The Mogambo Guru On The Fed's Monetary Regime Of Inflationary Horror

Wednesday, March 15, 2006

The Mogambo Guru is even angrier this week as normal. He is being outraged to see that excessive public spending will leave no other exit than higher inflation and fears that a breakdown of capitalism is imminent. In case you got infected with The Mogambo Guru's paranoia, put that pizza slice away. Read on to find out why.

The Fed's Monetary Regime Of Inflationary Horror
by The Mogambo Guru
Total Fed Credit went down by $5.4 billion last week, which was surprisingly out of character for the new Bernanke Federal Reserve Monetary Regime Of Inflationary Horror that is on record as officially actually wanting inflation, although they call it "targeting" inflation, which is sort of apt, as what they are targeting is my wallet in their crosshairs. But this is not about how the Fed and the rest of the government are all out to get me, but about how without constantly creating money (and low interest rates to entice people to borrow it), it seems that Bernanke is not just a complete moron, but an incompetent one, to boot! Hahaha!
And it is not just the Federal Reserve that is so brain-dead that it wants inflation. Paul McCulley, a heavyweight because he manages lots of bond money for PIMCO, is nonetheless a ludicrous and laughable putz who says "For the record, I support the Fed adopting an explicit numerical range for its long-term objective for inflation. The problem with the Fed's current implicit inflation target of 1% to 2% is that it is both implicit and too narrow. I'd suggest 1% to 3%, a range wide enough to warrant increased risk premiums for cyclical variability in inflation."
Three-percent inflation? My God! This halfwit numbskull actually WANTS price inflation to run at 3%? The last 6,000 years of damning historical evidence about the horrors of inflation mean nothing to him? Beyond that, he is saying is that he wants all those people who own the bonds he manages to lose lots and lots of money as interest rates rise in response to a rise in inflation? What a doofus!
But this is not about dorks who are in positions of authority, as they are so numerous that they are all over the damned place. No, what this is about is inflation, and in that regard the Federal Reserve is still trying to goose the economy, and the repo desk at the Federal Reserve did $27 billion in repo agreements one day last week, 3/9/06. In one day!
Breakdown Of Capitalism
If you want someone else's dismal take on the results of inflation, listen to Mark Faber when he says "I am convinced that the US Fed's monetary policies will lead to exponentially widening wealth inequity and impoverish the majority of US households, which will then lead to social strife, protectionism, war, and the breakdown of the capitalistic system."
Consumers Still Borrow Like Crazy
But the government is, obviously, not the only conclave of idiots. Consumer Installment Debt went up in January by $3.9 billion to a new record of $2.162 trillion. Non-revolving loans, like for boats and cars, increased by $2.2 billion to yet another new record. Revolving loans, like credit cards, increased $1.8 billion in January, too. Total household borrowing expanded an astonishing 12% during 2005, the latest record in a long string of new records of consumer debt for the last, oh, twenty years or so.
The surprising thing is that the interest rate charged by auto loan companies dropped to only 5.13%! The use of the exclamation point will becomes apparent when you learn that only two months ago, the rate they charged was 6.4%. So, interest rates are rising all over the place, around the globe, but auto loan companies have dropped their rates by 20% in two months? Wow! Things are worse than I thought! And in that regard the average length of the loans for these cars and boats increased to a new record, as far as I can tell, to 62.6 months.
A Quarter Million Bucks For A Compact Car
And speaking of cars, the average price for new cars is still over $25,000, which seems ludicrous to us old codgers who recognize inflation as the devouring monster that it is, because we remember back to our first cars, when you could buy a new Cadillac, loaded, for eight thousand bucks. A new Mustang? $2,700.00.
But today's young workers come in here, all boasting that they can do twice the job I do, and for half the money, and pretty soon everybody in the office is chanting "Mo-gam-bo, he must go! Mo-gam-bo, he must go!" So not only do these young punks get my stupid, thankless job, surrounded by hateful and spiteful people (who then wonder why I, in delicious Mogambo revenge (DMR), steal their lunches!), but they can also reasonably expect to live into their eighties and nineties, which means that in another forty years they can expect to pay ten times as much ($250,000) for a new car.
Joe Average Has No Retirement Account
And exactly how much do you have to put into your retirement account today? A hell of a lot more than we are putting aside now! John Mauldin of Frontlinethoughts writes, "a survey by the Federal Reserve Board's Survey of Consumer Finances offers us the most detailed recent look at the balance sheet of U.S. households. The median family has about $3,800 in the bank, do not have a retirement account, has a home worth $160,000 with a mortgage of $95,000. No mutual funds, stocks or bonds populate their investment portfolios. They make (jointly) $43,000 and struggle to pay off their $2,200 in credit card debt." And that is just the median figures, meaning half of us! He concludes "That means 50% of Americans are in worse shape than the above. It is not a pretty picture." As to where the money went, well, my wife spent most of it on useless crap for her and the kids, like food, clothing and medicine. I mean, I let them live in my house for free, and yet that was never enough!
Trade Deficit Is Only One Aspect Of The Whole Sad Story
From Bloomberg we learn "The U.S. trade deficit widened to a record $68.5 billion in January as the oil-import bill rose and Americans bought more inexpensive Chinese goods."
Bloomberg did not mention that the Merchandise Trade Balance went farther into deficit, but it did. This lack of merchandise manufacturing to export is perhaps underscored by the latest read of employment and the lack thereof. What I seem to gather from the numbers is that the entire gain in all non-farm payrolls (245,000) was accounted for by gains in government payrolls (40,000) and service payrolls (200,000). Not one of these jobs actually created anything to sell to foreigners. Not one.
And to further makes a mockery of the whole thing, Bob Wood, of Kaizen Managed Assets, noted, "BLS just added in 116,000 using their birth/death gimmick."
People have been asking me "What the hell is going on with gold?" and of course I laugh at them for thinking that I could possibly know anything about anything. For example, alert reader Hunter R. asks "Why the recent correction when the bozos running our govt. are continually adding fuel to the fire that will eventually be consuming our fiat currency?" Good question! My reply was "Think of rats trapped in corners. To think that they would NOT resort to extremes doesn't make sense to a cornered rat!" which is a rather pithy and nasty, yet descriptively accurate, way to put it, if I do say so myself! In short, they have been manipulating gold all these years by selling gold short, are now on the hook for more gold than actually exists in the world, and you think they are, now, just going to stop and take their lumps? Hahaha!
U Bet The Gold Maket IS Manipulated
And if you don't believe that they have been manipulating the markets, then you ain't read how the Gold Anti-Trust Action Committee, known by their acronym GATA, wrote an interesting essay entitled "Bank for International Settlements Confesses to Gold Price Suppression Scheme."
They write "Alan Greenspan confessed to the gold price suppression scheme. The European Central Bank confessed to the gold price suppression scheme. Barrick Gold confessed to the gold price suppression scheme in U.S. District Court in New Orleans on February 28, 2003, The Reserve Bank of Australia confessed to the gold price suppression scheme in its annual report for 2003. And now the Bank for International Settlements, the central bank of the central banks, has confessed to the gold price suppression scheme by saying 'the provision of international credits and joint efforts to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful.' "
Leave it to the BIS, a shadowy collection of unaccountable international bankers and commie idiots, to think that manipulating prices, and thus distorting markets, all done with your money, is "useful." Hahaha! What a bunch of low-life creeps! No wonder I hate their guts!
Central Banks Keep Selling The Yellow Metal
But it may have been that they were asking the wrong guy about what is currently happening in the gold market. For instance, perhaps they should have been asking Toni Straka at PrudentInvestor, who suggests that the fall in price lately has been the result of central banks selling. "In the week ending March 3, three Euro area central banks sold gold for 133 million Euros after they had gotten rid of gold for 75 million Euros a week earlier."
But they are doomed to failure. Dan Denning of the Strategic Investments newsletter says that a higher price for gold is just part of the picture. "Soaring gold and oil prices will be accompanied by soaring interest rates and inflation. The convenient fantasy world where consumer prices don't rise and the dollar doesn't lose purchasing power will collapse. As oil rises in dollar terms - whether from geopolitical tension or the growing realization that Peak Oil is real - the run on the dollar will grow. Hard assets like gold won't just be fashionable: They will be indispensable to wealth preservation. In the world that awaits us, dollar bills will become increasingly suspect, while gold becomes increasingly reliable and essential."
Gold $13,000 - Silver $675
And it is not just gold! Listen to Greg Silberman at FinancialSense when he says "Silver had a low of $1.50 in 1973 and a high of $40 in 1980.
Projecting forwards, Silver has a price target of $675. That's a 6,600% increase from current prices.
Gold had a low of $35 (1971) and a high of $850 (1980). Projecting forward, Gold has a price target of $13,000. That's a 1,400% increase from current prices."
There Is So Little Silver On This Earth
And speaking of silver, Yusef S. wrote to say that the while there is some disagreement about much silver there is in the world, "The relevant point about available silver is not that there are 500 or 600 million ounces. Even if we magically double the amount of total silver in the market to a billion ounces, that's only $10 billion dollars worth of metal, an amount that's less than what Americans pay annually for pet food: $15 billion."
He notes "The informed minority has already started to stock up on silver, and increasingly the general public as well. In one bullion store I know, large amounts of gold are being bought. But silver is going like gangbusters. Just one of their customers recently put in an order for $300,000 of the stuff."
And as for the long-anticipated silver Exchange-Traded Fund, he notes that "The British already have approved a silver ETF. It's scheduled to start operations in a month on the LSE. And lest we forget, the Chinese and Dubai Gold and Commodities exchanges are also starting to trade silver."
Shanghai Exchange Will Trade Silver
Alert reader Ajit V. writes that this is exactly true, and says "The latest news is that China is going to open up Silver trade on the Shanghai exchange. The Shanghai Gold Exchange is preparing to start silver trade, which will set the benchmark for Chinese prices. Industry officials expect the exchange to start the silver trade as early as June, since world silver prices have stayed at multi-year highs and investors were keen to trade." Hmmm! I mull over the phrase Chinese investors "were keen to trade" silver! Suddenly, I am more bullish than ever!
Dan sent the link to DollarCollapse, jumping to the FAQ, where you learn an answer to the question "What happens when the dollar collapses?" The short answer is, as they so pithily put it, "Many things, most of them bad."
Mfgnn Mmllunk Glb?
Mulling this over while biting off a few pieces of pizza until my mouth is so full that my cheeks are puffed out like a chipmunk, I casually ask "Mfgnn mmllunk glb?" They mistakenly thought meant "What bad things?", but what I really said was "Does that waitress have the biggest boobs you've ever seen?" Well, I was sorry for the miscommunication, because they replied with a barrage of horrors, starting off with "When foreign investors and central banks stop demanding dollars, U.S. bond prices will fall, which is another way of saying that U.S. interest rates will rise.
Mortgage and credit card rates will soar, bursting the housing bubble. Home prices in hot markets like California and New York will fall by 50% or more in a matter of months, bankrupting millions of over-extended homeowners. The U.S. government will respond by opening the monetary floodgates, printing as many paper dollars as necessary to keep the economy from collapsing. This surge in supply will send the value of the dollar through the floor. Prices for most things will skyrocket, and people whose life savings are in cash, bank CDs or dollar-denominated bonds, will be wiped out. Most U.S. consumer finance companies will be ruined, along with their stockholders."
When In Fear, Don't Eat Pizza
So, now I am sitting there with this big wad of pizza in my mouth, but am suddenly sick with fear. Turning this to advantage, this is where we learn another Mogambo Valuable Lesson In Life (MVLIL), which is "Don't eat while getting bad, bad, very freaking bad news, especially the kind where it means mass suffering and prolonged, destructive misery for everybody, because you will end up choking on it, and then gag it up, and you will end up spitting it all over everybody, and then they will get up, leave in disgust, and stick you with the check."
Stocks Should Correct 9%
It gets worse for the stock market, as we learn from Eric J Fry of RudeAwakening, who quotes Jay Shartsis as saying "A near-record number of days have passed since the last 9% correction in the stock market." He infers, therefore, that a " '9% correction - at least - is overdue.' "
He explains by saying "We are close to an all-time record, going back to 1950, regarding the time that has passed since the last 9% correction. The longest such stretch came between the 1990 bottom and a 9.7% correction in the first quarter of 1994, a period of 1,280 days. Presently, we are at 1,113 days, the second longest stretch recorded in 55 years."
Dollar Needs To Decline 30%
Paul van Eeden, writing at Kitco, says "A Chinese newspaper, called The Standard, printed an article that quoted Mr. Yu Yongding, a member of the monetary policy advisory committee to the People's Bank of China, as saying that China should weaken the link between the yuan (renminbi) and the US dollar. The next day Mr. Yu Yongding was quoted by the same newspaper as saying that Chinese firms should get ready for a strengthening of the yuan (renminbi) during the next one to two years."
Mr. Eeden's take on that? "My expectation," he says, "is that the dollar has to decline roughly by another 30% or so before balance can be achieved in international trade. That decline will not be uniform against all currencies, but will be predominantly against the renminbi, the yen, and other Southeast Asian currencies."
A 30% increase in the cost of Chinese imports? Wow! This is even more than the imbecilic, suicidal 27% tariff that Senators Schumer and Graham want to put on Chinese imports!
But he says this is good news for gold! "Such a decline in the dollar will also cause the dollar-gold price to rise to around $850 an ounce, and by the time this has all played out, inflation could add another one or two hundred dollars to the gold price."
Unwinding Of The Yen Carry Trade Will Come To An Ugly End
The big news (and if you don't currently think it is big news, you will) is the announcement that Japan will end their longstanding zero interest rate policy!! Note the two exclamation points that I cleverly used to indicate emphasis. At Bill Fleckenstein's Daily Rap we read, "Overnight, the Bank of Japan officially ended its quantitative easing policy, with the announcement that it would cut the amount of reserves available to the banking system by about 80%." Cutting reserves in the banks by 80%! I am astounded! And frightened! Where in the hell are the banks going to get money to lend?
The Japanese zero interest rate policy is the basis of the whole carry trade: Borrow money from Japanese banks at zero percent, and buy T-bonds which pay four percent! Jim Willie CB of the GoldenJackass site writes "The yen carry trade unwind is probably the biggest potential change factor in the financial world this year, whose unwind will last for at least two years with fits and starts. When it unwinds, the damage will be pervasive to investments bought with speculative borrowed money." He then quoted another guy, an HSBC analyst, who said "[The yen carry trade] is going to come to an end later this year and it's going to be ugly, even if we haven't reached the shake-out just yet." And an economist from Monument opines "The world has never been through this before, so there is a high risk of mistakes." Of course the world has never been through this before! Nobody has ever been this stupid before!
But my wife is in the room, so I don't want to talk about stupidity around Jim Willie, because it always comes around to her inevitable comparisons of how he is so smart and I am so stupid, and how she is crazy not to just pack her bags and leave, and I say "Go ahead!" and she says "Maybe I will!" but she never does, and then I have something ELSE to be grumpy about. Instead, he says "Down the road a vicious secondary cycle is certain, marked by rising rates, housing pain, economic strain, price inflation pressures, gold gains, and US$ suffering."
Gold Demand Hits A New Record
But the flight into gold has already begun, as Roger Wiegand of TraderTracks reports "The World Gold Council’s GFMS report update said gold demand hit a record of $53.6 billion in 2005 with a 26% rise in investment tonnage demand. Jewelry demand was overall 14% higher, in spite of those higher prices. What impresses us very much is the institutional demand which means the big boys and the big money are coming into the gold game.
"Since the current one began in say 2000," they continue, "we have possibly ten more years of bullish gold and other commodities moving through an inflationary and volatile period of time. With each year we advance, gold prices can only go higher faster."
Marc Faber of the Gloom, Boom and Doom Report hears this and says "My target is for gold prices to rise to between US$5,000 and US$10,000 in the next 10 years."
None of this is lost on the miners, as David Bond of SilverMiners reports that the 74th annual Prospectors and Developers Association of Canada convention at the Toronto Metro Centre drew "Fourteen thousand people, people! Seven hundred exhibitors. Mining is indeed back! And with a vengeance."
Higher Rate Begin To Bite Mortgage Lenders
Ajit V. also sent a forward from ElliottWave, which reports that a hell of a lot of mortgages have been taken out with adjustable interest rates, and that means "2006-2007 is when the initial period ends and the 'interest-rate resets' begin - 'reset' being the euphemism for mortgage payments that 'shoot up between 10% and 50%' ", and thus they figure this means that about "1.4 million of those households face a jump of 50% or more [!] in their monthly payments." Note his use of the exclamation point! This horrifying estimate is actually optimistic, as it assumes that "home prices stay around current levels and interest rates don't rise sharply."
Alert reader John D. writes that "5 or 6 people have mentioned their homes to me and they all want to sell and either rent or downsize. Foreclosures in the paper are running about 20 per week compared to 3 or 4 last year. The federal court is full of bankrupts here according to a friend who says most are in their 30s and are homeowners." He also notes that "Sam's club was very slow after Christmas and now the restaurant waitresses and food store clerks are saying the same thing." And to underscore those anecdotal reports, he himself has "noticed empty shelf space in stores."
As if to underscore that, The Detroit News reports that mortgage defaults are zooming in Michigan, and that they hold a record of sorts: "Wayne County ranks worst in the nation for foreclosures." Mish, of Whiskey and, hears me muttering about this and says, "Michigan is but a drop in the bucket of what is to come. Expect to see the same scenario played out in California, Florida, Arizona, Nevada, and every current bubble area."
Public Borrowing Exploded In 2005
The Grandfather Report asks "QUESTION: How much of our economy is controlled by federal, state & local government? ANSWER: 43% of our National Income ($13,568 per man, woman and child - or $54,272 per family of 4)."
Now, as horrific as that is, it unfortunately "does not count added economic control by un-funded government-mandated regulatory compliance costs of 14.9% of national income ($4,680 per person). Therefore, government spending plus its mandated regulatory costs means 58% of the economy is government-controlled, amounting to $18,248 per person."
Perhaps this is why, in 2005, state and local government debt exploded 11%, and borrowing by the Federal government went up by 7%."
An Oil-Natural Gas "Cheapness" Calculator
Matt Badiali, writing in DailyWealth newsletter, notes that "6,000 cubic feet of gas is equal to 1 barrel of oil. So, if your favorite oil company lists their reserves as 60,000,000 cubic feet of natural gas, you can calculate that volume in barrels of oil by dividing it by 6000. We can also use this ratio to compare the actual price of oil to natural gas.
"Here's how our ratio works," he says, "with today's prices: A barrel of crude oil is trading for around $61. Its 'equivalent' in natural gas is trading for around $6.65. At a ratio of 6, analysts consider natural gas and oil to be roughly of equal value. When the ratio is above 6, natural gas is cheap compared to oil. When the ratio is below 6, natural gas is expensive compared to oil."
If you are like me, you are wondering to yourself "I sure could use a crunchy taco right about now, and what in the hell does this oil/natural gas thing have to do with making money in the markets?"
Apparently they were just getting to that part, and they continued "In December, natural gas was very expensive. At the peak, it sold at a 54% premium to oil, the equivalent of $92 per barrel. Right now, natural gas is selling at an equivalent of $39 per barrel while oil is up around $60. That's really cheap natural gas." And even though Mr. Badiali has not addressed the important issue about yummy tacos and where I could get one right about now, but he does suggest a way to make some money by buying natural gas! Then we can buy all the tacos we want! Hahaha! I love this investing stuff!
No Signs For A Slowdown In Federal Spending
Doug Noland notes that things are no better with the government's finances. "February's federal deficit," he writes, "jumped to $119.2 billion, the largest ever for one month. Fiscal y-t-d Receipts (5 months) of $873 billion are running 10.5% ahead of last year, with Individual Income Tax receipts up 10.8% and Corporate Income Taxes up 29.6%. At $1.090 Trillion, Total y-t-d Spending is 7.6% ahead of fiscal 2005." What he does not mention is that this is a sham of a budget that doesn't even count whole swaths of expenses, like the wars in Iraq and Afghanistan, or the entire haul of excess Social Security taxes that are, actually, an increase in debt.
Interest On National Debt Is Up 28%
He then quotes John Connor from Dow Jones, who says "The Congressional Budget Office said outlays for net interest on the national debt were up 28% in this period from a year earlier. The budget office projected that outlays for net interest will be about 20% higher at the end of the fiscal year than they were last year. Net interest outlays for the first five months of the fiscal year were estimated at $92 billion, compared with $72 billion a year earlier."
And it gets worse, as Mr. Noland has taken a look at the Z.1 Flow of Funds report. He reports that "During the quarter, Total (Financial and Non-Financial) Credit Market Debt (TCMD) expanded by a seasonally-adjusted and annualized record $3.827 trillion, a growth rate of 10.1%. TCMD expanded $3.340 trillion during 2005 to $40.230 trillion."
Paul Mampilly of Capuchinomics says that anybody thinking that common stocks are a good investment, and that you can retire in comfort by buying them, is nuts. Well, he doesn't actually say that, but he does say "A purchase of the Dow at year-end 1999 has netted a loss of approximately 7% as of year-end 2005. That's a pathetic 6-year record. The Dow's performance has been so poor that it has even underperformed the lowliest of asset classes: cash." Ugh.
****Mogambo sez: Peter Spina of the Gold Forecaster newsletter says that he believes that the fall in the price of gold recently "is a healthy correction presenting 'buying' opportunities." And I think that the whopping rise in silver is a buying opportunity, too, as the pleasant price increases in that particular metal is just getting started. So I say "Buy 'em both. And oil!"

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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