Elements of the Dollar's Death Knell

By: The Mogambo Guru | Thu, May 10, 2007
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"If you think that Treasury Inflation Protected Securities will save your sorry financial butt or stop me from screaming 'Gaaaaah!' in terror, then I scornfully laugh the Scornful Laugh Of The Mogambo (SLOTM) with a loud 'Hahahaha!'"

The clanging of alarms in the Mogambo Bunker Of Panic And Fear (MBOPAF) thankfully fell silent, at long last, signaling that the Federal Reserve is NOT creating the excess money and credit needed to keep bubbles inflating, which means that inflation in stock, bond and house prices cannot continue to go up from that particular cause.

The sudden, satisfying silence was, to everyone's horror, replaced immediately by the mournful wail of sirens, indicating that excess money and credit ARE being created again, which means that inflation in prices will continue to go up! Yikes!

Everybody is upset about the noise, banging on the door and screaming, "What in the hell is going on in there, you Damned Mogambo Idiot (DMI)?" My hands visibly shake as I show them the news that the Fed ballooned Total Fed Credit by a whopping $16 billion last week, ending their so-far-this-year curtailment of creating more credit, which becomes more money when borrowed, thus expanding the money supply, and thus causing inflation in something or things. Brrr! The blood turns to ice in the veins!

As it turns out, it looks to me like all this borrowed money went into the stock market, and this new monetary fuel sent stocks to new records of various kinds. For example, Bob Wood of Kaizen Managed Assets sent along this quote from Richard Russell of The Dow Theory Letter who wrote that "the Dow was up 19 out of 21 sessions. This remarkable series has occurred twice before in market history. The first 19 out of 21 higher Dow series occurred in 1927 and ended on August 1, 1927. The second 19 out of 21 series occurred in 1929 and ended on July 5, 1929."

My hair stands on end anytime the date of 1929 is brought up, and it sends shivers of terror down the spine, not made any easier when he went on to say, "Strange that an amazing series of higher Dow's occurred just two months before the great 1929 crash." Gaaaaaaaah!

And while the bond market issued a huge load of new debt, too, theoretically sucking up scads of the new money, the picture was mixed, as some yields were up and some were down.

Doug Noland of the Credit Bubble Bulletin at PrudentBear.com writes that it is not just us stupid Americans that are creating too much money and credit, either, as "Eurozone M3 money supply grew at the fastest annual pace in 24 years in March", and which was also "the fastest monthly rise in more than 8 years. The annual growth rate of the broad M3 aggregate surged to a seasonally adjusted 10.9% in March from an unrevised 10.0% in February."

And how fast did the money supply grow in the euro zone 24 years ago? 11.0%.

David Tice, founder of the PrudentBear.com site, figures that for the last four years, the global money supply has grown by 18% a year. As a consequence, he told Brett Arends of thestreet.com that this latest crazy stock market action is a blow-off "topping pattern", and that the market is only months away from going down big time, where the Dow will fall "at least 50%".

And since this expansion in the money supply comes from more debt, it is therefore not surprising that Mr. Noland later reports, "Moreover, growth of loans extended to the eurozone private sector reaccelerated in the reporting month."

And since inflation in debt and inflation in the money supply lead to inflation in prices, sure enough, Bloomberg reported that "Swiss consumer prices rose the most in more than 15 years in April", as "Consumer prices rose 1.1% from March." Over 1% in one month! Man, that's inflation! It was explained that "a drop in the franc made imported goods such as oil more expensive."

This is particularly important since the downward spiral of the dollar means that OUR imports will become more expensive, too. Like oil. And it ain't cheap now, as from Chartoftheday.com we get the news that "when adjusted for inflation, gasoline prices are not far off the inflation-adjusted peak of $3.29 that occurred back in 1981."

And speaking of higher gasoline costs, Economist.com writes, "hit by higher fuel costs as well as falling house prices, consumers may finally be flagging. Americans cut their spending by 0.2% in real terms in March."

And it will get worse, as Peter Grandich of the Grandich Letter sums it up as: "U.S. Dollar - Dead! Dead! Dead!!! Any questions?"

And it is not just Switzerland that is experiencing consumer price inflation, as The Wall Street Journal reports that the Organization for Economic Cooperation and Development said that in March, "the annual inflation rate in its 30 member countries rose to 2.4% from 2.1% in February." And it looks to get worse, too, as "In the euro zone countries, producer prices were up 2.7% from March 2006."

And in other dismal inflation news, the Financial Times reports that last week copper jumped 7.2%, nickel jumped 10.6%, lead rose 4.2%, and zinc rose 12.6%. Even worse, John Williams, of the famous Shadow Government Statistics newsletter, said, "Annual PPI inflation for April jumped to 3.2% from 2.5%, while annual April CPI inflation rose to 2.8% from 2.4%."

And it will get much, much worse, too, as he also reported that M3 money supply "accelerated sharply in April to 12.9%, from 11.7% in March"! Gaaaaah!

And if you think that Treasury Inflation Protected Securities will save your sorry financial butt or stop me from screaming "Gaaaaah!" in terror, then I scornfully laugh the Scornful Laugh Of The Mogambo (SLOTM) with a loud "Hahahaha!" The reason that I am laughing so, umm, scornfully is that I just read where Michael Pento, of Delta Global Advisors, said, "Since TIPS add the CPI inflation numbers to the principal for the bond, the actual yield is the higher number of 5.4%." Not too shabby, I guess - but still less than the rate of inflation, I note with a practiced Hollywood macho sneer of contempt (which, in case you were wondering, I thought would impress the ladies. It doesn't, and they sneer back and/or call a cop. It has a worse effect on men).

"However," said Mr. Pento, predictably repelled by my sneer, "I thought you might find it very interesting to learn that the compounded yield of gold trounces the compounded yield for the TIPS since their inception. Put another way, $300 invested in gold in '97 grew to $700, 8.7% compounded. $300 invested in TIPS in '97 grew to only $536 (which is) 5.4% compounded."

Immediately I think to myself, "Hmm! Gold is a better hedge against inflation than TIPS!" But before I could say anything witty or clever, I had to think of something witty or clever, which took so long that Mr. Pento got tired of waiting and just came out and said the same thing: "Gold is a better hedge against inflation than TIPS!"

He then said, "For those who might say the history for TIPS is too short to draw any long term conclusions, we can also simply look back on the last 20 years of nominal Treasury yields, where we see an average yield of 6.21% before taxes. That yield is especially diminutive when compared to the average increase in M3 of 7.8% (which is closer to the actual rate of inflation) over the last 35 years."

What's the point of all of this? I immediately say, "TIPS are crap!" Mr. Pento takes the serious, analytical approach and says, "The point is that the calculation method for the CPI is flawed and will always understate the true rate of inflation; adding such a CPI figure to the anemic nominal TIPS yield will never allow investors to get ahead in real terms."

He is surely right, as since 1997, the terrible news is that the CPI has gone up from 160 to today's 205.352 in those ten years, which is 2.5% a year, compounded!

The number 205.352, by the way, reflects the absolute stupidity of too many government employees with nothing to do with their expensive time, so they got busy to calculate out to three decimal places a rough statistic that has oodles of assumptions, extrapolations, imported errors and just plain guesses about a lot of things, not to mention the slimy hedonic adjustments applied to the numbers to make the inflation look like less than it is.

This new-for-2007 "out to three decimal places" thing is exactly as stupid as somebody saying to me, "Hey, jerk! Quit staring at my wife and licking your disgusting lips! Instead, look over there and tell me how tall you think that building is."

So I look over across the street and I see that it's three stories tall. Figuring roughly 10 feet per story, I accurately reply, "It is 30.352 feet tall", which is a level of precision down to less than 1/32 of a freaking inch! Just by looking! Wow! What a guy, huh?

And if you think that the CPI is weird (three decimal places and all), Peter Schiff, in his book Crash Proof, says that the Personal Consumption Expenditure (PCE) is as equally bizarre a statistic, but allows for substitution in the consumer's market basket, whereas the items and quantities in the CPI market basket are relatively fixed.

His PCE analogy is to imagine, "a person sitting in a comfortably heated room under a chandelier eating filet mignon. Now fast-forward a few inflationary years. The same person sits in the same room; but having no heat, he is wrapped in blankets; having no electricity, he is using candlelight; and unable to afford filet mignon, he is eating cat food. However, since the individual spends the same amount of money in either circumstance, according to the PCE there is no inflation. After all, he is still warm, still has light, and is still eating."

Mr. Schiff also underscores the point that inflation in prices comes from inflation in the money supply by noting that the U.S. dollar was historically gold (as required by the Constitution), and therefore incapable of producing inflation since the government cannot create gold. Ergo, "The only time during the period from 1780 to 1913 when we saw rising consumer prices was during the Civil War, when the introduction of paper money expanded the money supply. When the war was over, the paper money was taken out of circulation and prices came back down."

And why did he pick 1913? Because in 1913, the loathsome and misnamed Federal Reserve was created, and that is when our problems really began.

For some good news to momentarily lighten the mood, the next President could be a smart and educated guy who understands both economics and the Constitution, as "Congressman Ron Paul finished first in the MSNBC poll following the GOP primary debate last night held at the Reagan Library in Simi Valley, California. Dr. Paul received 43 percent, beating the second-place finisher by five points, and crushing the rest of the field."

And now, back to the constant litany of gloom with the Bloomberg.com report that "Employers in the U.S. last month added the fewest jobs in more than two years." And things are not looking like they are going to get any better, as the latest report from Challenger & Gray reveals that April's layoff announcements rose 18.4% over this time last year.

Anyway, the big news is that the Labor Department reported (believe it or not) an increase in employment of 88,000 jobs. The funny past was that any increase in jobs was entirely a result of plugging in the results of the "Birth-Death model". This handy and easy computational device is merely an educated guess of how many jobs were created (but not counted) by new businesses and how many were lost by businesses folding. The result was that this "Birth-Death model" added 317,000 jobs! Hahaha!

Even worse news is found, says George Ure of UrbanSurvival.com, in Table A-12 of the report, where we find the statistic known as U-6 (Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers), which he calls the "Engineers flipping Burgers index,", and that this U-6 unemployment rate "is stuck at 7.9% - the same as a year ago."

Tony Cherniawski of thepracticalinvestor.com reflects, "To make matters worse, the report shows that the Civilian Labor force declined by 468,000. Really? Where did they go? Forgive my conclusion, but it looks like we may have lost as many as 697,000 jobs last month."

But, surprisingly, manufacturing is reportedly up! But even this is no real surprise, as Mr. Cherniawski reports, "Our government now wants to classify hamburger flipping as a manufacturing job."

Actually, I have to admit that it makes sense, as it is unassailably true that it IS manufacturing, because making a hamburger is just another case of a laborer, in a building, taking raw materials and using capital equipment to create a finished product. But it leaves a bad taste in your mouth, if you'll forgive the pun.

And why is the government doing this redefinition of terms? His analysis is that "manufacturing jobs as a percentage of the total labor force have fallen to an all-time low. Could it be that Washington wants to hide this embarrassment by lumping fast food with manufacturing in order that it won't look so bad?" I jump to my feet and exclaim, "You bet they do!"

Chuck Butler at Everbank.com explodes, "What a crock! How can they get away with lies like that? When the Bureau of Labor Statistics (BLS) doesn't count people who have had their unemployment benefits expire… When the BLS doesn't count people in jail as unemployed, as if they even have a chance to get a job! Oh, and the list goes on and on." He figures, "Unemployment, in my opinion, is probably more in the neighborhood of 12%."

To make matters worse, the average work-week declined to 33.8 hours.

Perhaps this nightmare of "lower hours worked plus price inflation that comes from monetary inflation" is why Bloomberg.com reports that, in March, "Consumer credit, or non-mortgage loans to individuals, increased $13.5 billion, or 6.7 percent at an annual rate, to $2.425 trillion."

Yikes! People are not only buying less, but having to go into debt just to pay current expenses! I surmise this from John Mauldin, of Frontlinethoughts.com, who reports, "The Liscio Report, among other things, tracks sales tax receipts from the various states. They report a serious deterioration in sales tax receipts in March."

In fact, Liscio reports that "In March only 18% of the states in our survey hit or exceeded their estimated sales tax collections, and levels in just over 30% of the states were lower than they were in March 2006, some quite steeply so."

Good ol' Phil S. sent an excerpt from something called, "Transcript: April 13, 2007 - Weekly Institutional Client Conference Call" by Donald G. M. Coxe, who is the Global Portfolio Strategist for BMO Financial Group, where we read that the, "dollar index (the DX) is now heading down to touch what is the very long term low for this index, which is the 79.5 - 80 range. And just to put it into perspective for those of you who don't follow it, that index was as high as 120 back in '01. So, we've already given up one-third of the value."

A hand goes up in the back of the class with the question, "So what? Who cares? And why doesn't the Stupid Mogambo Loudmouth (SML) just shut the hell up about it for a change?"

Naturally, I am frozen in place, paralyzed by my outrage at the insult. Intuitively sensing that diversionary action was needed to prevent the violence that was sure to soon erupt, Mr. Coxe jumps in and changes the subject by surprisingly saying, "The great bull market began on Friday the 13th of August 1982."

Hands fly up around the room, and I assume that everyone else wants to know (as I want to know!) how the hell he knows so precisely. He effortlessly answers that it is simplicity itself, as "Paul Volcker signaled an announcement to the first cut in interest rates on Friday the 13th of August."

More hands fly up, including my own, and we were all thinking, "So what? Get to the point! I am starting to sober up here, and I don't like it one damned bit!"

Showing a rare gift of being able to read the minds of the audience, he answers the question without actually being asked, and explains that the significance is that now "we come out and announce that after all these years of telling you that the primary challenge to the price system is deflation, we say that story which has been true for 25 years, is over."

25 years! Wow! What a bull run! And so, "What is the NEW 'primary challenge to the price system'?" we innocently ask.

Apparently already primed to answer such a question, he says that now "the primary challenge to the price system is inflation." The smart people in the audience immediately get up and rush out of the door muttering "Inflation! Gotta get more gold! Inflation! Gotta get more gold!", leaving the rest of us stupid people sitting here, all alone, thinking to ourselves "What in the hell does that mean, and where is everybody going?" Again our hands fly up.

With another superb demonstration of uncanny ability to anticipate our stupid questions, he says, "so naturally we've chosen for the Conference Call theme - gold."

And speaking of gold, Jim Sinclair at jsmineset.com writes, "When gold bottomed at $248 that was the true commodity value of gold", which is, "like any commodity, at the price of producing the metal. So the ability to be able to catch a low in gold is by no matter of means some act of a seer or genius."

To attempt to quantify the coming maximum price of gold, he says, "The maximum, in which gold gets fully priced, is when it attempts to balance the balance sheet of the United States. That is when the amount of gold held by the U.S. Treasury, in the form of Treasury gold certificates, is, by increasing valuation, attempting to equalize the value of an external debt of the United States held by central banks to the value of gold held in Treasury."

Well, let's see; the current total debt of the United States alone, as measured by the National Debt, is almost $9 trillion. And how much gold is in the Treasury? For that, we turn to The Financial Management Service of the Department of the Treasury, which came out with their "Status Report of U.S. Treasury-Owned Gold" dated March 31, 2007. It reports that the Fed has 261,498,899.316 Fine Troy Ounces of gold, which they value at $11,041,058,821.09. This comes to about $42 an ounce, an artificial government fiat value that hasn't changed since the '30s when gold WAS $42 an ounce.

At $660 an ounce, on the other hand, that seeming treasure trove of 261 million ounces of gold has a current market value of a mere $172.6 billion, which is chump change anymore. I mean, it's less than the deficit in the annual federal budget alone!

So, using Mr. Sinclair's formula, I grab my calculator, punch in the figures for $9 trillion in debt backed by only 261 million ounces of gold and, after a lot of data-entry errors, a lot of cursing and throwing the damned things across the room a few times in frustration, I find that gold would have to be worth $34,500 an ounce, right now!

Apparently, this is old news to some people, as Marketwatch.com reports, "On the supply side, gold warehouse inventories fell by 148,175 troy ounces to stand at 7.67 million troy ounces as of late Friday, according to Nymex data. Silver supplies were unchanged at 131.3 million troy ounces."

So why hasn't gold exploded in price before this? Easy question! It's because central banks have been selling tons and tons of it for years! BlanchardGold.com reports, "In two months, ECB banks have sold over 100 tonnes of gold into the market." Eric Hommelberg at GoldDrivers.com says "the ECB can't keep up with this pace of selling (they sold 89 tonnes in [the] last 7 weeks) and once this selling pressure dies, gold is ready to go."

And let's not forget silver, which is obviously the most undervalued commodity in the whole world. In that regard, MoneyWeek.com quotes Mark O'Byrne of Gold and Silver Investments as predicting that "silver will surpass $20 per ounce in 2007, its non-inflation adjusted high of $48.70 per ounce before 2012, and its inflation-adjusted high of some $130 per ounce in the next 8 years."

Wow! If I wasn't already so sick and tired of struggling with stupid calculators, I would frantically scramble for one to figure out how much profit there is when silver goes from today's $14 an ounce to $130 an ounce in eight years. Then I say, "Damn!" when I immediately remember that I have no idea how to calculate this stuff to start with!

So I turn and say to the intern walking by, "Hey, kid! Tell me the compounded interest of a 14 present value, 130 future value, and a period of 8, and maybe I won't fire you and ruin your life before it even gets started, ya little punk!"

Nervously, he pulls out his HP12C, quickly punches a few buttons and says "32 percent per year, sir!"

Impressed with both the startling profits and his smarmy lackey attitude, I say "Now go get me a taco! Two of them! No, three of them!" but he just walks off, snottily saying "Your wife says I don't have to!", which (as far as I am concerned) is the exact WRONG answer, so I decide to fire him anyway. And ruin his credit rating, too, if I could just remember who he was. But I'll find him, as I cannot ever forget that smirk on his stupid little face!

Anyway, Mr. O'Byrne ignores the cruel and arrogant way that I torment stupid Earthling employees for no reason at all, and says, "The fundamental reasons for our very bullish outlook on silver is due to continuing and increasing global macroeconomic and geopolitical risks; silver's historic role as money and a store of value; the declining and very small supply of silver; significant industrial demand and most importantly significant and increasing investment demand."

As to supply, he notes that "In 1900 there were 12 billion oz. of silver in the world. By 1990, the commodities-research firm CPM Group says that figure had been reduced to around 2.2 billion ounces of silver. Today, that figure has fallen to about 300 million ounces in above ground refined silver."

That rate of depletion since 1990 comes to about 112 million ounces of silver per year, and this was BEFORE the Chinese got their economy cranking!

Where did all that silver go? He says, "It is estimated that 95% of the silver ever mined has been consumed by the global photography, technology, medical, defense and electronic industries. This silver is", whereupon I pause the tape for delicious dramatic emphasis, "gone forever."

Now, if all of this silver is gone, then it is indeed "interesting", as he says that "silver has been used in more regions and countries and for longer periods of time as money than gold. Nobel Laureate Milton Friedman, said of silver 'The major monetary metal in history is silver, not gold.'" We used up what we usually use for money! Gaaaaah!

Perhaps all of this dolorous news of inflation and economic insanities explain why Bloomberg.com reported the entirely expected result that "U.S. bankruptcy filings in April were 47% higher than the same month last year." Ugh.

**** Mogambo sez: Addison Wiggin of DailyReckoning.com says, "At least writing about this stuff these days is like shooting fish in a barrel." Hahaha! It's easy, alright, but it is not very pleasant for the fish!

Since I am always loudly screeching for people to buy gold, silver and oil, and making very rude and crude remarks when they don't, the task is made much harder when you are not shooting at the fish in the barrel, but yelling at them, "The Federal Reserve and all the world's central banks are shooting like crazy at you! So buy gold, silver and oil, you stupid fish, and buy yourself some protection! And make a hell of a lot of money, too!"

But they won't listen. Nobody ever does. That's why gold, silver and are oil are so cheap right now. And if you don't buy cheap, you can't sell when they are expensive!

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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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