out!

I remember that my Fabulous Mogambo Idea (FMI) at the time was that the deafening din would provide that extra little bit of tension and stress that would put that extra little bit of adrenaline in the blood, which would obviously befit the situation if all those alarms went off, as it meant that, in an old West reference, it was "Dog-eat-dog time at the OK Corral!"

For one thing, the Treasury increased the national debt by a whopping $55 billion since November 1! As scary as that is, the Fed is back to its old tricks, and Total Fed Credit jumped by $4.1 billion last week, meaning that the banks are being flooded with credit again, so that banks can loan money, so that the money can add to the bidding up of prices of stuff, which is nowadays defined as "stocks, bonds, houses and size of government."

The temporary good news is that the Fed's, and all the world's, monetary excesses have pretty much gone into stocks, bonds, houses and government, and everything is having a wonderful, wonderful, wonderful, especially since price inflation in stocks, bonds, houses or size of government are not considered to be actual evidence of, you know, inflation.

Perhaps this explains why Doug Nolan, in his Credit Bubble Bulletin at PrudentBear.com, reports that Bloomberg's John Fraher writes "Billionaire George Soros said there's a danger that a 'private-equity bubble' could burst, threatening the global financial system. Soros said that private-equity firms are channeling excessive liquidity in the global economy into the financial markets."

Well, memo to George Soros: "Well, duh!"

The Ugly, Ugly Mogambo Transcendent Truth (UUMTT) is that the majority of stock market investors will, over the long-term, not make any money, but worse yet, will not even break even. Indeed, most of them will lose buying power, as this is a requirement of a zero-sum game; the winners take the money from the losers. There is no place else for money to come from.

And note that I said that they will lose buying power, not mere money. If you invest $10 in the stock market when a pizza costs $10, but later, when you sell, you get back $15 when a pizza costs $20 (thanks to inflation), you have made a nice 50% gain on your money, that is true, but notice with alarm that you have lost 25% of your buying power! Nice investing there, Mister and Missus America! Hahaha! Invest a whole pizza to get back less than a pizza! That financial brilliance ought to fund a lot of retirement dreams! Hahaha!

And it is worse than that, much worse, as there are a lot of capital gains taxes to be paid on that measly $5 dollar profit! So you have, all told, lost about a third of your buying power on the money you "invested!" Hahaha! Now you are investing a dollar's worth of buying power to get back sixty-seven cents' worth! At best!

And this is all because the majority will always be wrong, because the majority has to be wrong by mathematical necessity. The majority must lose because they are the only people from whom the money can be taken by the small minority of investors (and the grasping, rapacious financial services industry) who make money!

Bill Bonner of DailyReckoning.com hears me talking loudly to myself about this, and comes out into the hallway to remind me that A) talking to myself indicates that I have made another error with my medications, and B) "Since the rate of returns you will get are always reduced by the managers' fees, you'll always - over time and on the average - get less than the market itself. You go through a complete cycle - paying fees, taxes, commissions and adjusting for inflation - and you are usually about where you began."

And it is even worse right now in America, as Marc Faber, of the Gloom, Boom and Doom Report, writes "Despite an unprecedented money and credit expansion since late 1999, US stocks and bonds have performed poorly against just about any other asset in the world." Hahaha! If American assets can't gain despite whole mountains of money being created just for this purpose, do you REALLY think that this is the time to hold stocks, or even buy more? Hahaha!

My duty is thus clear: As part of my assigned Mogambo Educational Duties (MED) to educate the people of this planet, naturally I am up bright and early each morning, standing at the stop sign at the crossroads. Before people even come to a stop in their shiny cars on their way to their big-shot jobs, I am screaming at them "The stock market is- at best! -a breakeven proposition over the long term, you stupid moron! It's a loser for the vast majority of people! And that means YOU, mister fancy-schmancy guy in his fancy-schmancy car on his way to his fancy-schmancy job with his fancy-schmancy retirement package, and who will see then all destroyed! Destroyed!"

Most people have, by now, learned that if they give me money, I will stop "instructing" them. To most people it's a bargain, because my voice is loud and irritating, especially that early in the morning. And since I have only the one message, that I repeat over and over and over, once you've heard it, it seems like once is more than enough.

So, then, imagine my surprise when one of my regular "customers" comes roaring up, squeals to a stop, gets out of his car, strides over to me, grabs me by the neck and shouts in my face about how he already freaking KNOWS about the freaking STOCK market being a freaking LOSER, and helpfully advises "So just shut the hell up about it, you creepy little loudmouth Mogambo twerp (CLLMT)!"

So, naturally, I coolly and malevolently say "You know that once you let me go, I am going to hunt you down and make you pay for this in blood, don't you, lowly Earth creature?" His face beamed with joy as he said "You won't once you found out how you can prove- prove! - that you are right!"

My eyes literally glowed at the happy prospect of being able to finally prove, one glorious time before I die, that I was right about something, and I say, hiding my rising excitement, "Oh, yeah? Prove it, smart guy!"

Getting my attention by tightening his iron grip around my throat, he tells me that Sprott Asset Management said "Having started the decade at 11,000, for the Dow to only have attained a level of 12,000 after almost seven years is nothing to write home about. It equates to a paltry 1.2% annualized return ex-dividends. Furthermore, the S&P 500 and the NASDAQ are still nowhere near the levels they were at the start of the decade. The NASDAQ, in fact, is still less than half of what it once was."

And as bad as that is, it gets worse when he adds "If one were to also incorporate the weakness of the US dollar over the past several years, then the performance of US equity markets looks even worse." Exactly! Just like I said!

And in this same "the majority must lose" vein, I have been getting heat from people who want me to relax my strident antipathy to the proposed hike in the minimum wage, which will make business costs go up, which will make prices go up, which is what the low-wage worker is complaining about to start with!

So let me be as forthright as I can be when I say that I pity them, and the essential message of the Mogambo Guru newsletter in the first place is to object loud and long against the creation of excess money and credit, which will prevent inflation, which will prevent this suffering from inflation from even happening.

But, and hopefully conveying all the venom and contempt that I can muster, I have no compassion for the damned poor or the middle class, who have consistently used their massive electoral power to consistently elect socialists, communists, fascists and morons to every elected office in the land, and it is these lying, brain-diseased politicians who have spent us into the economic grave, as has happened every other time in the last 3,000 years when a government, any government, tried such monetary crap. So it is not like this is anything new.

And so, given the stark lessons of the sheer tonnage of the last 3,000 years of history, it is obvious that government constantly growing, and especially by constantly deficit-spending to accomplish it, is suicidal stupidity writ large, and we also learn that allowing unfettered growth in money, credit and debt is suicidal stupidity writ large. Thus, the behavior of Americans is inexcusable, as it bespeaks a nation of ignoramuses and lunatics, and the historical fate of such persons, and their brain-dead countries, is always bleak. Very, very bleak.

And it has to be the poor who first suffer the coming avalanche of pain, as they have no cushion against it. But as more and more people become poor, and poorer, as prices continue to rise faster than wages, then this cohort will collectively soon have the sheer physical clout to violently overthrow the government and arrest the treacherous politicians (a la the French Revolution) and Federal Reserve numbskulls who have gotten us into such a wretched, miserable state, which is how Mother Nature instills in future politicians and citizens the reluctance to commit the staggering, unbelievable economic idiocies that we Americans have been blithely committing for half a freaking century.

And now, obviously working myself into a fit of outrage, and since my arrogance knows no bounds, I deliberately quote Bill Bonner of DailyReckoning.com completely out of context, and, twisting his words around to my own advantage, I have him agreeing with me, and that "in America, there is still a fool on every corner, a clown in every public office, and every village has not one, but several, idiots."

And now the wailing of the poor for higher incomes is merely the sound of the first people reaping the dismal economic rewards of what we, as a nation of irresponsible simpletons and knaves, have sown.

-- I seems to me that I would shy away from the stocks of property insurers, as I predict that as the value of houses keeps going down and down (while the mortgage does not, but instead keeps going up and up) and insurers keep increasing their premiums and deductibles but insuring less and less (by excluding from coverage those things that may actually happen to you), many homeowners are going to think to themselves "Hmmm! How can I escape the horror of letting this house drag me into debt hell?"

I figure that in a "Eureka!" moment (probably about the same time as the insurance bill arrives with that new, much-higher premium and much-smaller coverage), arson will seem to be a "painless and toasty way to wipe my debts away" (which is catchy and rhymes, so you know it must be true), thus allowing you to get the hell away from here, starting a new life somewhere else, clean and sober, free from debt and the burden of a suffocating, clinging family always complaining and whining for food and medicine, even though I have repeatedly, patiently explained that I am on the verge- the very verge! -of a big, big breakthrough in correcting my backswing, and so to give up even one round of golf per week for the sake of their constant, whining "needs" is not optimal.

-- From MoneyandMarkets.com newsletter we get the dispiriting news that "about 2.5% of all of the nation's homes were sitting vacant in the third quarter, according to the Census Bureau."

So how bad is it? Well, they don't answer directly, but they do say that "it's also the highest since the Census started keeping track in 1956." The worst in 50 years!

This at the same time as one of Congress's most Leftist whack-o embarrassments, Maxine Waters, is vowing that she will use her new powers to have the government build "affordable housing"! Hahaha! A glut of vacant housing, and she wants to build more! Hahaha!

-- Jim Rogers, writing at DailyReckoning.com, says that "the dollar has been a pale remnant of itself - down against the euro almost 40 percent from the beginning of 2002 until the start of 2004 and at a three-year low against the Japanese yen."

Like most people, I find this whole foreign exchange thing to be very confusing, and so Mr. Rogers sees my eyes glazing over as I try to understand how to use this apparently very useful, albeit mystifying, information to make a profit on something. Amazingly, I think he supplies the answer when he went on to say "Since commodities are traded in dollars, a weak dollar will make prices appear higher."

Perhaps a brief flicker of comprehension flashed across my face at that, but it was soon obvious that I was still stumbling in the dark for the answer. Attempting to be helpful, he added "Crude oil rose 64 percent in dollars over that two-year period, but only 16 percent in euros."

Surprising everyone, I shout out "I never expected to see the day when a 16% increase in the price of oil was the good news! Hahaha! Did you, Jim?"

With a stern look in my direction that says "It's 'MISTER Rogers' to you, you little Mogambo punk (LMP)!", he ignores my little joke and vain attempt at familiarity, and instead goes on to say that it all comes down to, as it always does, the supply/demand dynamic, as he tells us "For now, however, here's the story: dwindling supplies and increasing demand. And," he adds ominously, "the dollar has nothing to do with either."

My brain flickered to life at that ominous thing, as it means that prices of commodities would rise anyway, thanks to the increased demand, which is price inflation, which is the thing I fear the most. But a falling US dollar will make them rise MORE!

So who gets hurt the most? Only the people who use dollars to buy the commodities! And who will make the most? The people who invest dollars in commodities!

You want to know where the next boom is, my Cuddly Mogambo Darling (CMD)? It's right here in Commodity-ville!

-- If you want to know why we remain doomed, then the Bloomberg article titled "Bernanke's Program May Distance the Fed From Greenspan's Intuitive Calls" is the place to go. It reports that "Inside the U.S. Federal Reserve headquarters, a small team is testing a forecasting program that does the work of hundreds of economists. Never before has the Fed been able to crunch in real time such a large mountain of data -- as many as 150 indicators -- to divine where the economy is headed." Hahahaha!

It is universally accepted that Chaos Theory, and massive computer simulations, has proved that long-range forecasting of a complex system of any kind to be impossible. The analog example is weather forecasting, which is useless beyond a few weeks, and always will be.

Yet here is the Federal Reserve proclaiming otherwise! And with millions and billions and umpteen zillions of variables in the world's economy, they think that examining150 of them ought to do the trick of letting them constantly create more and more money and credit? Hahahaha! We're freaking doomed!

Thank goodness for gold, which will protect its owners from these kinds of stupidities! And speaking of gold, Richard Russell, of the Dow Theory Letter, writes "the ratio of gold to silver has been declining dramatically in waves over the years. The most recent down-wave began in May 2003. At that time an ounce of gold would buy 80.4 ounces of silver. As of yesterday, an ounce of gold would buy 48.04 ounces of silver, a huge drop in the ratio. This brings up the question -- should subscribers buy silver? Personally, I think it's a good idea."

If we speak of gold, how can we not speak of silver? And so, if you want another reason to buy silver, since I seem to always be screaming that you should buy silver and it hasn't done any good, then read the essay "Silver in clothing keeps odors away" by Michael Rubinkam at the Associated Press, and maybe you will get with the program.

For one thing, if you have ever listened to one of your kids say "Ewww! Don't put your stinky feet near me/in the same room as me/ in the same state as me/ I hate you", then you, too, are probably self-conscious about the odor of your feet.

So rejoice in that silver-impregnated socks prevent odors! If nothing else, this should send the sales of these socks soaring, sending the price of silver soaring, making me (as a holder of silver) rich, rich, rich, allowing me to run for office, get elected and use the power of government to crush my enemies! So how close are we to that sweet dream of self-righteous vengeance, as measured by the "silver per sock ratio"?

Well, the amount of silver in one pair of these socks, says the article, is 1/100 of an ounce. So a stinking million pairs of socks is 10,000 ounces of additional consumption of silver per year. A hundred million pairs of socks per year, which I think is globally conservative, is another million ounces of silver consumed per year! And this does not include shirts, shoes, or underwear with embedded-silver material!

And if that is not enough (although I think it is!), you can count on the military to increase consumption of silver-impregnated materials, as silver in soldier's clothing not only eliminates the smells, fungi, bacteria, viruses and icky crap that plague soldiers, but it is actually "a first line of defense against shrapnel wounds, because any of the silver fabric that becomes embedded in the wound 'actually starts treating the wound,' according to McNally, the company founder."

The clothing itself not only helps heal the wound, but will also maintain a relatively sterile area around the wound by virtue of the remaining protective clothing? Man, oh man! And you can be sure that it is not just the American army that is looking at this stuff and saying, echoing the sentiments of The Mogambo, "Man, oh man!"

And if you see somebody in your neighborhood buying silver like it is going out of style, then that is another person saying "Man, oh man!"

-- If you were waiting for proof that the International Monetary Fund is peopled by the same class of neo-Keynesian doofuses as all the other central banks, especially the American one, and governments, especially the American one, then your waiting is over, as we learn from a Bloomberg.com article with the headline "IMF Should Sell Gold to Cover Looming Losses, Directors Say". The writer, by Christopher Swann, reports "The International Monetary Fund, the world's third-largest owner of gold, should sell some of its hoard to cover projected operating losses, say a growing number of the fund's executive directors."

First off, we learn that the main problem is that "The Washington-based lender predicts it will lose $87.5 million next year and $280 million in 2009." Hahaha! This is priceless! Absolutely priceless! The big shot intellectual rocket-scientist economists at the IMF, the central bank of central bankers, blew it up like a bunch of rookies! Hahaha!

Part of the problem at the IMF, says Devesh Kapur, an economist at the University of Pennsylvania in Philadelphia., is that the IMF's annual budget "has doubled to $980 million in the past decade", and that "Staff has mushroomed to 2,700 from 1,800 in 1990." Hahaha! Another microcosm of the American dysfunctionalities! I'm glad he did not mention their enormous salary-and-benefit packages, as I would have probably lost it completely.

The bigger problem is that the IMF is doing less meddling, interfering and interventions, and that "Lending is the lowest in 25 years, with a single borrower, Turkey, now accounting for more than 80 percent of the fund's $12.2 billion in loans", probably as a result of the years-long, world-wide explosion in the fiat-money aggregates. Now anybody who wants money can get, and/or create, all the money they want, any time they want, and so no countries are technically bankrupt enough to need IMF help. Yet.

I remember my first big loss as a fledgling business executive, (parenthetically, the first in a long string of poor decision-making episodes that actually defines Mogambo Managerial Incompetence Syndrome (MMIS)), and I suggested, in my report, that the company make up for my "unfortunate mis-adventure" by selling all the company's assets! And, even better, I calculated that there will be enough left over to make ourselves feel better about ourselves by awarding some big, beautiful bonuses to the executive staff and hiring some of our relatives!

I don't remember exactly what happened next, but I do recall that there was a lot of swearing and screaming, and my own boss yelling for me to "Go to hell, you insane Mogambo idiot (IMI)", which I assumed meant "go home", as even back then family life was hellish, what with babies screaming, in-laws demanding I get a job and stop sponging off of them like a blood-sucking leech draining them dry, my wife always locking herself in the bathroom, wailing and crying that she is cursed and praying for God to kill me. You know; sort of like today, only with less gray hair.

But things are certainly different at the IMF! They suggest practically the same thing when they say "Some directors say the fund should sell a portion of its 103 million ounces of gold, valued at $64.7 billion, and invest the proceeds in interest-bearing assets."

This is very instructive! For one thing, the IMF was formed and financed by a loan of gold from countries, mostly the USA, and which was the underpinning for the Fund's own currency, the Strategic Drawing Right. And now they are proposing to take the gold that literally belongs to the taxpayers and citizens of (mostly) the USA, and sell the gold, which is the source of the underlying value of their own damned SDR, leaving the SDR as just another fiat currency! This is madness!

And not only that, but the IMF seems to be, astoundingly, totally unaware that anything bearing interest these days is yielding less than the rate of inflation. So they would be losing buying power the whole time, and actually contributing to their losses by buying the extra government debt, so that the governments could sell more debt, devaluing that currency even more, increasing their losses! I mean, jeez! What morons!

Then, down the road when they need real money again, they will beg for us to give them more gold. Ugh.

****Mogambo sez: Gold, silver and oil are your only friends, and that is why they have treated you so good for so long, and will continue for a long time more. Keep accumulating more of these friends.

 


 

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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