Cash and the Commodity Craze

By: The Mogambo Guru | Tue, Nov 13, 2007
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"Look at me! I am suddenly in the trigger swap business! I get to charge you a fee to float a dollar's worth of bonds backed up by a dollar's worth of your own money? Hahaha! And there are investors who will voluntarily do this? Hahahaha! What a racket!"

Inflation in prices is becoming widespread, and Adrian Ash of, writing at, notes that, "When unlimited money supply growth crashes into rising demand for limited-supply essentials - such as natural gas, copper, soybeans, and cocoa - the result is sure to be price inflation as violent as the monetary inflation that preceded it."

The use of the word "violent" is highly instructive, as the reports of, "Food riots in West Bengal and Mexico. Empty shelves in Caracas. Warnings of hunger in Jamaica, Nepal, the Philippines and sub-Saharan Africa. Soaring prices for basic foods are beginning to lead to political instability, with governments being forced to step in to artificially control the cost of bread, maize, rice and dairy products."

Indeed, horrifying inflation in prices is everywhere, as inflation in prices is caused by central bank inflation in the money supply, and central bank inflation in money supplies is everywhere, too, with the result that "Record world prices for most staple foods have led to 18% food price inflation in China, 13% in Indonesia and Pakistan, and 10% or more in Latin America, Russia and India, according to the UN Food and Agricultural Organisation (FAO). Wheat has doubled in price, maize is nearly 50% higher than a year ago and rice is 20% more expensive, says the UN. Next week the FAO is expected to say that global food reserves are at their lowest in 25 years and that prices will remain high for years."

For years? Indeed, as "fears for even tighter conditions revolve around deepening climate change, which generates worsening floods and droughts, diminishing food supplies. If the price of oil rises further it will make fertilisers and transport more expensive, and at the same time make it more profitable to grow biofuel crops."

And from we surmise that, like America, a war would be just the thing to distract their unhappy proletariat masses, as they report that "Iran's new central bank governor has warned the government of President Mahmoud Ahmadinejad over money supply growth, urging measures to prevent a further rise in inflation. At the end of May 2007, the central bank said money supply had grown by a colossal year-on-year rate of 39.4 percent. Iran's year-on-year inflation is currently 15.8 percent, according to the central bank."

And even increasing production is not much of an option, either, as "Supply will be further restricted if fish stocks continue to decline due to overfishing, and if soils become exhausted and erosion decreases the arable area."

The inflation rate in Spain jumped to 3.6%, and says, "Singapore's consumer prices rose 2.7 percent from a year earlier", that, "Australia's core inflation rate advanced 3.1 percent from a year earlier", and that "French annual inflation accelerated to 1.6 percent last month."

The November 2 issue of Business Week magazine says that the World Food Price Index has risen 19.8% between June 2006 and September 2007, and from we read "The world's most vulnerable who spend 60% of their income on food have been priced out of the food market," which is the alarming warning from Josette Sheeran, head of the United Nations' World Food Programme (WFP).

But as far as "surprising rates of inflation" go, the Economist magazine says that in Kazakhstan, "Bread prices have gone up by 30%. And the price of sugar, flour and sunflower oil doubled or even tripled within days recently."

And for other inflation news, orange juice is up 19% in the last 12 months, and corn up15%. And corn, I hear, is actually 40% more than it was four years ago! Wheat is up a whopping, eye-popping, traffic stopping, cow-flop plopping 61.7% since last year! Hell, the price of eggs is up a brain-scrambling 33.7% in the past 12 months! Milk is up 21% over the same period! How in the hell can there be no inflation?

And it is not just food, as Agora Publishing's 5 Minute Forecast reported that the Energy Department revealed that "The average retail price of electricity rose 9% last year - the biggest leap in 25 years. According to a report released yesterday, electricity prices rose the fastest rate since 1981, thanks largely to the lifting of retail price caps."

To make it worse, "This winter, the report estimates a 4% hike in electricity costs." Well, if winter is one of the four seasons, then winter is three months long, right? And so a 4% hike for one season means 12% for the whole year? Yow!

John Brown in his Financial Intelligence column at understates the problem and says that inflation statistics are somewhat misleading, as "Just two major components of the consumer price index (CPI), housing and autos, comprise a massive 58 percent of the inflation index and are falling in effective, 'street' price. Meanwhile, the prices of regular household items - things one really consumes every day such as food (15 percent) and heating oil (0.3 percent) - are rising rapidly in price, yet they comprise a very small part of the index."

Well, rising prices for commodities is not news to everybody, as John Fearon, director of Oceanic in Sydney, says, "The thirst for some exposure to commodities markets is growing all the time."

And sure enough, Reuters reports that "An army of structured credit experts is studying products such as collateralized commodity obligations, or CCOs, tied to the performance of a portfolio of underlying commodities, such as precious metals or energy prices."

So what in the hell is a CCO? It is explained that "The issuer sells protection on the underlying commodity portfolio to the swap counterparty under what is known as a 'trigger swap agreement.' To fund its obligations under the swap, the issuer sells notes in the amount of the protection sold, according to Fitch [Ratings]. Proceeds from the notes then serve as collateral for the issuer's exposure under the swap until it matures. At maturity, the issuer liquidates the remaining asset and returns the proceeds to noteholders." Hahahaha!

Let me make sure I got this right: I create and sell some debt, and I use the money that I get from these idiot noteholders as collateral for the notes? Hahaha!

Look at me! I am suddenly in the trigger swap business! I get to charge you a fee to float a dollar's worth of bonds backed up by a dollar's worth of your own money? Hahaha! And there are investors who will voluntarily do this? Hahahaha! What a racket!

The article says that stupid people with too much money have not learned anything from the subprime mortgage mess, and "most likely the bulk of investors about to start buying CCOs have no idea quite what these products are, either. All they'll see, instead, is a steady stream of potential income. Provided, of course, that the CCOs pay out at maturity." Hahaha! Just like subprime!

But like all scams like this, it works like a charm in the early stages, and "In other words, bond managers and fixed-income traders whacked by the collapse of mortgage-backed debt can now put commodities into their portfolios - and just in time, too, for the runaway inflation about to hit thanks to monetary oversupply and heavily geared financial buying."

We never learn. I sigh. But we can make a lot of money on it, as this commodities bubble is in the early stages yet. But everybody else pays a huge, society-destroying price for such inflation. I sigh again. I weep. Ugh.

Mogambo sez: Those who sought gold and silver to protect themselves are also waxing rich as their prices zoom, zoom, zoom, which is caused by, almost literally, everyone in the whole freaking world trying to get away from the inflationary idiocies of their own governments creating so much excessive money and credit.

And petroleum, our oily chum? Up, too, just like you'd expect.

And next week, and next month, and next year when they are all up even more, it will be just like you'd expect, too, and then you'll be much wealthier, just like you'd expect, and then I will be calling, calling, calling you, day and night, asking to borrow money from you, just like you'd expect, too, but you didn't, which shows you don't think things all the way through, to your dismay.

But you will be wealthier, thanks to owning gold, silver and oil, which will take some of the sting out of it, and with all your new wealth you can pay to have my calls blocked, which will take the rest of the sting away, too.

Ahhh! Is there no end to the benefits of real assets?

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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.

Copyright © 2005-2011 Richard Daughty

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