Inflation Adjusted Profit Pizza

By: The Mogambo Guru | Thu, Apr 19, 2007
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The doors of the Mogambo Bunker of Paranoid Seclusion (MBOPS) clanged shut at the instant I learned that Total Fed Credit actually went down by $2.8 billion last week, meaning that TFC has not increased since January 1, which is almost a third of the year.

This means that new money is not being created, which is the death-knell for a bizarre economic system like ours, that is founded upon constantly expanding the levels of fiat money and its creation by insane levels of crushing debt, all by virtue of an out-of-control fractional-reserve system of banking.

And if there is one thing that I am sure of (a lesson gleaned from watching a lot of movies and TV while consuming tons of popcorn, Milk Duds, Junior Mints and oceans of sugary carbonated drinks), it is that angry mobs get really nasty at the drop of a hat - especially during crises, and doubly especially during the kinds of crises that are "death-knells of economic systems" (a la the French Revolution).

And the only difference between people in real life and, say, Hollywood zombies on the screen, is that the zombies only want to eat my brain. Desperate people in real life want to consume my wallet and everything I own, via the elective and legislative process; or failing that, by just waltzing up here and taking it, via the robbery process.

Another helpful lesson one learns from watching a lot of movies and TV is that overwhelming firepower means overwhelming strength; and overwhelming strength means victory; and victory means money; and money means fast living - fast cars, hot entrees and lots of hot babes practically drooling over you like you're some kind of irresistible love-muffin from Planet Stud or something - which looks like it would be real nice!

Ergo, the Mogambo Death Star Fortress (MDSF) is not only heavily armed and heavily armored, but (theoretically) will also be a powerful chick magnet when this is all over! Three in one!

But the important thing here is not a page from the Mogambo Book Of How To Attract Hot Chicks (MBOHTAHC), but that Total Fed Credit is going horrifyingly down. And while (thankfully) it is not actually animating the ghoulish dead from their cold graves, it is (as we will soon see, my little pretties!) only better by a matter of degree.

Anyway, this is a big, scary change. Although Doug Noland seems pretty calm at his Credit Bubble Bulletin, and he casually reports, "M2 (narrow) 'money' was little changed at $7.203 TN (week of 4/2)." This is made even more meaningful when he goes on to say, "Narrow 'money' has expanded $159bn y-t-d, or 8.4% annualized, and $446bn, or 6.6%, over the past year." Big change!

Since interest rates have not moved all that much (and thus the prevailing supply/demand dynamic should not have changed all that much, either) this sudden lack of borrowing (and the resultant lack of growth of the money supply) seems somehow significant to my Puny Mogambo Brain (PMB).

Apparently, Peter Schiff of Euro Pacific Capital thinks so, too. And skipping over the lengthy part where he seems to correlate my PMB with my appalling stupidity, like they are, I guess, I dunno, somehow related or something, he writes, "The dollar is no longer responding to traditional stimulants. This week, despite the apparently 'hawkish' tone in the recently released Fed minutes, and trade deficit figures that were slightly less horrific than expected, the dollar nevertheless declined against just about every currency on the planet." Yikes!

"As a result," he goes on "Looming large is the 80 level of the U.S. Dollar Index which has stood as long term support for almost thirty years. This week, the Index broke below 82, and is sinking fast."

So, if "traditional stimulants" aren't working, it must be time to trot out Alan Greenspan! Perhaps he could work some of his familiar soothing magic by merely telling us, "The economy will range from fair to good to excellent, forever. And furthermore, I am not the stupid, neo-Keynesian, half-witted, Satanic, lunatic, dollar-destroying, insane monetary expansionist econometric wonk that the Moron Mogambo Mental Case Butthead (MMMCB) says I am. And even if I am, what do you think you are going to do about it, punk?"

Well, of course he did not actually say that, but I saw him on the TV news. And I could tell from the way he averted his rheumy, lying eyes - and from how they nervously darted from side to side in an almost rat-like manner - that he expected The Mogambo to kick open the doors and come storming in, grab him by his necktie, and give him the face-slapping of his filthy life for being such a lying (slap), despicable (slap) chairman (slap) of the Federal Reserve (slap slap slap) since he deliberately created the money and credit to produce these bubbles and booms in stocks, bonds, size of governments, derivatives, and houses - all of which are now going to collapse and take everything down with it! Slap slap slap slap slap!

Well, beyond my vicious-yet-gratuitous attack upon his intelligence and his ethics, the fact is that, as Bloomberg.com reports, "Former Federal Reserve chairman Alan Greenspan played down his earlier concern about a possible U.S. recession, saying the world economy would provide a cushion."

What? Hahaha! What? What in the hell could this "cushion" be? This makes absolutely no sense! We have a trade deficit of almost $830 billion a year! This is about a third of all the trade surpluses in the world added together! Hell, the U.S. GDP is equal to about a third of global GDP as it is!

So, exactly what in the hell could the world economy do to cushion us against a "possible recession", when we have a trade deficit of $830 billion a year (a new record), an "official" federal budget deficit alone that is running to more than $700 billion dollars a freaking year (a new record), with an accrued national debt of almost $9 trillion (a new record), which is growing at $700 billion a year (a new record). Add to this, future government obligations of more than $54 trillion, which is five times as big as total U.S. GDP (a new record), a consumer that owes more than triple as much as he makes (a new record), and huge government spending programs that are increasing at more than the percentage rate of population growth and inflation added together (a new record)! Hahaha!

So Greenspan thinks foreigners will provide us with a "cushion"? Don't make me laugh! Hell, they seem to be suddenly making less money, too, as the Commerce Department said the trade deficit narrowed to $58.4 billion in February, from $58.9 billion in the prior month!

But Paul H. figures that this comes to about $2.086 billion per day, and that's only because February only has 28 days in it. "Had February been a 'normal month,'" he says, "the trade deficit would have been between $62.57 billion and $64.66 billion. "Okay, so they are still making more money, and now I look like an idiot. Happy now?

Trying to divert attention from my embarrassment, Paul continues, "Now, if the $58.4 billion represented a narrowing of 0.7% from January (which was a 31-day month), then using the normalized figure for 31 days indicates that the trade deficit actually widened for February by about 3%!! Holy cow, Batman! We are freakin' doomed (to coin a phrase)." Yep!

And speaking of federal budget deficits, Rep. Ron Paul, who would be the next President of the United States if we weren't a nation of moronic Big Government-loving wankers, writes, "The greatest threat facing America today is the disastrous fiscal policies of our own government, marked by shameless deficit spending and Federal Reserve currency devaluation. It is this one-two punch - Congress spending more than it can tax or borrow, and the Fed printing money to make up the difference - that threatens to impoverish us by further destroying the value of our dollars."

I leap to my feet and shout, "Bravo! Bravo, Mr. Paul!" with an angry undertone to my voice that clearly indicates that I am astonished that the rest of Congress, our "leaders", is so completely clueless about this stuff. "Bravo!" I bellow! "Bravo!"

This brings up an excerpt from Lee Iacocca's new book, Where Have All the Leaders Gone? that I was sent via a forwarded email, where he purportedly writes, "Had enough? Am I the only guy in this country who's fed up with what's happening? Where the hell is our outrage? We should be screaming bloody murder. We've got a gang of clueless bozos steering our ship of state right over a cliff, we've got corporate gangsters stealing us blind, and we can't even clean up after a hurricane. I'll give you a sound bite: Throw the bums out! I'll go a step further. You can't call yourself a patriot if you're not outraged."

And I, the Wildly Irrepressible Mogambo (WIM), will bravely go even further than that! I will say that: 1.) Every sentence of that excellent paragraph of Mr. Iacocca's should have concluded with at least one exclamation point to indicate the dramatic emphasis that it clearly deserves, and 2.) If you are not tracking the guilty bums down and dragging them in chains to The Mogambo Secret Kangaroo Court Of Vengeance (TMSKCOV) for a quickie trial, guilty verdict and sentencing, THEN you are not a real patriot!

MarketWatch.com, completely ignoring my clear call to begin The Mogambo's Terrible Revenge Of The Sheep (TMTROTS), instead risked inflaming me even more when they reported that the Treasury Department revealed, "The U.S. federal government spent more money in March than in any other month ever." Ever!

In actual numbers, "The federal budget deficit widened to $96.3 billion in March, compared with $85.3 billion last March."

In total, "Excluding the Social Security and other trust funds, the deficit totaled $108.2 billion in March and $347.8 billion for the fiscal year so far." That's about $700 billion!

I assume that inflation helped make government receipts rise, "about 1% year over year in March to $166.5 billion, while outlays rose about 5% to a record $262.7 billion", as, "Defense spending totaled $67.8 billion in March and $268.3 billion so far for the year," which is up 7%.

Continuing, "Spending on Medicare and Medicaid totaled $83.4 billion in March and $418.4 billion for the year," up a huge 15.6%. "Spending on the Medicare drug benefit" is up a staggering 144%. "Social Security tallied $55.5 billion in March spending and $306.8 billion for the year", up about a whopping 6%. "Spending on interest on the public debt totaled $21.3 billion in March and $202.1 billion for the year", up a terrifying 4%!

And all of this excessive spending, made possible by the excessive creation of money and credit by the Federal Reserve, means that prices will go up excessively. And sure enough, from Bloomberg.com we read that the Labor Department released the nightmarish news that that U.S. consumer prices, as measured by the Consumer Price Index, rose 0.6% (including food and energy prices) in March, which is even higher than February's 0.4% increase.

And "Producer prices rose 3.2 percent from March 2006, compared with a 2.5 percent gain in the 12 months ended in February. Prices excluding food and energy rose 1.7 percent from a year earlier, compared with a 1.8 percent gain in the 12 months ended in February." Yikes!

It's a good thing that they are excluding energy costs in reporting inflation, as "Energy prices jumped 3.6 percent last month after increasing 3.5 percent the prior month. The price of gasoline rose 8.7 percent, the most since November, and natural gas costs increased 3.3 percent"! Yikes and yikes again!

And let's not forget food! Luscious, delicious food that is sometimes fried, often crunchy and/or chocolate covered, and then eaten a hell of a lot more often than I should (but a lot less than I want) which results in a big deficit in the Total Mogambo Food-Oriented Hedonism Quotient (TMFOHQ), for which I angrily blame a cruel, uncaring world, and thus proceed to make everyone's life a living hell with my righteous revenge.

Now, unfortunately, things are getting worse, as the new report, "showed food prices rose 1.4 percent in March, after the previous month's 1.9 percent increase that was the most since October 2003."

Well, judging by the lack of frightened wailing and screams of outrage, apparently I am the only guy in town who can multiply the 0.6% rise in the CPI times twelve months to get a terrifying annual inflation rate of 7.2%, or who can add March's 0.6% inflation in prices to February's 0.4% inflation in prices to get an average of 0.5% inflation in prices, and then multiplying THAT by twelve months to get an annual price inflation of 6.0%, which is still horrifying enough to make you whimper and cringe in terror if you have any tiny little bit of a hint of comprehension of the enormity of what this means!

Or maybe everyone else is so gullible, non-thinking, childishly trusting, ignorant, stupid and easily-led that they are falling for the Fed's trick of making you pay attention only to "core consumer price inflation", which EXCLUDES food and energy prices, but is still hedonically adjusted to make it look better than it is. When you do that, "core consumer prices" are, magically, up only 0.1%! Hahaha! What a scam!

But even that slimy trick fails over the long term, as Bloomberg.com reports, "Core prices were up 2.5 percent in the 12 months ended in March," which, as bad as it is, is still "the smallest year-over-year gain in almost a year."

For a little local color, a little mom-and-pop discount fast-food Chinese restaurant around here has a sign that reads, "Complete dinner $3.49." Two years ago, that sign read, "Complete dinner $1.99". Even the comic strips have Dagwood Bumstead and Blondie at a restaurant delaying ordering dinner until they can decide whether or not they can afford it.

And Kate "Short Fuse" Incontrera at DR writes, "The University of Michigan report that was released Friday showed that Americans have raised their outlook for inflation to a rate of 3.3% from the previous 3%." But the report did NOT report if there were looks of terror on anyone's faces at the prospect of 3.3% inflation, or if the gun stores were suddenly jammed with customers, or if mobs of people were buying gold in a frantic panic - which they should have (and would have, if we weren't so stupidly trusting as to let the Congress and Supreme Court allow the Federal Reserve to recklessly expand the money supply with a fiat currency, in clear violation of the Constitution).

And it is not just us, as consumer price inflation in England (another fiat currency/ massive fractional-reserve banking country) is now reported to be up to a blistering 3.1%!

The site chartoftheday.com writes that if we want some long-term perspective on the stock market (and we do!), take a look at the Dow adjusted for inflation since 1925. They say that it is, "interesting to note that the inflation-adjusted Dow is now a touch less than three times higher than where was in 1929 and a little over double where it was in 1965. Not that spectacular of a performance considering the time frames involved."

"Not that spectacular", indeed, as this comes to a lousy, stinking 1.41% gain per year! Hahaha! "Investing for the long term!" Out of which you would have had to pay commissions and fees and expenses all along, and now taxes on the gain, too! And you think that the stock market will provide for everyone's retirement? Hahahaha! Welcome to reality! Less than one percent per year! Hahaha!

Writing at FinancialSense.com, Anthony M. Cherniawski of The Practical Investor hears all the commotion and says that, according to his calculations, "The Dow Jones Industrials did not make a profit in the first quarter", and that a lot of stocks have been bought with borrowed money, as "Total margin debt has soared to $321.2 billion in February, exceeding the prior high of $299.9 billion in March 2000." So this is a new record for margin debt, too!

What is the significance of a new record in margin debt? By way of explanation, Mr. Cherniawski notes, "You may recall that the market hit its 2000 high on March 22, and in about three weeks slid into a 13% decline in the blue chips. The decline in the Nasdaq was a blistering 35% in that same period."

Larry Edelson at Moneyandmarkets.com says that if you allow for inflation, then, "the Dow has lost over 50% of its value since 2001, despite its recent gains. Put another way, if you bought all the stocks in the Dow Jones Industrials back in 2001, the purchasing power of your investment today would be less than half what it was back then."

But from this we get the immortal lesson in inflation that, "the Dow can rise, but you can actually be losing money all the while. It's simple…if the Dow goes up 10% but the value of the dollar falls 20%, you've lost 10% in terms of your money's purchasing power."

In terms of Mogambo Metrics (MM), you invest a pizza, but get back 9/10's of a pizza! Less than you invested! Hahaha!

And yet, to add insult to injury, you still have to pay a tax on the capital gain you got with your 10% nominal profit! So you invested a whole pizza, "made a profit" in nominal (non-inflation adjusted) terms, paid taxes on the gain, and yet you got back less than 9/10's of a pizza? Hahaha! Nice investing there, dude! "Investing for the long term!" Hahaha!

In a similar vein, the success of stock markets is just a matter of what unit of value you use to measure it. Our mistake was in using dollars, when we should have used, according to Mike Maloney of GoldSilver.com, gold, as "It took almost 45 ounces of gold to buy 1 share of the Dow in 1999. Today it takes less than 19. Today, if you sold 1 share of the Dow, the proceeds would only buy you 19 ounces of real money. So measured in real money, the Dow has crashed 58%."

Then Mr. Maloney asks, "Why does everyone think the Dow is going up, when it is actually going down in value?" I shrug my shoulders, hang my head and try to look invisible, which is my clever way of saying, "Please, please, please don't call on me, because I haven't got a freaking clue!"

My tactic worked, and he immediately sets out on his own to prove that the Dow has crashed by 58%, which he does by presenting graphs of the Dow in terms of ounces of gold, the Dow in terms of ounces of silver, the Dow in euros, in Australian dollars, in British pounds, in Canadian dollars, in the CRB Index, in copper, in crude oil, in industrial metals, in food, and in 30-year bonds - all of which show that the Dow has not been rising, but in fact has been falling against all of these things! Hahaha!

And in his final few graphs, he looks at the S&P 500 in terms of gold, too, but warns us, "The situation only gets worse if you use the S&P 500, because it's still down 7% from its 2000 high."

Of course, that's nothing compared to the NASDAQ, since "the charts would literally look twice as bad, because the NASDAQ is more than 50% below its previous high."

Larry LaBorde of SilverTrading.net, writing at 321Gold.com, underscores this exactly by writing, "In 1913 the [U.S. dollar] was worth 1/20th an oz. of gold. Today it is worth 1/678th oz. of gold. In the last 7 years the Dow Industrials have lost almost half its value when priced in oz. of gold."

And things will get even better for gold, as Eric Hommelberg of The Gold Drivers Report quotes Neal Ryan of Blanchard & Co. as saying, "We've gotten our update on ECB bank sales the past week, and just as we figured, we've seen another week of massive increases in bank reserve gold selling into the market. This past week's additions are roughly 17.5 tonnes of gold into the market. That means that in the last three weeks, 45.5 tonnes of gold have flooded out of ECB banks into the gold market. For a point of reference, the previous three weeks, sales had…roughly 7 tonnes total. Considering the past price action in periods when selling has increased this dramatically, the gold price has held up considerably well and even made advances in the face of this massive selling pressure."

"The simple truth is," he confides, "that central banks are running out of physical gold to hit the market with enough physical gold in order to kill gold's primary trend."

GoldForecaster.com agrees, and says that this is actually good news, in that, "despite these additional sales, the gold price looks very robust. Investment demand, the underlying current in this market, is across a broad global front from London to the Middle East to India and then to Asia. This move by long-term Investors into gold is gathering pace and is set to continue accelerating for a long time to come."

And if you are still worried about gold, Enrico Orlandini of DowTheoryAnalysis.com has some comforting words. He tells people who worry about gold, "[I am] worried about a lot of things in life, but gold was one of the few things that doesn't worry me. What causes me to ponder is the very phrase 'worried about gold'. It displays a lack of understanding as to just what gold is and the purpose it serves."

My wife, like a lot of people, has no idea what gold is. To her it is just something pretty, shiny, heavy and handy with which to hit me on the head. Hopefully hard, in order to 1.) Punish me for past sins, 2.) Punish me for future sins, or 3.) Hit the hell out of me just for the fun of it.

In reality, Mr. Orlandini says, "Gold is a store of wealth, the only true store of wealth in today's world, and it is insurance against real problems. Although it's been around for five thousand years, it can be manipulated over the short run, but it cannot be debased over the long run. To worry about gold is the equivalent of worrying if the sun is going to come up tomorrow morning." In short, he says you are right to be worried about something, just not gold.

Although, "[he does] worry why gold is rising in such a relentless fashion." And he is right to worry about that. He is very, very right. He is very, very, horribly, horribly right. Inflation is a killer. Ugh.

**** Mogambo sez: For those that say to me, "Hey! Loudmouth Fathead Mogambo (LFM)! Hey! Yeah, I'm talking to you, creep! How much gold and/or silver should I have?" I can now offer both the customary rude hand gesture and this interesting metric from Rhody. He writes that his brother had the opinion that 10,000 ounces of silver would ensure "financial security" through old age

Unfortunately, the brother "did not explain how he obtained this figure." So the clever Rhody did some research and found that "in 1900, one ounce of silver was a professional class daily wage. If one retires, one can expect a life expectancy of 30 years, which is about 10,000 days. At one ounce per day, this is how much silver one should have."

And I seem to remember something about the historical averages of the value of silver through the ages, when measured against a day's wage for a professional class worker, being around here someplace.

All of this immediately says two things to me. First, I need 9,999 more ounces of silver! And second, silver should be selling for (since the average working-class wage is now almost $15 an hour) at least $120 an ounce. It's actually selling at $14 an ounce.

So is silver a compelling buy at these prices? You do the math!

And when you do, and you factor in various estimates of inflation that are coming down the line, don't be surprised if the answer screams, "Buy as much as you can possibly buy, chump!"

The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning and other fine publications.

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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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