The Mogambu Guru On The Predecessor Of Deflation >> Inflation

Wednesday, December 21, 2005

Maybe you have not noticed it, but Santa Claus has arived early this year. First he brought us gold prices at a 24 3/4-year high, and now, just right in time for you to get a last minute present for your loved ones he presented us with gold prices below $500 an ounce. Don't miss out. This could be the last opportunity to pick up gold that cheap - and it won't come much cheaper than that. Looking at all the problems the Mogambo Guru shines a light on in this week's column I am quite confident that Santa Claus will not be able to bring gold that cheap again in one year from now.
No Deflation Without Inflation
by The Mogambo Guru
In case you didn't see the news item and accompanying photo in your local newspaper, my mouth was hanging open in stunned disbelief and my eyes had this glassy, distant look as the police were jamming me into the backseat of a police squad car. The reason for their rudeness was that things are getting so weird in the world of economics that The Mogambo had one of his "spells" of Mogambo outrage (SOMO), and there was an unfortunate "incident", and the police thought that maybe some mental-health professionals could help me, but I'm screaming at them "They are destroying your money, you idiot fascist bastards! And you think that some head-shrinking quack is going to change THAT inescapable fact, you dimwit Gestapo morons?"
I am not sure what it was, specifically, that set me off, but for one thing, the trade deficit goes up to a new record, yet the stock market goes up! Weird! How about that the Federal Reserve raises the Fed Funds rate by the 13th consecutive quarter-point, and yet the stock market goes up! Weird AND weird! Hell, even more bizarrely, the bond market goes up, too! Weird weird WEIRD! Meanwhile, back at the ranch, the dollar is rolling over while interest rates are being raised by the central bank, and yet some knucklehead foreign bozos are increasing their demand for US bonds, thus driving price up and the imputed yield down? And then they get hit with an additional whack from the fall in the value of the dollar? And yet they keep on buying US debt? This is now totally beyond weird! This is spooky!
Flat Yield Curve
And how about the 2-year T-note yielding a quarter-point above Fed Funds rate? This is insane! The 10-year T-bond is yielding almost the same? This is insane, too! The yield on the 10-year bond is less than the freaking Discount Rate, which is the rate the banks themselves pay to borrow money from the Fed! I shake my head in disbelief, and my ears comically go flappa-flapp-flappa as they slap against my head.
These are the kinds of crazy things that makes a guy go "I gotta get gold and get away from this insanity! And get away from my wife and kids, too, now that I think about it!" And then as you are packing your bags you get rattled further when you see that the action in gold is getting really weird, too! And the lease rates for gold! Maybe it's just me, but the way I figure it is that since I am the suspicious and distrustful type, which comes at the end of a long life (which is, in itself, just a long series of being screwed over by hucksters, crooks and liars), my sensitive Mogambo weirdness sense (SMWS) is highly attuned to things that are the least bit weird, and right now loud alarm bells from the Mogambo Weird-O-Meter (MWOM) are clanging and clanging and clanging.
You can take it from me and the whole rest of human history, that when things get really weird like this, something bad happens that you are not going to like. For example, all last week my family was real nice to me. Naturally, I am suspicious. Then, sure enough, on Thursday, I accidentally bumped the rearview mirror on my car and it broke off!
Today Debt To GDP Ratio Is 350%
But things will continue to get weird, as Puru Saxena at The Daily Reckoning answers that age-old question "How much debt qualifies for the use of the term 'ridiculous' "? Well, Mr. Saxena figures "The total American debt is roughly US$40 trillion whereas the size of its economy is around US$11 trillion. So, the debt to GDP ratio is over 350%!"
In 1929 It Was 260%
And I will note, for the record, that the debt-to-GDP ratio at the top of the stock market in 1929 was "merely" 260% of GDP, which was, until today, America's worst example of rampant financial stupidity. But we stupid Baby Boomers and our grubby, mutant children have set a whole new world record in financial stupidity and insanity.
Nothing Has Risen Forever
And, in keeping with that level of ignorance and mental illness, we now have Ben Bernanke as the new head of the Federal Reserve, who actually thinks that he can engineer (in "cooperation" with the Congress, I suppose) a permanent prosperity based upon constantly-rising asset valuations? Hahahaha! I can hardly believe that we Americans, who think that we are so smart and so educated and so sophisticated, could possibly believe that such a thing was even possible! Hahaha! Buy stocks and they will always rise? Buy bonds and they will always rise? Buy houses and they will always rise? Hahaha! But my charming and mirthful Mogambo ways (CAMMW) are suddenly silenced. A look of cold, dead seriousness gleams from my blue steel Mogambo eyes (BSME) and you wonder to yourself "My goodness! What has happened to The Mogambo?" What has happened to The Mogambo is that he has remembered what happened in all the rest of the history when some idiot country tried that inflation crap (and they all did); it did not work then, and the result was catastrophe. And it will not work now, and the result will be a bigger catastrophe.
I had planned to use this space for another official Mogambo rant of outrage (OMROO), about, you know, the Federal Reserve and Congress, and how they are murdering our money, and, by extension, us. And, by further extension, everybody else, too. But then I would get all worked up, angrier and angrier, more and more, finally escalating into senseless, mindless, gratuitous use of childish, gutter profanities at high-decibel volumes. And nobody wants that, especially little kindergarten children who, it turns out, get REALLY freaked out by it, and there's suddenly a lot of screaming and crying and pooping in one's pants, and it's a real ugly mess, and then the children start screaming and crying and pooping in their pants, too. So instead, I think to myself, "Perhaps young grasshoppers would be better instructed by a genteel and refined approach!" Always willing to take the easy way out, I graciously turn today's lesson over to Robert Blumen on LewRockwell, and his essay entitled "Bernankeism: Fraud or Menace?"
For The Time Being, Buy Commodities
I admit that I almost didn't read it because I already knew the answer; Ben Bernanke is menace. And I assume that you, likewise, skipped over it, too, after seeing the trick question posed in the title, and thinking to yourself, of course, "Bah! Any child can see that the man will destroy our money with his insane theories! But knowing that, I can personally prosper, making plenty big money (PBM), by buying gold, and buying silver, and buying oil, and buying damned near any commodity that you can name! And then I will be rich, rich, rich! And you shall be poor, poor, poor, and then The Mogambo and I will look out through the bullet-proof windows of our lovely mansions and watch you, in your filthy misery and squalor, rooting around in the dirt for bugs to eat, and we will laugh at you, and bellow 'Welcome to fiat money hell, you morons!'"
The class is suddenly silenced by my outburst. I am embarrassed, and take my seat as Mr. Blumen calmly goes on to say "The first principle of Bernankeism is that it is better to prevent deflation than to attempt a cure after the disease has set in." Hahaha! What a chump! Not only do they now teach this idiocy in our schools, but Ben Bernanke was the chairman of the damned economics department at Princeton! My hollow laughter drips with contempt, which is not as easy as it sounds.
Deflation Only Comes After Inflation Has Killed Our Savings
If Mr. Bernanke truly DID understand economics, then he would have known that the REAL "first principle" of economics is that it is best to prevent the inflation that LEADS to the deflation!! And note the use of the rare "double exclamation point" to denote particular emphasis, as befits its importance in economics.
Likewise, commenting on other areas where I also have no competence whatsoever, it is likewise NOT true that the First Law of Holes is "When you find yourself in one, stop digging." The REAL "First Law of Holes" is "If you don't want a hole, don't dig one."
But this is not about holes, unless you think Mr. Bernanke is a real first-class hole, if you get my drift, and if you don't, then you soon will, as Mr. Blumen goes on to write, "Governor Bernanke and his accomplices are obsessed with something known as 'the zero bound problem.' " I interrupt to explain, in case you ain't heard, that one of the new buzzes in the lucrative profession of "economics masquerading as a science" is the obvious notion that you can't loan money at less than zero percent interest. This is, and always has been, obvious: There is nothing cheaper beyond "free." This, then, is the "zero-bound problem." For some reason, this is now a big freaking deal (BFD) in central bank circles.
Proving my point, he goes on to say "Eight of the fourteen papers and speeches that I examined deal with this problem either as their main point or in passing. Bernankeism advises the central bank to avoid the zero-bound problem by creating a constant state of pleasant and benign inflation of around 2-3%." As I read that last sentence, all I could hear was a sizzling sound as my few remaining brain neurons overloaded. So I am not sure about this next part, as the phrase "pleasant and benign inflation of around 2-3%" sort of made my brain freeze up ("urrrkk!") as my puny little Mogambo mind (PLMM) cannot accept the idea that anyone, ANYONE, in their right mind would even think, much less say, much, much less to say in from of witnesses, much, much, MUCH, MUCH less to declare it to be monetary policy, that a constant amount of price inflation, OF ANY AMOUNT, is even benign, must less pleasant!
Working myself into a Mogambo frenzy of outrage (MFOO), I throw the window up, lean out, and shout "Stop the presses, America! I, The Mogambo, declare that anyone who would proclaim such an asinine thing is a dangerous lunatic!" By this time I am screaming like a wounded banshee in my rage, and neighbors were soon crashing loudly into the room to wrestle me to the floor and stuff smelly rags into my mouth, trying to get me to stop screaming, but which only made me scream louder! Arrgghhh!
And another thing that I was screaming about is how Congress, the biggest bastion of butthead bozos in the history of the USA and an embarrassment to themselves, their families and all of us, just sits there as this horrid little man is telling them that we are going to have constant, simmering inflation, the kind where, little by little, month by month, prices creep creep creep upward, but your income does not. And every month you have to borrow more money, or give up something else, or cut back on something else, or reduce your consumption of something else, and after awhile it starts adding up and up, and then one day you get down to rationing basic necessities, and you get angry and scared, and then angrier and scareder.
Wage Gap Leads To Profit Bubbles
But we are not here to talk about how I am an angry coward, as I am tired of hearing it. And while we are talking about it, I am also tired of hearing how I am an ugly idiot and I stink, too. So I quickly veer back to the subject and say that Ravi Batra, who is an economics professor at Southern Methodist University and author of terrific doom-and-gloom books with terrific titles, goes beyond the anger and cowardice thing in his new book entitled "Greenspan's Fraud." Anyway, he ties this all in with what he calls the Wage Gap, which is the difference between the rise in wages versus the rise in productivity. Here Mr. Batra takes it up and says "According to this theory, the rising wage gap creates exponential growth in debt, which in turn generates an exponential rise in profits, leading to the share price bubble. Eventually, debt growth slows, so the demand-supply gap, thus far hidden by the debt mountain, comes to the surface; profits plummet and stock markets collapse."
And you can tie that in with Bill Bonner of the DailyReckoning when he correctly notes that borrowing for consumption is the equivalent of a free lunch to businesses, as everybody gets to sell stuff to people without first having to pay wages to those people as workers! Money and sales come out of nowhere! False profits!
Printing More Money Has Never Helped Out Of Problems
But none of this is in keeping with the current theory of economics, which is preposterous through and through. So what is this bizarre new economic theory that allows ever-increasing asset values? Mr. Blumen explains, "Dr. Bernanke accepts Milton Friedman’s theory of the Great Depression. In the Friedman view, a contraction of the money supply brought about by loan defaults and then bank failures turned what would have been an ordinary recession into the Great Depression. This catastrophe could have been avoided had Fed inflated sufficiently."
Wow! See how easy this stuff is? All the government has to do, see, is make so much money available, see, at such low interest rates, that (are you following me so far?) people can't stop themselves from borrowing the money and goosing the economy by producing and/or distributing the goods and services being bought by the government itself! There is, literally, no upper limit on the amount of debt that people can, or will, carry!
The Hard Part Will Be To Reduce Government Spending
I am laughing! Hahaha! I laugh because, and this is the important part, this is freaking insane! How can anyone possibly think, even for a minute, even for a second, even for a teensy weensy micro-second, that an economy that has grown because of government spending and accumulation of massive public and private debts is going to, one day, magically, be transformed into one that does NOT depend on government spending and ever-higher debt loads? Hahahaha! Then where is the money going to come from, moron? Hahaha! I am laughing my big fat Mogambo butt (BFMB) off here! Hahaha! Stop! Stop! My sides are hurting from all the laughing! Hahahaha!
But, wiping the tears from my eyes, I get suddenly very serious and note that Ben Bernanke, the next chairman of the Federal Reserve, actually believes this, this, this (pause for dramatic effect) stupidity! He actually does! And he is the next a chairman of the Federal Reserve! I keep repeating this because my mind refuses to accept the fact that we Americans, who like to pride ourselves on how smart we are and how wonderful we are, would do something so, so, so, so (pause for another dramatic effect) incredibly so, so, so (a crescendo of a pause) stoooOOOOooopid! The mind screams "Noooooooo!"
Unconventional Measures? Like Printing More Money?
Mr. Blumen doesn't want to answer my question, but instead goes on to send me screaming from the room by explaining "The third principle of Bernankeism is the necessity of 'unconventional measures.' The reader of the Fed's papers and speeches will find a series of increasingly exotic plans for the dollar. From beginning to end, these methods range from the merely unsound to the bizarre and terrifying." Now, I don't know about you, but being a real coward and crybaby little wuss, I don't like things that are classified as either bizarre or terrifying. So with real dread in my voice, I timidly ask "Like what, dude?" Well, how about, for example, "money rains", whereby the Fed would "give money away either through directly disbursing currency to the public or by disbursing it through the banking system." By this time I am sure your heart is beating like a trip-hammer, boom boom boom at the very thought of such monetary sinfulness! Nobody ever needs to work, because the government will give everybody money to spend!
Never Stop Consuming And Don't Even Think About Saving In Order To Save The System
Then, with this wicked little grin on his face, Mr. Blumen goes on to say that another scam is "to make money pay a negative nominal interest rate, by imposing some type of 'carry tax' on currency and deposits. A tax or fee on Reserve deposits of 1 percent per month, for example, would mean that those deposits, in effect, pay a nominal interest rate of roughly minus 12 percent." What?!? And note the use of two different punctuation marks, where I was trying to be clever and failing miserably, to indicate a mixture of anger, shock, disbelief, anger, fear, anger, terror, confusion, some more anger, and the vague, tentative beginnings of what appears to be jock itch.
But the idea is that you would spend all your money in a fit of consumption, rather than saving it, because you would be paying a 12% tax on it if you did! My heart is slamming into my ribs at the very thought that anyone would actually advance such a terrifying idea, much less the next chairman of the Federal Reserve.
Bernanke Will Do Wonders To The Gold Price
So, is it any wonder that I strongly advise you to buy gold? And is it any wonder that gold is doing so well? And is it any wonder that gold will CONTINUE to go up in the face of this Bernanke thing?
And it is not just us! It is everybody! Hell (and you can tell from the plaintive cry in my voice that this is horrifying), damned near every country in the world is creating lots and lots of excess money and credit, too! Dan Denning of Strategic Investments newsletter hears me screaming about this, steps out into the hall and shuts me up by saying "Gold is rising because of the fundamental mismanagement of the dollar by Alan Greenspan. And to be fair, in the club of central bankers who destroy the purchasing power of their currency, Alan Greenspan has a lot of company. Their respective tactics and strategies might differ, but the result is the same: decreased confidence in paper money and an increased appetite for gold."
And that is why commodities are rising in price and will continue to rise in price for a long, long time.
So, in light of all of this, it is a given that things are being manipulated by the government, and you can bet on it. So much money is in real danger of being lost, so much money that the entire economy of the world would implode, with bankruptcy and ruination up and down the line, that you can bet your sweet patootie that Congress and the Federal Reserve are pulling every string and are twisting every arm. To expect otherwise is to make The Mogambo laugh at your naiveté, which is a French word that implies ignorance, sort of like how Mogambo is a word that implies "loudmouth know-nothing lunatic stinking pig." Perhaps Paul Hein on said it best when he said "To bemoan the manipulation of fiat currencies is to bemoan the fact that north is opposite of south. How could it be otherwise?" And it just ain't currencies and interest rates, dude! It's also stocks! And bonds! And gold! And houses! Everything, dude! Everything!
Bet Against A Trend Based On False Premises
Can it last? In the original Spanish, "No freaking way, Jose!" So can you make money on this knowledge? Again, in Spanish, "Si!" How? As George Soros once so famously said, "Identify the trend whose premise is false, and bet against it."
And the trend away from gold and the gold standard was a trend whose premises were false, and those who bet against it made a lot of money so far, and are going to make a LOT of money in the near future. And the trend to have central banks constantly manipulate the markets to bail out its friends is ANOTHER trend whose premise is false, and again it leads directly to how gold, cold, hard gold in the hand, is the only friend you have.
A lot of people are suddenly somewhat distrustful of ETFs and other gold-storage deals since their investment in the gold stash may, or may not be, unallocated. In short, owning unallocated gold is when the investors do not own individual bars of gold, but the sponsor is the actual owner of the gold, and the investors own shares of the entire collected stash of gold. Therefore, the investors are not owners of gold, but are creditors.
Bill W. sent me a relevant paragraph from a description of gold EFTs, in particular, the Gold Trust. "The Gold Trust's gold will be stored at a variety of vault locations by the custodian and its sub-custodians, which creates some risk of fraud regarding the actual existence of identified bars of gold. This risk does not exist if an investor takes physical possession of gold, which is why the more paranoid gold bugs reject ETF gold as a true investment in gold. Anybody not willing to accept this risk should avoid Gold Trust units."
He did not mention me by name, for which I am thankful, but being the epitome of distrustful and paranoid, I naturally take a dim view of anything that requires me to have trust in someone. So, is an ETF or other gold custodianship deal a good place to put ALL your money? No. Some money? Sure! A little here, a little there is the essence of diversification.
Debt To Money In Circulation Ratio Is 600%
Did you ever wonder how much money-denominated debt there is compared to the amount of actual cash? Well, if you have, then Robert Prechter is the guy for you, as he says "Every bank account is an I.O.U. for cash, not cash itself. Needless to say, the $64.3 billion in cash in U.S. bank vaults and at the Fed is insufficient backing for the 38 trillion dollars worth of dollar-denominated credit outstanding, not to mention at least twice that amount in the implied promises of derivatives. The ratio is about 1 to 600. This ratio has grown exponentially under the easy-credit policies of the Fed and the banking system."
So, for every dollar of actual money, the banking system has multiplied it by 600? Hahaha! The things we let banks do! Hahaha! No wonder we are doomed!
On a slightly different topic, I note that Mr. Prechter agrees "Von Mises was exactly right: 'There is no means of avoiding the final collapse of a boom brought about by credit expansion.'"
America Is Exhausted
Lyndon LaRouche, interviewed in China's People's Daily, does not mention either Mr. Prechter or me, but obviously agrees with us, as he is otherwise quoted as saying "Today we Americans have been exhausted. Our infrastructure has not been replaced. We have not replaced our power stations. Our railroad system is dead. Our economy is dead, in whole parts. Our people don't have the skills they had 20 or 30 years ago.
"We are losing our water systems. We're losing our power systems. We're losing our transportation systems. We're losing our health-care systems. All these physical things on which the prosperity of the economy had depended are now worn out. They're gone. So we are disintegrating. Europe is disintegrating. We are a lost nation. We are a failure. Europe is a failure, in general. So the world economy has failed. We have a tremendous amount of financial debt that we can never pay. Our rate of production is collapsing. And therefore we are at a point where the system is going through a systemic collapse. This is the biggest collapse in modern history, it is now occurring. And the idiots just deny it. They just deny it."
How the hell did we get to this point? Well, I knew you were going to ask me that question, so I was going to launch into a long and boring discussion about the horrors unleashed by the Federal Reserve, but at the last minute you have been saved by Mr. LaRouche, who sums it all up perfectly when he said "It's collective insanity, mass insanity. It's cultural insanity." In case you are wondering how I would grade this, I would take off some serious points for not using an exclamation point. I mean, cultural insanity does NOT call for an exclamation point? Hell, even he goes on to say "It's how whole empires disappear. Suddenly it collapses." Again, no freaking exclamation point!
Retirees Are The Worst Off Victims Of Inflation
Since I am always on the lookout for examples of how inflation is a terrible thing, Gary North of Reality Check newsletter gives us a different way of looking at inflation, and writes that "the price tag for a new Rolls in 1958 was $13,550."
Hahaha! But this is not about the headaches of the rich, but about how inflation was such a killer-diller. He writes, "If I were going to do a book on the Federal Reserve System, I might consider this headline: 'At 5% inflation per year, the loudest noise in this fiat money system is the screaming of widows and orphans'." Not to mention retirees on fixed pensions, other annuitants, and the people who have NO income. Now all their plights are made worse by inflation.
Central Banks May Stop Selling Gold
And maybe it is not just us paranoid whackoid lunatics out here who are accumulating gold, because GoldWatch newsletter says that "we can now confirm the Germany’s government as well as its Bundesbank President does not wish to sell gold whatsoever! This has to influence other Central Banks, who were previously inclined to sell. The tide is turning!"
I had an interesting email from a guy who says that the drop in Consumer Installment Debt was due to write-offs at the banks, as all those overly-indebted people rushed to declare bankruptcy before the laws changed to make it harder to walk away from debts. And more expensive. An interesting tidbit, methinks.
Chris P. says "I saw a good bumper sticker yesterday. It read, 'Stupid SHOULD be painful'. " Hahaha! It usually is! But if you are talking about being stupid about economics, then trust me, Chris; it will be painful! Very! And for the guys who are the most stupid of all (we Americans) it will be the most painful of all! It's just that you can't get all of that on a bumper sticker.
S&P Is Overvalued
If you are starting to think that maybe the stock market is the least bit enticing, then listen to John Hussman of the Hussman Funds, who has taken a look at what happens to stock markets after periods of the Federal Reserve raising or lowering interest rates. He writes "when favorable valuation meets favorable market action (even if you restrict market action to Fed-controlled rates only), you get some amazingly strong outcomes." In this case, "favorable valuation" means a price-to-earnings multiple of less than 12. The P/E ratio for the SP500 is currently over 19.
"There is, of course," he goes on to say, "a flipside to that story. If you look at periods where the price/peak earnings multiple was 16 or higher on the S&P 500, the final rate hike of a tightening cycle was actually associated with losses on an annualized total return basis, averaging -7.18% over the following 6 months, -9.94% over the following 12 months, and -5.87% over the following 18 months." So where are we now, and should you be putting money into the stock market? "Given the current multiple of 19 times peak earnings on the S&P 500, this would be the relevant set of comparisons even if the latest rate hike was the final one." Which it won't be, which means that interest rates are still heading up, and so this whole discussion about what happen at the end of rate hikes is waaayyyy premature. But what is the essential Mogambo lesson (EML) to be learned? Buying stocks at these idiotic high prices is almost certainly, almost assuredly, almost definitely, almost guaranteed to be a bad, bad idea (BBI).
Buying Bonds is a BBI
And yet people buying bonds at these absurdly low yields is another BBI, because when rates rise, bond prices fall.
And if you want to share a recurring Mogambo nightmare (RMN), keep thinking about how everyone's retirement fund accounts are almost certainly buying common stocks and/or bonds with every tick of the clock. Ugh.
****Mogambo sez: No news is good news, and there is nothing new in the Mogambo Retirement Portfolio To Amazing Wealth (MRPTAW); keep accumulating oil, gold and silver, and things related to them. The recent declines in prices is just a benevolent Lady Luck being very nice to you, so that you can leisurely walk over and pick some of these things up at bargain prices. Don't be a chump. Do it!

The Mogambu Guru's straightforward writings are made possible by The Daily Reckoning.
Richard Daughty aka The Mogambo Guru is general partner and COO of the Smith Consultant Group and can be emailed at

Time For A Xmas Break

Friday, December 16, 2005

It has been an interesting year. With christmas/Hanukkah (and my well-wishes extend to all in favor of a peaceful world) approaching rapidly I feel it is time for some contemplation and to retreat from the beat of the newswires, the more than 100 cyber sources and the same number of blogs I try to follow on a regular basis. The big picture appears very clouded to me right now although visible necessinflation (inflation figures are low but everything we buy became more expensive) and ever growing indebtedness of western governments plagued by anemic growth and high unemployment don't change my fundamental view that there are too many bubbles any economy could weather without deflating them. My bullishness is strictly limited to precious metals and the Eastern hemisphere although prudence bars me from overweighting markets where I cannot read the language. Seems I will be stuck with miners, a few tech-picks and convertible notes in a an alternative medicine start-up about which I will blog a little later once my due diligence is more complete. Although the dollar could find additional support from a further firming in US rates my suspicion grows that the better part of strength in the greenback lies already behind us, but I am not yet willing to enter positions in accordance with this.
Looking at the growing stack of books on my bedside shelf where such diverse literature like William Greider's "The Soul of Capitalism" lies only half read on other yet unopened must reads like Ayn Rand's "Atlas Shrugged", Andrei Shleifer's "Inefficient Markets", Jeremy Rifkin's "The European Dream", Ray Kurzweil's "The Singularity is Near", Clyde Prestowitz' "Three Billion New Capitalists", Thomas Morus' "Utopia" (to be read a third time) and Michael C. Ruppert's "Crossing The Rubicon" I have plenty of reading material to broaden my perspective again and re-question my views.
Add in my suspicion that my loved ones will most probably put Daniel Reingold's "Confessions of a Wall Street Analyst", Jeffrey D. Sachs' "The End of Poverty", Heinz-Peter Spahn's "From Gold to Euro" and Joseph Stiglitz' "Towards a New Paradigm in Monetary Economics" under the christmas tree and you will understand that this will not leave much time for blogging in the next two weeks. (And I hope the real Santa Claus has enough room on his sledge so that he can bring Joshua Slocum's "Sailing Alone Around The World" together with a centre cockpit 52-foot Hallberg Rassy with on-board internet and a guarantee for calm seas with just a nice breeze to make decent headway while enjoying drinks from a gin and tonic fountain.)
Expect me to be back with my set of guidelines for investing in 2006 before New Year's Eve as I will certainly give market developments during the thinly traded holiday season a close look.
At the beginning of this year equities, gold and the dollar reversed direction in the first week. I am curious to monitor the action the first days of 2006.

The Mogambo Guru Uses The Correction In Gold To Buy More

Wednesday, December 14, 2005

Wednesday has become my favorite day of the week. Not only that I can watch the markets comfortably with my feet on my desk I can also take relief from the fact that The Mogambu Guru will deliver his next treasured piece of comedy intertwined with so many hard facts that I am always tempted to run and get a few more ounces of gold. Unfortunately there is no way to buy physical silver in Austria unless one is willing to pay 20% VAT for it. So much about government intervention in a monetary metal.
Having had delivered a few cases of fine Austrian Goesser beer along with some homemade applestrudel also helped to improve the relationship with The Mogambo Guru. His column came on my desk just before my lunch break. He obviously had had his meal already, telling from the greasy spots all over the manuscript.
As always, enjoy reading his latest column and maybe use gold's current correction to buy some ounces yourself. It is time. According to his research there are only 4.8 billion ounces of gold; but the current global population count comes in at some 6.5 billion people.

Less Than An Ounce For All Of Us
by The Mogambo Guru

Things are getting so weird that even my extreme Mogambo paranoia (EMP) seems oddly inadequate. For example, gold is going bananas! Several people asked me what this could possibly mean, but, as usual, I have no idea. It's like when people ask why my wife, who is such a nice, pretty person, would marry a disgusting creep like me or why she hasn't at least have killed me long ago; it is weird, but that is all I know. But I DO know that there are a hell of a lot of people sitting on some big, big, big positions on the short side of gold (and mining shares), and these hapless chumps are getting crushed, I mean freaking crushed, with gold is soaring like this. The statistic that keeps pounding pounding pounding in my tiny little Mogambo brain (TLMB) is that there is, reportedly, a short position in gold, measured in umpteen jillions of ounces, that is 78 times as big as all the gold in the whole damned world! That means that one guy has some gold, and 78 guys THINK that they own some gold, but they don't. All they have is a slip of paper that says "I owe you gold" and signed by somebody. Somebody who does not, obviously, have any gold to give!
What I am confessing is that that people who sent money to The Mogambo Gold Depository (actually a shoebox in the back of my closet) and think that they have some gold, just because I promised that I would store gold for them, are screwed. I always MEANT to go out and get some gold like I said I would, but one thing led to another, and then there was that drunken brawl at Paula's Passion Pit of Prancing Princesses that I take full responsibility for, and am still paying for all the damages, so don't get me wrong. But the gold you thought I was storing for you? Sorry. Bummer, huh?
COMEX Gold Contracts Only Guarantee Fiat Money
Fortunately, I have taken the wise precaution of wording the deposit contract to mimic the Comex rules, and now, since I am on the hook to lose a lot of money, I can merely cancel their stupid contracts and give them their original money back! Without interest! Hell, I might just keep the money for myself to make up for MY looming losses from the lawsuits that will soon be filed. It's the American Way!
But the point is that people who erroneously think they have gold safely stored away someplace, and who have not seen the 60 Minutes show where they expose this dirty little Mogambo scam of mine, are all out dancing in the streets, thinking they are rich rich rich, and they're buying drinks for everybody, and they're all laughing and having fun. And every time gold goes up by another few bucks, everybody is even happier and they start having even MORE fun!
Bullion Banks Are Net Short
So, in a strange yin-yang thing, you can bet that this rise in gold has lots and lots of other people (namely the people who are short all that gold, and the central banks who lent all that gold to bullion banks, who sold it long ago at prices far below this, and are now net short in gold) are in a real panic. Now all those shorts are rushing about in desperation and panic, including elected officials, banks, bullion banks, central banks and especially the Federal Reserve, which is ALSO nervous about all that gold belonging to the United States that has been lent out to guys who can't pay it back! Yow!
The only guys who are NOT rushing around in panic are the guys who have taken possession of physical gold bullion. They know EXACTLY where their gold is, and we have enough firepower to keep it, too. And one of these days real soon there will be lots and lots of guys who will ring our doorbells ("ding dong!") and who will say things like "Please please please PLEASE PLEASE please please sell me some of your gold!" and who want to buy it at absurdly high prices. And if you are buying gold right now, then one day that will be YOUR doorbell ringing, and you can decide for yourself if you will sell them a little of your gold for some big, BIG money, or chase them off with a mighty shotgun blast and your laughter ringing in their ears.
End Of The Credit Fueled Boom
But this is not about how I let off a few warning shots at a neighbor's kid who was acting a little too suspicious to suit me, but about how this is just the weird, scary stuff that always happens at the end of long, credit-fueled booms, especially ones where the government is the major buyer of goods and services, like now. In short, there are a lot of desperate rats trapped in a lot of corners, and they are ferociously lashing out in fear and panic, which is, if you have seen ANY horror movies at all involving rats, a very bad situation, indeed.
I bring this up because a guy who likes to be an "anonymous source" reports, "if a bank has physical possession of some gold which it owes you as its creditor, the bank itself is the current owner of the gold." An interesting thing to consider! On the other hand, if the gold you deposited at the bank has your name on it as the owner, then you have what is known as "allocated gold." But if all you have is a deposit slip showing that some ounces of gold was deposited, then you have, unfortunately, unallocated gold. He goes on to say that "Unallocated gold is the most widely traded form of gold in the world. While this gold remains unallocated to you, the regulator considers it part of a bank's liquid reserve." He figures that 99% of gold deposits are in unallocated form, and therefore all the deposited gold is, in effect, in a big commingled pile in the basement of the bank.
Your Gold Counts To The Banks Reserves
Another way of looking at this stunning fact is "This makes unallocated gold an attractive way for the bank to maintain its regulated liquidity, because you have paid for your gold, and the bank is free to use your money, while it is also able to add your unallocated gold holding to its own reserve."
Being stunned to speechlessness at the revelation, I nevertheless raise the bony pointing finger of The Mogambo (BPFOTM) and tap on your computer screen so that you pay special attention to where he says that the bank uses YOUR gold as part of ITS reserves! If you are not impressed by the use of the exclamation point, or if you are NOT likewise impressed and horrified by the actual words, then I know that 1) you are still young and trustful, and 2) I also know that you don't realize that bank's reserves are the assets that the bank can legally use to offset its own losses. My mighty Mogambo super-brain (MMSB) detects a sudden disturbance in the fabric of the cosmos, as you that you are saying to yourself, "The banks can protect themselves and their owners by confiscating and selling the assets of the depositors? Yow!" Yow indeed, young grasshopper!
So your unallocated gold could, and would, be sold if the bank were in need of cash. If the bank went bankrupt and insolvent, then you would be put in the line with all the other creditors, and you would divvy up what is left, if anything, after the bondholders have been paid and the secured creditors have been paid and lots and lots of other people have been paid and the furniture has been repossessed. Hahaha! Trust the banks? Hahaha!
Now, learning this while you are still young, you perhaps now find that you are not quite as trustful anymore. Good! Now you are becoming wise, and you realize that, as they say, "The price of freedom is eternal vigilance."
Always Insist On Allocated Gold
So what to do? Well, if your safe deposit box is full of gold, and the backyard is full of buried gold, and you are running out of places to store gold, and you want to deposit some gold at the bank so that you can make room in the den for a wide-screen TV, then the lesson is: always insist on having it treated as allocated gold. "Allocated gold is different," he says "because you become the outright owner of gold and you are no longer a creditor. Your allocated gold is your property and it cannot be used as the bank's reserve."
Only 4.8 Billion Ounces Of Gold Mined - Ever
So, adding all of this up in my big fat Mogambo mind (BFMM), and realizing that we are constrained by the inescapable fact that there is only about, as Jason Hommel tells us, 150,000 tonnes of gold in existence, and that the global increase, per year, is about 2,500 tonnes, then why is gold selling at only $540 an ounce?
Anyway, I'm thinking of this and getting more and more confused, and I keep thinking that with such a huge, lop-sided short position in gold that has to one day "buy to cover" the short position, that there HAS to be money to be made in buying gold now! And then I read Jason Hommel, of GoldIsMoney, whose terrific new essay is entitled "Central Banks Now Buying Gold" should make those gold shorts cry. He reports that "The Russian Central bank is buying up to 1,000 tonnes of gold, to double its gold holdings from 500 tonnes, most of which, 377 tonnes, is lent out." See? They have loaned out 65% of their gold hoard, too! To some guy who sold it, too, and thus went short to the bank, too, and I'll betcha that the bank is getting VERRRRRYYYYY nervous about the short position established with their gold, too!
Mr. Hommel figures that this is probably the reason for the recent "$70 spike upwards in the gold price, and you can see this spike on any gold chart. Why the spike? Because people realized that the gold selling (and gold lending) by central banks was going to be slowing down. And it has. And now it has reversed, and is turning into central bank gold buying." Notice how he ended that sentence with a mere period. But if you have been paying attention, you would know that central banks buying bunches of gold is a big, big, BIG deal, and it CERTAINLY calls for at least one exclamation point! Like that!
Anyway, I am sure that Mr. Hommel's face is burning in shame from the punctuation faux pas and that whole exclamation point thing, but you'd never know it, as he goes on to write "Argentina, South Korea, & South Africa are also gold buyers now. And now, China, and perhaps all of Asia!" See! Now he uses an exclamation point! Excellent!
Having achieved mastery of the use of the exclamation point, Mr. Hommel moves into math. He asks "So, how much gold can $2.6 trillion U.S. dollars, held by Asian central banks, buy?" I personally have no idea, but if he asks me, I am going to give him a wisecrack reply that it is a HELL of a lot of money and hope to get a laugh from the clas, and by the time order is restored he will have forgotten that he asked me a question. But he doesn't ask for my stupid opinion! Instead, he answers his own question, which is mighty sporting of him, by saying "More gold than exists in the world! Remember, all the gold ever mined in the history of the world is 150,000 tonnes. Annual mine supply is a mere 2,500 tonnes annually!"
There Is Sooo Much More Money Than Gold
Then it starts really getting good. He goes on "Let's convert that to ounces, shall we? All the gold ever mined in the history of the world: 150,000 tonnes x 32,152oz./tonne = 4.8 billion ounces. At current prices of $524/oz., that's 2.5 trillion dollars! " So, now we have established that all the gold in the whole world is currently valued at $2.5 trillion. I am thinking to myself "Should I bring up the fact that this is about the same amount as the American federal government budgets every year, and is about half of what it actually spends?" and decide that not even I want to think about that, especially since there was a time when gold WAS money, so obviously the government, spending twice as much money as all the gold in the world is worth, means that the government is waaayyy too big, or that gold is waaayyy too cheap.
So I don't bring it up, and it's a good thing, too, as he goes on to say "Now, compare that to the popular estimate that that the total tradable supplies of gold are actually about $1.6 trillion."
"So, what we have is the Russians buying about $8.4 billion worth of gold, and this is causing the gold price to move up. And now, Asia is going to spend a portion of $2.6 trillion (in dollars in their foreign reserves), that's TRILLION, or $2,600 billion, on gold? Where do you think gold prices are headed? At this point, guessing a final top is ridiculous, but you can know for certain that in the coming months and years, gold is going to go way, way, way up from here. Probably well beyond $10,000 to $30,000/oz."
Get Some Ounces Today
I know what you are thinking; you are suddenly crazed by your greed, but since everything else that you own is now a piece of crap and not worth anything, you are wondering if you could sell your children on eBay in exchange for gold bullion because you want to get in on this action in gold and make a lot of money! But before you start composing your ad, listen to this: Mr. Hommel goes on to say, and you can tell by the way I am actually salivating at the prospect of getting rich by merely owning gold, "And Asia's $2.6 trillion is nothing compared to the size of the bond markets. We have $22 trillion in U.S. bonds that could also be sold for gold. After all, big money is FORCED to seek out returns, and protect itself from being devalued."
My eyes are spinning in my head here! And my greed gland is squirting out, apparently, a hormone that makes me salivate. I noticed that the front of my shirt is suddenly soaked in drool at the same time as he was saying "And Japan alone has about $10 trillion dollars worth of yen that could also buy gold."
Bonds Are Guaranteed To Go Down
Hell, just a tiny fraction of all that money buying gold would be, be, be, I am mesmerized by the prospect! He then brings me back to reality by making the point that "bonds and gold are competing asset classes", and as such "With gold heading up about 20% per year now for 4 years since 2001 from $255/oz., and no top in sight, why would any sane person choose to hold bonds paying 4%, when inflation is about 7-8%? Bonds are guaranteed to go down in value, and will be forced to buy gold for the returns. It's as simple as that." At that, I jump up onto my seat in my excitement, my fists punching the air as I bellow "Yes! Yes! It is EXACTLY as simple as that!"
Silver Will Rise And Rise And Rise
And even better, Mr. Hommel supports my belief that while gold is a great investment, silver is a better investment. Taking a decidedly metaphorical tack, he soothingly writes "Acorns can grow into big oak trees, but oak trees cannot grow to the moon. Silver is like the acorn, gold is like a young sapling. The acorn will grow at a much faster rate, and in the end, they may be both the same size!"
Toni Straka at The Prudent Investor has not been looking at silver, but instead has been looking at the central banks selling gold under their agreement, and writes "Euro members were quite heavy sellers and as a rule of thumb one notes that the bigger the budget problems, the bigger were the gold sales. The ECB itself sold off 6.5% or 1.6 million ounces in the first 10 months of the year, which leaves it with 23.05 million ounces. The biggest seller in absolute terms was France. Second come the Netherlands. The bronze medal for the biggest gold sellers is awarded to Spain. Rank #4 goes to Portugal." On the other side of the ledger, he notes that Greece, Ireland and Finland each bought some gold. "Summing all this up," Mr. Straka says "I arrive at a figure of 10.05 million ounces sold and 6,249 ounces bought."
5 Important Things About Bernanke - And Where He Might Be Wrong
I was stunned to read an article on the front page of last Wednesday's WSJ about Ben Bernanke entitled "Long Study of Great Depression Has Shaped Bernanke's Views", by Greg Ip. I was flabbergasted that Mr. Ip, for whom I now have a sudden gigantic respect for, did not tear Mr. Bernanke a new one. If you are like me, then you do not want to read a long article because your lips get tired, but want something short and sweet. To those persons, Mr. Ip has graciously included a summary in an inset box on the front page, bearing the title "History Course." According to research into Bernanke's own book, speeches and articles that he has written, we owe a debt of thanks to Mr. Ip for his efforts, as we can quickly learn, as a result, five important things about Ben Bernanke.
  • First, we learn that he thinks we should "Beware of outdated orthodoxies such as the gold standard." Hahaha! Wrong! Right off the bat he is wrong! There IS nothing other than a gold standard, or somewhere in the musty, misty mists of time someone else would have thought of it LONG before this! And everything else that they ever thought of turned out to be a big, ugly mistake.
  • Secondly, he believes "A stable/banking/financial system is critical." Correct. At least he is not a TOTAL idiot!
  • Thirdly we now know that he thinks "The Fed's key objective should be stable prices." Correct again! Hey! This isn't so bad! He's right two out of three! Maybe I was too tough on the guy! Let's read more!
  • Fourthly, "Don't try to prick asset bubbles." Wrong again. I say no, and I say "no" with a sneering look of arrogance on my sullen, insolent face. To say otherwise would be to say "Inflation in food is bad, but inflation in assets is good!" Hahaha! Moron! Inflation in ANYTHING is bad!
Now I'm really getting snotty and supercilious, and I hiss, "Two right and two wrong! Your precious little Ben Bernanke is not doing so well, is he, America?" So with trembling eyes we go on to read the
  • fifth, and last, thing about him, which is that he believes that "An inflation target can defend against deflation and inflation." Gaaakk! I am too flabbergasted to speak! The Mogambo is, finally, speechless! Then, finally, from deep inside the manly Mogambo chest (MMC), a laugh begins to bubble up, getting louder and louder! Hahahahaha! HAHAHAHAA!"
Inflation Does NOT Defend Against Inflation
This is, without a doubt, the most stupid thing that I have EVER read! And I have read some stupid, stupid, stupid things in my time, and have written stuff even stupider, too! A LOT more stupider, as the very use of the word "stupider" implies. But, and ignore the way I am laughing my guts out, inflation defends against inflation? Hahahaha! How the hell he can even keep a straight face when he says something like that is beyond me! Hahaha! Inflation defends against inflation! Hahaha! Slapping your face defends against your face getting slapped? Stealing your car defends against your car getting stolen? Hahaha! This is too much! No! No, wait! How about this; how about if I run around on my wife to defend against me running around on my wife? Hahaha! This is great stuff!
I can't wait to use this stuff as a legal line of defense the next time the judge asks me why in the hell I am back in his court again and how he is going to throw the book at me this time, what with his "No more Mister Nice Guy!" crap and all. Well, screw that! With a short trumpet fanfare ("ta-daaaa!") I unveil to you, Loyal Mogambo Reader (LMR), the Bernanke Defense! How it works is that while the judge is picking up the book to throw at me, see, I run up, fall on my knees, and, clasping my hands together, say "But Judge! I am back in front of you again, on these trumped-up charges, so that I can defend against appearing in front of you again! That's the way it works now! It worked for Ben Bernanke, Judge! Nobody threw HIM in jail! He's murdering our money by promising us inflation, and he is walking around free as a bird! Yet, here am I, bedecked in chains and a smelly straightjacket because of some minor misunderstanding about registering an insignificant self-propelled howitzer cannon, and how I TRIED to register it, but the police told me that I CAN'T register a cannon, so naturally I figured that you didn't NEED a license or anything! And besides, I got the cannon only to defend against myself getting a cannon!" See how neat this Bernanke Defense is? Dontcha just love it? Wow!
Naive And Absurd
Mr. Peter Schiff of Euro Pacific Capital has no interest in my legal problems or new strategy, but he also read the article, and concludes, in his usual refined way, "Not only are his assertions naive and egotistical, but flat-out absurd."
Anyway, the rest of the article is about how Bernanke is this self-described big shot "expert" on the Great Depression or something, and he considers that understanding it to be the "Holy Grail of economics". Hahaha! To show you the shallowness of his thinking, a quote from the article about how people borrow money to buy a house or business may prove instructive, as he says, "But deflation, even though it leaves the loans value untouched, erodes the value of the collateral and shrinks the borrower's equity." Well duh!
Deflation Can Only Happen After There Was A Bubble
What this halfwit Bernanke twit does NOT understand is WHY there was deflation in the first damned place! Why did the price of the asset go down? I leap to my feet and shout, "You want to know why? I'll tell you why! The price went down because the price had gotten so high! THAT is why the price went down!" Jeez! You would think that a guy that is the new chairman of the Federal Reserve would know that!
Now I will tell you why he doesn't want to get into that inflation part, and the reason is that his own damned Federal Reserve created too much money and credit, and a succession of idiots borrowed money to buy assets from each other, around and around, inflating their prices until, finally, one day, the damned assets are too overpriced. Then they go down. Simple.
Monetary Inflation
In short, you get a deflation because first you have an inflation in the money supply, which shows up as an inflation prices, all of it (and this is the part that makes me stand up on my chair and howl "aaahhoooOOOOooooooooooo" like an angry, wounded wolf in my rage AND outrage, to show you how enraged I was) is caused by the damned idiots at the Federal Reserve playing footsie with the other banks under its control, so that the banks can make more money by loaning more money, which is monetary inflation, and the money goes into buying assets, causing inflation in those assets, but after awhile the economy can't support those prices, and they adjust (down) to their "natural", or "neutral" value where they would have been all along if there hadn't been any money to chase prices up and up.
Peter Schiff agrees with me, although he doesn't like agreeing with me in public or being seen in public with me, or even calling him on the phone for that matter, and he doesn't even mention my name as he writes, "The mistake made by the Fed during the 1920's was expanding the supply of money and credit too rapidly. However, as increasing productivity prevented consumer prices from rising, the Fed was unconcerned about the inflation it was creating. Instead, the excess money and credit that spilled into financial and real estate markets caused asset prices to rise, which resulted in claims of a 'new era' (sound familiar?). The bust of 1929 led to the Great Depression of the 1930's not as a result of Fed tightening, as Bernanke claims, but due to the misguided economic policies of the Hoover and Roosevelt administrations. "
Credit Inflation 1929 - And NOW
And speaking of the Great Depression, the lead-in to the latest Richebächer Letter was a quote from Melchior Palyi from his book "Twilight of Gold, Myths and Realities." He writes, "The chief reason for the financial confusion in the late 1920s, as in similar eras of the past, was the credit inflation. Combined with stable price levels, it generated a sense of security and an overestimation of the expansionary potential. This misled a dynamic society into reckless speculative ventures on an unprecedented scale. Believers in monetary stability were carried away by their wishful thinking."
Ergo, you get a deflation after you have an inflation, which, in the case of the Great Depression, was caused by the Federal Reserve acting like bonehead halfwits in the 20's. The Great Big Freaking Depression that is now encroaching upon us was caused by the Fed acting like bonehead halfwits during the 80's and 90's. And most of the 80's, and 70's, and 60's, too! Which was, for the record, all necessitated by the idiotic Congress deficit-spending.
Highest Consumer Debt Levels In History
Bill Bonner of DailyReckoning hears us talking about Greenspan and Bernanke, and says "During Greenspan’s reign at the Fed, more new money and credit has been created than under all the rest of the Fed chiefs combined. Consumer debt rose to its highest level in history, the ratio of debt to income also rose higher than it has ever been. The effect was to inspire bubbles all over the world and to transform the United States from the world's largest creditor to its biggest debtor.
"What the Greenspan Fed had accomplished was to put off a natural, cyclical correction and transmogrify an entire economy into a monstrous economic bubble. On the other side of the globe, foreign businessmen worked overtime to meet the phony new demand; China has enjoyed a capital spending boom as excessive as any the world has ever seen."
TCMD Trebled Under Greenspan
Steve Lachance, who is a financial translator, elaborates on that point and writes "Since 1987, the year Alan Greenspan became chairman of the Federal Reserve Board, TCMD (total credit market debt) has more than tripled, from $13 trillion to $40 trillion, and now accounts for well over 300% of GDP. This debt growth is without precedent by any relative or absolute measure, and is evidence that the US has experienced a debt bubble."
If you are not interested in all that old history crap, perhaps because you are such a "now" and "happening" kind of person, then you may be interested to have Mr. Lachance clue you into what is happening currently. Mr. Lachance obliges by announcing "According to the most recent Flow of Funds report from the Federal Reserve, TCMD expanded by $799 billion in the third quarter of 2005. At this rate, debt growth for a single year is $3 trillion, or 50% greater than total US industrial production." Hahahaha! $3 trillion a year in more debt! More than a quarter of GDP! In one lousy year! We're freaking doomed!
Consumer Spending About To Collapse
Another bit of jarring recent news is that in October, paradoxically, consumer installment debt went DOWN by $7.2 (although seasonally adjusted) billion dollars. In one month! It is a collapse in consumer spending that is (and here I am quoting the Wall Street Journal), the "biggest dollar amount on record" according to the Federal Reserve! The biggest on record! I have redacted the original transcript of my actual utterance upon learning this, so that now the officially record reads that I said "Yipes!" and the humorously quaint "Run for the hills, boys!" Those who know me are probably thinking to themselves "Hmmm! That certainly doesn't sound like The Mogambo at all!" And they would be right, because, in reality, it was mostly me screaming in mortal dread and outrage, over and over, that we are freaking doomed, we're freaking doomed, we're freaking doomed, over and over and over, as the implications of it started to sink into my tiny little Mogambo brain (TLMB).
So this means that the 70% of the entire Gross Domestic Product of the USA that is attributed to consumers, meaning 70% of all the goods and services produced in the whole country in a whole damned year, took a big whack to the wallet? The HUGE part of the economy that makes its money by catering to the consumer who was buying all this stuff took, in total, as a group, a whack to the corporate wallet that was the biggest whack to the corporate wallet that THEY have ever had, too? Again, in the official transcript, it shows me responding "Yipes" and "Run for the hills!" and, again, that would be a lie to sugar-coat the loud, and mostly obscenity-laden, truth.
Gold Should Be At $2,176 in Real 1980 Terms
But it is gold that we are speaking about in such loving terms, as only precious metals can protect us from the predations of the central banks. And since we are talking about gold, what about the price? Martin Weiss of Money and Markets newsletter writes, "Today, it would take a gold price of $2,176 to equal the inflation-adjusted value of that ounce of gold in 1980. So put another way, today's gold price of $518 is less than one-quarter of what its true inflation-adjusted price was 25 years ago. Just half of that level would be $1,088, more than double today's gold price."
And the price of gold is destined to go up and up, as he explains when he says "central bankers don't wake up each morning with a deliberate plan to push up gold prices. But "higher gold prices are the inevitable consequence of their routine efforts to print money and pump-prime their economies."
Oil And Gas Prices Will March Higher
He goes on to say that it is thus inevitable that "oil and gas prices will continue to march higher." I raise my hand to inform Mr. Weiss that we were talking about gold, and without even pausing, he goes on to say "China and India are pressuring gold prices both directly and indirectly. First, they're buying gold themselves. Second, they're driving up worldwide inflation in natural resources all over the planet, which also drives up gold. This is big. It's happening right now. And it's not going away. "
Dan Denning, of the Strategic Investment newsletter, writes that things are even worse that that, as "Gold will visit $2,000 an ounce sometime over the next few years, but not while oil languishes at $60 a barrel. Most likely, both commodities will rally together to some extent. We're headed to a place where gold hits $2,000 an ounce and oil hits $100 a barrel, in the process sending the oil/gold ratio to around 20."
TOCOM Introduced Extraordinary Margins For Gold Sellers
And perhaps part of the recent wildness in gold may be related to a story sent to me by my old buddy, Phil S. The scoop is that the Tokyo Commodity Exchange (Tecom) had a news release dated December 12. The text of the release is that they are imposing what are called Extraordinary Margins on gold futures which, in terms of money, doubled the margins for all NEW contracts. Hmmm! And the sellers of gold options have had their margins raised, too, but not, oddly enough, for buyers! Another hmmm! Anyway, the important point is; what actual date separates the OLD contracts (with the low margins) from the NEW contracts (with higher margins)? It turns out that any contracts dated December 14 or later are new contracts, while anything December 13 and before is an old contract. The news release came out on the 12th.
And I'll tell you another reason why the rise in precious metals is not going away. The Chinese top dogs and a lot of other foreign top dogs, unlike Americans top dogs, care about what their descendents think of them, and they want to be revered as noble and wise ancestors and rulers, and not be remembered as a spendthrift, debt-addled plague upon his neighbors and children, most of whom all think that just because their stupid new, fancy barbeque grill disappears that I somehow took it and sold it at the flea market and used the money to buy this really nifty new 55-degree golf wedge that I really, really needed.
Budget Deficit Hit A November Record
As an example of this idiocy and shamelessness of Americans, from we get the report "The U.S. federal budget deficit widened as expected to $83.1 billion in November, the largest deficit of any November, the Treasury Department said Monday. A year ago, the deficit was $57.9 billion." No matter how much we owe, no matter how out of whack federal finances are, they always spend more and more and more! Ugh.
****Mogambo sez: Whatever the hell is going on, it means that gold is being temporarily suppressed, and that gives you the chance to buy some more on the cheap. And with the gigantic short position in the world, I suggest that you take physical possession of your gold and silver bullion. Remember that somebody has to get screwed, and if you leave gold lying around in other people's vaults, then that person will, most likely, be you.

The Mogambu Guru's straightforward writings are made possible by The Daily Reckoning.
Richard Daughty aka The Mogambo Guru is general partner and COO of the Smith Consultant Group and can be emailed at

Euro Members Sold Gold For 138 Million Euros Last Week

Tuesday, December 13, 2005

The members of the Eurozone sold gold woth a value of 138 million Euros in the week ending December 9. According to the consolidated financial statement of the Eurosystem two central banks took part in the sales, bringing the Euroarea gold hoard down to 148.413 billion Euros. The Eurozone's gold treasure, valued at 393 Euros/oz will be revalued at the end of the year.

Seismic Shifts In The Global Economy

Saturday, December 10, 2005

While Thomas L. Friedman postulates "The World Is Flat" a look at economic and political developments leads me to the conclusion that nowadays many principles of the last century get turned upside-down. Although many shifts in the world are not apparent to the eye, even when sucking in myriad pieces of information, capital markets are speaking a clear language. The power shifts from the West to the East.
Take bond markets. Yield spreads between the so-called 1st world and the developing countries have shrunk to levels that were unimaginable before the millennium.
When a conflict-torn dwarf-nation like Serbia can find buyers for debt maturing in 2024 that pays a coupon of 3.75% while the US has to pay some 4.50% for the same maturity I face a conundrum.
The other conundrum is the performance of European bonds altogether. The basis for the Euro is the stability pact that stipulates that governments must not exceed a target of 3% for budget deficits in comparison to GDP. This target, established in 1999 when Europe's economies enjoyed growth rates above 3%, has not been met by the biggest European economies for years. Bond investors, mainly pension funds and other institutionals, don't seem to mind though. 10-year German government bonds still yield a paltry 3% although all economic indicators are sliding downward with no end in sight. Even Italy can continue to pamper its bloated public sector, where employees can be more reliably found in their favorite espresso bar than behind their desks, with ridiculously cheap new debt, given the fact that the country's growth rate falls within the statistical margin of error.
Take share markets. Despite the comparatively strong officially published GDP growth rates in the US the stock market limps along on the crutches of still excessive liquidity. European shares meanwhile have performed impressively this year although the growth outlook can be described as foggy at best and energy-induced inflation will roar its head foreseeably in 2006 and after that. Here too the performance can be directly linked to excessive liquidity that costs governments just the paper and ink to print more fiat money.
Turning further east, I can only marvel at the performance of equities in places like Russia and India. Both markets are racing from one all-time high to the next. At least these moves follow a rationale. Russia, discussed in an earlier post, can brag about a balanced budget and strong economic growth while inflation has been stabilized at manageable levels.
India looks altogether like a place to be when in search of economic dynamism. The country has embarked on a flight towards greater economic freedom after having followed austerity policies until the 1990's. The gamble has paid off. India's silicon valley in Bangalore is now home to the biggest software development centers in the world. Only a few days ago Microsoft has announced another multi-billion investment in India which turns out three times as many engineers every year as the USA do. With a middle class counting more than 300 million people the biggest democracy in the world can fall back on huge domestic demand in case the economy in the until now so-called 1st world turns sour.
Turning to China one short paragraph is enough to decribe the outlook there. Chinese officials estimate growth to average more than 8% until 2020. This year China has become the largest vehicle market in the world and it now does what Japan did 40 years ago: It starts to export locally produced cars to the rest of the world.
Let us fly back a bit westward again in our virtual tour of the global economy. The former members of the communist bloc in Eastern Europe are all posting impressive economic growth rates too. As a result investments in the Polish share market are to be counted to the ranks of the top performers in a global portfolio.
The same can be said about Austrian shares. The former empire spanning from Venice in Italy to Lwow in the Ukraine and the coast of the black sea now enjoys a stock market that jumps to new historic highs frequently. Reason for the success is their early drive in the developing economies in East Europe where they now have a strong footing, especially in the finance sector.
Taking a plane down south to Africa yields a mixed picture. While democratic South Africa is the economic powerhouse of the continent, its neighbour Zimbabwe is hit by the worst humanitarian crisis the regime of dictator Robert Mugabe has brought along.
Other African countries are set to share in the new wealth the commodities boom from commodity-poor China will bring. As China has relatively few commodities it has gone on a buying spree that will last forever.
Looking at the gold price which has always been a barometer for the expected stability in the world it is almost ironic that the growing uncertainty about coming developments will help the poorest countries in the world most. 70% of today's gold production comes from the 25 poorest countries in the world.
My conclusion of all this is: When scouting for profitable investments throw the old dogmas overboard. The world is changing more rapidly than ever and I see no stone that will be left unturned. The seismic shifts will come as no surprise to those who stay on top of the information that is so easily available on the world wide web.

Study: Grandpa Just Can't Stand It Without Work

Thursday, December 08, 2005

I can't say whether it is because they are incurable workaholics or because grandma is lying on their ears too much all day long; but America's retirees are happy to get a job again after an average pause of only one and a half years since they received their gold watch. According to a study by Brightwork Partners and Putnam Investments 7 million retired Americans have entered the workforce again, two thirds not because they had to, but because they wanted. They represent 10% of the labor force aged 40 and older.
No wonder, with average assets of $550,000 their choice is a lot easier than that of the "have to" retirees whose nest egg averages $140,000. While the current US savings rate is below zero, one can't fault the elderly for it. More than three quarters save on average 11% of their income and I hope they don't need to bail out their happy spending offspring with it at a later point of time.
Even if they can afford it with average household incomes of $86,600 or 60% more than full-time retirees; although it would be nice to know the median income.
The housing bubble should not drive them into homeless shelters. Only 47% own their domiciles.
There is a happiness gap between the "wanted to" and the "have to" reborn members of the labour force. More than 40% of the first group think working again might be fun vs. 16% of the "have to's". This proves the rule that money does not make a person happy; but it is so comforting to have it.
The will to work must put a smile on the faces of employers and the administration too. While employers get highly educated laborers a termination of their contracts will not show up in the unemployment rate (although it does in non-farm payrolls), keeping government propaganda intact.
In Europe the situation is certainly different. A flat trend in pension payments and unemployment rates double of the figure in the US leave retiress without a choice. European governments want to raise the minimum retirement ages well above 65 years, but people older than 40 have close to zero chances in the labor market, one observes.

Gold And The Eurozone Central Banks: Who Bought And Who Sold In 2005

While gold climbs to highs last seen a quarter century ago, the members of the Eurozone continue to sell into the strength. In the week ending December 2 they sold gold with a value of 108 million Euros, bringing the total since the end of September, when the current central bank gold sales agreement was renewed for another 12 months, to 1.369 billion Euros or almost 30% of what was sold in the first nine months of 2005.
As the ECB only announces how many Euro members have been selling gold I dug deeper into the ECB's database to find out which countries have been on the selling side and who has stayed away from the market.
Conclusion: Only (booming) Ireland, (insignificant) Finland, Greece and the stubborn Bundesbank, which sits on its ears (and the biggest gold hoard after the USA) whenever the government calls for gold sales in order to shore up the budget, did not take part in the continuing gold sales.
All other Euro members were quite heavy sellers and as a rule of thumb one notes that the bigger the budget problems, the bigger were the gold sales.
My methodology was to convert the monetary values of the gold assets into ounces with their respective evaluation which was 321.5 Euros at the end of 2004 and is currently 393 Euros/oz.
All together the Euro members and the ECB sat on 368.889 million ounces of gold at the end of 2004 and have reduced this cushion by 10.056 million ounces or 2.6% by the end of October 2005, bringing it to 376.832 million ounces.
  • The ECB itself sold off 6.5% or 1.6 million ounces in the first 10 months of the year, which leaves it with 23.05 million ounces.
  • The biggest seller in absolute terms was France. The "grande nation" sold 5.432 million ounces, reducing its gold treasure by 5.7% to 90.55 million ounces. France's unemployment rate hovers above 10%.
  • Second come the Netherlands. The country is plagued from recession dangers after the housing boom came to a halt some time ago. The Dutch sold 1.948 million ounces, shrinking their gold assets by 7.8% to 23.048 million ounces until October.
  • The bronze medal for the biggest gold sellers is awarded to Spain. The Spaniards reduced their gold reserves by 9.9% or 1.67 million ounces to a current total of 15.16 million ounces.
  • Rank #4 goes to Portugal whose budget deficit is out of control. The former colonial empire sold 1.16 million ounces in 2005, shrinking the contents of its treasure chest by 7.8% to 13.7 million ounces.
  • Belgium, shattered by frequent strikes of disgruntled state employees this year, sold a total of 982.088 ounces. Its gold hoard fell 11.8% to 7.3 million ounces this way.
The other Euro members were quite reserved about selling off the hardest part of their currency reserves.
  • Most surprising is the fact that Italy, just an inch away from a recession, was tight-fisted. In 2005 the boot-shaped country sold only 315,600 ounces of gold, reducing its gold assets by 0.4% to 78.5 million ounces.
  • Austria, faced with a sluggish economy but blessed with a very hawkish central bank governor, sold a total of 189.400 ounces, bringing its gold hoard down 1.9% to 9.7 million ounces.
  • Germany sold a negligible amount of 176,000 ounces, shrinking its gold treasure by a mere 0.2% to 110.2 million ounces.
  • Luxembourg let go a mere 868 ounces and currently holds 73,768 ounces.
So far the gold purchases within the Euroarea amount only to a few peanuts this year.
  • Biggest buyer was Greece which saw its gold reserves rise by 5,303 ounces or 0.2% to 3.47 million ounces.
  • Ireland's gold treasure grew exactly 514 ounces, bringing the total to 193,323 ounces.
  • The list ends with Finland which added 432 ounces to its gold treasure, now standing at 1.577 million ounces.

Summing all this up I arrive at a figure of 10.05 million ounces sold and 6,249 ounces bought.
One additional note that should not be forgotten is the fact that all European central banks state gold, gold swaps, leases and gold receivables in one figure. So we do not know how much physical gold they actually hold.
Of note is also that save for the Mexican central bank no other monetary authority lists the extent of its silver reserves - if there are any left since silver was gradually de-monetized in the 20th century.
It is up to you to decide whether this speaks for or against gold. In my opinion there will be no better investment in the rest of this decade. This bull market, supported by huge physical buying in Asia and the Arab world has only just begun. Don't short this market but buy the dips.

The Mogambo Guru Reinforces His Bunker With Gold And Silver

Wednesday, December 07, 2005

As my readers know well by now I am not overly enthusiastic about economic developments in the Western hemisphere. But reading the Mogambo Guru's weekly column has such an unsettling effect that I tend to look for cover and I have to agree with him that save for precious metals there is no other investment that will be able to shield me from the foreseeable dramatic worsening of the financial situation of the USA that will in turn take all other economies with it. Looking back in history I cannot find one example where a government was able to print it's way out of the problems it faced. At the moment we have two large money blocs trying exactly that: The USA and the Eurozone. It will not be different this time.

Ducking Behind Silver and Gold
by The Mogambo Guru
Last Friday is now known, around here anyway, as The Day The Mogambo Finally Lost It Completely. That was the day I found out about the latest horrific happenings at the Federal Reserve. I don't remember much about it, but I do remember that my eyes felt like they exploded from their sockets, as if in an Itchy and Scratchy cartoon, when I read that Total Fed Credit went up by an astonishing $6.2 billion last week. This is literally the "money and credit from thin air" of fabled story and song, and I am sure that as good little Mogambo Scouts (MS) you have joyfully sung many, many of the campfire tunes from the Official Mogambo Scout Songbook (OMSS), such as the popular "Give control of our money to the Fed and pretty soon it's dead, cha-cha-cha", or that old favorite "The Fed killed my money and now it's killing me" which is, of course, sung as a dirge. In fact, ALL the songs in the OMSS are dirges. And the reason for that is that the consequences of creating so much credit, which becomes both a new debt and new money, is that prices will rise as all that money, that luscious, luscious money, money that I'll never have because I am lazy and stupid and have a family that tries to fill a void in their pathetic, miserable lives caused by having a distant and hateful husband or father (that they blame for everything) by buying stuff, will all seep into the prices of things, as there is (as my voice rises to a fever pitch) nothing else that can be done with money except increase demand for something by spending it on buying something!
That is why I nervously laugh the laugh of The Mogambo in full panic mode (LOTMIFPM) to glom a headline in last Friday's Wall Street Journal that read "Nikkei, Gold Hit Milestones; Dow Nears One". At first glance, it seems like such pleasant news. You think to yourself, "Ahh! People have more money! How nice for the economy!" But suddenly your blood turns cold when you read the sub-head that said "Japan's strengthening economy and market overhauls propel stock Index to close above 15,000." What? Hey! Bonehead! I just told you in the previous paragraph, and so it should be still fresh in your young grasshopper mind, that all this money that the Fed is creating, and all the money that foreign banks are creating in response and emulation, has to be spent by the government on something! If not, then why in the hell is someone borrowing the damned money in the first place? And it has to, eventually, percolate through the economy and wind up in someone's pocket, and they have to put lots of it into stocks and bonds because there is just so damned much of it!
Do Governments Buy Stocks And Bonds?
But this is not about how mysterious strangers are borrowing so much money, or how mysterious strangers are tapping my phone or lurking outside my house, but let me merely go out there with an AK-47 assault rifle and "hose down" a clump of suspicious bushes, and they will twist it all around so it is ME that gets in trouble for it! But the point is, instead, that the Japanese stock market went up for the same reason that the US market is going up, and that is because the governments are borrowing and spending enormous amounts of cash, and the Federal Reserve is creating enormous amounts of cash to buy the enormous amounts of new government debt being created. And then this money eventually seeps into pockets, and then what do you do with it? Well, what other market is so big, so huge, so complicated, so diffuse, so liquid, so secretive, so willingly compliant, that can absorb so freaking much money EXCEPT the stock market and the bond market?
And speaking of humongous mountains of money, the national debt exploded again, jumping $11 billion IN ONE FREAKING DAY on December 2. In one day! And then people want to know why I am so freaked out that I cannot eat, and I cannot sleep, and I keep screaming and shooting that damned pistol of mine at anything that moves all night long, and one of these days someone is going to get hurt and blah blah blah.
Liquidity Serves Bulls And Creditors Well
But even so, this is one hell of a lot of money being created! I mean, jeez, the $6.2 billion in increased Total Fed Credit last week alone, when translated through the reserve multiplier inherent in fractional reserve banking, means an almost infinite multiplication of that credit into an amount of credit available at the banks! The banks can now loan out lots and lots of, essentially, free money! And what can they buy with those hundreds and hundreds of billions of dollars of newly-borrowed money except stocks and bonds? And THAT is why the Japanese stock market went up! That's why the American stock market is going up and the bond market is not collapsing. Keep putting enough money into anything and it will go up! Nobody has EVER disputed this.
And speaking of things going up, actual Currency in Circulation, the kind where the kid says "Dad, may I have five dollars, please?' and you say, "hell no, you greedy little brat! Why don't you get a job? Then I can borrow money from you, you worthless parasite!" but your spouse gives her the five bucks anyway, and now there is something ELSE to yell about, was up by $3.6 billion all by itself! That's $36 more actual money for everybody that has a non-government job in America! In one week! No wonder she had five bucks to loan the damned kid! But let me ask her, you know, since she has all this extra cash and all, how about a little taste, you know, for The Mogambo? And then she lies to my face, and says "Money? I don't have any extra money, you stupid little creep!"
Government Spending Can Be A Fatal Cure
(In this paragraph, notice the extensive use of exclamation points to indicate emphasis. This means that it WILL be on the mid-term exam, young grasshopper!) So, in total, tons and tons of money are coming into the economy from government spending, which is completely off the charts in terms of historical precedence! Off the freaking charts, I tells ya! Do you really, really, REALLY believe that things are going to get better because of this? If you do, then I laugh - Ha! - in your face! Now I will insult your kids! And your parents! And then I will heap scorn on your spouse or significant other, and generally be very unpleasant, because that is the Way Of The Mogambo (WOTM) when I run across someone who is soooOOOooo stupid (audience yells out "How stupid, Mogambo?") that they could actually think that increasing government spending to the level of insanity would NOT end very, very badly! If it didn't end badly, then everybody would do it, you stupid blockhead! But they don't! So I know that it will end badly (EB)!
But nobody listens to the poor old Mogambo, sitting there on that cold bench in the police station, as I calmly and gently explain to the nice policemen (according to flimsy videotape evidence and only a few dozen eyewitnesses lying their stupid heads off on the witness stand) about the economic Armageddon that awaits us: "Let me go, you stupid, ignorant fascists! I am telling you that your money is being destroyed by the banking system! And when the purchasing power of your money is destroyed, YOU are destroyed! Can't your understand that, you morons? You should arrest everybody at the Federal Reserve! But you don't, do you? No! Don't listen to The Mogambo! No! Go ahead; ignore The Mogambo! Don't even save yourselves, you stupid pig cop Gestapo fascist goons!" What they DON'T show, because the tape was "accidentally" erased and burned and then thrown away, was when they asked me if I knew what it means for them to tell me to shut the hell up or they were going to come over here and shut me up? And I said I did, and I was real quiet from then on, too. But that doesn't change the facts about this money thing!
I even tried to lighten the mood with a joke from Irwin W. that is about this girl, see, who can't balance her checkbook, and so he says "If she can't balance her check book, she knows all there is to know about fiat currencies!" Hahahaha! I love it! But they did not laugh, and it turns out they cannot see the joke, and so I called them a stupid bunch of humorless monkeys, and that made everything worse, in case you were wondering.
Gold Cannot Be Replaced By Paper
So don't listen to me. Nobody else does, either. But maybe you will listen to the highly literate and entertaining Bill Bonner, of DailyReckoning fame, who, writing about gold, humbly said "We know nothing of the future, and very little of the past. But what we do know is that every other time mankind has tried to replace gold with paper, people ended up craving gold more than ever. We see no reason why the present experiment should produce a different result."
I jump to my feet and say "It won't, dude!" I started running like hell when he exploded "That's the last time you call me 'dude', you damned idiot Mogambo!" and leapt after me, and he probably would have caught me, too, if someone hadn't asked him "And why did they come to crave gold?" Well, I was hightailing it pretty good out of there, so I did not hear him as he stopped to answer, but I thought to myself (as I ran like the scared little coward that I am), "It's simple, you dimwitted clot! Because their paper currencies always end up just like ours is ending up; worthless! And now our economy is going to end up like all those other ones, too, and for the same damned simple reason; when you give the government the power to create as much money as it wants, it always creates too, too much, and the buying power of the money is destroyed!"
Only Gold And Silver Are Constitutional
Pretty soon I was home, hiding behind the couch, panting from the run, and there was no sign of Mr. Bonner in pursuit. After a while I finally settled down, and that was when I realized that the part that drives me absolutely freaking crazy is that the only perfect way to absolutely prevent this destruction of the money from happening is already in the Constitution! It is supposed to be the inviolable law of the land, because it was written in the Constitution, that money shall only be made of gold and silver! It says so, literally, in the actual Constitution! But in case you are young and still have a childish faith in the Supreme Court, let me inform you that the Supreme Court, in a despicable act of treason in 1933, said that FDR was right when he argued that the Constitution does NOT say what it clearly says. Money does NOT have to be of gold and silver, even though the Constitution says it must! And no subsequent Supreme Court or any Congress ever raised the issue, making them guilty of treason by aiding and abetting. The result is that now we are paying the price for letting so much credit and money be created, just like the Founding Fathers knew it would, and just like every theory of economics in history said it would. Well, that is, every theory of economics until we come to the blathering idiots of today, who preach and practice the most stupid theory of economics that has EVER been advanced outside of a lunatic asylum.
The One Wrong Thing (TOWT)
We are idiots! We ought to put it on our money! "America; a Nation of Morons!" It is inconceivable to me that every Congress since 1933 could be so inept, so ignorant, so brain-dead, so impossibly corrupt as to let these central bank jackasses get away with this! Right in front of our eyes, too! We are doing The One Wrong Thing (TOWT) that is so wrong, so horrifically wrong, so tragically wrong, that the Founding Fathers created the Constitution to try and prevent it!
And what is the awful result of TOWT? Inflation! All this money has to show up in prices. And when people start suffering from the higher prices, it is bad, so bad, so tragically bad, so nightmarishly bad that all civilized people and all intelligent governments go to great lengths to prevent inflation. Any inflation!
But yet, here we are, in 2005, with Ben "Blasphemy" Bernanke helping Alan "Easy Al" Greenspan at the controls, declaring that he is going to commit TOWT just like Greenspan alone did for at least a decade, and which we have been doing since the 60's!
In short, we are a nation of complete and utter morons to even CONTEMPLATE letting the banks get away with this crap! And yet they ARE doing it! And right in front of our eyes, too!
So, the theory says, since stock prices can now grow infinitely higher to the sky, and house prices can now grow infinitely higher, too, then, in a certain manner of speaking, so can bonds! You can keep interest rates low forever! All it takes is, appropriating a delicious phrase of Dave Barry's, "More money than the human mind can comprehend." While he was humorously talking about the cost of home improvements, I am nervously listening to Bernanke talking about the destruction of the economic system of the USA and the world, and, by extension, the economic AND financial destruction of my neighbors and family, for whom a financial tragedy will entail them all coming over here, one by one, tears in their eyes, begging "Please help us Mogambo! We heeded thee not, and thy wise words counseled us to 'Buy gold, you stupid freaking morons!', but the seeds of Mogambo wisdom (SOMW) fell on barren ground in our feeble minds, and now we suffer for our foolishness! Help us, Mogambo! Please help us!" and I, being as polite as I can in the face of their staggering, stupefying stupidity and their loathsome willing ignorance that has destroyed the America I love, have been looking for a reason to hunt them down like the diseased vermin they are.
Empire Of Debt
But Messrs. Bill Bonner and Addison Wiggin have taken a different, much more non-lethal approach, and have graciously sent a copy of their book, "Empire of Debt", to every member of Congress, with an attached note asking them to read the book, or at least the introduction. The idea, see, is that the Congresspersons will recognize the profound error of their ways, clap their hands to their foreheads, ("Oh my goodness! What have I done?"), heroically reverse course (sound of tires screeching) and bring us back from the edge of the precipice of the economic abyss that they have heretofore led us to. Whew!
I admire their boundless optimism, and I wish them the best of luck, and suggest that we all participate in this grand experiment, and contact our Congresspersons and ask them to read it, because there is just that little chance, that tiny glimmer of hope, that it will work! And then, in worshipful gratitude, our children will make a movie out of it, and we will be Hollywood heroes! A stirring story of how brave Americans saved America! Americans saved America by reading the Bonner and Wiggin book, and forcing the Congress to read it, too, and when things didn't change, the voters threw them all out of office at the very next election, and elect people who DID read the book and learned the lesson contained therein! And then everything was terrific from then on, and we look good in the history books AND on the silver screen until the end of time! But am I hopeful? Nah. But if it DOES work, I get dibs on having Brad Pitt play the role of me!
Home Equity Extraction Runs Dry
David C. sent me the Merrill Lynch Morning Call Notes by David Rosenberg, who writes "Housing starts, new home sales, mortgage applications and building permits are all negative on a year-over-year basis, and this last happened in tandem in July 2000." This is the set-up. Now he gives you the punch-line: "So we think it's pretty safe to say that the housing boom is over." Hahahaha! Who says economics can't be fun? Haha!
Anyway, he follows this dry humor with "mortgage refinancing activity is down 43% in the past four months, so something tells us that the home equity cash-out effect on spending is beginning to dry up." Hahaha! I love it the way he says it with such a straight face! Funny! But notice the way the smile is frozen on my face. The reason I am abruptly semi-catatonic is that, as he explains, "Last year this re-financing produced over $700 billion in increased consumer spending, and I am wondering what will happen if consumer spending went down by $700 billion, which is 6.4% of GDP!" I notice that YOUR eyes suddenly look a little vacant and glassy, which shows that you are in shock, because you have a deep understanding of the full, terrifying ramifications of this gigantic drop in consumer spending! Well, that's the way it hit me.
Bill Bonner notices Mr. Rosenberg slapping me to try and bring me out of my sudden coma, and pretty soon they are BOTH slapping me, and Mr. Bonner is saying that this borrowing against home equity is actually bad news beyond the debt thing, because things are really distorted. "Normally, when consumers earn extra money it comes from the businesses they work for. It is a cost to the business, reducing profits. But this new revenue comes to corporate America (when it is spent in America) without offsetting labor costs. U.S. businesses didn’t have to pay anyone a salary in order to increase consumer spending. Instead, the money came as though from heaven, and fell directly into profit margins."
Hahaha! Good one, Bill! I mean, good one, MISTER Bonner, sir! But whether or not I am allowed to call him by his first name when he is around to hear me, the fact remains, "How long do you think that we can keep THAT silly home-equity withdrawal crap up?" Hahaha!
House Prices Dipped In Real Terms
George Ure notes that if we are talking about houses, then we should listen to this! "The median price of a home was up to $231,300, up a scant 0.9% from year ago levels. The problem is that with inflation running 4% for the year to date, that means that in purchasing power terms, home prices have dipped about 3% year on year." Exactly!
Additionally, Mr. Rosenberg goes on to report that a lack of demand has pushed "unsold new housing inventory to almost five month's supply, which is at a nine-year high and the trend is clearly up." Well, if all of this is not enough to convince you that there is something amiss with the housing bubble, then perhaps you will be convinced when he says "The number of newly built homes that have yet to sell is up 20% year-on-year, the biggest increase in two decades."
And in speaking to some real estate people I know, they say that business is down about 50%, too. But I dunno if they were lying to me or not, but they were suspiciously calm about it, whereas I know that if MY income was down by 50% I would be frantic and REAL tired of my wife screaming at me to wake up and get my big, fat Mogambo butt (BFMB) out of bed and go out find a damned job, or rob a store or something, to get some damned money into this house!
Retailers Are Worried
He probably figures that a LOT of people are lazy and worthless like me, and with such lackluster performance in the housing market, he also surmises that retailers are so worried about a lack of consumer spending that "they had to rely on unprecedented discounting on Black Friday to lure consumers into the malls." In case you don't know, the day after Thanksgiving is known as Black Friday because it is the start of the Christmas shopping season, the time when the stores finally make enough profits for the year that they are now profitable (in the black), instead of making losses (in the red).
And it is not just houses that are peaking, as Jim Puplava of FinancialSense explains when he writes, "there are a number of indicators that have been sort of a warning that we were heading to a profit peak. One thing that you're going to see that is common to all these cycles is every one of them was preceded by a sharp spike in oil prices."
Inflation Figures Don't Tell The True Story
Even worse, Mr. Puplava reports that "There are calls now in Congress for increasing the minimum wage. If you start increasing the minimum wage labor contracts start going up. That is a cost factor. If you look at this overall, we've got rising energy costs, rising headline inflation, and rising interest rates, which means it's going to be more expensive to borrow. All of these things are taking place right now. "
With my red editor's pencil, I write on his otherwise great essay, "Dear Mr. Puplava, Thank you for your recent submission. We agree with you completely, but feel your manuscript is unusable in its current form. We suggest that you be more forceful in your conclusion. To that end, please rewrite your excellent submission with more punch. Perhaps we could suggest, as a starting place, ending the work with the expanded sentence 'these things are taking place right freaking now, and if you were not such a stupid jerkface halfwit moron you would be running like hell back to your mommy, cowering in fear, about what is going to happen to you and everyone you love because The Mogambo was right! We're freaking doomed!' "
Liberty Dollars Doubled In Value
To show you a living, breathing beautiful benefit of having silver as money, Bernard NotHaus of the Liberty Dollar organization announces that, because silver has gone up so high in price, the base has doubled. In essence, if you had a Liberty Dollar silver ounce with "$10" on it, representing a suggested buying power of ten bucks, the very next day you would have, instead, a silver Liberty Dollar with "$20" engraved on it! You doubled your buying power when conducting business in Liberty Dollars!
Silver Dollars Buy Same Amount Of Gas After 50 Years
He also said "But wait! I contend we do not have inflation." He sees me rising up in my seat to come up there and slap his face for saying something so stupid, so he hurriedly goes on to laughingly explain "I can remember over 50 years ago that I could buy four gallons of gasoline for a dollar. At that time the dollar was backed by silver. And that same amount of silver will still buy four gallons of gas today! That just proves silver money holds its value." Hahaha! Exactly right! Now I feel foolish for doubting him!
COMEX Raised PM Margins By A Third
Speaking of precious metals, something weird, I mean really weird, is happening, as a reader of George Ure's UrbanSurvival site notes when he writes "Just a quick note for you and your peoples. Last night the COMEX gods gave a small notice of margins being raised in our precious metals. Margins as of tonight will be 50% higher in gold, from $1,350 to $2,025. Silver will be raised to $1,363 from $2,025. "
For an explanation of what in the hell this could mean, I have no idea, and am petrified that someone would ask me what this means. Just in time, the reader saves my bacon and explains "Whenever this happens, the markets for the precious metals correct (go down). For the conspiracy theorist (me & you), it's the only way the big boys can slow down the demand. I know you don't give advice, but being a stock and commodities broker for 15 years, this little tidbit is a money saver. Get ready to buy physical gold and silver at discount prices from today's price."
And speaking of weird, the chart of gold lease rates is REALLY weird and dramatic!
Gold Still Cheap
And the best part, and this is why you should be buying gold, is that the price of gold is being held down by governments because it reflects so bad on them, giving you a bargain, as Alex Wallenwein explains in his "Euro Vs. Dollar Currency War Monitor". He writes "Gold is 'manipulated' for sure, but that's a very broad term. The US would generally like to keep it down. Europe wants it to rise, but slowly, very, very slowly. The Chinese like it cheap - and so do the Arabs. It allows them to buy more of it for less money.
"In the end, what is really happening? Europe and the US are wasting their precious resources and general confidence-capital to try and keep its price under wraps, somewhat at least - and the Chinese and Arabs are the real beneficiaries.
"Those two blocs just love gold manipulation - and they have no interest in ending it. The Arabs have benefitted from it for the longest. They've been using expensive dollars to buy cheap gold for decades now. Then come the other Asians. They still have a cultural affinity for it that has not quite been bred out of them - yet. But during the 1990s Asian Contagion currency crisis they all dutifully sold their gold to their governments and bought US treasuries instead except for the mainland Chinese. They were anecdotally reported to be buying it wherever anyone was willing to sell it: In Africa, in Europe, in the Middle East, you name it, they were there, crawling all over the place, hungry for that yellow stuff."
Who Is Gearing Up For A Gold Standard?
Now, this looks like somebody, and I am not saying who, but somebody is gearing up to declare their money to be on a gold standard, so that their currency would have instant, permanent value. And how do you say "How can I serve you, master?" in Chinese? Well, alert reader Ford C. says it is, phonetically, "Lei yiu mut yeh low see." The way things are going, our children and our grandchildren may find that phrase very handy.
But we are not here to bandy Chinese supplications about, but to listen to me run my big fat mouth about gold being suppressed. And how much is the price of gold being held down? Steve Sjuggerud writes that adjusted for inflation, gold was above $1,400 an ounce in 1980. (Editor's note: It actually was $2,150 in 2005 dollars) But notice that gold is still only selling at about a third of that! "We're in a bull market in gold," he writes. "It's a secular bull market, which is just a fancy way of saying the general uptrend will stay in place for many years. And we're only near the beginning."
Silver Set To Skyrocket
Well, what about silver, for which I have been pounding the table as the freaking Buy of the Mogambo Century (BOTMC)? Well, Jason Hommel of the writes "About 95% of the gold ever mined in human history still exists in above ground, refined form. In contrast, about 95% of the silver ever mined has been consumed by electronics and jewelry. A silver ring or silver necklace, for example, costs about $50/oz. to $100/oz., and thus, the silver is not recoverable nor recyclable at a profit to the silver jewelry buyer until we exceed those prices. So, gold is going to skyrocket in price, due to the central banking change from selling to buying, (but) silver is going to skyrocket in price much more than gold, due to the silver shortage."
And it is not just eastern nations and foreign nationals that are buying gold. Robert M. went to Boca Raton and reports that the herding behavior has started showing up in precious metals, and the coin shop he visited was sold out of Platinum Eagles. The lady running the coin shop says "There has been riproaring business there in Palm Beach County. Those rich guys have been coming in and BUYING physical precious metals."
Dollar Set To Nosedive
Tom Griess, proprietor of the, made an appearance at by posting his essay, "Gold vs. U.S. Dollar Index," which clearly shows that the dollar has completely divorced itself from gold. His chart shows that whenever the dollar got out of line with gold, it was the dollar that corrected, not gold. In short, my bet, based on this chart alone, is that the dollar is going to take a big, big dive pretty soon, which is only appropriate for a currency as worthless as the US dollar.
And in case you were absent from class the day they went over this, if the dollar goes down, then either the price of gold must rise, or everybody else on the planet must agree that the price of gold should be down for them, too. It's a mathematical imperative. And word to the wise; not everyone in the world is as stupid as we Americans.
He finished his essay with exactly what I have been saying, namely "History wants to tell you a story." Hahaha! Perfect!
Fed Holds Only $130 Billion Bullion
Speaking of stories, there is a lot of interest in the idea that the government will confiscate people's gold again, just like the horrid FDR did in 1933. But let me tell you that that day is a long, long, long way off, if ever. Hell, the gold holdings of the Federal Reserve itself, the biggest holder of them all, is only about $130 billion! Chump change! And that is assuming that all the gold is all still there, and we still own it, which I doubt very, VERY seriously, because that would assume that bankers and governments are NOT lying thieving murderous scumbag sociopaths, and to THAT I can only laugh the nervous laugh of the fearful Mogambo in fear (NOLTFM).
But this is NOT about how the CIA is out to get me and shoots invisible thought-control rays into my wife's head so that she hears "voices" commanding her to "erase my disk drive", whatever in the hell THAT is supposed to mean. But this is, instead, about the idea of the government confiscating your gold, and I say you can relax. When gold gets to be around $500,000 an ounce, or a million dollars an ounce, then maybe they will start thinking about it. But at $500? Hahaha! For what? A few dozens of billions?
And where in the hell are they going to get the money to pay us for the gold? Hahaha! They are going to accept that much inflation in the money supply so that they can get some inconvenient physical bullion, which they are already selling on the open market to get rid of it? Hahaha! Don't make me laugh!
So set your heart and mind at ease, young grasshoppers. You may safely buy precious metals until you are blue in the face from arguing with your spouse and your relatives and your neighbors and your own bratty children (and their snotty little Child Welfare Workers with their precious "court orders") about the relative merits of spending dollars on food (which doesn't have lasting value) versus getting more gold and silver (which do.)
Platform Companies
If you like the appeal of the theory of Americans running financial platforms, where we do all the mental jobs and under-paid slave labor in other countries does everything else, including all the work, then you will be sorely tested when you read an essay on Financial Sense entitled "Cauldron of Anxiety", by a guy who goes by the name Joe Average. He says "Signs are that China is already beginning to move up the food chain and away from being merely a source of cheap manufacturing labour. Motorola, which once contracted out manufacturing to companies like The Ningbo Bird Company, soon found this former supplier had become a serious rival in the Chinese handset market."
Hey! What the hell is going on here? Didn't anybody tell the damned Ningbo company that we're Americans and they are just stupid foreigners who must bend to our will and accept subsistence-level wages so that we can live in relative splendor? Did we just forgot to explain that to them?
The Economy In 24 Words
Well, the NEXT time somebody thinks about "platform companies" perhaps they will pause just long enough to read an explanation penned by my pal, Phil S., which he performs for us today as a marvel of brevity. "The economy in 24 words," he writes. "East makes. West takes. East lends. West spends. East saves. West consumes. East creates deflation. West creates inflation. East buys gold. West sells gold."
In an odd happenstance, Rick Ackerman of Rick's Picks has an idea about how Phil could be right to say that the "east buys gold." He innocently asks, "What could account for gold’s amazing strength over the last month? One story making the rounds is that the Saudis and some of the other oil producers have been moving into gold in a big way. That sounds superficially plausible, except for one detail: If oil revenues really were moving into gold in a big way, the rally would be far more powerful than the one we've seen. Crude oil constitutes a huge global market, gold a microscopically small one, and my unscientific guess is that even if just 10% of the oil producers' revenues in a given month were to be shifted into gold, bullion quotes would reach $1,000 in a trice."
In case you are not familiar with measuring time in trices, it is the short length of time it takes for somebody to call my wife and tell her I am at the bowling alley, making googly eyes at the one I call Darla, which is my adorable Mogambo way (AMW) of shortening "my darling cocktail waitress" to an intimate nickname. She calls me, in her funny and charming way, "Old Barf Bag" because, she says, I make her want to puke.
But this is not about my exciting social life, but about gold. For that, let us return to Mr. Ackerman as he says "If the story about the Saudis is true - and it probably is - quite a bit of OPEC flight capital could find its way into gold, pushing quotes significantly higher while the global financial system is still relatively strong and liquid. That is what I believe we are seeing now, even if it's just a trickle so far. One robust piece of evidence that supports this thesis is the relative sluggishness of mining shares. You can be sure that if the princes of Saudi Arabia and Qatar are acting to hedge their dollar exposure, they are piling up every ingot they can get their hands on, not scaling in shares of Durban Roodeport, Coeur d'Alene et al. Physical metal is, and will remain, far more desirable for their purposes - and let the rest of us scramble months or years down the road for that part of the supply that must still be gotten out of the ground." I sit, stunned and speechless. Finally, I say "Wow!"
19 Reasons For A Bear Market 2006
Russell Randall, on his AustrianEnginomics site, lists 19 reasons why the stock market will go down 30% in 2006 (before the "traditional" end-of-year rally, he says). After reading these 19 reasons, and agreeing with all of them, I marvel that that the market will only be down by that little. But even that will be plenty enough to cause a lot of money to disappear, and Ben Bernanke's dreaded deflation will be here. Ugh.
****Mogambo sez: Things are getting more and more scary every day, and that is why you should be accumulating more gold and silver and oil stocks every day, too. That's what the intelligent people in the past all did when things got like this, and it worked out really well for them, too. Things worked out pretty badly for those who didn't, however.

The Mogambu Guru's straightforward writings are made possible by The Daily Reckoning.
Richard Daughty aka The Mogambo Guru is general partner and COO of the Smith Consultant Group and can be emailed at

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