India - What A Difference 25 Years Can Make

Thursday, August 17, 2006

As there are so many remarkable impressions I have already gathered in my first 72 hours in Delhi/India I cannot resist writing it all up.
The world is currently preoccupied with China's run to the economic top of the world, but the China bulls could be all wrong. Whereas China has liberated the economy but still suppresses any political oppposition, India is all different.
Searching for words that could adequately describe the dynamics of the world's biggest democracy leads me to the term "mind-boggling."
Having criss-crossed India exactly 25 years ago for a very short 18 months I am amazed of the economic progress in this nation of one billion people that now grows at a solid 7% p.a. while an obviously smart central bank succeeds at keeping inflation at bay without hindering long-term growth. Memories of a time when India followed a leftist-oriented austerity policy, punishing imports with duties of up to 300 %, immediately fade away. While GDP per capita is still a paltry $3,100 and put India on rank 149 among 226 countries, the capital has become a truly international metropolis.
An ongoing liberalization of the banking sector will be sped up further. Only recently authorities decided to extend the number of licenses for foreign banks from 20 to 100 and industry observers expect more steps that will help the domestic banking sector grow out its infancy and become more efficient. With an average staff of 153 in every bank branch and physical check delivery the potential for rationalization is simply enormous and should even keep the state-owned banks - which comprise the majority of banks - in the black.
In comparison to China India's banks are not burdened by a myriad of non-performing industry loans while consumer loans fuel a surge of domestic demand. Queues in front of the sales-desks of car and bike dealers prove that the Indian consumer has money to spend and having accidentally gate-crashed a private party of the Indian upper crust flaunting their wealth in a hotel that charges $350 and more per night I am baffled by the easy-going lifestyle of those transforming the Indian subcontinent from a poorhouse into a powerhouse.
While I have always harbored the suspicion that India may surpass China one day - simply for the fact that Indians can strike their deals in the lingua franca of this world, English - intense discussions with my friends at Business & Economy, India's biggest econ magazine opened my eyes for the immense intellectual potential that is surfacing here. Where else in the world could I have met 21 year young MBA's that already have a track record of successful ventures with more than a handful of exciting and unique projects waiting in their drawers for short- and medium-term realization? I am proud to be a member of their team of exclusive columnists that is made up of such controversial and well-known thinkers like Noam Chomsky, Marc Faber, Thomas L. Friedman, Jeffrey Sachs, Joseph Stiglitz, Jack Welch - and Toni Straka
An openness in discussions I have always missed in other Asian cultures seems to be the visible expression that Indians want to work with and for the rest of the world.
While the hand of government can still be felt in many areas - blocking progress by unnnecessary regulations that mainly secure the jobs of government employees - India still has come a long way.
Some Micro Impressions
  • 25 years ago it was the norm to wait 8 years for a telephone line and a 3-minute international call was $5. Today it took me 15 minutes and less than $20 to get a SIM card for my mobile, 500 minutes local talk time included (international calls are 30 cents per minute, cheaper than in Europe.)
  • 25 years ago Indian airways was the sole domestic carrier. Today you can choose between 10 private and low-cost carriers.
  • 25 years ago there was no Coca-Cola. Today environmentalist groups may succeed in a new ban of the brown liquid because of pesticide levels that exceed Western standards.
  • 25 years ago it took an hour and up to 17 forms to cash a travellers cheque. Today it is done in less than a minute.
  • 25 years ago a typical lunch cost 5 Rupees or a half-dollar. Today it is 25 Rupees - or still a half-dollar. Inflation! What inflation?
  • 25 years ago there were no foreign brands and Indians had the perception that all locally made goods were inferior. Today you can get whatever you want - and Indians have found out that foreign does not always mean better. A long list of Western and Japanese companies that have failed to satisfy the needs of one billion incredibly quality-conscious consumers and consequently faltered shows that Indians cannot be fooled for long.
  • 25 years ago I could not have ordered a Tanqueray & Tonic but only “3 Star Whisky” that made you blind. OK, attribute this to my holiday mood.
Some More Cool Facts About A Hot Economy
India's middle class now numbers 300 million or about the same as the whole US population. Middle class is defined by having a monthly income of 5,000 Rupees or roughly $110. The line of poverty is drawn at 875 Rupees for a family of four per month!
Considering minuscule price levels - I hired an air-conditioned taxi all day long for meetings and sightseeing for 650 Rupees or less than $15 - this money can go a long way. If you wonder how taxi rides can be so cheap I point you to the use of liquefied natural gas (LNG) that powers all public transport and also helped lift the veil of smog from most parts of Delhi which is also called the garden city.
Although 400 million people lead a life on the edge of marginality without access to health services - and education - prime minister Manmohan Singh knows that he and his government have to strive to improve their living conditions to keep this country as peaceful as it is.
Never mind the travel warnings of the US embassy here and the tight security around Independence Day celebrations on August 15. Nobody here is anti-American but it is certainly a different story when talking about the changes to the world the Bush administration - here widely considered as fascist - has brought.
Indians get enraged that the USA currently tries to block their adavances in nuclear power energy production. Indians have a hard time to understand why Pakistan - haven for Islamic fundamentalists like the Taleban - can proceed with all its nuclear ambitions and India should be deprived of the cheaper energy it urgently needs to stay on the path of peaceful economic expansion. I have a hard time too to understand the reasond behind this issue.
Why are Afghanistan and Iraq being bombed back into medieval times while the so called ally Pakistan goes as unharmed as Saudi Arabia, home to 15 of the 19 terrorists alleged to have conducted 9/11? Never mind the fact that the US government has not come up with an explanation how kerosene burning at 900 degrees Celsius could melt the steel pillar of the WTC's which had a melting point some 500 degrees higher. As long as pigs can fly we have to believe the official story.
Energy is a major issue as frequent blackouts - called brownouts here - remind you several times daily that India lacks a couple of gigawatts. Although substitute generators do a wonderful job - my computer never crashed - they unnecessarily add to the cost of doing business. As probably do the armed guards posted next to every ATM.
Investing In India
Looking at this amazing country from an investment perspective I feel tempted to allocate more funds for Indian share purchases. Keeping a macro view I have been invested in India since early 2006, sharing all the joy when the Sensex, India's leading stock market index, raced to all-time highs and now sharing the fears that higher interest rates in the wake of energy-induced inflation may bring the advance to an intermediate halt. But hey, in the long term we are talking one billion consumers, most of them still craving for the basics of a 21st century life.
Indians themselves see it more relaxed, although, and they have every reason for it. A centuries-old tradition to buy gold as a store of value - heavily subsidized by the gold sales of Western central banks - cushions recent paper losses on the Mumbai (formerly: Bombay) stock market. The figure will never be available but I assume it can be safely bet that no other nation's populations holds as much gold as the Indians do, having snapped up more that 600 tons of gold in the last years. And now they are moving into platinum as well, I hear.
Allright, before I get too agitated and apply for a work permit I finish here and retreat to my Yoga course in the vicinity of the Dalai Lama's home in Dharamsala. The computer stays here in Delhi. Namaste.

Summer Break

Thursday, August 10, 2006

Although a surge in market moving events these days will make it difficult, it is this time of the year where I will have my annual news de-tox in the 4 weeks to come. I'll be back in September.

Holi festival of colours

ECB Steps Up 0.25% - Elevated Inflation To Last For A While

Thursday, August 03, 2006

With its 4th step, bringing the leading Euro overnight lending rate to 3%, the European Central Bank (ECB) has followed its mandate to combat inflation in the Euro area. It has every reason. In his remarks ECB president Jean-Claude Trichet not only repeated his warnings on the dangerous impact of record oil prices and runaway money supply growth, he also changed his inflationary outlook:
"Turning to price developments, ... annual HICP inflation was 2.5% in July 2006, unchanged from June and May. In the second half of 2006 and on average in 2007, inflation rates are likely to remain above 2%, the precise levels depending very much on future energy price developments."
Before, the ECB had seen inflation return to a level of not more than 2% in 2007. It could be significantly more, concedes the ECB.
"Risks to the outlook for price developments have augmented and include further increases in oil prices, a stronger pass-through of past oil price rises into consumer prices than currently anticipated, additional increases in administered prices and indirect taxes, and - more fundamentally - stronger than expected wage and price developments owing to second-round effects of past oil price increases at a time of gradually improving labour markets."
Euro money supply growth shows a lot of inflationary potential too, hovering above 8% for M3 and 11% for M1 this year, continuing an up-trend that began in mid-2004. The ECB has failed to meet the M3 target rate of first 4% and now 4.5% since the start of the Euro. Currently consumers are sitting in the driver's seat of the almost stalled Euro economic bandwagon. Says the ECB:
"Looking at the counterparts of M3, the expansion of credit to the private sector remains the main driver of monetary dynamics. On an annual basis, loans to the private sector as a whole have continued to increase at double-digit rates over recent months, with borrowing both by households and by non-financial corporations rising rapidly. Ongoing strong lending to households continues to be explained, in particular, by borrowing for house purchases. The dynamic growth of money and credit, in an environment of already ample liquidity, points to increased upside risks to price stability at medium to longer horizons. Monetary developments therefore require careful monitoring, particularly in the light of strong dynamics in housing markets."
It appears as if the ECB will have to steer through the same rough seas of economic indicators as the Fed.
Most notable is the shift in the timeframe. Until now the ECB had seen all problems panning out short-term. Oil prices on a permanent plateau have extended this perspective to medium-term worries.
The difference between official inflation figures and the prices rises every European feels painfully in his wallet - first filled with credit - will not make the ECB's task any easier.

The Mogambo Guru - Gold Is My Only Hope

Wednesday, August 02, 2006

Readers in Vancouver can ease up again, now that the Mogambo Guru has returned from a week of loitering the streets of this pretty city. Get your weekly dose of stern warnings that the money bubble will end like all bubbles.

Gold Is My Only Hope In The Coming Financial Crash
by The Mogambo Guru
So I got back home from the Agora Financial Wealth Symposium in fabulous Vancouver, where everybody was real nice to my face, although I am pretty sure they were plotting things against me when my back was turned. But since I couldn't prove anything, I was in a particularly good mood, which was unusual, in that my speech was unexpectedly cut short by 25%, due to the Case of the Mysteriously Disappearing Soundman.
But even THAT I turned to happy advantage when I realized that I could still use the unused 25% last part of my speech (where I reveal the secret of immortality and eternal youth), another day, another time, another place, perhaps on another planet. So, to paraphrase Barbara Billingsley in the movie Airplane! who was similarly rebuffed when she offered to translate English to Jive, "Chump don't WANT no immortality and eternal youth, chump don't GET no immortality and eternal youth!"
Gold, Silver, Oil Are Doing Okay, So I Am Doing Okay
And besides, gold is doing okay, and silver is doing okay, and oil is doing okay, so I'm doing okay, and I'm feeling pretty good until that old, familiar terror started to again overcome me as I noticed that Total Fed Credit was down by $4.8 billion last week, which meant that $4.8 billion was not used to extend more loans. This is the ugly reality of the new "good news/bad news" economy: Growth can only come from creating more credit, which creates more debt and the off-setting increase in "money". This creation of debt is how the banks create more money, which inflates the money supply some more, which is defined as monetary inflation, from which inflation in prices inevitably follows.
Bank Credit Surges Into Two-Digit Growth
Oddly enough, against this $4.8 billion drop in Total Fed Credit, Doug Noland says that the trend of credit creation is still waaaAAAaaay up, as "Bank Credit surged $35 billion last week to a record $7.980 Trillion, with a y-t-d gain of $474 billion, or 11.3% annualized." That is a lot of monetary inflation, and a lot of price inflation is sure to follow.
And sure enough, after all these months and years of constant increases in bank credit, Bloomberg reports that the new Commerce Department release showed that inflation is getting worse, and that "In the second quarter, the government's core personal consumption expenditures index rose at an annual rate of 2.9 percent, the fastest since a 3.2 percent pace in the third quarter of 1994." Twelve years ago!
Biz.Yahoo.com reports it as "(AP) - Heightened fears of inflation prompted investors to sell off stocks Tuesday as a key price index climbed to an 11-year high. While inflation-adjusted consumer spending rose a sluggish 0.2 percent in June, the Commerce Department also reported that consumer prices are up 2.4 percent year over year, the highest rate of inflation since April 1995."
Inflation Highest In 11 Years
From an encrypted Mogambo Free Anarchist Radio News editorial we read "While 2.4% inflation over last year is, indeed, 'the highest rate of inflation since April 1995', as claimed, it is also the biggest, lying piece of crap in history, as inflation is MUCH more than that! Much! In fact, real inflation is now so bad in comparison to the official government numbers (audience shouts out "How bad, Mogambo?") that The Mogambo, in his recent radio address, actually said ''What a load of lying crap! Inflation is much worse than that!', which accurately and eerily presaged this new government estimate of inflation, which is, in itself, perhaps the very lying piece of crap that The Mogambo, in a flash of inspiration, was referring to!"
And the result is much more sinister than that in effect, as Ty Andros of Tedbits newsletter writes, as this all results in a situation where "All loans and bonds are mis-priced, robbing the lender of his or her true returns." And who is the lender that is getting cheated? It is us! American businesses and people! We're going to get screwed! Gaaahhh! Now you know why I am screaming my guts out!
And while spending is up a little and wages are up a little, it's not enough, as the report also showed that "the savings rate rose to minus 1.5 percent from minus 1.6 percent in May. A negative rate suggests consumers are dipping into savings to maintain spending."
Americans Still Spend More Than They Make
Paul Kasriel of Northern Trust reminds us that "These deficits are not just records in absolute terms, but relative to their disposable incomes as well - e.g., 6.15% of disposable income in the first half of 2006."
So, for the average American, spending only out of disposable income is not enough, and they are still spending more than they make. If the average American is like my family, it's never enough, and it will never be enough, no matter how much money you give them, and they are always whining "More! Give me more money or I will be more hateful than I am now!" and pretty soon you discover, the hard way, with scars to prove it, that they were deadly serious about that, too.
And then one day you realize that providing for your idiot family is a losing proposition, and you decide to cut your losses by running away to another city, in the middle of the night, with all the money and liquid assets in the trunk of the car, where you change your name, pick up a little plastic surgery and liposuction, and try to salvage at least a glimpse of happiness in these last few remaining years of your miserable life. Since this roughly corresponds to our collective American plight, I wonder when foreigners, who are now providing for us while we relentlessly clamor "Give us more of your money! More! More!", will similarly cut and run?
Well, it ain't last week, as foreign central banks gobbled up a huge, strangling, choking $11.2 billion mouthful of American debt last week, taking them to a new record. So it is really starting to get spooky around here.
But screw these foreigners! It is inflation that I am yelling about! Perhaps you will find it particularly instructive if you watch my lips when I tell you that it is inflation in prices that causes societal misery, as people listening to their children crying in hunger usually starts to wear on your nerves after a very short while. And that is why the Founding Fathers were careful to write into the Constitution that money shall be ONLY of silver and gold. To prevent inflation!
But the Founding Fathers are just a bunch of old, dead white men, while I am an old, live white man carelessly toying with a loaded, large-caliber handgun, so perhaps you should listen to me, and I, too, say you can only prevent price inflation by preventing monetary inflation, which you get when you let banks create excess money and credit out of paper and electronic digits. But since nobody can create gold out of thin air, you automatically prevent price inflation by preventing monetary inflation!
The first time I ever heard of this idea of benefits theoretically derived from constantly increasing the money supply, by constantly increasing debt, I made an almost fatal Mogambo mistake of analogy (AFMMOA); I figured, using this terrific logic, that the more weight I gained, financed by increasing debt, the more my family would love me! I admit that I was, at the time, desperate for even a flicker of a chance of getting any love from that crew of twisted, hateful boneheads, and was willing to try anything if it would shut them up for five lousy minutes.
To make a long story short, I learned that getting to be really, really obese is, alas, not a way to make your family love you. And I further discovered that when they threw objects at me, they apparently couldn't miss a target that big.
Banks Suck In Record Volumes Of Treasuries
My hands are trembling slightly as I remember all of this, but that is normal. Then my gaze swept across a table in Barron's, and my fear turned to that old familiar anger, as I saw that the banks belonging to the Federal Reserve system (nearly all of them), sucked up $15.5 billion in U.S. government securities last week! This takes their total to $1.217 trillion, which is back to the historical high point, first achieved about this time in 2004, and then again in 2005.
So with a sigh, I direct your attention to a chart of government securities owned by the banks which shows that it has, overall, mostly hit a plateau in 2004. Varying a little bit up and down, we are now, for the third time, at the upper end of that range.
Since reserves in the banks have not changed (which even today are only $41.5 billion, and actually below the average since 1997). In fact, to show you how precise I am, I'll tell you that total reserves in the banks have been bouncing along like this since hitting the lows of under $39 billion in early 2001.
Then I groaned aloud when I noticed that the money supply (as measured by M2) is apparently falling, too, which is completely predictable, as there has been a widely-reported slowdown in the expansion of credit for mortgages and business investment.
All of this stuff is whirling, whirling, whirling around in my head as I pretend to listen to my stupid wife and nasty, bratty children telling me how wonderful it had been all week, and how they discovered, while I was away, that they enjoyed life after all. I think they were implying that they want me to go away again, or die, or both, when they said "Why don't you go away again, or die, or both?"
But this is reduced to mere background noise when I read that the "movement" to increase the minimum-wage is heating up. And this time it is not just the stupid, brain-dead Democrats that are leading the Big Parade Of Loudmouth People Who Are So Completely Ignorant Of The Rudiments Of Economics That Something Must Be Seriously Wrong With Them. Standing so close beside them that they are getting each other's cooties are the now-loathsome Republicans, demonstrating either a) things economic are now so completely desperate that they are willing to do, or say, anything to temporarily forestall us from drowning in the ocean of disgusting drool and slobber that comes from being a nation of economic and Constitutional imbeciles, or b) Republicans are now actually as stupid as Democrats, which, given the astonishing dumbing-down of the American school system over the last 50 years, is probably (Occam's Razor-like) the simplest and best explanation.
But I will admit that people needing higher wages because prices are higher is a valid point, but that is not the issue, as sad a tale as it is. The real issue is why the prices are higher in the first place, making their erstwhile perfectly-satisfactory wages suddenly inadequate. So I casually ask the class the innocent rhetorical question, "Why do people need higher wages?"
Well, the place exploded in a simultaneous shout "Because things cost more, you stupid Mogambo moron (SMM)!" and then they all joined together to laugh at me!
Inflating Money Supply Brings Price Inflation
My eyes stinging with tears, I took out my Mogambo Educator's Daily Logbook (MEDL) and made a quick note to myself ("Seek revenge: Fail everybody and torment their parents for bribes!"). Then I fired back, my voice cold and heartless, "This is the effect popularly called 'inflation.' And why do things cost so much more?" Instantly, all their hands flew up, as they all know the answer by now: Price inflation follows inflation in the money supply, and the hateful, stupid Congress allowed the hateful, stupid Federal Reserve to act completely irresponsible in that regard since the 1960's.
But I ignore them, and go on "And when inflation in prices gets so bad that you are forced to buy less stuff, then that is popularly called…" and before I could even finish the sentence the entire class again yells out "A fall in the standard of living!" and then they all high-fived each other and laughed some more. I sense that my lectures have become somewhat predictable, so I pull down my zipper so everybody can see my Spiderman underwear. I laugh as I think to myself "Predict THAT, you little bastards!"
Over the sounds of disgust (mostly "ewww!" and gagging up vomit), I blithely continue, as if I did not hear them, "a fall in the standard of living." I don’t tell them that a reduction in the standard of living results in a constant clash of cultures (The family: "We're starving and dressed in rags! And we need medicine, too!" Me: "Your point being what?").
A Fall In Living Standard Is Inflation
And a fall in the standard of living is, in effect, inflation. It's a horror. In fact, inflation is such an economic horror that it is the only economic variable that the Founding Fathers tried to control in the Constitution! They tried to prevent inflation by preventing the government's ability to create excess money. Why? Because inflation should be, now and always, zero.
And if the economy is operating perfectly, inflation would be less than zero! Prices would always be slowly dropping, year after year, as the promise of productivity and competition paid off in more goods and services, resulting in higher employment, but also with lower prices! A huge rise in the national standard of living!
But since the filthy, traitorous Supreme Court keeps on allowing the money of the United States to be mere paper and promises, instead of gold and silver as literally required by the Constitution, and as long as the filthy, traitorous Congress allows the Federal Reserve (an un-audited private bank, partially owned by foreigners!) to create excess money and credit (that they own!), we will suffer from inflation, wailing and crying the whole time, or at least listening to The Mogambo wailing and crying the whole time, interspersed, as it usually is, with obscenities and vague death threats.
The minimum-wage worker can't make ends meet now because things cost too much to be able to afford them. So (and here is where The Mogambo laughs and laughs and laughs (LALAL) at the sheer stupidly of mandating higher wages), businesses are now required, as a result of paying higher labor costs, to charge their customers higher prices to make up for it! Hahaha! Higher prices, caused by requiring higher wages, is the solution to higher prices? Hahahaha!
This is the genius of the electorate? Instead of stopping inflation by reining in the Federal Reserve, we are going to make the inflation situation worse by mandating higher wages? Hahahaha! What suicidal idiocy! It makes you wonder why anyone has any respect for democracy at all! Hahahahaha!
And there are a hell of a lot of people who do not have jobs, and therefore do not have the ability to get higher wages, who are going to suffer. One of these groups is the criminal class. When prices go up, organized crime's net profit falls, and you don't have to see many movies starring Al Pacino before you realize that those guys don't take that kind of news lightly.
New Mogambo Conspiracy Theory Of The Week
Therefore, as my new Mogambo Conspiracy Theory Of The Week (MCTOTW), the reason that California is so hot to raise taxes on cigarettes to about $7 a pack is that there will be a boom in smuggling, as Canada has found out, which has contributed to a drop in the sales of legal smokes by almost 9% in the last year since they instituted such a tax.
So the proposed enormous tax on cigarettes is really just a "New Jobs for the Smuggling Industry" government program, giving the unemployed-and-desperate something to do to get some cash, as dealing in drugs and prostitution won't even make ends meet anymore.
Take Part In The Mogambo Game Show
It's time for Mogambo Game Show (MGS)! Today, we first tune in to Paul van Eeden, in his essay "Bells Ringing" as he says "They say the stock exchange does not ring a bell at the top of the market. Well, I can hear all sorts of bells ringing: when investors buy stocks because they believe the economy is slowing down, it is a sign that______"
Now, to win the fabulous prize behind curtain number one, you have to fill in the blank! Did he go on to say
  • A., "we are a nation of idiots"? Or
  • B., did he say "our money is being invested by idiots"? Or did he say
  • C., "we have reached the top of the market"?
The answer is C, but I am sure that if you gave him a moment to think about it, he would join me in chanting "A and B! A and B! We're freaking doomed here!"
John Stepek of the Money Morning newsletter makes the interesting observation that, in Britain, "lenders have now stopped offering 0% interest rates on credit cards." How that I think about it, I'm suddenly not getting any offers like that anymore, either!
Anytime a government allows a central bank to create excess credit and money (and they are all doing it!), it is a good time to buy gold, especially if you want to make a lot of money in the short-term. Which I do. Unfortunately, over the long-term, on the average, you will only preserve your purchasing power by owning gold. But considering the alternatives, (all losers) gold is the best-case scenario!
And when a desperate people get a bad case of Mogambo Gold Fever And Boogie-Woogie Flu (MGFABWF), as all previous generations have done after their idiot governments created an economic mess like we are in, and they all start running to the Mogambo Triad Of Power (MTOP) of gold, guns and good grub, and start running away from the U.S. dollar, then the price of gold, as priced in U.S. dollars, will soar.
Downside Manipulation In Silver
And not just gold, but silver, too, as Theodore Butler, writing at InvestmentRarities, has an interesting perspective on the manipulation in the silver market. He writes "The silver manipulation is a downside manipulation, which is very rare." Hey! That's right! Most manipulation in prices are to the upside! I am delighted at his pointing out the novelty!
The novelty ends, however, when he says "But as bad as manipulations are, when they are terminated, the market moves dramatically in the opposite direction of the manipulation." Mr. Butler sees the blank expression on my face, clearly communicating that I am stupid and confused, so he adds, helpfully, "Since silver has been manipulated to the downside" and here he pauses to stare at me while the words sink slowly into my tiny little brain. I am looking back at him and thinking to myself "Wow! The way he is staring at me, this must be important! What did he just say? Something about silver? Will the price of silver go up or down or something?", a befuddlement which he instantly clears up when he says "the big move will be to the upside when it is resolved."
And if that is not enough to confidently predict higher prices for silver for the rest of your life, it gets better when he says "The increase in oil and energy prices greatly increases the cost of mining, melting and refining." I am suddenly mesmerized, as higher costs means producers must charge higher prices, just like in the minimum-wage thing!
Just as I am wiping the Mogambo Drool Of Greed (MDOG) from my chin about the profits to be made in silver as the price is inexorably forced higher and higher, he makes it all the more delicious when he says "Peak production concerns seem to be creeping into a broad range of commodities. In other words, the 'easy' oil, copper, zinc, etc. has already been found and exploited. New mineral discoveries are smaller and more expensive to develop and may not keep up with current production levels. Silver is no exception."
Fractional Reserve Oil At The NYMEX
And speaking of commodities and the impact of rising oil prices, generous reader Laura S. sent me a report by the Commonwealth of Australia, "Reference: Australia’s future oil supply and alternative transport fuels." In it, we read of a Dr Samsam Bakhtiari saying "Crude oil is a commodity unlike any other. It is simultaneously a strategic raw material, a unique industrial feedstock and the most essential of fuels." Perhaps from this you get such curious results. "For example," he writes, "you have no free market in oil. Naturally, you can go to the NYMEX stock exchange and buy as many barrels as you want at the price of $74 now, but these are paper barrels." In short, fractional-reserve oil!
This suddenly reminded me of the glut of fractional-reserve paper silver, and fractional-reserve paper gold, and fractional-reserve paper commodities, and even fractional-reserve paper paper, which makes for a gigantic short position in all kinds of things. I was going to bring these eerie, spooky and ominous parallels up to Dr. Bakhtiari, but he just smoothly went on, saying "If you try to buy 10,000 barrels a day of real oil, of genuine barrels, you will have enormous problems getting that much oil on a regular and sustainable basis. So that is one of the problems that we will encounter in the medium term."
He goes on to say that all of this "all things being equal" and linear extrapolations aside, "we cannot accept the projections of certain institutions like the International Energy Agency in Paris, which predicts that the world will be consuming 118 million barrels per day in the year 2030 as realistic, because I cannot see how the world can get over 81 or, say, 82 million barrels per day right now, let alone in the future."
Here is where video news footage showed that I jumped to my feet, startling everybody, and shouted "Hahaha! Exactly right, good doctor! There haven't been any big new discoveries of oil in a decade or more, and yet total oil consumption is going to be able to grow and grow and grow until it is 50% higher in 24 years? Hahahaha! Good luck, world, and good point, doc!"
The audience erupted in anguished cries of "Shut up, you stupid Mogambo idiot" and angry demands that Dr. Bakhtiari rip me a "new one." But, being the classy guy that he is, he controls his rage, and calmly summarizes as "So you have an enormous discrepancy between what these institutions publish and what we believe in, whether it is in reserves or whether it is in production of crude oil per day."
And that all assumes at least some growth in oil production, and the good doctor does not agree with even THAT modest assumption. Almost as an afterthought, he ominously says "I believe we are in decline."
Maybe all this has something to do with Doug Noland, in his Credit Bubble Bulletin at PrudentBear, from whom we also learn whether or not your heart can stand terrifying shocks, who reporting that last week "the AMEX Oil Index traded to a new all-time high (up 21% YTD). The Philadelphia Stock Exchange Utility Index also traded to a record high (up 7.3% YTD)."
My Sensitive Mogambo Nose For Danger (SMNFD) catches a whiff of the overpowering stench of a looming disaster writ large, as inflation in the price of energy is, if I may lapse into official theoretical economist-speak, the "Revenge Of Stark Reality" theory, which, if you are even passingly familiar with the term "revenge", is all you need to know to be afraid and paranoid, as you should be. Ugh.
****Mogambo sez: Gold, silver and oil have been a winner for the last three years, and they will surely be a winner for the next three, too. And almost certainly more.
So keep loading up with them. One day you will be very, very glad (VVG) you did.

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. The "angriest guy in economics" can be emailed at RichardSmithGroup@verizon.net.

Paulson Sees Energy Security As Biggest Threat In Debut Speech

Tuesday, August 01, 2006

Let the new US Treasury Secretary Henry Paulson speak himself:
"The global demand for oil is outstripping supply and we as a nation have a long-term structural problem:
  • We consume much more oil than we produce.
  • We are too dependent on foreign sources of oil.
  • And too much of it comes from troubled parts of the world."
In his debut speech Paulson whipped up a lot of hope, based on the innovative forces driving the US economy long-term, but little in terms of impromptu improving perspectives.
While Fed chairman Bernanke failed to remind Congress on fiscal deficits, former Goldman Sachs CEO Paulson ignored inflationary dangers and the housing bubble in his speech entirely.
Don't think your troubles are over after the gas pump. Paulson cited social expenses as the biggest problem to tackle, which makes two long-term structural problems in my count.
"The biggest economic issue facing our country is the growth in spending on the major entitlement programs: Medicare, Medicaid, and Social Security. The cost to the federal government of these three programs, without fundamental reform, is projected to more than double, from the current level, 8 percent of GDP, to nearly 17 percent by 2060."
More longer-term challenges? Get another serving:
"From the position of strength we enjoy today, we can address the longer-term challenges that will face our economy in the years to come. These include:
  • Reforming entitlement programs.
  • Advancing energy security.
  • Maintaining and strengthening trade and investment policies that benefit American workers.
  • And addressing issues of wage growth and uneven income distribution."
I count 4 long-term structural problems by now.
Paulson will not be a hands-off Treasury Secretary, he said:
"I have always tried to live by the philosophy that when there is a big problem that needs fixing, you should run toward it, rather than away from it. That is one of the reasons I decided to come to Washington, and that is the reason I admire the President's political courage and willingness to address entitlement reform. The entitlement challenge is difficult, but it is fixable. And given our expanding economy we can approach the issue from a position of strength."
Paulson may find himself in a marathon race that starts with a kow-tow to Bush and his tax cuts. His optimism on the rejuvenating forces of the American people was not shared by former Fed chairman Alan Greenspan who did not tire in warning that the educations system no longer provides the economy with the needed skilled workers.
Don't Worry, Be Happy
Earlier he had described the economic slowdown as a return to more sustainable growth rates. No reason to worry in Paulson's opinion:
"We have to be careful not to put too much emphasis on any one quarter, and remember that this was an advance estimate that will be revised."
As this is true to a certain extent I still cannot see any improvement as all economic indicators are in a negative trend which I worry about. One abysmal quarter may be followed by another and another ... and pretty soon we may find the USA in a recession ignited by a drastic slowdown in consumer spending that will come on the heels of higher mortgage rates.
Gold Shoots Up, $ Down
Precious metals markets read the same negative tone. Gold advanced $ 13 to $647 an ounce and silver raced from $11.37 to $11.70, scratching the resistance on the weekly chart. On weekly charts it looks as if gold could see one more downleg before the Indian wedding season will offer physical support as it does every year.
Paulson's commitment to a strong dollar may backfire. "Currency values determined in open and competitive markets" are not exactly what the ailing greenback, propped up by mysterious and most reliable 800-pound Treasury buyers operating out of Caribbean offshore havens, needs. And a good dose of inflation would save the Treasury a lot of real money when trying to pay US debts.

A Guaranteed 130% Profit Waits To Be Realized

Monday, July 31, 2006

US pennyUS Nickel

That Nickel and Penny jar in your kitchen is slowly becoming a money-spinner. John Trudgian from Williams Inference alerted me today that pre-1981 pennies now contain metal worth 2.3 cents, guaranteeing you a 130% profit when you bring it to the smelter instead of the candy store (are there still candies for a penny around?)
A nickel is worth 6.17 cents to the smelter at current metal prices. "The USA now has 2 of the 5 coins they make for general circulation wherein the metal value exceeds the face value. So we shall expect to see proposals for zinc or aluminum Nickels before long," says Trudgian.
Copper currently trades at $3.52 per pound, Nickel at $12.01 and Zinc at $1.49.

Euro-Inflation Remains At 2.5%; Current Account Deficit Doubles YOY

-- UPDATED --
ECB president Jean-Claude Trichet and his fellow council members may be in the position to announce another pause in the rate-hiking process after their meeting on coming Thursday. According to Eurostat's consumer price flash estimate inflation in the Eurozone remained stable at 2.5% in July.
The Eurozone economy could certainly need such a shot in the arm. Eurostat today also released figures on a dramatically growing current account deficit. "According to the latest revisions, the EU25 external current account recorded a deficit of 36.7 billion euro in the first quarter of 2006, as compared to a deficit of 17.1 billion in the first quarter of 2005 and a deficit of 29.1 billion in the fourth quarter of 2005."
The worsening is the result of a net goods trade deficit of 47.8 billion Euros (Q1 2005: 20.8 billion Euros) whereas the 11.5 billion (Q1 2005: 9.3 billion) surplus in services stems mainly from financial services.
The Eurozone runs current account surpluses with the USA (32 billion Euros), Switzerland (1.5 billion Euros) and Canada (2.9 billion Euros.) Deficitis occurred in trade with Japan (minus 6.1 billion Euros) and "other countries" (67.1 billion Euros.)
Eurostat will release GDP growth rates for the second quarter of 2006 on August 14. A second estimate for growth in Q1 2006 from July 12 had shown growth of 0.7% compared to Q4 2005, well within the means of statistical error.
Low growth or no growth - place your bets.
I'd rather tend to project another growth figure with a zero in the front for Q2 2006 as private consumption does not get back on its feet in Europe due to high savings rates - as much as 10% of disposable income in Austria and Germany - and permanently high energy prices.
Consumers may want to run for even better cover in the months ahead as they will be burdened by rising energy prices and VAT hikes in Germany and Hungary from next year.
Politicians Fight For Influence In The ECB
Although summer heat has brought life in Europe to a standstill market chatter circles around EU initiatives that would give EU politicians another forum to press their wish for stable intererst rates. According to the chatter the EU finance ministers want to establish a regular meeting session just before the meetings of the governing council. Politicians and industrialists have been speaking out this way since last year, hoping that historically low rates may help lifting the EU economy out of the doldrums. They are disregarding inflationary dangers.
it is believed that Trichet completely opposes such a high level forum as it would compromise the mandate of the ECB which is only responsible for keeping inflation low but has no mandate to stimulate the economy.
UPDATE: Jim Picerno has a highly recommended post, looking at the expansive trend in US money supply M2; now that we do not have M3 around anymore. Picerno observes a contradiction: Both M2 and interest rates are rising, a more than unusual anomaly as economic theory says that higher rates lead to lower liquidity.
My two cents are the same as always: It never worked to try to print your way out of problems. I want to add that I consider the unusually high US treasury purchases from the Caribbean banking centers in recent months are quite a mystery. Purchases in the billions by "anonymous" buyers contradict the knowledge that the USA has been sifting through SWIFT (scroll down) money transfer data. Why is it that US authorities never manage to find out the securities buyers of the really delicate transactions, e.g. the put options purchases ahead of 9/11?
Back to the Caribbean: Wouldn't it be an all too easy game to loan unlimited amounts to those Caribbean operators in order to prop up the dollar and keep yields low? I have no proof, but my mind keeps wandering...

Now This Makes A Good Read

Wednesday, July 26, 2006

In the absence of the Mogambo Guru who is probably somewhere hangin' out in ill-reputed bars I came across this fantastic article by Lew Rockwell Jr., president of the Mises Institute. Headlined "The Case for the Barbarous Relic" Rockwell has produced an intriguing story highlighting the dire consequences of what is going wrong in the USA which I highly recommend.
Click here for the article and enjoy your lenghty Wednesday reading.

NYT: SEC Wants More Control On Hedge Funds

Wash me but don't make me wet. The Securities and Exchange Commission (SEC) has made a half-hearted plea to the Senate Banking Committee on Wednesday, asking to adopt measures to regain the authority it lost a month ago, when a federal appeals court ruled that the SEC could not require hedge funds to register, reports the New York Times.
Hedge fund is a new name for an old game. In the 1920s they were called investment pools and the most important denominator of the two vehicles is that they lack any regulation, making them prone to cut corners in an investment climate that has changed since 2000. According to the NYT hedge funds nowadays account for as much as 30% of trading activity. It is estimated that the almost entirely unregulated investment pools manage more than $1 trillion in assets.
While all this is a recipe for market manipulation, SEC chairman Christopher Cox has declined to ask Congress for for additional authority to police the industry.
From the NYT:
Among the measures Mr. Cox will recommend to the commission is changing the rules on who can invest in hedge funds, increasing the net-worth threshold for an individual or couple to $1.5 million or more from $1 million today.
"I am concerned that the current definition, which is decades old, is not only out of date but wholly inadequate to protect unsophisticated investors from the complex risks of investment in most hedge funds," he said.
But when pressed by senators about whether he needed more authority to regulate hedge funds, Mr. Cox replied, "I am not prepared to say yes or no. Our review of our different authority is still ongoing."...
...The commission has the authority to investigate any kind of fraud it suspects, but the court's decision to throw out the registration requirement limits its ability to conduct routine exams and improve its understanding of the industry.
Some lawyers said Tuesday that they were not surprised that Mr. Cox did not ask Congress for more authority.
"I think there is some reticence by regulatory agencies overall to admit a need for, or affirmatively ask for, help from Congress,” said Jim C. McCarroll, a partner at the law firm Reed Smith who focuses on hedge funds and funds of hedge funds. "They prefer to exercise their individual regulatory authority before seeking a legislative fix."
Mr. Cox explained some of steps he would ask the commission to take to reclaim some of the authority it had lost when the court declared its registration requirement invalid.
For example, the Investment Advisers Act has strict rules on what books and records must be kept to back up performance data. The registration rule required hedge funds to have those books and records after the funds registered, but exempted them from having them for periods before they registered. Mr. Cox said he wanted that exemption to be reinstated.
Mr. Cox also said he would introduce a measure to permit the commission to sue managers on behalf of investors in the fund.
Mr. Cox said 10 hedge funds had withdrawn their registrations since the appeals court decision, but more had registered. "Although these are early returns and may not be indicative of the final outcome, we have actually experienced a net increase in the hedge fund registration," he said.
The Treasury Department, meanwhile, has formed a group to examine potential risks in the industry, including the exposure that many large banks could have to certain trades. The group, which first met a few weeks ago, will work with members of the hedge fund industry and the banks who manage their accounts.
The 1998 near-collapse of the hedge fund Long-Term Capital Management was invoked several times during the hearing.
In his testimony, Randal K. Quarles, under secretary for domestic finance at the Treasury Department, asserted that the conditions that had led to that spectacular near-collapse were not as prevalent today.
"There is reason to believe there is less risk posed by the hedge fund industry than in the past," he said, including less leverage, less concentration of risk and more awareness by the banks that manage the hedge funds' accounts.
He said one risk he saw was embedded leverage, or bets that hedge funds have taken with derivatives that are less apparent on the balance sheet.
I think it is obvious that leveraged hedge funds/investment pools pose a risk to markets in the climate of an inverted yield curve. Why is it that the USA - so eager to police each and everything around the globe - takes a hands-off attitude towards these potential market manipulators?

Global Madness Explained In 4 Minutes

Tuesday, July 25, 2006

This video is self-evident. How much did you give this year? Hat tip to Past Peak and compliments to Ktkuda.

FOMC Minutes Talk Shop

Friday, July 21, 2006

What a difference to Fed chairman Ben Bernanke's testimonial the latest FOMC minutes make.
Ahead of midterm elections it is clear that Bernanke's appearance on Capitol Hill was dominated by a strategy of staying out of president George Bush's firing range.
The FOMC minutes from the June meeting sound different altogether. Slowing growth and persisting inflationary pressures put the Fed between a rock and a hard place.
Some quotes:
  • ... growth of economic activity in the second quarter slowed substantially from its rapid first-quarter pace.
  • The expansion of consumer spending softened, and activity in the housing market continued to cool.
  • Gains in nonfarm private payrolls averaged 112,000 over the three months ending in May, a pace considerably below the average of about 170,000 jobs...
  • For the year to date, manufacturing production advanced at a rate significantly below its rapid fourth-quarter growth rate but only a bit below its average pace of expansion since mid-2003.
  • Real consumer spending appeared to be on track to decelerate noticeably in the current quarter...
  • The level of nominal wages and salaries beginning in the fourth quarter of 2005 was revised down considerably, and rising consumer prices held down the gains in real disposable income.
  • Higher interest rates also likely restrained spending.
  • Residential construction activity moderated over the past few months but remained at a historically high level.
  • The U.S. international trade deficit widened in April, reflecting a large increase in imports coupled with a slight decline in exports.
  • Headline inflation picked up in April and May, driven partly by sharp increases in the prices of petroleum-based products.
  • Core price inflation rose less than headline inflation in April and May but above its pace earlier in the year.
  • ...participants observed that housing construction activity had declined notably in recent months as indicated by lower housing starts and permits; moreover, higher inventories of unsold homes, a sharp rise in cancellations of new home sales, and reports from construction companies suggested that the weakness was likely to be extended.
  • Participants also observed that the evidence to date indicated that the slowdown was orderly but were mindful of the possibility of a sharper downturn in the (real estate) sector.
  • The growth of consumer spending had dropped off significantly in the second quarter from a robust pace earlier in the year. The slowdown was attributed in part to higher energy prices and also to a likely downshift in home price appreciation and higher interest rates.
  • All meeting participants expressed concern about recent elevated readings on core inflation.
It appears the FOMC finally acknowledges there are problems with inflation, housing, and consumer spending, given the sharp words with only a few drops of hope in and between.
Confirmed by the weakening trend in economic data the Fed finds itself confronted with the need for the impossible in the run-up to the next FOMC meeting on August 8. Lower growth expectations rub with inflationary pressures nobody sees going away in the short term, which would need a cut and a hike at the same time.
Including seasonal factors like the increased appearance of market drops in autumn I would not be surprised to see the Fed continue its 17 steps long path of 25 basis point advances at the next meeting to be able to offer some temporary comfort at a later stage, once consumer sentiment nosedives.
The rate trend will stay the same and probably accelerate once investors rediscover the meaning of the term real interest.

The Mogambo Guru Smells A Lot More True Inflation

Thursday, July 20, 2006

Had he been reading this blog regularly, the Mogambo Guru would not have to quote from elsewhere to come up with the basic advice to buy what China buys and to sell what China sells. Otherwise we are being presented with such a grim outlook for the future this week, one could not be shocked more by the Mogambo Guru's own appearance in the current heatwave. In case you disagreen you won't be wrong looking for him behind a bottoms-up beer bottle.

Mad About True Inflation
by The Mogambo Guru
The policeman was yelling through the megaphone, "What are you so mad about, Mogambo? Come out of the famed Mogambo Bunker (MB), nice and quiet, with your hands up, and let's talk about it!"
So I fire off another burst of machinegun fire over their heads to recapture their attention, and shout through the gun port, "Don't pretend you don't know about how the Federal Reserve reversed course from their previous outsized $11 billion injection of credit into the banking system, you stinking lying cop! So don't insult me by acting like you were completely unaware that Total Fed Credit fell by $6 billion last week!"
As I am jamming home a fresh clip of ammo, I shout "And what about Japan finally raising interest rates from zero to 0.25%? Rates have been zero for six years, you idiot Gestapo pig!" I squeeze of another long burst.
How could I explain to this government goon squad about the strange and scary perturbations in the flow of economics? Can they even be made aware of such things as the frightening levels of activity in the bank repo market, where $11 billion per day is now expected! With spikes into the high $20's of billions! Per day!
Then I realize how to connect with them! I shout "What about oil, you nasty bastards? The price per barrel is up around $75 a barrel, and the price zooms up and down by a buck and a half a day sometimes!"
And it is not just the money, but that such sudden, wild fluctuations are completely out of character for stable systems. And the terrifying thing about breakdowns in smooth, laminar flows is that a chaotic, catastrophic breakdown soon appears.
At this point everything became confused and chaotic, as suddenly my wife and children were, for some reason, there in the bunker with me, bathed in a strange, wavering light, urging me to heroically shoot it out with the fascist goons and die like a proud martyr to Austrian economics and the gold standard. Suddenly, I awoke!
It turns out that I was only dreaming the whole thing! Whew! But the statistics, my panic and the bullet holes in the walls of my neighbor's houses are all too real, as are their vicious, lizard-like lawyers.
Industrial Prices Up 19.5% YOY
But the slimy schemes of the Federal Reserve are one thing, the paranoid hallucinations of The Mogambo are another, while actual inflation is yet a third thing altogether, making, in all, three. And on that note, and because I don't want you to miss so much as a single syllable, I pick up my Mogambo High-Powered Megaphone (MHPM) and fairly scream through it "The JOC-ECRI Industrial Price Index jumped in July, rising to 130.17 from 128.18! That one-month gain of 1.6% in prices is a lot of inflation in one month! What is even more interesting, if you think that being eaten alive by inflation is 'interesting', is that the index is up from 108.95 a year ago at this time, which is an inflation rate of 19.5%!"
In an odd, almost tangential way, Frank Holmes, CEO and Chief Investment Officer of U.S. Global Investors, has a few words in the annual report, entitled "The Rise of The Chinese Consumer". He writes "China's energy consumption is expected to be 69 percent higher in 2010 than in 2002, according to the Federal Energy Information Administration. That growth rate is five times higher than the estimate for the United States and more than 15 times higher than Europe. China, in the midst of a massive infrastructure build-out, used half of the world's cement and 40 percent of the world's steel last year, according to government statistics."
Now, as a pop quiz, take out a clean sheet of paper. After paying particular notice to his use of the phrase "in the midst of a massive infrastructure build-out", combine that with the statistic that China, alone, was responsible for half the world's consumption of cement and steel (and a lot of other things, too!) last year, to derive the longitudinal extrapolation of this exponential trend to arrive at probable price predictions (PPP) for various assets, upon which we could make a big pile of money (MABPOM) by investing in them.
Congratulations to those of you who demonstrated True Mogambo Attitude (TMA) and contemptuously said "Screw that!" As luck would have it, Mr. Holmes immediately went on to give the answer to that very problem when he said "But because of years of low commodity prices and other factors, exploration and development of these now-coveted resources have not kept pace with global population and GDP growth. That has created an Economics 101 scenario - demand is greater than supply, so prices climb."
And if you are not content with merely owning gold and silver to participate in the general rise of prices, but want the excitement of daily wheeling and dealing and trading to make the Big Money Fast (BMF), then Mr. Holmes has the perfect investment philosophy for you: "Whatever China needs, get long, and whatever they have as surplus, get it out of the way, because China will just dump it."
I can personally testify to this last point. Mogambo Money-Grubbing Enterprises, Inc. (MMGEI) has the distinction of being the only stock in the world that actually has a negative worth, as even one share of this despicable company is considered too many, and people actually take a loss to pay other people to take the stock off their hands. Well, the story is that last week one lousy share of this toxic stock accidentally got misfiled in the portfolio of a Chinese woman, see, and desperate to get rid of it, her hand moved so fast throwing it out that it went through the time barrier! Talk about being dumped! Hahaha! The rest of the story is, with her hand in the future like that, that she can scratch her own butt before she knows it itches! Hahaha! How handy!
Overseas Construction Boom
But Mr. Holmes is apparently not remotely interested in old women scratching their butts or how despicable both my corrupt company and I personally seem to him (and apparently) everybody else, and although I agree with him about the butt scratching thing, he calmly goes on to note that the continued gobbling of resources by China for years to come is written in stone, as "China plans to build 14 express highways, six railways and a dozen new seaport facilities before 2010." In three years!
And it is not only China, but he also says that "India invests 3.5 percent of its GDP on power plants, roads and other infrastructure and the government there is financing 'industrial townships' to promote more manufacturing. Even Bangladesh, one of the world's poorest countries, is building hundreds of miles of highways, as well as schools, water systems and the like."
I jump up and say "Hey! Mr. Holmes! Hey dude! How about an analogy so that we can, you know, like, get a taste of the economic results?" He looks at me with the usual disgust and revulsion, and with a voice dripping sarcasm, asks "Do you even know what an analogy is?" and I say "No, but that was not my question! So do you have an analogy, yes or no, and why are you motioning to the security guards like that?"
Without even pausing for a moment's reflection, he says "A good example of this is when the U.S. built interstate highways in the 1950s. This construction work absorbed more than half of the world's commodities." Yow! What an amazing statistic! And what a nice economy it produced, too! I was so stunned by this that I reacted too slowly to the sound of someone yelling "Get him, boys!" and I was soon unceremoniously hustled toward, and dumped into, the hallway outside.
China Is Screwed Too
And a good thing, too, as down the hall I heard Stephen Roach, of Morgan Stanley, saying that China "has a central bank that was reorganized in 1998 along the lines of America's Federal Reserve System." And they have a fiat currency! In other words, China is screwed, too!
I laugh contemptuously ("Hahaha!") at these Chinese doofuses for their incompetence and stupidity for copying the same stupid mistakes in monetary policy that everyone else made, namely listening to America when we, slopping around in our stupidity and greed, extolled the siren-song virtues of a fiat currency and the powerful currency derivative of electronic digits in bank computers, all multiplied by an extraordinarily lax fractional-reserve banking system. Morons! Just like the rest of us! Morons!
That means that China and India will also experience the horrifying inflation in prices, too. And so the next time you hear me say "We're all freaking doomed!", remember that the category "we" includes the Chinese.
And while I am not sure if this is directly related, Doug Hornig at KitcoCasey.com caused my heart to spasm when he reported that "Nickel remains the story, as inventories dropped precipitously. The LME reported a decline of nearly 500 tons (5.5%). Stocks are down a cumulative 76% on the year." Supplies of nickel are down by more than three-quarters? Wow!
Reader Pete K., familiar with buying and selling on eBay, recently went to see what things were like, and thinks it is unmistakable that sales and bids are down. "Only the finest collectibles (unlike my junk) had any bids on them at all. The rest was all just sitting there, like dead bugs on the floor."
From this he gathers that "the money that has been gushing through eBay, washing all sorts of junk into people's pockets, has stopped." Oops! Another spigot of liquidity is now drying up!
And if that news about inflation was not bad enough, the Aden sisters, who publish the eponymous Aden Forecast, write "Barring an accident, there's little question that inflation will ultimately be the dominant economic force and that's why metals prices will continue to rise, and stocks and bonds won't, looking out to the years ahead."
In the exact same vein concerning prices of stocks and bonds, Mark Faber writes "Whenever central banks create excess liquidity, symptoms of inflation will show up somewhere." Exactly! And the big question is always "Where will this inflation show up?" He says "Sometimes wages and consumer prices will react the most to expansionary monetary policies (for example, the 1960s and 1970s), but in today's world where, given the low wages in China and India, an almost unlimited labour arbitrage can take place, easy monetary policies drive asset prices such as homes, commodities, equities, art, and so on, higher, while wages and consumer prices rise only with a lengthy time lag (once commodity prices begin to be passed on in the prices of finished manufactured goods). Therefore, it should come as no surprise that, when liquidity growth is slowing down, asset prices begin to cave in first."
From AP we learn "The Labor Department said Thursday that applications for jobless benefits totaled 332,000 last week, an increase of 19,000 from the previous week, exceeding market expectations. The four-week moving average for claims increased to 317,250 from 308,500 in the previous week." Remember that it was recently considered conventional wisdom that if that number stayed comfortably below 300,000, then there was nothing to worry about!
"Three Steps And A Stumble" No More?
And I guess that is why you never hear about unemployment from the talking heads of the world, or why you never hear the old adage "Three steps and a stumble" anymore, which is the Wall Street folklore that if the Federal Reserve raised interest rates three times in a row, then the stock market would fall. Now that the Fed has raised interest rates 17 times in a row, things are, apparently, different.
Reader Stephen G. writes to say that people who take out reverse-mortgages will not necessarily be on the hook when, at the end of the reverse-mortgage when you sell the house, for any drop in the value of the house, and he included several sites that explain the whole deal.
Thus we learn that while the explanation of the contract explicitly says that "When you sell your home or no longer use it for your primary residence, you or your estate will repay the cash you received from the reverse mortgage, plus interest and other fees, to the lender."
If you read carefully, you will notice that the money that you get every month sounds suspiciously like nothing more than an increasing-balance, home-equity loan to you, upon which the bank charges interest. So while it is called a "reverse-mortgage" loan, it is actually just another run-of-the-mill equity financing scheme with a new name.
So, if you got a total of $100,000 in payments, but you can only sell the house for $40,000, won't you have to repay $60,000? Yes and no, it turns out: These are, as Mr. G. points out, Home Equity Conversion Mortgages, and are non-recourse, meaning that the bank can't come after you for the sixty grand, even though you owe it to them. How to reconcile the two?
Well, for one thing, the bank makes you buy an insurance policy to cover any shortage in the value of the house! "Borrow some money and buy an insurance policy, making us the beneficiary!" Hahaha! Thanks for clearing that up, Stephen!
And, of course, since you are "selling" your house piecemeal, I'm sure that they can (and will) cut you off before things get to that point.
Bill Bryan of MarketPulses.com probably wonders how a complete buffoon like me could come up with the winning investment strategy of accumulating gold, silver and oil. But since he is too polite to actually accuse me of stealing someone else's idea, he merely adds "A few words on Gold, Silver and Oil. While we maintain our core positions in each, we continue to view the climate as a secular bull with much, much further to go."
How much farther to go? He figures "Gold=$1,500; Silver=$40; Oil=$100-125 minimum 3-Year targets", but that "perhaps some further consolidation will be necessary before the next major up leg ensues. Nonetheless, for those seeking protection from the machinations of the US Fed and central banks worldwide, pullbacks may provide wonderful long-term buying opportunities."
Anthony M. Cherniawski, of The Practical Investor newsletter, has an interesting technical trading tip. He writes "Lowry's has already told us that the month of June contained the highest intraday market volatility that they have recorded in 55 years. The VIX is simply telling us that volatility may be coming back in spades. In this case, the bottoming of the VIX pattern may be considered an inverse signal for the market since, in more cases than not, a rising volatility index often spells trouble for the stock indexes. Do I hear growling nearby?"
The famous Bill Bonner of the equally famous DailyReckoning.com has another bit of immortal technical analysis for you, too, as he writes "We remind you, dear reader, of an Essentialist Economic Principle: A slump is opposite and equal to the fraud that preceded it. The recession of the ‘70s was the worst one since the Great Depression."
And although Mr. Bonner is too refined to mention it, our current economic excesses and imbalances now dwarf anything the world has ever seen, and far, far worse than what preceded the Great Depression!
Soaking The Rich
To illustrate the bizarre, simplistic thinking of the Wall Street Journal, I quote from their July 12 editorial "Soaking the Rich", where they wax enthusiastic about the falling budget deficit, which was reduced by about $115 billion stinking dollars, thanks to an unexpected increase in tax remittances. We still had a deficit of $300 billion, but somehow this reduction from a deficit of over $400 billion is supposed to be such terrific news or something. Hahaha!
The WSJ crows "The real news, and where the policy credit belongs, is with the 2003 tax cuts." Hahahaha! They admit that "Monetary policy has also fueled this expansion, but the tax cuts were perfectly targeted to improve the incentives to take risks among businesses."
The Economist magazine, to its credit and to the embarrassment of the Wall Street Journal, came up with several other alternative reasons why an extra $115 billion in tax revenues could show up, including the fact that wages have been weak, and the savings showed up as profits to corporations, and indeed, capital gains and dividends have soared, which are taxable. Or maybe it was that a bunch of tax breaks for investments expired at the end of 2004, and now those investment expenses are taxable.
Or perhaps it was the unusually big profits of small businesses are taxed at the individual level. Or maybe it was the growing income inequality and the progressive tax system, where the rich got richer (but paid more taxes) and the poor got poorer (but paid the same level of taxes). Or any of a lot of things.
But nobody but the true patriots at Radio Free Mogambo (RFM) made the connection that, for 2005, total credit (debt) expanded by $3.34 trillion. To get a lousy $125 billion in extra taxes out of a $3.34 trillion increase in debt, which increased tax revenues by a miniscule 3.4% of this amount, is hardly a ringing endorsement of the Laffer Curve, as the Wall Street Journal editorial presumed when they said that the cuts "succeeded even beyond Art Laffer's dreams." Hahaha! In YOUR dreams, Wall Street Journal!
To those unfamiliar with the Laffer Curve, it is the idea that for every level of tax revenues, there are two tax rates that will produce them. One is very high, and the other is very low. The high rate produces the tax revenue directly, and the low one increases economic activity so much that more tax revenue is produced. The morons of the world immediately and consistently misinterpret this to mean that every time you reduce taxes, you will always get more tax revenue! Hahahaha!
So pardon me if I do not break out the party hats and balloons to learn that in America, in total, at least $3,400 billion was borrowed and spent last year, and the government got a piddly $115 billion in "extra" tax revenue out of it. Hell, looking only at the government's budget, the national debt went up by $569 billion in the last twelve months, exploding to $8,408 billion, all to satisfy the government's insatiable, insane, bankrupting, ravenous craving for spending. Thus the national debt increased by $7.3% in the last twelve months. Hahaha!
And besides, the Economist magazine also said that profits everywhere around the world had unusual growth and gains, too.
Reader Adrian S. alerted me to a January 2005 issue of the Richebaecher Letter that contains probably the only other point where I disagree with the famous Dr. Kurt Richeb├Ącher about anything. As serious scholars of the Life Of The Mogambo (LOTM) know, the first thing we disagreed about was that that he thinks that I am the most worthless economist and human being in the world, and I, in strident rebuttal, think that there is probably someone, somewhere, more worthless than me, although I can't think of anyone right now.
Anyway, our second disagreement took place recently when he was asked "What do you think of gold?" Dr. Richebaecher replied "I do not really like to talk about gold. Of course, some of my best friends are gold bugs. And while I respect their opinions, I do not agree with them. They say gold is the only real money. No, it is not the real money. The term 'real money' for me is something irrelevant. The money you pay with is fiat money. Call it fiat money or not." I think to myself, "Jeez! Talk about taking theory to the extreme!"
"Yes," he admits "the system was better under the gold standard. But the gold bugs are missing the point." Missing the point? I may shoot at your hat and miss the point to the dismay of your haberdasher and your next of kin, but as a raving gold bug myself, I am suddenly insulted! Naturally I leap to my feet, stick my finger right at his face and shout, like I do when I am talking to crying babies, "Shut up! Shut up! Shut the hell up! Maybe YOU are missing the point, old man!"
He doesn't say anything, but calmly and coolly continues as if I wasn't there, which further infuriates the hell out of me. He says "The key component of the gold standard was not the gold. It was the fact that the rules of the gold standard did not allow credit excess. It was the rules tied to the gold, not the gold itself."
Suddenly, I am thinking to myself, "Uh-oh! He's right and I am wrong! He's going to make me look like an idiot!" I felt a little better after I remembered how many times a damned day, every day, other people effortlessly make me look like an idiot, just because I am an idiot, and how it is almost like they take some weird, perverse pride in picking on a poor, pathetic mental cripple like me. And that is why I hate them all so much, and that is also why I punish them by stealing food out of their lunches when they are not looking.
But this is not about how the world is cruel to me or that most people pack terrible lunches, but that he is right: It was the strictures on the creation of money and credit that gold placed on banks that was the magic. It prevented the banks from creating more money!
So, I am standing there ready to apologize for getting in his face like that and losing my temper, and I was going to offer, by way of an apology, to give him the one thing that he is always asking for: For me to go away and never call him, write him, mention his name, or even think about him for the rest of my nasty, wasted, stupid Mogambo life (NWSML).
But before I could make my generous offer, he set me off again when he said "So the truth is there is no serious economic argument for gold. It is all psychology." The fact that gold has held its value for millennia apparently means nothing to this guy!
So I grow increasingly hostile as he winds up with the phrase "But I find it interesting that so many people in America are looking at gold. I believe they realize that Fed policy is irresponsibly inflationary. And they believe gold is the obvious and only alternative. They do not think about foreign currencies."
Well, by this time, steam was coming out of my ears as a terrific rebuttal immediately flowed fully-formed into my Tiny Mogambo Brain (TMB), but before I could say it, the door slammed shut right in my face! Wham! As I stand there, stunned, through the closed door I can hear his muffled voice screaming, over and over, "Release the attack dogs! Release the dogs now!" and I took off running.
But as I bounced along, I was thinking "Yes, Dr. Richeb├Ącher, we gold bugs 'realize that Fed policy is irresponsibly inflationary' and we also know that gold always, always, always holds its purchasing-power value in any inflation, in perfect safety, too, and that is why we are buying it!"
I also remember that I had a lot more to say, a lot of it real snotty, too, including my disdain for foreign currencies, since those other countries are also doing that same stupid damned inflationary thing of creating more and more money and credit, which causes inflation in the money supply, which causes inflation in prices, which is registered as a loss in purchasing power. I was even intending to say "It's bad enough with the dollar and Americans, but buying foreign currencies is a really stupid thing to do, too."
And besides, I would rather deal with Americans and our dollar, as I can understand Americans when they speak, and they can understand me ("Up yours, too, you ugly little troll!"). So why compound my misery by including foreigners and their stupid inflations, and the losses in purchasing power I would sustain by holding their stupid-looking money?
But after furiously running like a lithe Olympic sprinter at top speed for (I estimate) about ten feet, I was completely exhausted, my heart was pounding and I was gasping for air. But you get the drift.
In the end, in any currency, inflation means that you spend your time fending off 1) governments who want to increase your taxes, and 2) desperate, dirty people who are frantic to get some money because they are being slowly starved to death by the horror of inflation, when dealing with my own hateful family is plenty bad enough. In short, who needs the aggravation when I can prevent it all by merely owning gold and sufficient firepower?
The latest issue of the St. Louis Federal Reserve Bank of St. Louis Review, July/August 2006, 88(4), pp. 235-49, has caused a real stir, especially the article by Laurence J. Kotlikoff entitled "Is the United States Bankrupt?" In fact, Edmund Conway, Economics Editor for the Telegraph.co.uk, called it "an extraordinary paper published by one of the key members of the country's central bank."
And extraordinary it is! I have seen many references to this article popping up all over the place, but nobody but the vicious Mogambo tried to satirize the government's unconcern for elderly people by using his innocent quote "The most the government can do for the elderly is to set h equal to (1 + r)w/r." I still think it is funny!
But there is more than that. He goes on to write "Let's assume the government does this. In this case, the government impoverishes each generation of young from time 0 onward in order to satisfy the claims of time-0 oldsters. In the words of the Oxford English Dictionary, we have a country at the end of its resources. It's exhausted, stripped bare, destitute, bereft, wanting in property, and wrecked (at least in terms of its consumption and borrowing capacity) in consequence of failure to pay its creditors. In short, the country is bankrupt and is forced to reorganize its operations by paying its creditors (the oldsters) less than they were promised."
So if you were asking about the future of Social Security, this is it. You will get less than promised. A lot less.
A Gap 5 Times The Size Of GDP
As to the bankruptcy question posed in the title, Prof Kotlikoff said: "The United States has experienced high rates of inflation in the past and appears to be running the same type of fiscal policies that engendered hyperinflations in 20 countries over the past century."
It all stems from our long-term "fiscal gap", namely the difference between all promised future government/retirement spending and all future receipts. The shortfall will grow very wide, especially as spending soars as the Baby Boomer generation retires. How big is this gap right now? About $65.9 trillion! Prof Kotlikoff said: "This figure is more than five times US GDP and almost twice the size of national wealth."
Almost as a Theater of the Absurd, he hypothesizes that "One way to wrap one's head around $65.9trillion is to ask what fiscal adjustments are needed to eliminate this red hole. The answers are terrifying."
And he wasn't kidding! Being forced to rely exclusively on the budget process yields truly terrifying results. "One solution is an immediate and permanent doubling of personal and corporate income taxes. Another is an immediate and permanent two-thirds cut in Social Security and Medicare benefits. A third alternative, were it feasible, would be to immediately and permanently cut all federal discretionary spending by 143pc." Hahahaha!
So a budget solution is out of the question. Now it is up to Ben Bernanke and the Federal Reserve to destroy the currency instead. In short, yes, my Darling Mogambo Junior Rangers (DMJR), we are bankrupt, and everything else soon will be, too. Ugh.
****Mogambo sez: There will not be a Mogambo Guru newsletter next week, due to a confluence of an unforeseen family situation and my appearance at the Agora Financial Wealth Symposium in Vancouver. But this issue of the MoGu was extra long.
And don't look for one of those filler "Best Of" substitutes by publishers, because they have all looked, and there isn't a single issue that ever rose above the level of "awful and stupid", which I think says something more ugly about the people who publish or read the Mogambo Guru newsletter than it does about me.
So use the time wisely: Buy more silver and gold.

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. The "angriest guy in economics" can be emailed at RichardSmithGroup@verizon.net.

Fed Has Not One Word About Fiscal Deficits

Wednesday, July 19, 2006

Amidst a general advertisement for the strength of the US economy and persistent reminders that inflation is here and will likely not go away that easy, the Federal Reserve's testimony to Congress lacks an important memo to the government. Ben Bernanke, at his first appearance as Fed chairman on Capitol hill, did not once utter a word about fiscal deficits or address the government in any other way. The Fed under Greenspan was a constant reminder that something should be done about unsustainable double deficits.
Not so in Bernanke's initial address that offers too much comfort and too little in critical analysis.
No word on deficits, no word on Fannie Mae and Freddie Mac. OK, not that the White House has in any way heeded Greenspan's advice, but the Fed going completely silent on pressing matters under a Bush regime that strictly bars any dissent I begin to wonder how much value will lie in future information.
I wonder if overstretched real estate users (does one really own a place mortgaged to the bank?) will find comfort in the Fed's take on consumers:
"The slowing of the housing market may restrain other forms of household spending as well. With homeowners no longer experiencing increases in the equity value of their homes at the rapid pace seen in the past few years, and with the recent declines in stock prices, increases in household net worth are likely to provide less of a boost to consumer expenditures than they have in the recent past. That said, favorable fundamentals, including relatively low unemployment and rising disposable incomes, should provide support for consumer spending. Overall, household expenditures appear likely to expand at a moderate pace, providing continued impetus to the overall economic expansion."
From "Core" To PCE
The Fed also signals a more dovish take on inflation. From "core" it shifts its eye further to the Personal Consumer Expenditures (PCE) indicator - to be exact the "core" PCE - which paints an even softer picture and is seen between 2.25% and 3% this year and 2% to 2.25% in 2007. A dove greets.
Real GDP growth is seen at 3% to 3.75% in the running year and the Fed expects growth to slow 2.5% to 3.25% next year.
Rates? Bet For Worse
Reiterating its view that future rate policy will depend on incomaing data I still see no reason why the Fed should step off the accelerator. Take note that "other" commodities next to energy have inched up the watchlist of the Fed.
"Inflation has been higher than we had anticipated in February, partly as a result of further sharp increases in the prices of energy and other commodities,"
said Bernanke, describing what drives prices higher. Looking at oil prices and gold's reaction to Bernanke's testimony I see more trouble ahead than the benign Fed.

Volcker Feels Pity For Bernanke

Monday, July 17, 2006

Former Federal Reserve chairman Paul Volcker feels pity for Ben Bernanke. In an interview for Bloomberg TV's show "Political Capital With Al Hunt" Volcker warned that inflation should be taken most seriously and that an improvement in this year's budget deficit would be wiped out by permanently higher social spending on an aging population. Oh, and don't forget that "is is critical that we maintain confidence in our currency," Volcker said.
Excerpts from the interview:
Paul Volcker, who took over the Federal Reserve a generation ago at a time of soaring prices and stagnant growth, said the current central bank chief, Ben S. Bernanke, faces an even tougher challenge.
"It was easier for me," Volcker, 78, said. "While the economic situation was much worse, it was easier to act because it was clear what the enemy was."
...The U.S. economy will slow from 5.6 percent growth in the first quarter to a pace of 2.8 percent in the second half of this year, according to the median forecast in a Bloomberg News survey of economists.
Consumer prices rose at an annual pace of 4.2 percent in May, up from 3.5 percent a month earlier. Excluding food and energy, prices rose 2.4 percent, compared with 2.3 percent in April.
"I worry about people getting too relaxed" on inflation Volcker said. "I don't think it's out of hand today, but it is obviously creeping up."
Skeptical About Inflation Targets
Volcker was skeptical that inflation targeting, a device for anchoring inflation expectations embraced by Bernanke, would be helpful.
"That's a little too precise for me," he said. "The inflation rate is bound to go up and down a little bit and it should go up and down a little bit. But I would like to see stability as the target."
He suggested that Bernanke, who has championed better communication through transparency at the central bank, may be communicating too much.
"It's kind of ironic," said Volcker. "Mr. Bernanke seems to be criticized for a little too much transparency."
While he said the global economy is doing well, Volcker voiced concern that the good times can't last.
"We are skating along quite nicely," said Volcker, though "the ice is not as thick as I would like it to be."
The U.S. current-account deficit exceeded $208 billion in the first quarter. The figure, which includes trade as well as transfer payments and investment income, declined from $223 billion the previous quarter. It was still the second-largest on record and requires the U.S. to attract $2.3 billion in foreign capital each day fund the gap.
"We are consuming too much and investing too little," said Volcker, who also indicated that higher taxes may be needed to narrow the budget deficit.
This week the Bush administration cut its estimate of this year's budget deficit by 30 percent to $296 billion amid a surge in tax collections from corporations and wealthy individuals. Budget analysts say the shortfall will widen again as the aging U.S. population begins to stretch entitlement programs like Social Security and Medicare.
"Revenues have gotten too low" relative to what the government wants to spend, Volcker said.
Because of U.S. dependence on foreign capital to fund trade and budget gaps, "it is critical that we maintain confidence in our currency," said Volcker.
Caution on China
Some economists suggest the solution is a weaker dollar and stronger currencies for U.S. trade partners, especially China. Yet Volcker cautioned about pushing China to revalue its currency, which it has tightly controlled since abandoning a decade-old peg to the dollar a year ago.
China "will move and should move when they find it in their interest," Volcker said. "Pushing them to do things they don't want to do I'm not sure couldn't backfire in the end."...
Alan Greenspan said last year that oil above $60 would shave off 75 basis points of GDP growth. So what will $80 oil to the economy?
A question I still have no answer for is how commodities will behave in the face of a slowing US economy. So far my take is that there will be a short-lived sell-off before Chinese demand - based on domestic consumption - will pick up any slack.
For the week ahead I would be very cautious as political markets can surprise with big volatility. Keep the leverage down and the news channels on.
Inflation figures and 2 speeches by Bernanke can provide even more fuel for turmoil in the markets.

World Cup Trophy For Sale - Tale On Physical Silver Prices

Tuesday, July 04, 2006

Play or pay!
It was not my intention to get sucked into World Cup mania, but while watching a rather eventless Germany-Italy game - score still 0:0 - I checked prices on ebay for physical gold and silver and found this offering from an anonymous seller. Starting at 25,000 Euros ($32,000) he offers an 18 carat copy of the original FIFA World Cup Trophy 2006, weighing 1.5 kg.
Goldbugs and football (soccer) fans could make a double killing (I am in no way affiliated with this offer.)

World Cup Trophy 2006 (Copy)

The bullion value of the trophy stands currently at 17,800 Euros/$21,800 with a gold price of $622. The seller claims that 5 copies of the trophy were made about 30 years ago and were stored in a safe since, remaining in mint condition.
So if you fancy to show off your own - slightly smaller than the original - World Cup Trophy you don't need to get in shape, just click here and start bidding. Still let your friends only look at it: the genuine trophies are made of massive gold.
So What Is The Real Silver Spot Price?
Checking silver prices on ebay I also found out that physical silver gets traded at sometimes hefty premiums vs. spot. Standard 1 kg bars sell between 335 and 390 Euros ($430 to $500) whereas the silver spot price would only justify a price of 282 Euros ($360). This is a markup between 19% and 38%.
As theses are actual trades of physical bullion it is interesting to note that prices remained stable when silver went from $12.50 to $10/ounce in the past weeks. I am left with the question: Where is the real silver spot price to be found?

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