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Did they have deflation or inflation?
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Not much happened last week that you could
put a finger on, as then perhaps you could understand why
I am in such a foul mood. I dunno why. I just am. And then
I remember that I am The Mogambo, bearing the crushing weight
of the world on my brawny Mogambo shoulders (BMS). There is
no other way to feel.
Debt problems worsened, of course, but only
to the usual degree of the average monthly increases in that
particular bad news category (BNC), such as outstanding consumer
credit increasing by $5.5 billion in March, which means that
the consumer's debt load is rising at an annual rate of somewhere
between 3% to 4.5% or so, and is already at $2.12 trillion,
which is a tidy $15,193 per every freaking worker in this
whole freaking country (140 million of them) who has a damn
job. And the interest rate is rising on that debt, or is getting
ready to rise, because interest rates are rising. And if lenders
DON'T start raising their interest rates on credit balances,
then their own bottom line (which is where profits would be
found, if any) will suffer, and then somebody's cushy executive
job will be on the line, since they did not produce results
that "benefit the shareholders", and then they get
laid off, and then after awhile they start coming around here
and wanting me to pay them back the money I borrowed from
them five years ago. And then that bums me out. And then THEY
get bummed out when I laugh in their faces at the very thought
of me even having any money, and if I DID have any money I
certainly wouldn't give it to him, as I had him in my crosshairs
from the moment he turned the corner.
Maybe it was that foreign custody holdings at
the Fed increased by $8.1 billion last week, which is, again,
towards the top of its range, and is worrying to me, mostly
because I am the worrying type. And I worry because I believe
that the Austrian Business Cycle Theory school of economics
is correct, and Mises and Rothbard were very explicit about
what happens when a government has acted as irresponsible
as ours, and especially when you have a central bank that
has actually eclipsed Congress in pushing the envelope of
the bizarre, hewing, as they are, to some lunatic economic
theory that can be conveniently modeled on computers, which
means that things are permanently linked, and which is why
their dumb-ass theory starts out with the proposition that
lowering interest rates always causes an increase in economic
activity which is, on its face, such a stupid statement that
you marvel that educated adults would say something so damned
insane, especially when Japan is the living proof that it
is NOT true, because they are limping along at interest rates
that are almost literally zero, and have been for almost fifteen
freaking years in a row (how do you say "Nice job of
investing there, morons!" in Japanese? Answer: Mogambo
him say Hahahahaha!"), and it is only an export surplus
that is keeping them alive. For fifteen years bond holders
make nothing, and shareholders make ditto.
That things are heading for doom was even at
the meeting of the Berkshire Hathaway people in Omaha, which
produced this memorable quote from Buffett's sidekick, Munger,
who said "The present era has no comparable referent
in the past history of capitalism. We have a higher percentage
of the intelligentsia engaged in buying and selling pieces
of paper and promoting trading activity than in any past era.
A lot of what I see now reminds me of Sodom and Gomorrah.
You get activity feeding on itself, envy and imitation. It
has happened in the past that there came bad consequences."
So there are lots of people who are cognizant of the facts.
Big deal. But now, the moment you have been waiting for! Now
comes the reward for those who have not already stopped reading
and said hurtful things like "This is really stupid!
What kind of idiot reads this Mogambo crap?" which, although
it is true, hurts my feelings nonetheless.
So, without further ado, here is the real reason
The Mogambo is so forlorn (TRRTMISF): The general trend of
the last seven years, since 1998, is that the Federal Reserve
started creating money and credit in earnest , creating credit
like something out of a nightmare that just doesn't end, like
my wife hitting me on the forehead with a hammer, but I can't
move and I cannot pass out, and I have to go to the bathroom
real, real bad, and she is yelling "Maybe THIS will knock
a little sense into your thick, stupid head!" But it
doesn't! It doesn't teach me anything except that I think
toilets should be closer to the bed, and then I feel worse
and worse. But this tidal wave of fresh, new credit, as measured
by Total Fed Credit, is reflected in a concomitant rise in
debt that passed the point of being "un-payable"
years and years ago. And given the lack of press coverage,
apparently it is all a non-event, even though I am right there,
every morning, under the 49th-street overpass, standing in
the shade so that the harsh morning sun does not hurt the
sensitive eyes of the Mogambo (SEOTM), holding up my sign,
"Prepare to meet thy doom! The Federal Reserve and the
world's central banks are killing our money! And everybody
else's money, too!"
I also have another sign that says "Free
kittens to good home" and a new sign that reads "Homemade
cookies, $1.00". But (and here is a little business tip
that they don't teach you in those fancy-schmancy business
schools), it turns out that very few people want to buy a
home-made cookie from a crazy man standing on the curb. Not
that I am complaining, because I made them out of stuff I
found in a dumpster, so it's not like I have a lot of money
invested in the Great Mogambo Cookie Venture (GMCV). But with
the price of ingredients so low, I figured that if I sold
any at all, the profit margin was at infinity! Wow! What a
business model!
But this is not about how a plucky young entrepreneur tried
and failed to make a successful business in the cutthroat
world of cookies, and how they all laughed at me for trying
to sell a cookie that tasted worse than it smelled, and how
I told them that it is not about smell or taste, but about
PRICE! But explorations into that fascinating bit of marketing
lore will have to wait for another day, as I am much too busy
preparing the release of the seldom-issued Mogambo Market
Move Memo (MMMM). We cut to the inside of the Mogambo Bunker
Of Impenetrable Gloom And Homicidal Despair About Global Monetary
Policy (MBOIGAHDAGMP), where our scene opens with me taking
a long pull on a bottle of bourbon, chain-smoking unfiltered
Luckies and glancing nervously over my shoulder. Using a .45
automatic as a pointer, I gruffly refer to several charts
fastened to the walls with stiletto daggers, mostly for the
effect, as it looks so cool. I use the barrel of the gun to
point to one of the charts, where we see the slowdown in Total
Fed Credit over the last month or so, as compared to 1) the
whole history of Fed Credit since 1913, and 2) since 1998.
For you Mogambo fans, this next part is going to be on the
Mogambo Bloopers and Outtakes Show, showing where I accidentally
pulled the trigger and the gun fired and that damn bullet
started ricocheting off the wall, going ping! plang! whing!
and, if I remember my Batman correctly, where Adam West, as
Batman, is being fired upon by various criminal elements in
comical attire, ker-plewie! Subsequently, I have amended the
Mogambo Bunker Policies and Procedures Manual (MBPAPM) to
include the requirement "Fingers off the trigger! Off!
Until such time as it is immediately obvious that something
or somebody needs a big ol' healing dose of Dr. Leadplugger."
But since we no longer have one of the charts,
thanks to the little accident, I motion for you to move your
seat closer to me, right up close, so that you can look into
the fiery eyes of The Mogambo (FEOTM) as I tell you, with
words, hand gestures, facial expressions and ESP, what I was
planning to show you, but now I can't. But you would have
loved it, because it so graphically illustrated the point
that you would look at the charts, instinctively clasp your
hands together and excitedly exclaim, "Oh, Mogambo! You
have made me see the light! We're freaking doomed, dude!"
So pay attention, because here it is (H I I).
The last time a slowdown in credit creation happened, and
you can tell by the way I have kettle drums and discordant
brass instruments in the sound track, was in the year 2000.
Clash of cymbals! Lightning flashes outside the window! Wolves
howl in the distance!
Now you know why your hands are clasped in, to use the popular
phrase, shock and awe. And you also know why we are doomed.
And you know why the Mogambo is holed up in that filthy little
rat hole of his, hiding out in the backyard, crying and shaking
in fear, bristling with so many heavy weapons and ammunition
that he cannot even get up to walk. And yet, unbelievably,
when he politely applies to have one of those do-gooder departments
of the damned government to supply him with a lousy electric
scooter to get around, and maybe help me move some cases of
munitions, they say "no!" Real snotty, like. "No!"
Then I go home with their rude laughter ringing in my ears
and the salty bitterness of my tears on my trembling lips,
and after awhile I get tired of plotting my revenge, and turn
on the TV, where I see these commercials where all these other
people get electric wheelchair carts! It is just another example
of how they are all out to get me, the bastards. And now people
want to know why I am resentful, and snarling, and hateful,
and sometimes all three at once, and all the people around
me are snarling and hateful, but then I remember that they
are just family and neighbors, so who the hell cares what
they think? Screw 'em.
In short, the dysfunctional idiocy known as the New American
Economy, based entirely on debt-fueled consumption and trading
financial securities and borrowing against the bubble-created
value of our houses and assets, needs ever-more debt to just
stay where it is. And that creation of debt has, suddenly,
not been increasing anymore. Just like in 2000. Ergo, big
freaking problems are coming soon (BFPACS). The headline in
tomorrow's newspaper in your hometown, and in hometowns all
across America, will read "Mogambo Says Big Freaking
Problems Soon!" and if it is NOT the headline, then you
know that your newspaper is ALSO out to get me, the bastards,
and lie to you, which is worse.
But if the perfect revenge is to make money
and flaunt it in front of them until they die of jealousy
and envy , this would seem to be a very, very good time to
buy a put option or two on the OEX. The optimum strike price
is, the way I figure it, at-the-money. If I am right, we will
all make a lot of money when the SP100 falls a long way. If
I am wrong, well, I have been so wrong about so many things,
for so long, that you were stupid to listen to my advice,
and now you have nobody to blame but yourself, and even I
sneer in disgust and disrespect at your gullible stupidity.
The credit rating of General Motors and Ford
were downgraded to junk status, which means it carries a higher
risk of default. An ominous sign of some kind. We'll see how
it turns out, but I am betting on lower share prices, a threat
of bankruptcy, an emergency government bailout, the foisting
of their retirement plans onto the government pension bailout
safety net, the PBGC, and a resurgent share price, making
Wall Street a bunch of money both on the way down and the
way back up.
Antal Fekete, "Goldbug Variations V"
on the Freemarketnews.com talking about the decision by Nixon
in 1971 to take the dollar off the gold standard, essentially
defaulting in the worth of the US dollar. "We must remember
that the financial annals do not record a single case in which
a default has not been followed by a progressive increase
in the discount on the paper of the defaulting banker, until
it reached 100 percent - possibly several years or even decades
later." Mogambo Instant Translation (MIT): the purchasing
power of the currency went to squat, which makes everything
cost more. "Obviously, the defaulting banker would try
to slow down the process by hook or crook. However, ultimately
economic law was to prevail and the remaining value of the
dishonored paper would be wiped out."
Now, because you are reading this, I know that there is something
wrong with you, as only people who have something seriously
wrong with them would stoop to reading the Mogambo Guru, and
so you are saying to yourself "What in the hell does
this have to do with me making some money and amassing incredible
power through the sheer bulk of my money, so that I can stride
as a colossus across the financial and social landscape, and
all will tremble at the sound of my name?" Well, I was
getting to that, in my peculiar Mogambo way (PMW), but first
the grasshopper must learn to place his consciousness in a
garden of serenity whereby one can grasp the transcendent
wisdom about to befall him. But now I am not in the mood anymore,
thank s to someone interrupting my train of thought.
So, instead, we will hear from Mr. Ankete himself, he declares
"There is no reason to believe that the dollar default
will end differently." Then he sits back down. Obviously,
that phone call he got earlier was when he found out that
my check has bounced. Bounding up (Just like that damned neighbor's
kid who accidentally backed into the electric-fence section
of the Mogambo Bunker Perimeter Security System last week.
You should have seen the look on his face! Hahahaha!), I go
on to fill the sudden silence by asking "The value of
the dollar will fall, a money backed by nothing and therefore
can be created out of nothing, until so damn much money has
been created through the creation of debt, that the country
and the world are going to be affected, and in a bad, bad
way (BBW)? Hahahaha!"
Mogambo scholars immediately run to their dog-eared
copies of the Mogambo Dictionary (MD), and look up BBW. The
entry is "BBW. Acronym for Bad Bad Way. Indicative of
worsening pain and suffering of one kind or another, and if
it is used in conjunction with economic or financial subject
matter, it implies the certitude of ruination and starvation
and misery on a grand scale, and then one bad thing will lead
to another bad thing, and after awhile people will get tired
of ruination and starvation and misery, and they will rise
up in the street, crying out 'Save us, Mogambo! Save us!'
but I will be too busy counting my wealth because I had seen
it all coming, plain as day, and bought gold, but I will ultimately
be convinced to seize the reins of power by shallow flattery
and cheap bribes of one kind or another, which will lead to
a deepening sewer of depravity and corruption, a period known
to historians as 'The Mogambo Reign of Terror'."
Seeing that The Mogambo is getting all the attention with
this ridiculous fantasy about ruling the world and how if
I do, there are going to be some BIG changes made, Mr. Ankete
gets up, walks over to the podium, and stands right beside
me. I am pretty sure that he crossed his eyes and graphically
indicated that I am crazy by making little circles with his
finger alongside his head. But I can't get mad at him, as
it is such a good impersonation of me. I step aside, and he
immediately steps to the microphone and says "As the
discount on the dollar approaches 100 percent, the dollar
price of gold will approach infinity. To assert that the dollar
is going to escape this fate is tantamount to asserting that
the laws of economics and logic have been turned upside down,
and the penalty for default has been replaced by reward in
perpetuity."
If the dollar falls in value, then the "dollar price
of gold will approach infinity"? Wow!
For those of you who want me to give you tips on what the
"small investor" should do, here is a tip: Buy an
asset whose value, in dollars, will go to infinity. If you
are not familiar with the subtleties of an infinite amount
of dollars, it is more than a jillion dollars, it is more
than a gazillion dollars, it is more than a trillion, zillion,
bazillion flabgobble splendillion dollars and, as such, represents
one hell of a large chunk of money, and I cannot imagine the
size of a wallet needed to carry that much money, so don't
get me started thinking about it.
And the good thing is that it is also worth a lot of money
all over the world! Perfect safety! Huge gains! All at $435
per ounce! What more could you ask for in an investment? And
at the same price as the large investor would pay, too!
And while Mr. Ankete does not come right out and say it,
I am sure that he is thinking it, and instead of trying to
coax it out of him, or wheedle it out of him, or demanding
that he tell me, or threatening to beat it out of him and
if he knows what it good for him he had better start talking,
I will tell you myself. Buy gold and/or silver.
Besides the bad news that we are doomed, and how we are all
going to die a horrible, painful economic death, he also notes
that "A reliable measure of destruction is the so-called
'notional' size of the derivatives market trading interest-rate
futures, options, and swaps. It now stands at a quarter of
a quadrillion dollars and is increasing at an accelerating
pace." Now this, in American terms, is $250 trillion,
which is about nine times the value of global GDP, which means
it is ten times as big as all the goods and services produced
by everybody and every company on the face of the earth.
This is not news to John Mackenzie, who wrote the essay entitled
"M2- Debt and the Delusionals", as he has been looking
at the most current Settlements Data on Derivatives, assembled
by the Bank of International (BIS).
He notes that the BIS figures that Exchange Traded Derivatives
now total $279 trillion, and OTC derivatives now total $220
trillion, which add up to, and I am going to take his word
for this, as I cannot reliably add $279 plus $220, almost
$500 trillion, which is almost HALF a quadrillion!
The good news, if there is any, is that the banks also figure
that not all of that $499 Trillion in combined Derivatives
is at risk. Whew! The banks decided that only somewhere between
$25 trillion and $35 trillion of that total amount of derivatives
is, as they say, "at risk." Hey! Now I feel a LOT
better! The amount "at risk" is only the total value
of all the freaking goods and services produced in the whole
freaking world in an entire freaking ear! I feel MUCH better
now!
This is where I was supposed to get up and
make some stupid comment about how these are big, BIG numbers,
but I could not handle the stress, and the mere mention of
those mountains of big bets (MOBB) caused my brain to seize
up in a spasm. Always the trooper, Mr. Mackenzie bounded up
out of his seat, grabbed the microphone out of my lifeless
hands, and said "These figures are simply staggering."
A faint smile crosses my face, and with a Herculean effort
I manage to waggle my little finger to indicate that I agree
with him. And it is probably a lot worse than that, as he
goes on to say "It is important to note that although
Exchange Traded Derivatives are regulated, OTC derivatives
are not and in fact many OTC derivatives can go unreported.
Essentially, the $220 Trillion figure in the BIS release does
not account for non-reporting, and is therefore low."
Steven Lagavulin has written "The Most
Important Thing You Don't Know About 'Peak Oil' at the WorldNewsTrust.com
site, which is the idea that we have already passed the point
where we can get more and more oil out of the ground, and
from now on there will be dwindling supplies because we have
used up so damned much of it. He sees, naturally, a feeding
frenzy for oil. "If this scenario sounds over-dramatic,"
he writes "keep in mind that what I'm talking about is
a dawning recognition of something that many analysts have
already come to realize: that the 'oil grab' is in fact already
on, that it's not a temporary 'bottleneck' or passing 'shock',
and that the losers in this game will not survive."
And since we are talking about oil, let me give
you the Mogambo Investment Tip Of The Day (MITOTD). I smile
as I gently and confidently forecast that the current fall
in the price of oil is a big chance for you to buy oil-related
stocks, and oil futures if you have the inclination, because
there is not one instance in all of history when a rising
demand, a falling supply, coupled with the devaluation of
the currency, resulted in lower-priced oil for that stupid
country that so debased its currency. Never. And it never
will happen, either. Ever.
And it is not just oil, as Addison Wiggin of
the DailyReckoning.com notes that there is a new interest
in coal and coal-fired energy. He first notes that "The
Chinese plan to replace 10% of their oil imports with liquid
coal by 2013. And it will also have huge advantages for running
power plants that Chinese trains and trucks can't get to as
easily or regularly", and then he brings it all home
when he goes on to say "Over the last 12 months, energy
companies in the United States announced plans to build over
$100 billion worth of new coal-fired power plants."
So, investing in companies that build these things seems
to be a no-brainer, which is the kind I like, as not having
any brains makes it hard to understand any other kind.
I, like a lot of people, am continually pondering
the "inflation or deflation" debate, mostly so that
I can place some investment bets on it and make a big pile
of money and then maybe I'll get a little respect around here.
Mostly I get a headache from the confusion, because and I
gotta say that both sides make good arguments. On the one
hand, the deflationist camp is right that if all those derivatives
go bad, and houses deflate in price, and stocks deflate in
price, and bonds deflate in price, and debts are bankrupted,
then money will simply disappear. The reason is that all our
money comes from debt; and when you go to the bank to borrow
some money, the bank creates the money out of thin air. But
if I bankrupt out of the debt, doesn't the money disappear,
too? And a falling money supply is the actual definition of
deflation. So, therefore, we should have deflation.
The other side of the debate, the inflation side, is (for
one thing) that in all other post-inflation busts, asset prices
DID fall, just as in the deflationist camp said they would,
and the economy suffered. But not all prices went down. Many
of them went up, including food and fuel. And inflation can
happen with surprising suddenness. In Germany in 1919, the
most recent example of a large, modern economy going bust,
the exchange rate was nine German marks to one US dollar.
In November 1923, four lousy years later, the exchange rate
was 4,200,000,000,000 (4.2 trillion) German marks to the US
dollar. But food and fuel and other necessities became so
damned expensive that the suffering was unimaginable, and
that is why Germany, desperate for someone to "do something",
elected Adolf Hitler, which didn't turn out to be such a hot
idea in the long run.
So the values of things they owned, and their whole economy,
were in tatters, but food and all the things you need to stay
alive and warm were so expensive that they were unattainable.
So, now, YOU answer the question: Did they have deflation
or inflation?
Peter Spina Julian Phillips and Peter Spina
of GoldForecaster take a look at how a falling dollar against
the Chinese yuan might work out. They ask us to "Imagine
all those holding Yuan waiting for the revaluation. They are
looking for the Yuan to fall to around Yuan 5.90 to 6.00 to
the US$. In Yuan, then, a gold price of $426 stands at Yuan
3780 at present. After a revaluation of 40%, it should trade
at around 2703. Suddenly, the Chinese gold holders are sitting
on a 40% loss, that's true. But there are not so many of them.
But you can be sure that many, many Chinese will see it not
as a drop, but as a tremendous buying opportunity if this
happens. This could set of quite a demand across China."
Ken Gerbino has also looked at what a devaluation of the
dollar could mean to the Chinese. "If the Chinese revalue
the RMB, the very next day after a 5-10% revaluation (and
this could be very soon) every Chinese saver will be able
to go out and buy 5-10% more gold for the exact amount of
cash from the day before."
Messrs. Spina and Philips are through talking about gold,
and want to get back to the subject of interest rates and
inflation. "The Fed is caught in a cleft stick,"
they say, "knowing that if they don't raise interest
rates, inflation will grow. If they do raise interest rates,
growth in the economy could wither and reverse. The balance
is so delicate now that whatever they do may be wrong."
This just shows you what optimistic guys Spina and Philips
are, because The Mogambo says that whatever they do WILL be
wrong, as there is no way out of this damned mess, and that
is why it is so crucial that we not get into this damn mess
in the first damn place.
But that does not answer the question "So
what will the Fed do?" Spina and Philips figure that
they will err on the side of growth, and keep interest rates
so low for as long as it takes for The Mogambo go out of his
mind and end up in custody somewhere, cursing and kicking
and vowing revenge on Alan Greenspan. Mr. Willie thinks the
same thing, and writes "We reiterate that the Fed will
place continuing growth of the economy above the curtailing
of inflation". The Fed, for its part, hopes that nobody
notices that the main damn purpose of the Federal Reserve
is to achieve price stability.
Part of the demand for gold is coming from India,
and they note that "Indian buyers are in the market in
force. Below $430 they are rapacious, above it they are still
there, but somewhat cautious, hoping for a pullback. The demand
is so strong that they will not stand back for long."
The news is not so good for platinum, as some news from the
world of nanotechnology says that work with nickel has "advanced
to the point where nickel can be substituted for platinum
in catalytic exhausts."
"Gold Mining Stocks: What is Happening
Now" by Kenneth J. Gerbino is not about gold, per se,
but about how everyone is going to wake up every morning and
find that inflation is gnawing their feet off, and the reason
is that all the world's governments are now peopled exclusively
by morons who are creating more and more money with every
breath. "Inflation in the U.S is 3.5% and rising. Globally
this number is 4.3%. My investment management firm monitors
61 foreign countries that report regularly on money supply
statistics. In the last 12 months these 61 foreign countries
have increased their basic money supplies by an average of
15.2%. Most people with savings in these countries will try
and protect themselves from inflation that is surely looming
and will most likely be buying gold. The Chinese basic money
supply from 1998 has averaged an annual increase of 13% for
7 solid years. Inflation is coming to China - and that means
plenty of gold buying."
This bring up John St. George, the guy who is the terrific
voice and quick-on-his-feet host of on FreeMarketNews.com.,
who was interviewing me on the phone, which was, I regret,
not so much of an "interview" as it was my screeching
in my usual whining, hysterical little sissy-boy way, when
he suddenly distracted me by graciously remarking that he
thought I had finally, after all these years of trying, constructed
a memorable sentence. I was as surprised as you are, since
I seem to specialize in forgettable prose that is also stupid.
He was referring to how I wrote that the money that the Federal
Reserve creates to sustain the economy is a bad thing, because
"All that new money will, because it always does, show
up as inflation in prices, since there is nowhere for the
money to go except into buying something, and with all that
new demand, prices rise."
Okay, now that I look at it, I see that this St. George guy
was either puffing my ego or pulling my leg, because after
the big introduction, now I look like an idiot again, and
everybody is laughing at me, giggling and pointing like when
someone has taped a paper onto my back that reads, "I
am a big stupid idiot". So I went to a mirror and checked,
and was relieved to find that I do not. I DID have one stuck
on the back of my coat that says "I am a filthy pervert",
but it was an old one; I have mixed feelings about the free
publicity, and it doesn't take up much room, so I just leave
it there.
But, to give myself a little credit that Mr. St. George tried
to give me, the sentence is banal but unassailably true, and
the curse of inflation is why normal countries and normal
people do not inflate their money supplies.
A few people have taken notice of how undervalued
gold is right now. One of them was cornered by Tom Dyson,
writing on the Daily Reckoning Rude Awakening column. He quotes
Steven Jon Kaplan, who is "author of a free website called
the True Contrarian [www.truecontrarian.com], and student
of the precious metal markets since the 1970s." Mr. Kaplan
says "The key to knowing good buying and selling opportunities
in gold mining shares is to track the spread between the price
of spot gold and HUI, the Amex Gold Bugs Index" which
he calculates by subtracting the HUI from the spot price of
gold. "As a general rule, a high spread indicates pessimism
toward gold mining shares, so you want to buy these stocks
when the spread is starting to reverse lower from a major
high point." So where is it now? "This past Friday,
April 29, 2005, the spread reached 257, an all-time record
high. The record low was 148 on December 2, 2003, when HUI
was at 258.60." Yow! According to this, we are at an
historic opportunity to buy gold mining shares? Great!
Another guy is Bill Murphy of LeMetropoleCafe.com, who was
quoted by John Hussman as saying pretty much the same thing,
only using the XAU in comparison to the spot price of gold.
"Probably the simplest way to emphasize conditions in
the precious metals shares is to examine a simple valuation
indicator that is, surprisingly, nearly as useful as much
more sophisticated indicators: the ratio of the spot price
of gold to the Philadelphia XAU Index. On Friday, spot gold
closed at 434.39, while the XAU closed at 83.51. That put
the Gold/XAU ratio at 5.20."
Now, if you are like me, then numbers come and numbers go,
mostly in reference to things like neighbors standing out
in my front yard, yelling things like "You are number
one on our list of people we hate!" and it is only when
we consider the exact meaning of numbers do we understand.
To this end, they go on to say, "To put some historical
context on this measure, since 1974, the Gold/XAU ratio has
been greater than 5.0 about 15% of the time. When the ratio
has been this high, the XAU has followed with annualized gains
of 89.6%, on average - a figure that remains high even if
the data is split into multiple samples. When the ratio has
been greater than 4.0, the XAU has followed with average annualized
gains of 27.4% (though the finer profile of returns has been
sensitive to other conditions such as interest rates, economic
trends, and inflation)."
Wow! This is great! If you would loan me some money, I would
buy some gold mining shares right away! But not all is beer
and chili dos, as that is what I would really do with the
money if you were so stupid as to loan me some, as he notes
when he goes on to say "In contrast, when the ratio has
been less than 3.0 (meaning that the gold stocks are very
elevated relative to the actual metal), the XAU has declined
at an annualized rate of -36.6%, on average."
Now that we know all about the relevance of the numbers,
we re-read the part where 1) the ratio is at 5.20, and then
2) we skip down to the part where he says "When the ratio
has been this high, the XAU has followed with annualized gains
of 89.6%."
And let's not forget to mention Bob Hoye, who is "a
market historian and editor of Institutional Advisors",
and hope he is correct when he says "According to thorough
technical analysis, the gold sector seems to have reached
a significant low." But he notes that this is not particularly
news to him, as "Every era of financial bubbles is eventually
followed by a severe credit contraction. Since the advent
of modern financial markets by around 1700, there have been
five examples prior to the blowout in 1Q2000."
And that is not all, especially as pertains to gold. "Also
typically, the post-bubble rise in gold ran for 20+ years.
With varying degrees of intensity and success, the record
is complete back to the 1690s' depression bottom, which recorded
the 'Oro Preto' mania in Brazil."
Bull markets in commodities typically run for more than 20
years, and "They start from a depression bottom and end
in the era of bubbles - never the other way around."
So all we need is for the weird markets to roll over to get
this thing started? Apparently so, as he writes "This
recovery in stocks, business, and credit markets is showing
some of the classic signs of topping at the same time as the
gold side of the equation is indicating downside capitulation.
In which case, the second cyclical bull market, whereby gold
will outperform most commodities as well as most financial
assets, is about to get underway."
And what will happen when it does get underway?
"The first one out of the collapse of the tech bubble
launched a remarkable drive to acquire millions of ounces
of gold. This one will launch an even more remarkable drive
to discover millions of ounces of gold. Exploration companies
with outstanding field abilities and portfolios of identified
properties will be outstanding performers." Ergo, acquire
both physical gold and gold stocks.
I was sitting here thinking about how to convince people that
investing in the stock market is NOT a place where a lot of
people make money. The stock market IS, on the other hand,
a place where lots of people put their money, THINKING they
are going to make money, only to see it wither away. But the
more I thought about it, the more beer I drank, and the more
confused I got, and , fortunately, ran across the essay, "Bear's
Shadow Falls Over Financial Markets", by Jeffrey L Ferguson
in the Asia Times which saves me a lot of thinking time that
could be drinking time. He writes "The second secular
bear growled its way through the 1970s and it was truly secular
in nature. Contrary to a common belief, equities didn't simply
trend sideways through the 1970s before moving to new highs
with the great bull market starting in 1982. This illusion
is caused by inflation that plagued the period. Deflating
the S&P 500 with the CPI reveals that the market peaked
in 1969, not 1973, before falling 64% over the subsequent
13 years, ultimately bottoming out in 1982."
It gets worse. "Stock prices failed to exceed the 1969
peak until 1993, 24 years later, and didn't move convincingly
through the 1969 level until 1995. At this point, the weary,
and rather aged, investor still faced capital gains taxes
on a phantom 300% gain wholly due to inflation. Covering this
tax liability likely extended the true recovery period to
within shouting distance of the bear market in stocks beginning
in 2000, the most recent peak in equity markets."
I short, nobody made any money, in the real, inflation-adjusted
sense, until just before the swoon in the stock market in
2000, and then, of course, they are back underwater again.
In other words, if you had not bought a new car in 1969, but
had, instead, invested the money in the stock market, in 2000
you would have enough to, after taxes, buy a new car. You
call that investing? Hahahaha! If you do, then you are the
product of the American public school system! Hahahaha!
And it won't get any better for the rest of your life, according
to Captain Hook, of Treasure Chests, who says that "we
are of the opinion true highs (Grand Super Cycle Degree) in
the broadest sense of the word were not put in until last
month, as presented above in the S&P 500 Equal Weighted
Index." And, in case you can't gather from the phrase
"Grand Super Cycle Degree", it means that you will
be dead and gone before the next bull market in shares starts.
David Bond, the man behind the annual Silver
Summit, has announced on the site theSilverPennies.com that
it will be "the rock'n'roll concert of the investment
conferences this year. Literally." The Whole Hollywood
Story is that Steve Dore, who is a terrific boogie-woogie
piano player, has written a song about the wonders of silver,
and will be performing it live and in person. To elevate the
event, there is also an educational component, as I will help
him out by simultaneously demonstrating 1) why there are no
boogie-woogie fiddle players, and 2) why my career in music
was an even bigger failure than everything else I tried and
failed.
The Silver Summit will also celebrate Wallace's
international recognition as Center of the Universe, as represented
by a year-old marker, "a manhole cover of incredible
detail and quality."
The subject of this week's Newsweek magazine
is "Special report: China's Century." For the last
twenty-five years, they have had 9% economic growth, which
is, according to the magazine, "the fastest growth rate
for a major economy in recorded history", quadrupling
the average income and bringing about a quarter of the entire
population "out of poverty." Pretty impressive.
Now, the more thoughtful among you may sit back, stroke your
chins, and calmly ask yourself, "What in the hell is
this idiot writing about now?" Ah, grasshopper! If you
had waited just a moment longer, my impetuous and impatient
one, I would have eventually gotten to the point, probably
after a long and tiresome diatribe about the Federal Reserve
and how they are, predictably, out to kill us all by killing
our money, and I won't even mention how they are out to get
me personally, maybe to turn us into slaves for some alien
invader from someplace like Mars or something, or maybe another
dimension or something. I dunno.
But this is not about how money and capital has poured out
of this country, thanks to the aforementioned Federal Reserve
policy of creating money out of zipola. But it is the next
sentence that shows how the modern neo-Keynesian/ Supply-Side
monster grows and gains legitimacy. They write "The Chinese
leadership has to be given credit for this historic achievement."
Well, duh!
But it has come at a cost, as they report in the very next
paragraph which echoes my sentiments exactly, although in
a style that is MUCH different than you get from the hysterical
Mogambo (THM). They write, "There are many who criticize
China's economic path. They argue that the numbers are fudged,
that corruption is rampant, that its banks are teetering on
the edge, that regional tensions will explode, that inequality
is rising dangerously and that things are coming to a head.
For a decade now they have been predicting, 'This cannot last,
China will crash, it cannot keep this up' So far, at least,
none of these prognoses have come true." Well! If we
are going to get snippy, let me point out that the snotty
little author, whose name is Fareed Zakaria, doesn't actually
mention me, The Mogambo, by name. But if you carefully read
between the lines of what he actually wrote, you can plainly
see that he is saying "Mogambo is a big, fat idiot, and
everybody hates the Mogambo, and that is why we 'arranged'
to have his lawn sprinkler bite the dust last week, and that
ought to teach him a lesson!"
Well, yes and no. I learned, on the one hand, that this Zakaria
guy hates my guts, and so I am going to make a note to myself
to put this guy's name on the Mogambo Official List Of Known
Enemies (MOLOKE).
On the other hand, I haven't learned a damned thing, because
we did NOT say that a government creating gigantic amounts
of money in the banking system and spending vast amounts of
money on government projects, using government-favored businesses,
would not work. Nobody EVER said it would not work! It WILL
work! It will ALWAYS work! What we REALLY said is that this
cannot LAST! This stupid non-self-sustaining spending and
rampant creation of money will not last because it cannot
last, and it cannot last because of the one thing that they
CANNOT control: inflation. Inflation in the prices of various
things will always keep rising until all the money is accounted
for, and it will be a long and ugly process the entire trip.
It will be driven towards balance and equilibtation, if you
believe in that kind of thing.
But isn't the damn point of the thing that economies are
supposed to LAST? Aren't we supposed to be looking for some
way to make economic prosperity last a long time, so that
there is nothing but gently rising prosperity, as scarce resources
are put to their best use, and therefore put to their most
economic use, which brings up standards of living because
things generally get cheaper and cheaper as firms compete
in the markets, using differences in price versus perceived
value paid by the final consumer in the open marketplace to
let those customers in the open marketplace decide whose products
are good and whose are bad? And then, after awhile, the bad
firms go under, victims of relentless competition, and bankers
and foolishly-trusting people for miles around learn not to
ever trust a guy named Mogambo selling stock certificates
of Mogambo World-Wide Enterprises, which he had by the crate
in the trunk of his car, and now all that money is gone, and
so are their whole pathetic lives, boo hoo hoo?
We, by which I mean me and the Austrian school
of economics, ALWAYS said that is entirely possible to achieve
miraculous growth if you create as much money and credit,
and accommodating tax laws, and corruption, as you are capable
of creating! My God! Do you think that we are so stupid that
we believe that creating huge demand (by deficit-spending)
and also supplying the money (Federal Reserve policy) to pay
for it all would NOT create a boom? Hahahaha! How stupid do
you think we are? Gimme some credit here!
So I am here to tell you that China, like the USA, like a
lot of countries, is on the path to ruination, too, because
they are ramping up their own money supply in reckless fashion,
too.
By the way, John S. a reader from Canada, wonders
why no-one at the US mint ever thought of investigating the
success of the Canadian one-dollar "Looney" coin,
which complies with the basic, non-stupid criteria of the
Mighty Mogambo (BNCOTMM) by being made LARGER than a quarter
(He notes that "of course, a dime is smaller than a nickel,
but that's because it used to actually be made of silver").
He goes on to say "We poor backward Canucks also have
a two dollar coin we affectionately call the "Two-nie"
(hahaha -- get it? We kill us!) Guess what, it's bigger than
the Looney, and even has different edges, so that you can
tell them apart without even taking your hand out of your
pocket ... which has led to the popular Canadian gibe: 'Are
you counting your change, or are you just glad to see me?'
OK, I made that last part up. And our beer's stronger, too!"
- From American Banker, we read Rob Blackwell who writes"
"Fannie Mae has announced that it will begin purchasing
40-year fixed-rate loans from lenders, saying that doing so
could help borrowers in areas where home prices are high…
It said that such loans reduce monthly payments and make it
easier for borrowers to get approved."
Well, duh! Let me get this straight; your stupid teenager
suddenly says that she is moving out and she is going to get
as far away from you as possible, and it is right on the beach,
probably a large penthouse of some kind, and if you ever try
to find her or bother her in any way, she will come after
you with a knife and "cut you bad", and you say
"Oh, yeah?" and she says "Yeah!" and you
say "Oh, yeah? Who's going to loan you the money, miss
smarty-pants thinks she's got it all figured out?" and
she says because she afford to buy a house that not even YOU
can afford, because the length of the loan is extended out
by 33%! Your eyes suddenly have that blank look of incomprehension,
and your mouth is hanging open. The total amount of money
she will owe, and eventually pay back, will be monstrously
bigger, but the monthly payment is lower, and the monthly
payment is lower because she will be paying it, month after
month after month, for an additional 20% of her adult life?
What can you say except "Stop the madness!"? Ugh.
****The Mogambo Sez: This looks like the beginning of the
end (TBOTE) to me. But relax, as I am scared enough for the
both of us.
The MOGAMBO GURU, e-economic newsletter
Richard Daughty, the angriest
guy in economics
9241 54th Street North
Pinellas Park, FL 33782
727 546 5568
e-mail: scgcjs@gte.net
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