25 Basis Points - Here's Why (The Fed's Take)

Thursday, June 29, 2006

The Fed has acted as described in yesterday's post, raising the Fed Funds rate in an unanimous vote a 17th time 25 basis points (bp) to 5.25%.
In its statement the FOMC said that the expected cooling of the economy has become more visible.
"Recent indicators suggest that economic growth is moderating from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices."
Even more interesting is that the FOMC takes note of spiralling commodities prices. Until now inflationary effects were mainly blamed on energy.
"Readings on core inflation have been elevated in recent months. Ongoing productivity gains have held down the rise in unit labor costs, and inflation expectations remain contained. However, the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures."
The FOMC hopes to benefit from slowing aggregate demand but pointed to remaining inflationary risks.
"Although the moderation in the growth of aggregate demand should help to limit inflation pressures over time, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information. In any event, the Committee will respond to changes in economic prospects as needed to support the attainment of its objectives."
Restless markets took this statement as rather dovish in comparison to the May 10 statement, a stance I am definitely not willing to share.
Neither the Fed's pointing to inflation risks in both CPI and "core" inflation nor the phrase "inflation expectations remain contained" let me see a pause in August or later, save for a financial crisis. Real interest rates are still way too low to act as proper cushion for future inflation. Central banks everywhere may stick with questionable CPI data but human investors all tell a very different story of prices; worldwide.
I raise my end-year forecast of a Fed Funds rate from between 5.25% and 5.75% to 6% and more. International investors may become worried about the additional risk factor of slowing growth in the USA, now that the Fed too acknowledges that the housing market is past its top.
It will also depend on the ECB which has to catch up with true inflation too. Once the ECB decides a 50 bp hike, which could be as early as July 6th, interest rates will act as strong determinant for the "attractiveness" of the two currencies.
The ECB fights on 2 fronts. Today's release of money supply M3 growth in May shows an acceleration to 8.9% (April 8.7%), putting more pressure on the Eurobankers. The target rate of 4.5% M3 growth has been exceeded since the introduction of the Euro.
The other risks for the stability of the greenback remain unchanged: deficts, debts, this president.
The rally on Wall Street in the aftermath of the FOMC's decision will be shortlived as all the old problems are still around and will not go away. The strong run-up in precious metals and crude with Wall Street being in congruent mode is an anomaly that will soon correct itself.

25 Basis Points - Here's Why

Wednesday, June 28, 2006

With core inflation outside of the "comfort zone" for several FOMC members it can be safely bet that the Federal Reserve will continue its series of babysteps at the June meeting that has started Wednesday, ending Thursday afternoon. The 17th 25 basis point hike in a row will propel the Fed Funds rate to 5.25%.
The well known environment of accelerating inflation, a fragile housing market, overextended consumers' finances, sluggish markets and an increasingly worried international investors community, fearing a demise of the dollar, provide Chairman Ben Bernanke and the board with a myriad of facts to be discussed.
Fighting on all fronts to pursue a hawkish image Bernanke walks a tightrope between luring international investors via higher rates and the wishes of markets and businesses that fear such a trend will lead to an overshooting, pulling the USA into a recession.
With 25 basis points more the Fed will be just fine: The Euro has stabilized around $1.25 and debtors with property collateral - aka home"owners" - will not get choked at once.
A pause at 5%, as I had expected it until now, is unlikely in the wake of anew surging oil prices. A 50 bp hike is out of the cards because of the recent recovery of the dollar. The Fed will save the heavier ammo for the days it will really need it, e.g. one or more major central bank dumping dollar IOU's.
Markets have discounted the 25bp move too and will move on to the next focal point: The ECB meeting on July 6 where a committed president may send a very clear signal to markets and governments by hiking the Euro overnight rate 50 bp to 3.25%. Jean-Claude Trichet made headlines these days by resisting political pressure to give Eurozone finance ministers a say in the rate-decison process of the ECB, defending his mandate to fight inflation and inflation only.
Both money blocs share a host of problems like swelling trade and budget deficits. While Europe is still at least two blocks away from recovery the US economy is heavily supported by government spending on unproductive areas like wars and espionage efforts on all levels.
After the SWIFT scandal I am waiting to hear the same story about Visa/Mastercard. These records are certainly best suited to find out about a person's living circumstances. This being US domiciled companies the feds will have no problem at all, muscling their way into the world's richest database on individuals.

The Mogambo Guru Has A Current Tale On Hyperinflation

$500,000 for two pints of gas? No, it is not out of this world, only happening on another continent where inflations has left millions in rags. The Mogambo Guru, a much needed support while I am head over heels under the bonnet of a vintage Ford Transit van, has a current tale from Zimbabwe where inflation hit the 1,400% mark.
Don't stop reading there as he makes a compelling case for stocks to go further south for technical and fundamental reasons.

A Tale On Hyperinflation
by The Mogambo Guru
I creep out from behind the couch and nervously peek between the tightly-drawn curtains in the living room. I darkly note that, ominously, things are getting really spooky out there, and I am not a happy dude when I am spooked. Dangerous and homicidal maybe, but not happy. Perhaps even a marked tendency towards loud, hysterical outrage, but definitely not happy.
For instance, how about the spookiness of almost no increase in Total Fed Credit last week? $1.1 billion was almost nothing! Even Currency in Circulation is holding steady.
Of course, we can always count on foreign central banks, which put another $4.6 billion into increasing the clotted hoard of over-priced, low-yielding American government and agency debt in their custodial accounts at the Fed. As an aside, I hear that if you stand downwind of the Federal Reserve, you can actually smell the stench.
But even all that foreign central bank stuff may be coming to an end very soon, as we read on Bloomberg that "Bank of Japan Governor Toshihiko Fukui said Japan needs to adjust rates from near zero percent 'without delay' to prevent companies from investing excessively and the economy from overheating."
Ponzi Scheme
So this is getting to be serious business here, because new money has to always (homework assignment: Underline the word "always" and meditate on its significance) be coming from somewhere, more and more all the time, as that is the whole point of a Ponzi finance scheme. It's the only thing that makes it work: You either come up with more money, always, all the time, forever, or prices of some things go down. Or the prices of most things go down. Or the prices of all things go down. I dunno; I never was good at multiple-choice questions, and I am not going to try and answer this one, either.
But the world's governments and central banks are deathly afraid that the Ponzi-finance schemes that produced the bubbles in stocks, bonds and real estate will go bust, as all Ponzi schemes do. It's not that they feel bad for you (because believe me when I tell you that the government does not give a rat's patootie about you), but because the governments have their OWN outrageous Ponzi-schemes, such as Medicare, Social Security and myriad other welfare/transfer/government programs. Not to mention all the graft and corruption. Perhaps that is why Sprott Asset Management says "Nary has a crash ever occurred in these areas without the central banks turning on the spigots. We highly doubt it will be any different this time."
So, these things WILL go down in price unless, unless, unless more money gets created (by the simple expedient of somebody going deeper into debt) to buy out the current owners of those assets, handing them a profit that is taxable. It's that simple.
This Week And Every Week: Buy Gold And Silver
One thing I am very, very, VERY sure about, though, is that gold and silver will be fabulous assets that will undergo a huge inflation in price. Another thing that I am sure about is that one day in the not-too-distant future, your grandchildren, with the advantage of 20/20 hindsight, will be able to prove that in 2006, with gold and silver selling at less than $700 an ounce and $13 an ounce respectively, precious metals were the Mogambo Freaking Bargain Of The Century (MFBOTC), and your grandchildren will laugh at you ("Hahaha!") because you did not buy gold and silver then, proving that you were so stupid that whereas even newborn babies can see that the MGBOTC was right in front of your damned eyes the whole time, you, perversely, kept all your money (and even put more money!) into the Ponzi stock market, and the Ponzi bond market, and the Ponzi government economy, and the Ponzi real estate market! Hahahaha! Now you are forced to eat weeds and bugs because all of your money is gone and the song was right; "Nobody loves you when you're down and out.".
ZIM$ 500,000 For Two Pints Of Gas
Don't think it can happen? Well, pull up a chair and let me tell you about Zimbabwe, the most grossly, insanely-mismanaged economy in the history of the world; they confiscated the assets of the only profitable businesses in the country and they printed money. For perspective, a decade ago the Zimbabwe dollar was roughly equal to the U.S. dollar.
Anyway, according to a woman known only as Cathy, who actually lives in Zimbabwe and gets paid in Zimbabwe dollars, "Petrol was 260 thousand dollars a litre three weeks ago. Last week it rose to 360 thousand a litre and this week it galloped to 500 thousand dollars a litre and then disappeared altogether." Disappeared!
I am thinking to myself "Big deal! Not being able to afford gasoline just means that you have to send your whining wife and/or kids walking to the store to buy bread, frozen pizza, and some of those little chocolate donuts that I love so, so much and too, too much to share with hateful, ungrateful family members."
Government Pretends There Is Less Inflation
But perhaps I was too hasty, and there is more to this than meets the eye! Sure enough, she goes on to write "In complete contrast to the realities of four-figure inflation, this week a dramatic crisis arose with bread. Bakers put the price up, the government ordered them to put it back down. At the price stipulated by government, bakers said they were operating at a loss and putting twenty thousand jobs at risk." What to do? Well, in their own defense, the "Bakers took out a full page advert in the press detailing the increases of everything from flour and yeast to wages, packaging and delivery."
The result? Hahaha! The same in Zimbabwe as everywhere else, my darling Mogambo cherub (DMC)! For instance, our own American government calculates that there is almost no inflation, and so price increases are, therefore, proof of price gouging, for which you can be fined and sent to prison! She says almost the same thing about the comparable idiocy of the Zimbabwe government when she writes "The government refused to allow the price increases and called in the police. In a week over 280 bakers and shop assistants have been fined for overcharging."
Martians Take Our Wives And Resources; HaHaHa!
Now that we have the predictable government response out of the way, let's now turn our attention to the predictable economic response. She writes "As the bread war continued all week, the obvious happened, and fewer and fewer shops had bread on their shelves as less and less loaves were baked." It disappeared, just like the gasoline that disappeared! This is proof - proof! - of a Martian invasion to take our resources and women back to Mars with them on their flying saucers!
It is strange that she doesn’t even mention this manifest Martian menace, but instead she summarizes it as "It has been an absurd but now familiar case of denial by the government." At this, I laugh! I say "Welcome to the club, lady!" All of this is no less absurd, and no less familiar, as the denial and suppression by our own American government, the irresponsible American press, the calumny of the mainstream universities, and the horrid, insane Federal Reserve about our monetary and price inflations, which differ from Zimbabwe only in degree. Only in degree!
My Father’s Day’s Nightmare
But this is not about how Zimbabweans can't afford bread and are now forced to eat weeds and bugs. Instead, the point I was painfully belaboring is that since all of the money and assets in America are now debt ("putting equity to work!"), and since interest rates are still hovering around the lowest in history and thus destined to rise significantly, that this lack of increase in Total Fed Credit is frightening, sort of like when I came down to breakfast and my wife is standing there wearing a hockey mask and holding a chainsaw. As she yanks the handle, cranking it to roaring life, she lunges at me with it, screaming "You're going down, you sick bastard!" and my daughter is yelling encouragement "Get him, mom!"
But I'm not here to talk about Father's Day this year. The point is that this lack of new credit is THAT kind of spooky: It leaves an impression on you!
Perhaps we should, instead, listen to the calm, steady and rational voice of Hans Sennholz, who says "As soon as goods prices and wage rates begin to rise, businessmen need additional funds. As long as the Fed provides them, the boom can continue and even accelerate. It comes to an end when the Fed ceases to throw new funds on the loan market or the quantity launched no longer suffices to feed the boom. At that time, the readjustment, that is, the recession, begins."
Rising Rates Will Suffocate Consumers
And I assume that it will manifested as described by the folks at DailyReckoning.com, who write "The feds spared the nation a serious correction in 2001. But they did it at the expense of America’s working classes, who were lured deep into debt in order to keep spending. Now that rates are rising, they find it impossible to continue."
If I was writing that, I would have finished the sentence"…they find it impossible to continue" with "eating real food, and they had to eat weeds and bugs, and they lived in their cars, and then the government turned this excess population of weed eaters and bug suckers into Soylent Green, a nutritious food supplement that we used to buy oil."
Strut Your Stuff And/Or Hire Some Legal Eagles
Anyway, this is actually about how most assets will deflate in price, and there will be a simultaneous inflation in some other asset. Choose wrong, and your living standards fall to the point where you are, again, eating weeds and bugs, but choose correctly and you can do anything you want to do and strut around like you own the place because you probably do. And if not, you can hire so many lawyers that you can destroy anybody who says you don't or can't.
Putting words into the mouth of Captain Hook, of TreasureChests.info, I note that economic history is always boom-bust, therefore it is cyclic, and it therefore it always repeats itself. He writes "we would like to point out that like Rome, where it was not outside forces that finally caused its demise, but the rot from within, sooner or later price managers / bankers / politicos will have wrung as much speculation out of the current population as possible, and stock markets (most equities) will ultimately collapse in price."
Bloomberg reports that the Conference Board announced that their Leading Economic Indicator fell in May, registering a goodly-sized drop from 138.9 to 137.9. Keep it in mind that this is known as their "leading indicator" because it tends to anticipate future business activity, generally agreed as three, to six, to (sometimes) nine months or so into the future.
Leading Indicators Vs. Coincident Indicators
Seven of the leading index's ten indicators "are known before the report is released: jobless claims, consumer expectations, the yield curve, building permits, stock prices, supplier delivery times and factory hours." The three missing ones are the measures for money supply adjusted for inflation, new orders for consumer goods and business equipment. The Conference Board overcomes this serious obstacle by estimating them.
But the sudden lack of growth in M2, reflected in the lack of growth in Total Fed Credit, is reflected in their lowering their estimate of the "money supply adjusted for inflation". This is an important component, as it is "the component with the greatest weighting in the leading economic indicators index." Even so, this stagnation in the money supply subtracted just a teensy, weensy, tiny amount (0.14%) from the leading index.
Saying goodbye to the leading indicator, Bloomberg went on to say "The Conference Board's index of coincident indicators, a gauge of current economic activity, rose 0.1 percent in May after rising 0.2 percent in April. The index tracks payrolls, incomes, sales and projections." Note that they make sure that you understand that this is a measure of what is happening right now.
Oddly, this contrasts slightly with a new report from the Census Bureau, which announced that “New orders for manufactured durable goods in May decreased $0.6 billion or 0.3 percent to $208.7 billion. This is the second consecutive monthly decrease and follows a 4.7 percent April decrease.”
Bllomberg is not quite so explanatory when it comes to the lagging indicator. Instead, we must turn to The Mogambo Guide To The Indicators (TMGTTI), where we learn that that "The Lagging Indicator is essentially a measure of inflation and inflationary pressures." Bloomberg does add, helpfully, that the lagging index "measures business lending, length of unemployment, services prices and ratios of labor costs, inventories and consumer credit", so you can kind of figure it out for yourself The important thing is that the lagging indicator, this indicator of inflation, "rose 0.2 percent for a third month."
Spooky Technicals
If I take a look at the chart of the yield for US Treasury Bonds, I open one bleary eye and casually note that beginning in 1981, just after Volcker finished raising interest rates to cripplingly high levels to combat inflation, yields have been falling in a nice little zig-zaggy channel ever since. The interesting things is that every time the yield declined to the bottom of the interest-rate channel, there was an immediate spike, usually up to the top of the channel (or soon thereafter). Then it meanders down, slowly, month after month. Over the next two, or three, or five, or seven or so years of this slow, fitful decline in interest rates, yields would one day again hit the bottom of the channel before immediately rallying.
This means to me that a lot, and I mean a LOT, of people use charts and technical analysis to time their entries and exits. It's too supernatural and spooky otherwise.
I bring this up because this time rates did NOT touch the lower end of the channel before hitting new highs! It looks like they only dropped to halfway down the channel! And then, and then, and then, building and building and building the suspense until you want to scream, and then interest rates bounced up, and out, of the channel, penetrating the upper boundary of the channel!
Danger, I Tell Ya
If you know anything at all about charts, then you are saying to yourself "Hey! This Mogambo idiot is right! This is big stuff! Maybe I was being a little too rough on him when I said he was a worthless, know-nothing, stinking, low-life moron!" Ordinarily, I would try and find something in that rude description to disagree with, but I am too shook up about interest rates penetrating-the-upper-channel-boundary thing. And as a guy who is already very paranoid, scared and edgy, my Keen Mogambo Senses (KMS) are acutely attuned, nervous and rat-like in nature, to anything that is suddenly different in the environment, as it usually signals danger. Danger, I tells ya!
And if you think that rising interest rates are not dangerous, then prepare for an important lesson in economics!
The Currency Exporting Economy Of The US Of A
I love the way Ahmed Amr, editor of NileMedia, sums up our uniquely Federal Reserve/mainstream-university economics and monetary policy idiocy when he says "We have become a currency exporting economy - a new economic phenomenon that undermines every economic theory postulated since Adam Smith." Hahaha! Exactly!
I’d Like To Have THAT Bernanke Action Figure
Alert reader Jeffery K. sent an advertisement for a satirical Ben Bernanke Action Figure, which shows a bearded plastic doll sitting in a yellow plastic helicopter, throwing hundred-dollar bills out into the air. "Now YOU can drop money out of a helicopter!!" the package triumphantly declares in big, bold letters.
The funniest part was the legal disclaimer at the bottom, in tiny print: "Warning: cannot really prevent a severe recession." Hahahaha! Excellent!
Hedge Funds Account For 30% Of Stock Trading
Tony Cherniawski of The Practical Investor newsletter cites an article in Today’s CNNMoney that states “Hedge fund transactions now make up 30 percent of all trades in the nation’s stock exchanges, and they can have a major impact on the markets. The funds control an estimated $1.2 trillion in assets, according to the report.”
He asks the burning question "Could it be that a few too many hedge funds are caught on the wrong side of their trades?" Without even waiting for me to hazard a guess, he immediately goes on to say "Next week will tell, since most hedge funds must provide their investors a liquidity option at the end of every quarter. Since things are not going well for the markets, those exercising their options may cause what is known as a 'crowded trade.' As the Wall Street Journal puts it in yesterday’s article, 'Hedge funds are vulnerable to 'runs on the bank,' where investors worried about their investments demand (too many) withdrawals all at once. Thus, a string of difficulties in the market can quickly evolve into a crisis for a hedge fund as managers sell more and more losing investment positions to satisfy those seeking to withdraw their money.' ”
Ahead Of The Herd With Gold Stocks
I have always maintained that investing in the stock market, over the long term, is a net-loss game, and it should never be considered a part of saving for retirement. And I say this because the stock market must be, in the long run, a net-loss to the average investor. How could it NOT be? Where did the money come from to pay Wall Street hustlers trillions of dollars, and also pay all the people who heretofore "made money" from this type of investing, if not from you and me and other investors? And it actually DOES come from you and me and other investors, as the clever Bill Bonner at DailyReckoning puts it, "In order for markets to function as they do, most investors must be wrong most of the time."
The majority of funds (12,678) tracked, summarized by Lipper as "All Equity Funds", averaged 0.83% gain this year! Hahaha! Less than one percent! When inflation is running at 4.5%! Hahahaha! Chumps!
But it is not all bad news, of course. Even after all the supposed "carnage" in the gold market, so you hear, the latest Lipper averages show that gold-oriented mutual funds are actually up 13.21% since January 1. This glittering performance is beating the living snot out of almost every other category of funds, almost all of which are seriously lagging inflation.
The exception was, of course, China-oriented funds, which are up 15.48%.
7 Meager Years And Less To Come
With a little longer view, being the sneaky little creep that I am, I take the words of George Ure, of UrbanSurvival and twist them to my advantage, and thus having him saying the exact same thing when he reports "Consider that the Dow closed this week at 10,989. You could have purchased the Dow on May 7th, 1999 for 11,031. In other words, you could have made an investment in the Dow 7-years ago, held it as so many 'advisors' have told you, and you would have lost money."
I rudely interrupt to note that this is nominal gains, too! When you adjust for the huge devaluation of the dollar in that time (inflation), it was a net-loss! Just like I said!
But Mr. Ure sneers at me in contempt for my rude interruption, and concludes, independently, that "Thanks to incipient inflation, your Dow today would need to be 13,408.76 - just to have kept even with inflation."
An 8-Year Ride On The Dow For - Nothing
The class laughs at me because Mr. Ure's sneered at me. The ice broken, he continues "In fact buying the Dow in April of 1998 would just break even with inflation - and 8 year ride for - nothing - on an inflation adjusted basis using the government's figures - which as I've pointed out (I don't know how many times) under-report real experiences of price inflation."
As an aside, I included this little "investing in the stock market as a retirement plan" nugget in my latest regular report to the High Command for this sector of the galaxy. Apparently, it was a big hit around the universe, as it was forwarded like a virus around the 'net, and I started getting tons of email that went "Hahaha! Making a profit by investing for the long term? Hahaha! And earth creatures actually believe that silly crap? Hahahaha!"
A Boom In The Intergalactic Travel Industry
Anyway, the point is that this has spurred a lot of economic activity in the intergalactic travel industry, as creatures from all over the cosmos now want to come and see you puny Earthlings believing these things, and maybe get some nice pictures of you actually investing your retirement money in the stock market. They are snapping up intergalactic travel packages and renting flying saucers like crazy! It's a boom!
For anyone who still thinks that ethanol or hydrogen will solve the energy crisis, I cleverly hide my laughter by unexpectedly stuffing a whole taco into my mouth with one hand. With the other hand, I direct your attention to Robert Rapier, of R-Squared Blogspot, who reports that "a barrel of ethanol contains approximately 3.5 million BTUs, and a barrel of oil contains approximately 6 million BTUs." So, using Advanced Mogambo Mathematics (AMM), I quickly calculate that you will need to use almost twice as many units of ethanol to produce the same work and one unit of oil! And when you consider the energy necessary to produce ethanol from seeds, to plants, to harvest, to process - whew! - what a loser!
And while I do not have the figures for hydrogen, I am sure that they are a LOT lower than that, as at least ethanol contains powerful carbon-carbon bonds like oil, so that when you break the bonds you get a lot of energy. Hydrogen merely combines with itself and oxygen in a low-yield way. Big deal.
And the energy available from solar power, in total BTUs per square foot, is actually miniscule to the point where the energy used to manufacture solar cells is more than you will ever get back out from the solar cell as usable energy.
There are no easy, pleasant ways to correct monetary problems, nor the problem of energy over-usage and dependence, and it always comes back to the maxim "There ain't no such thing as a free lunch." Ugh.
****Mogambo sez: You can almost smell the fear in the gold and silver shorts, as more and more people are waking up to the fact, without elaboration, that every time in the entire course of history that a government committed these kinds of monetary sins, it was gold and silver that saved the day for those wise enough to buy and hold them. And it was curtains for everyone else.
And the pertinent lesson is not just that the people who bought gold and silver prospered, but that the people who bought early in the cycle made the most money when gold and silver rose.

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.

Note About Feeds - And A Markets Perspective

Friday, June 23, 2006

Original Bloglet subscribers to this blog have already noticed that they now receive a daily mail from Feedblitz. This is due to Bloglet outphasing its service.
In case you do not receive any posts please check your spam folder or subscribe again.
I have rechecked all my feeds in the sidebar and they all appear to work properly again as there was a problem with a few subscribers in Feedblitz which should be solved now. Apologies to 11 former subscribers; I hope you come back.
Please take note that I will only check Feedblitz once a week for problems, all other feeds get checked only once in a while.
So if you encounter problems with any of the free services please let me know.
Talking about feeds and their incredible help in compiling all relevant news in a single screen I recommend to subscribe with the XML button as a first option when using a RSS reader because this ensures the quickest notification about new posts.
Next to this I like Bloglines which is very efficient to keep track on blogs.
All others are a matter of different tastes and internet portals.
Counting more than 200 subscribers with 3 services (Bloglines, Feedburner, Feedblitz) makes me proud to have developed a loyal readership.
Blogging is competitive. Having seen my daily number of readers swell close to 1,000/day in early 2006, this has dropped to half again; certainly due to my less frequent posting. I hope it's not because quality/accuracy have slipped.
I have stopped a routine of daily posts for 4 reasons.
  1. Things are developing the way I have projected them in my longer-term outlooks written in the past 15 months. Browse the archive. Only stock markets are still much stronger than I had expected them. But they also follow my long established rule that higher rates mean less liquidity and therefore rates and markets always develop inversely.
  2. Less trading but sitting out the correction in precious metals. Although I would not be surprised to see gold take another dive once markets get the idea that the Fed will have to resort to 50 bp hikes the long-term trend is clear. The safe haven for 6,000 years of monetary history will unfailingly be one again this time. I shall repeat that silver should develop even better.
  3. In my view White Noise has dramatically increased as higher volatilities in all markets prove.
  4. Bear markets lasted in most cases longer than the preceding bull markets. We are only 6 years into the bear after a 20-year inflation of stock prices.
I guess that leaves me with ample opportunity to fill in my 2cents.

Fed Governor Olson Quits

Wednesday, June 21, 2006

Federal Reserve governor Mark W. Olson today resigned from his post, effective June 30. According to a press release,
"Olson, who has been a member of the Board since December 7, 2001, submitted his resignation to President Bush. He is leaving the Board to assume the chairmanship of the Public Company Accounting Oversight Board. He will not attend the June 28-29 meeting of the Federal Open Market Committee...
...Before joining the Board, Olson served as staff director of the Securities Subcommittee of the Senate Banking, Housing, and Urban Affairs Committee. Prior to that, he was a partner with Ernst & Young LLP at its predecessor, Arthur Young & Company, and he was president and chief executive officer of Security State Bank, Fergus Falls, Minnesota."
Olson opens the next vacancy on the governor's board after vice chairman Roger Ferguson had resigned in February.
The WSJ had earlier named Fredric Mishkin as a possible successor to Ferguson.

The Mogambo Guru Sees Yields Skyrocketing

Seeing both Wall Street and crude oil gain today it is time to bring back some reason into markets' gyrations. The Mogambo Guru informs and entertains us this week with more - or should I say, all the more - dire predictions on the inevitable course the US economy will take.

Inflation And Yields Will Skyrocket
by The Mogambo Guru
I don't know if I am just confused as usual, but I am unsure whether last week's $4.6 billion drop in Total Fed Credit is cause for celebration (that the Fed has stopped acting like profligate monetary morons) or panic (that the economy is now totally dependent on the Fed acting like profligate monetary morons).
New Fed-created bank credit is supposed to mean new debt and new money, but where is it? As a result, the M2 measure of the money supply is just languishing all of a sudden. It is not a good sign, and toting an Uzi with me everywhere I go is not a good sign either, but they are both connected. Why? My finger suddenly spasms, and a bullet unexpectedly gets fired into the wall. My wife is screaming "What in the hell was that all about?"
I fix her with a glare instead of explaining that it might have something do with Ty Andros, of TraderView, writing "The fiat currencies and debt creation model the industrialized world has implemented will collapse unless money and credit is continuously being expanded. It is basically a type of Ponzi finance scheme where new buyers must take out existing holders of assets at always-higher prices."
Rampant Monetary Inflation
This is oddly in keeping with Puru Saxena, of the Money Matters newsletter, who writes "In 1971, the non-gold reserves of all countries were worth US$100 billion and today these have grown to roughly $4.3 trillion - an alarming 43-fold increase in 35 years! Rampant monetary inflation fuelled by the growth of credit turned the capital markets into one giant casino as punters worldwide (often loaded with credit) searched for the next opportunity to make a fortune."
And I notice with a grim Mogambo frown (GMF) on my stupid face that Required Reserves in the banks actually went down to the bottom of its range for the last zillion years or so. Hell, picking a date in random, say, in May 1995, which was eleven long years ago, total deposits in the banks ("savings") were only around $110 billion, and total Loans and Leases on the books of the banks logged in at only $204 billion. And against that, the banks were saddled with $57 billion in Required Reserves.
Now, I notice how my blood has run chilly, and how everything is dark and gloomy. Gaunt buzzards have gathered in the trees to sit and lick their chops as they glare into the deep, dark, dangerous depths of my soul. I realize, in a sudden cold sweat, that the dollar and the banks (as we professional Mogambo economists (PME) say) "are freaking doomed!"
Bank Reserves Are Even Less Than A Joke
The scene is now perfectly set to reveal the ugly fact that Total Deposits at the banks are up to $5.2 trillion, which is 47 times bigger than it was in 1995. That's a growth rate of 42% a year, compounded! And total Loans and Leases is now $5.7 trillion, which is 27 times bigger than in 1995, which works out to an annual growth rate of 35% a year! Big, BIG increases!
Yet against that monstrous, cancerous rise in both assets and liabilities, the Required Reserves went DOWN from $57 billion in 1995 to only $42 billion today in 2006! Hahahaha! Surprise! Down! Required Reserves went DOWN! Hahahaha! To keep the same 0.518 ratio of Required Reserves against total deposits in the banking system in 1995, the banks would have to have, right now, in Required Reserves, $2.693 trillion! Instead, they have only $42 billion, 1.6% as much! Hahahaha!
In short, more than ALL of the money and credit created in the banking system since 1995 have been literally created without any underlying cash deposits of any kind! None! Zero money! This is an infinite multiplication of deposits! Fractional-reserve banking at its insane, suicidal extreme!
Chinese Money Supply Inflating Big Time
But the latest stupid shenanigans of us Americans and our precious little Federal Reserve are getting to be almost insignificant. Bloomberg reported that China's Shanghai Securities News revealed that, for May, "the Chinese M2 money supply growth rose 19.5% higher than the level last year."
Anyway, Foreign Holdings in custody of the Fed went up by a hefty $6.8 billion last week, which is, I guess, how foreigners are trying to help us "manage" the planned decline in the dollar.
And you wonder why it is that I am always screaming that you buy gold and silver? Hahaha! Wonder no more!
Fannie Mae - A Mess But Still Trading
Fannie Mae, which has turned into a gigantic cesspool of corruption, lying and deceit, has already admitted to $11 billion in "mistakes", mostly tied to the managers massaging the books to award themselves outlandish bonuses while hijacking the majority of the American mortgage market. Beyond the fact that it IS bad, it also LOOKS bad, according to Alex S. Gabor, who is a freelance writer appearing on OpEdNews. He opines that "Allowing Fannie to continue to trade tells the rest of the world that the corruption is not yet over. America has gotten so fat it cannot reach around and clean up its own messes without keeling over." Hahaha! Well put!
Next Uptick In Inflation
The latest "official" annual rate of inflation is 4.2%. Four point two percent! Even after all the rubbing and scrubbing and statistically falsifying of the raw price inflation numbers and "adjusting" the contents of the market basket they are measuring, this is the best lie they can come up with? Hahaha! I laugh in contempt until little specks of spittle start flying off my rubbery lips, as disgusting and obviously revolting as it is to the other people around me in the restaurant, huddled together in their stupid booths, eating their stupid hamburgers while plotting against me and saying terrible things about me behind my back.
In weird contrast, the official "Gross Domestic Product Deflator" went down from 3.5% to 3.3%. Hahaha! In case you have forgotten, the "Gross Domestic Product Deflator" is the rate of inflation that they use to statistically adjust nominal GDP (which is essentially the prices of all the things that were bought in a year, times the number of units bought). This wrings out the effect of inflation to arrive at real, honest, inflation-adjusted growth, and reported as "real" changes to the Gross Domestic Product, which ain't a-going nowhere, even with all of this statistical hocus-pocus.
Perhaps this has something to do with total nominal retail sales being up a scanty 0.1% in May. And remember that these are "nominal" sales, meaning the only thing actually being reported is total money spent. When you adjust for inflation in prices, you derive the increase/decrease in the standard of living.
Failing that, you can more accurately derive the famous Mogambo Standard Of Living Index (MSOLI) as part of your professional duties (and therefore tax-deductible!) by repeatedly going to local "gentleman's" clubs and keeping careful records of how many dollar bills are tucked into how many ladies' garters per unit of time, cross-referenced by ugliness of the girl (a high reading indicating that times are so good that men are, from the sheer ennui of constant beauteous bounty, looking for less comely ladies in a quest for "weird").
Dead-Cat Bounce Of The Dollar
The dollar, as reflected in the dollar index, is still in a dead-cat bounce; it is still slightly rising when it should be crashing. I bring this up because the standard of living is connected with the value of the dollar. If the dollar buys a lot of stuff, you feel good, sort of like when I came home from my strenuous research at the Club Wanda Wanda Wanda, situated, as it is, way out on the dusty outskirts of town, where regulations are few, where police are scarce, where they have no cover charge, and where they serve hard liquor really, really, really cheap. This means you get can drunker for the same amount of money, which is the same as having a strengthening currency. This, in turn, means you don't care or even notice that the girls are older and uglier. But that means, again in turn, that you can tip them less, and they are still grateful as hell! I keep telling my wife, "But going to Club Wanda Wanda Wanda is a rise in the standard of living!" But not being a trained economist, she obviously just does not understand the whole concept.
So, retail sales and both sets of MSOLI data are in agreement; total units sold are down, total dollar bills tucked are down, and only pretty girls are getting the heavy action.
Statistical Hocus-Pocus
The Labor Department said that prices paid by Americans rose 0.4% in May, which is plenty bad enough, but marginally better than in April, which showed a 0.6% increase. MarketWatch figures "In the past year, the CPI has risen 4.2% - and at a 5.2% annual rate so far in 2005."
The CPI-U, a subset of the Consumer Price Index (CPI) figures, on the other hand, increased 0.5 percent in May, which is 25% higher than the headline CPI of 0.4%. Annualizing and compounding 0.5% inflation results in an annual inflation rate of 6.2%! Yow!
And none of this wholly, or sometimes even partially, reflects the big rise in energy prices, which are rising at the annual rate of 31%!
And the measure that the government uses to estimate the cost of home ownership as part of the CPI, owner's equivalent rent, jumped 0.6 percent last month, which was "the biggest increase in 16 years." The blame for this is that rents for housing are increasing, reflecting higher demand for rental housing, reflecting increasing property tax bites, reflecting higher property values (thanks to Greenspan's monstrous Federal Reserve, which spawned the housing bubble) and reflecting higher insurance costs, thanks to the Federal Reserve keeping yields so low to make up for its own mistakes that the insurance companies can't make any money from investing your premiums in bonds.
Volatility Before The Crash
Naturally, Treasuries fell, pushing yields on two-year notes to more than five-year highs, which not only means that the yield curve is inverted, but it also means that bond prices are lower than five years ago. And they are probably going to get worse after the big increase in May consumer prices "cemented expectations the Federal Reserve will boost interest rates again this month."
And all of this nervousness is not just me over-reacting as usual, accidentally pulling the trigger at every bit of bad news. Others beyond my wife, kids and obnoxious neighbors are starting to get real nervous, too, as evidenced by the VIX, an index at the Chicago Board Options Exchange that measures stock market volatility. The index has risen to levels higher than at any time in the last three years.
Higher Rates Bring Higher Inflation
And if you think that gingerly raising interest rates will stop a rising inflation, you are wrong, wrong, wrong. Until the rates get so high that they cripple the economy, higher interest rates only produce higher prices, which is de facto inflation: As the producer of goods and services borrows money to finance the on-going business, the higher costs of that borrowing have to be figured into the higher prices of the final output of goods and services so that the business can make a profit. So in the short run, higher interest rates actually cause higher prices. And that's another compelling reason, as if you needed any more reasons, not to let inflation in prices get started by letting inflation in the money supply get started.
The only thing that will stop inflation is the inability or unwillingness (or both) of consumers to consume goods and services at those higher prices. This will cause economic contraction in our grossly distorted, mal-invested, twisted economy. And when those mal-investments fail, it is going to take everything else down with them.
Roger at the Rocklin Coin Shop sent me a one-ounce, pure silver round that was, so I surmise, made in 1985 by an outfit named Liberty Mint. The obverse has abstracted Article 1 Section 10 of the Constitution to read "No State Shall...Make Any Thing But Gold and Silver Coin A Tender in Payment of Debt", in the singular, whereas in the Constitution it reads "...in Payment of Debts" the plural. So this is an obvious mis-strike, and therefore worth lots and lots of money to collectors, and the first one to get over here with $100,000 in cash can have it.
The face of the "coin" has a beautiful engraving of the old wooden square-rigger warship, the U.S.S. Constitution, circumscribed around the outside of the coin by the words "Honest Value Never Fails." Oh? Says who? Gold ounces should be selling north of $2,000 right now, which is gold's honest value, and silver should be easily over a hundred dollars per ounce right freaking now, and that's its honest value. But they are not!
And not only are gold and silver NOT selling for "honest value", but they have a taken a huge tumble in the last month, down from less than half their "honest values" as it was!
Orchestrated Attack On Gold
The explanation? For honest prices, you have to have an honest marketplace. But you can forget about that, as Dan Norcini of jsmineset.com noted when he discusses the recent price decline in gold. He, due to longstanding familiarity with the commodity trading pits, says that the strange action in the futures pits before and during the decline in the prices of precious metals leads him to only one obvious conclusion; it "was an orchestrated and deliberate attack by the Central Bankers of the West to break the back of the gold market and defuse the warning message that gold was sounding abroad."
See My Math Skills
Rob Parenteau, a global strategist for RCM and appearing at PrudentBear, writes "As of Q1 2006, the gap between household sector expenditure and income widened $100b to a nearly $700b deficit at an annualized rate." Having recently mastered the "on-off" switch of my calculator, this is a chance for me to show off my new skills! So, deftly, I divide that $700 billion income deficit by the 300 million people in the USA, and it means that very man, woman and child in America spent $2,333.33 more than they earned!
This may have something to do with the Labor Department reporting that weekly wages, adjusted for inflation, fell 0.7 percent last month. Even worse, wages are down 0.2 percent over the past year.
Household Wealth Deteriorates Since 1997
But before I can interrupt him with this priceless bit of information, he goes on to say "This deterioration in the household financial balance has been going on since 1997."
Again desperate to show off my math skills, I quickly subtract 1997 from 2006, and after a few tries, I finally get the answer "9", meaning that people have been spending more than they were making for the last nine years. Again I raise my hand to interrupt Mr. Parenteau, hoping to impress him with my fancy calculating, but he is still not interested, probably because much worse news is to come, namely, "Since early 2005, the rate of decay has accelerated noticeably. The US household sector financial balance is plunging."
From Dr. Steve Sjuggerud at DailyWealth, we find him taking a page from Marc Faber's book Tomorrow's Gold, which he calls his "cheat sheet for the next ten years." From the book he lists the things that gained the most in the 1974-1980 period, which is highly reminiscent of today.
Compare The Commodities Bull Markets
Back then, oil topped the list, rising 1,866% in price in that period of time. The next biggest winner was gold, up 1,458% in price, followed by U.S coins (1,053%), silver (739%), Chinese ceramics (607%), diamonds, farm land, art, followed by housing (164%), stocks (81%), bonds (89%), all of which sounds pretty good until you note that Mr. Sjuggerud includes the fact that inflation (as measured by the CPI) was up 110% in those six years.
Brian Hunt, also at DailyWealth, has an interesting technical indicator. He reports that all three times in the last 110 years that the stock market went three years without a correction, "it always precedes a plunge in the S&P 500." This seemingly-infallible indicator has now ominously again occurred on March 15, 2006.
From Reuters we read the horrifying news that "The dollar slid to session lows against the euro and yen on Thursday after the release of data that showed net capital inflows into the U.S. in April were way short of expectations and insufficient to cover that month's trade deficit. The net $46.7 billion net inflow into U.S. securities in April was the lowest since March last year."
Bush Is Bad For The Dollar
Edgar J. Steele of ConspiracyPenPal.com "You may not have noticed, but the dollar lost one third of its value under the first five and one-half years of the current Bush Administration. You won't believe what's going to happen during the next couple of years!"
He goes on to quote an "unattributed article on Unknown Country's web site entitled "Dollar on the Edge" which notes that "A 'run' on the dollar, caused by panicking foreign holders attempting to sell into non-existent buying, could cause the dollar to collapse very suddenly, even over a matter of days."
Dirty Games In The Caribbean?
To prevent that and to prove that we Americans are now as corrupt as any other dirtbag nation on the earth, the article continues "There is evidence that the US is attempting to manage the decline by purchasing its own debt. As Asian purchasing of US paper declined last month, the slack was taken up by Caribbean and UK banks that would not normally have the liquidity to make such purchases. Therefore, they are acting for a third party, and the only party that would buy dollars when a loss in value is inevitable is the US Treasury."
Why are we so intent on proving that we have no morals or ethics? "By doing this," the article concludes, "the US is hoping to prevent a sudden collapse of the dollar and the subsequent unwinding of the US and world economies in a fiscal disaster so profound that it will eclipse the Great Depression."
Mr. Steele's summation was "In other words, boys and girls, the dollar is doomed."
Meet Me At The Silver Summit In Idaho
I wish to happily confirm the rumor that I am again invited to speak this year at the Silver Summit in Idaho in September. Thankfully, the people who run the Silver Summit obviously have very low standards and a peculiar penchant for embarrassing themselves by the quality of the company they keep. But if it weren't for those kinds of poor, pathetic, deluded people, I'd never get out of the house at all! Hope to see you there!
Martin Weiss of the Safe Money Report takes a trip down memory lane when he recalls that his dad said, in 1970, "In past cycles, for each $100 billion in new debts added to the economy, the level of short-term interest rates went up by one full percentage point before the cycle was over."
Instantly my ears pricked up! $100 billion in new debt equals one percentage point higher interest rates? Wow! Hell, the federal government alone amasses that much new debt every two months!
See T-Bills Yielding More Than 17%
Mr. Weiss goes on to say that in 1970 his dad said, "Now, after adjusting for inflation, $1 trillion in net new debts has been added. So, if the ratio holds up in the next cycle, the short-term T-bill rate will have to leap from about 7% where it is today to as high as 17% where I think it will eventually peak."
The result of this prediction? "Precisely ten years later, in 1980, that's exactly where the 3-month T-bill rate peaked: At 17%. Meanwhile, the price of crude oil rose by over tenfold."
Then he fast forwards to today. "Even adjusting for inflation, today's numbers make America's 1970 debt pyramid look like an anthill by comparison."
So how high will interest rates go if this rule of thumb (one percentage point higher rates for every $100 billion in new debt)? Search me. How do you measure debt? Do you include derivatives? I dunno. But comparing the end-state 17% interest rate of 1980 as an "anthill" to today's insane levels of debt, I must conclude that 17% will look "anthill-like", too!
If you wanted more proof that the economics profession has been taken over by grubby idiots (beyond the proof offered by the fact that the Federal Reserve was chaired by Alan Greenspan, and now by Ben Bernanke!), then get a load of the Wall Street Journal editorial Tuesday that showcased a letter by "500 prominent economists, including five Nobel laureates" who signed a letter to President Bush saying that "immigration has been a net gain for American citizens." Hahaha!
Their analysis is that they work cheap, see, which helps keep prices down. This is the "net gain" for America. In short, ruthless exploitation of the tragically poor is a "net gain", while, somehow, the $80,000 in taxpayer money spent per illegal immigrant per year is NOT supposed to be part of this "net gain" for America. And this all comes at the same time the Democrats are working feverishly to increase the minimum wage by 40% over the next two years because wages are so low? Idiots! All of them! Idiots! Hahaha!
Next, look for a letter from these five hundred filthy halfwits recommending that we re-introduce slavery to America, since they will champion anything, no matter how despicable, loathsome or laughable, that can be misrepresented to show a "net gain" of some kind.
A Grain Deficit On The Horizon
Lester Brown of the Earth Policy Institute says "This year’s world grain harvest is projected to fall short of consumption by 61 million tons, marking the sixth time in the last seven years that production has failed to satisfy demand. As a result of these shortfalls, world carryover stocks at the end of this crop year are projected to drop to 57 days of consumption, the shortest buffer since the 56-day-low in 1972 that triggered a doubling of grain prices."
He goes on to say "Perhaps the most dangerous threat to future food security is the rise in temperature. Among crop ecologists there is now a consensus that for each temperature rise of 1 degree Celsius above the historical average during the growing season, we can expect a 10 percent decline in grain yield."
None of this is news to alert reader Andrew H., who says he has farmed in eastern Australia for 36 years, who says that "The last 18 months is the worst I have ever experienced. Large parts (90%) of New South Wales are drought stricken (no winter wheat plantings) in Western Australia they had the driest May on record ever, also no wheat planted."
Cars And Loans Longer On The Road
On Azcentral we read where Jesse Toprak, executive director of Edmunds.com, says "Where the average car loan in 2003 lasted for 60 months, it has crept up to 64 months today."
As horrified as I am at the concept of a car loan for five and a half years, I run screaming from the room when he reports that "Part of the reason is the introduction of the 72-month loan." The introduction of the six-year car loan is only part of the reason that the average new car loan is longer? Wow! It is worse than I thought!
"Seventy-two months is sort of becoming the norm," he said. "Unless you put a substantial amount of money down, you will have negative equity."
That last cryptic remark stems from the additional news that "nearly 29 percent of U.S. car buyers found themselves 'upside-down' on their loans, owing an average of $3,789 more than their trade-in value." Ugh.
****Mogambo sez: My advice on gold and silver? Instead of me droning on, hour after hour, listen to the succinct Mike Hoy, who says the same things I would in few words. Writing an editorial on Gold-Esagle.com. He says "I believe the reasons for owning the precious metals have only intensified and become more obvious as each day passes."

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.

W(arlord) Visit - Vienna In A Deadlock

Tuesday, June 20, 2006

The city of Vienna came to a standstill because of the visit of the world's most disputed politician. George W(arlord) Bush will arrive in Vienna at 9:30 PM today, meeting the EU presidency.
Security measures in this 2-million town where no-go areas are unknown, are unprecedented. The liar, killer, insider trader, torturer and gravedigger of the US constitution and the bill of rights will be protected by 5,000 Austrian police and several hundred members of the secret service.
Bush had better come to Austria to meet the EU heads. In Belgium, home of the EU, ordinary citizens are allowed to report anybody to the judicial system for war crimes and crimes against humanity. Belgium has an outstanding arrest warrant for defense secretary Donald Rumsfeld. He has not been seen in Belgium, home to European NATO headquarters as well, since.

American Buffalo Silver Coin 2001

The day here had already started with some incidents. Protesters - certainly a very clear majority here - managed to place four suitcases along the routes Bush will drive in Vienna. None of the suitcases contained explosive material.
On Wednesday Viennese pupils will strike and attend a demonstration against Bush. Demonstrations are set to take place on routes that will never ever come closer than half a mile to the warlords whereabouts.
Austria's chancellor Wolfgang Schuessel has promised to address both the closing of Guantanamo and CIA flights over Europe but it is expected that Bush will direct the agenda of the meeting towards finding more allies for his crusade against Iran.
I end my post with the notice that 80% of Europeans are highly critical of Bush's policy of unilateral aggression.

NYT: First 24K US Gold Coin To Go On Sale

Monday, June 19, 2006

The US Mint has made investing into gold just a little easier. According to a report in the New York Times the Mint will offer its first 24 Karat coin from today.
While the website of the Mint offers no information whatsoever about the new coin, the NYT tells us that the American Buffalo will have a face value of $50 and portrays an Indian chief and a bison on the other side. This design was used for the 2001 silver coin depicted here.
Buffalos are expected to be sold at gold's spot price plus a markup of about 12%, said Becky Bailey, a spokeswoman at the Mint. Maybe you will find better deals on ebay.

A high-relief, mirror-finish version known as a proof will also be made for sale to collectors. Quantities of the regular coin will be determined by demand; 300,000 of the proof version will be minted in 2006 and sold initially at a price of $875.

A $2.7 Trillion Error In The Current Account?

Friday, June 16, 2006

Markets are in heads-up mode before today's release of US current account figures that are expected to show a deficit of $222 (Q4: $224.9) billion or 7% of GDP.
Having no idea how markets will react in the short term my eyes fell on a piece of research that may have far wider implications in the medium and long run.
According to Daniel Gros, director of the Centre of European Policy Studies (CEPS), accounting errors in America's balance of payments and the net international investment position add up to a staggering gap of $2.7 Trillion or more than ten times the official deficit and half of it hidden in items like "errors and omissions." Gros, also chairman of the board of respected San Paolo IMI asset management, thinks that the US' net debtor position runs rather at $4 Trillion than the official $2.5 Trillion.
The medicine he prescribes is bitter: "The need for a substantial depreciation of the dollar and/or a period of sub-par growth is even bigger than generally accepted."
His entire commentary:
The global financial system seems to have a black hole at its centre. Over the last two decades, US residents have sold a total of about $5,500bn worth of IOUs to foreigners, yet the officially recorded net investment position of the US has deteriorated only by a little more than half of this amount ($2,800bn). The US capital market seems to have acted like a black hole for investors from the rest of world in which $2,700bn vanished from sight - or at least from the official statistics.
How can $2,700bn disappear?
It is often argued that the US can simply make large capital gains on its gross positions because its assets are denominated in foreign currency and its liabilities in dollars. However, the available data indicate that over the last two decades this factor has netted the US at most $300bn-$400bn. This still leaves a loss of well over $2,000bn to be explained.
The explanation comes in two tranches of about $1,000bn each.
The first source of accountingrevenues for the US derives from an anomaly in the item "reinvested earnings" on foreign direct investment in the US balance of payments. This item improves the current account by about $100bn a year because foreign companies systematically report abnormally low profits for their US operations to avoid US corporate income taxes. If one assumes that foreign companies earn the same rate of return on their direct investment in the US as on their portfolio investment in equity, the US current account would deteriorate by about $100bn. Properly measured, the country's current account deficit would thus be about 1 per cent of gross domestic product larger than officially reported.
The underreporting of the current account deficit implies that US indebtedness is also underestimated. Over the past two decades the cumulative correction for the anomaly in "reinvested earnings" would lead to a higher US net debtor position of about $1,000bn.
A second source of gains comes from very large residuals - labelled "other changes" by the Bureau of Economic Analysis in its statistics on theevolution of the net US international investment position - the total of which also reaches about $1,000bn over the past two decades.
The US international investment position today should in principle be equal to the sum of past current account balances (mostly deficits). However, this is not the case by far, even taking into account the balancing item "errors and omissions". The quite detailed data available for the period 1989-2004 show that the exchange rate and valuation adjustments mentioned above have netted the US $300m-$400m, still leaving a discrepancy of around $1,000bn.
The discrepancy arises for a simple reason: the current account data are based on actual flows of payments recorded in the balance of payments. By contrast, the data on the US international investment position are based on surveys of depository institutions, which year after year tend to lose sight of US assets held by foreigners, especially portfolio investment and real estate.
Could the discrepancy be due to inaccurate statistics on the balance of payments? This is unlikely because the financial flows are just the mirror image of the current account which can be accurately measured given that it consists mostly of business-to-business transactions. With the improvement in current account statistics, the global current account balance discrepancy has now almost totally disappeared. If the current account figures constitute a more reliable source (except for "reinvested earnings"), it is likely that the true US net external debtor position is around $4,000bn (about 40 per cent of GDP) rather than the $2,500bn reported officially for end-2004. Taking into account the current account deficit of about $800bn for 2005 would bring the net current US debtor position to more than $4,500bn. (The official US net international investment position as of the end of 2005, to be published soon, is likely to again include a significant write-down of foreign assets in the US, so the official data are likely to show a net indebtedness below $3,000bn.)
A closer look at the data thus suggests that both the current account deficit and the net debtor position of the US are even worse than officially reported. This can only mean that the need for a substantial depreciation of the dollar and/or a period of sub-par growth is even bigger than generally accepted.

Another nail in the dollar's coffin.

Survey: Central Banks Will Intervene In All Markets

Wednesday, June 14, 2006

Housing bubble? Don't worry. Almost 90 central banks are ready to intervene. Reuters has this report on a survey done by UBS that concludes that central banks will diversify from US government into MBS (mortgage backed securities) and other collateralized bonds. The notion that central banks also plan to buy shares and corporate bonds sends a shudder down my spine. This is outright market manipulation. Printing money to buy whatever ailing investment class in order to keep prices "stable" is a far cry from the free market gospel central banks love to so lavishly soothe the public with.
From the Reuters report:
Central banks are planning to diversify foreign exchange reserves away from U.S. government debt into higher-yielding assets, including mortgage bonds, through 2007, according to a UBS Securities survey.
Almost all of the 90 central banks polled by the unit of the world's biggest wealth manager now have the authority to spend reserves on bonds other than Treasury debt, the poll found. Just 3 percent said they only invest in Treasuries, down from 31 percent four years ago, it said.
Problems with agency bonds will also go away is the vain hope in the temples of fiat money. Historically the plan to print one's way out of problems has never worked but only delayed the inevitable.
"Sixty-one percent said they plan to purchase more bonds with higher yields, led by mortgage- and other asset-backed securities, and so-called agency debt of government-sponsored enterprises such as Fannie Mae the recent poll said.
The survey's results "suggest that central banks are moving more aggressively into spread product," UBS mortgage analysts led by Laurie Goodman in New York said in a report on Tuesday."
One in five central banks plans to decrease its dollar-denominated holdings, the report said. I wonder whether gold is a "dollar investment."
"About $2.7 trillion of the $4.3 trillion in foreign exchange reserves are in dollar assets. The percentage should remain constant this year, the analysts said.
"With the large build-up in reserves over the past decade, far more than is required to meet liquidity needs, central banks have become increasingly focused on maximizing the long-term return, while controlling risk," the analysts said. That favors MBS since their potential to outperform Treasuries increases the longer they are held, they said.
21% of the banks said they would boost purchases of the securities backed by monthly payments on U.S. home loans. Sixteen percent said they would buy more agency debt; 14 percent plan to purchase asset-backed securities; 12 percent intend to buy covered bonds, or European debt secured by mortgages; and 8 percent said they want more gold and Treasury inflation-indexed securities.
Corporate bonds and stocks rounded out planned central bank portfolio additions at 5 percent and 4 percent, respectively, the survey said."
Welcome to the new world of securities buyers with a printing press in the backroom.
Some more data from the report.
"Six percent of central banks said they would reduce holdings of agency bonds and 5 percent expect to cut back on Treasuries, it added.
Growth of reserves outside the United States is especially strong at Asian central banks, which UBS estimates will average $30 billion a month. Seven of eight of the largest holders of foreign exchange are in Asia, led by China and Japan, the UBS analysts said.
For MBS, the reallocation of the existing foreign exchange reserves as central banks make their portfolios more closely match benchmark indexes could push $82 billion a year into the bonds, they said. Another $34 billion a year from reserves accumulated in Asia would bring the total of new MBS purchases to $116 billion, or 58 percent of expected new supply in 2006.
Foreign holdings of MBS in the last year have already increased to $259 billion from $176 billion, UBS said, citing Treasury data. Official holdings, including central banks, nearly tripled to $66 billion from $23 billion.
In addition to Asia, UBS also said it expects "big reserve accumulation" in the oil-exporting countries."
I am kinda shell-shocked from such news.

The Mogambo Guru Becomes "The Pessimist"

A barrage of apocalyptic economic news has overwhelmed the Mogambo Guru to the point where his depressive, perspectiveless side of his borderline personality has taken over. A quick review of this week's column shows that the title "The Realist" would actually be a better choice. I'll talk about it with him once his medication regime has been restored which probably urgently needs a good dose of rising gold which he thinks is just hidden around the corner.

The Pessimist
by The Mogambo Guru
Last Friday, after gobbling a handful of assorted tranquilizers washed down with coffee, my wife tied me to a chair before looking in the Wall Street Journal to see the report of new Total Reserve Bank Credit on page C 12. Cinching the last of the knots, she picks up the paper and reports "It says here that it's up $2,460 billion."
I breathe a sigh of some relief. Two and a half billion bucks ain't too bad for one week. Even a little on the low side, maybe! Suddenly she throws the newspaper at me and starts to walk out, and I say "Hey! How about looking up U.S. Gov't Securities: Bought Outright?" I hear only scorn in her voice as she says "Look it up yourself, jerk!"
So I ask, "Well, how about untying me so that I CAN read it myself?", but she was gone, although I could hear her muttering to herself as she walked down the hall, "Hahaha! Screw you, creep!"
The Ultimate In Fiscal Fraud
After awhile I get tired of alternately begging for help and screaming death threats at her, so I decide to try and find out on my own. I finally manage to loosen one corner of the strip of duct tape that she put over my eyes, and I could use my Amazing Mogambo Super Vision (AMSV) to read "U.S. Gov't Securities: Bought Outright" next to the number $1,423" which means the evil Federal Reserve bought up $1.423 billion dollars in government bonds last week, after first creating the money to do so.
What a racket! This is the ultimate in fiscal fraud and they all should all go to prison for it. And if the American government was not filled with (being as nice as I can manage) stupid, ignorant, untrustworthy, lying, corrupt, cheating bastards and whores, that's where they would all go.
Bank's Reserves At An Insignificant $42 Billion
But if I dare to show up at the Federal Reserve to make a citizen's arrest, dressed for the occasion in my best Rambo outfit, complete with headband and .30 caliber, belt-fed, air-cooled machine gun under my brawny, manly Mogambo arm (BMMA), the cops come roaring up with sirens blaring, not help me round up the economic terrorists that have taken over the Federal Reserve, but to arrest ME! Like I'M the one guilty of something!
But those vainglorious days seem now over, and I am stuck here, ignominiously tied to a chair, peeking out from under a blindfold. Then I notice that Required Reserves in the banks dropped back to an insignificant $42.459 billion.
What fraud! What audacity! What an embarrassment that the self-important nitwits at the nation's universities see nothing wrong with not only an out-of-control fractional-reserve banking system, but one where there are literally no freaking reserves at all (NFRAA)! Money is literally created out of thin air, with no backing from deposits whatsoever! This level of risk and multiplication of the money supply is insane! This is beyond insane! And yet, there it is!
I also noticed that custody Foreign Holdings of government debt rose $11.4 billion in the last week, too, and so I amused myself with laughing at foreigners while I struggled at the ropes.
Chuck Butler of EverBank notes that the G-8 finance ministers are meeting again and he reports that Brad Setser of Roubini Global Economics said that the ministers are promising not only more action, but "vigorous" action, regarding the global economic imbalances. Yow!
"Vigorous" action ought to produce a lot of fireworks, including a rise in the dollar price of a barrel of oil. And if you have not been out shopping for oil-related stock lately, then I strongly suggest that you chug down the rest of that morning "eye-opener" can of beer and buy some. Pronto.
And this suggestion that you load up on oil is because the dollar is going to go down in purchasing power, which is the whole point of the G-8 promising "vigorous" action.
You will, theoretically, seemingly make a lot of money on this oil trade, but that is just an example of "money illusion"; you THINK that you made money because you bought low and sold high, but remember; it is still only a damned barrel of oil! And now the "money" you think you "made" only offsets the loss in buying power that your money has suffered. And to make it worse, you are actually a loser, since you have to pay taxes on your nominal "gain"!
Global Inflation At The Fastest Pace In A Decade
And to make it worse yet, you have to pay higher prices for gasoline when you gas up the car to go pick up the profits and mail the check to the IRS! Hahahaha! Welcome to the world of inflation! And it will get worse, as evidenced by Barclays Capital estimating that global inflation is increasing at the "fastest pace in a decade."
If you are panicking about the swoon in gold lately, then I pity you, because I know that you have not achieved True Mogambo Enlightenment (TME), and thus I further I know that you will be, to your dismay, repeating my again course next year. And while I may be seeing your happy little face again next term, we will obviously not be seeing Jim Otis, aka The Optimist, who demonstrates flawless TME when he addresses the "near certainty that inflation and world tensions will continue to get worse, so an opportunity to buy silver and gold at temporarily reduced prices is truly wonderful and positive news."
And the reason that he has the apt moniker "The Optimist" is that he hedges his bet about inflation with the phrase "near certainty" about price inflation, hoping for, I suppose, a chance that a miracle of some kind will occur.
The Pessimist
Tired of being referred to in the press as "local obnoxious halfwit", I seize this opportunity to re-invent myself to become (insert trumpet fanfare "taa-daa!") "The Pessimist", because I am 100% sure that we are going to get price inflation. Lots of it. I am so sure, so very sure, so very, very sure that price inflation is coming because it has always, always, always followed monetary inflation.
As proof of monetary inflation, David Tice of the Prudent Bear Funds, in his semi-annual report, notes that "Across the world, domestic credit systems are firing on all cylinders. Double-digit credit growth now blankets the economies and asset markets of the U.S., the Eurozone, the United Kingdom, Scandinavia, China, Russia, India, Australia, throughout non-Japan Asia, and elsewhere. To be sure, global monetary conditions have never been so loose."
And when you have, like we do right freaking now, lots and lots and lots of growth in the global monetary base, especially after whole decades of it, you eventually run out of bubbles in the stock market, bubbles in the bond market, bubbles in the size, scope and cost of government, and bubbles in the housing market. That's when you finally get around to bubbles in commodities. Gold is a commodity, AND it is a store of wealth.
Weekly Reminder To Buy More Gold
And if you believe that there are such things as "lessons of history", then as price inflation heats up and up, as the value of the dollar goes down and down, gold will go up and up, just like it has all the other times in history when somebody's stupid government caused too much money to be created. And especially those times when the "too much money" created is not just by literally printing up cash with paper and ink, but creating the money from debt! Hahaha! But now, this one time in history, you think gold is going to go down as a result? Hahahaha!
The losses suffered in markets around the world, raging from 5% to over 50%, have given me a reason to moan. Stocks. Houses. Bonds. Precious metals. Everything. In stocks alone, Bloomberg reports $1.85 trillion in market value has been lost, worldwide, this month.
Wealth Effect And The GDP
It makes me wonder about the so-called "wealth effect", which is the phenomenon that you spend more money (giving GDP a boost) when you feel rich. Dr. Kurt Richeb├Ącher notes that "It has been calculated that the 'wealth effects' on consumption have raised real GDP growth by 1.5 percentage points a year for the past five years. With nothing in sight to replace this monstrous asset and credit bubble, a sharp downturn of the U.S. economy is the most obvious conclusion."
Now add in that $1.85 trillion of "wealth" lost this month and then tell me your new updated GDP estimate!
Consumer Credit Still Rising
But Americans are as optimistic as they are ignorant and greedy, and to prove it, the Federal Reserve reported that consumer borrowing rose by $10.6 billion in April, which works out to an annual rate of increase of 5.9%. Total consumer credit is now a record $2.17 trillion.
My wife was behind a woman in line at the grocery store, and she was saying as how "We owe $12,000 on our credit card and we don't know how we are going to meet the minimum payment"! And how did she pay for the groceries? With a credit card! Hahahaha!
A Mogambo Cartoon In Words
It was from these humble, humble beginnings that the new Fabulous Mogambo Editorial Cartoon (FMEC) was born, and it is not only sure to go down as an Historical Mogambo Milestone (HMM) of some kind, but hopefully also win some kind of prize or award or something that I can turn into some cash, and pronto.
Anyway, the new Mogambo cartoon is a delightful series of similar vignettes, starting with a woman at the grocery store checkout counter paying with a credit card, and then, in successive panels, to City Hall paying with a credit card, to the county paying with a credit card, to the state paying with a credit card, and finally to Congress paying with a credit card, all saying the same thing: "Goodness me! I don't know how we are going to make the minimum payment on the credit card this month!"
Import Prices Go Skywards
The Labor Department said that the U.S. April trade deficit widened 2.5% to $63.4 billion. The prices of imported goods was up 1.6 percent for the month. The month!
This increase came on the heels of a 2.1% surge in April. MarketWatch took a look at the report and noted that excluding all fuels, import prices rose 0.7% last month. Non-agricultural exports rose 0.6%. Export prices were up 3.4% in the past year. Prices for imported food rose 1.3% in May. Anywhere you look, inflation is rising.
Richard T. Williams reports that "Of the mortgages written in the last year, approximately worth $3 trillion, upwards of 29% have no equity in their homes. For almost a third of recent mortgages to be underwater suggests that potentially well over $1 trillion worth of homes could come to market as homeowners turn in the keys to banks and walk away from their failed investments."
Foreclosures Rise 75% Y-O-Y
This must not come as big news to the DailyReckoning.com folks, as they report "the housing bubble is over. Mortgage activity is at a four-year low. Nationwide, foreclosures rose 75% during the first quarter, over a year ago."
Miko reports from Florida's south central west coast that one big builder has had sales drop 97% from the same period a year ago, and another has had "A 100% decrease in sales."
Short Squeeze In Silver Imminent
If you want another reason to be bullish about silver, then Ted Butler's essay at InvestmentRarities is what you should read. He first starts of with the snide remark, "CFTC doesn’t even bother to analyze the data it monitors and publishes", and then seamlessly goes on to say "According to the COT, for positions as of May 30, 2006, the 4 or less large traders in COMEX silver have a net short position that is more concentrated than at any time in history." I can sense that you are salivating at the potent of a short squeeze. Me, too! I make a note to myself on my saliva-soaked notebook, "Buy more silver!"
Mr. Butler is obviously repelled at all this salivating, what with dribbling down my chin and all. So he quickly goes on "It is far more lopsided in concentrated shorts compared to concentrated longs than any other major market. This short position is not only 3.5 times greater than the concentrated net position of the 4 or less largest long traders, it is also more concentrated and larger than any position held by the Hunt Brothers in the great silver manipulation of 1980. In the silver market, the concentrated short position towers over the concentrated long position to an extent not found anywhere."
"An extent not found anywhere." Oops! More salivating! I wipe my chin with my sleeve and underline my "Buy more silver!" note as Mr. Butler goes on to say "The actual numbers state that the 4 or less largest traders are net short the equivalent of 181,584,000 ounces, while the 4 or less largest traders are net long 52,506,000 ounces. To put this short amount into perspective, it is more than is produced annually on the largest silver producing continent, North America (Mexico, US and Canada). It’s larger than the combined total holdings in the COMEX warehouses and the silver ETF (SLV)."
How to sum up? He does it easily when he says "The concentrated net short position is staggering in size."
A Short Position On A Third Of The World’s Silver
And speaking of silver, alert reader CBIP sent the news that "The 2006 Silver Survey claims that at the end of 2005 worldwide silver bullion stocks (government, COMEX, European traders, etc.) were approximately 600 million ounces. The CFTC data indicates that the largest four (or less) traders currently have a net short position of 187 million ounces, equal to more than 30% of all the silver bullion that exists in the entire world!!" Note the use of the rare double exclamation point!
He writes "Four (or less) traders short an amount equal to nearly 1/3 of the bullion that exists in the entire world, possibly a naked short, and the CFTC has let this situation develop under their very noses. Spooky, eh?" he asks.
Soft Commodities To Zoom In Hot Weather
From Bloomberg we learn "Corn prices may gain for a third week and soybeans may reach a six-month high on speculation that hot, dry Midwest weather will damage the two biggest U.S. crops. Fields from southern Texas to Iowa got about half the normal precipitation over the last six months, creating soil conditions ranging from abnormally dry to extreme drought."
It seems like it was just a few months ago that I reported that in the warm El Nino/La Nina region of water off the Pacific coast was not only (if memory serves) larger and warmer than at any time in the last, oh, zillion years or so, but it has appeared earlier in the year than it ever has before, too. The lesson was that the rain patterns were going to be disrupted to the extent that it will rain where it normally does not rain, and it will not rain where it normally rains. And, if I understand it correctly, most farmers plant their crops where it normally rains.
Perhaps all this has something to do with Jeff Wilson, writing at Bloomberg, reporting that the government said “The U.S. winter-wheat crop will be 4.5 percent smaller than forecast in May as unusually hot, dry weather last month from Texas to South Dakota damaged the crop.”
BusinessWeek.com reports that the Agriculture Department revised its Kansas winter wheat estimate to 291.4 million bushels, 23% less than last year, and that about 50% of the state's wheat is in poor condition, 30% in "fair" condition. 18% was "good' and 2% was "excellent" shape.
As a nation, the Agriculture Department revised their winter wheat estimate to be 1.26 billion bushels, a whopping 16% less than last year.
George Kleinman, the Editor of Commodities Trends, writes "Due to bone-dry growing conditions in the Great Plains this spring, the hard winter wheat crop was a disaster--the second-smallest yield in 30 years. Texas and Oklahoma combined will produce their smallest wheat crop in 50 years. And wheat production on a global basis is slated to fall sharply in the coming 12 months."
And with China and India, a third of the world's population, getting bigger, and whose middle classes are getting bigger, and whose economies are getting bigger, and who will all want to consume commodities, do you still wonder why I am bullish on commodities?
And it is not just me, either! The famous Jim Rogers says "Most commodities now are somewhere between 80% and 90% below their all-time high, especially adjusted for inflation."
Avoirdupois Measurements
Many people wrote to say that last week the stupid MoGu contained a figure for the weight/volume (mass) of silver that used 16 ounces to the pound, and not the 12 troy ounces. My point was that it was about mass (weight and volume). So 16 to the pound or 12 to the pound, it is still a pound.
But that was not good enough for the pickier Mogambo larva (PML) among you. To address these concerns, I use the note sent to me from Alert reader Mike A, as his was one of the few whose email did not address me as "moron" or "defendant."
He writes "Just wanted to give a quick correction with regards to troy vs avoirdupois measurements. A troy pound is 5760 grains (about 373.24 g), while an avoirdupois pound is 7000 grains (about 453.59 g), so one troy oz = 31.103477 grams. With the density of silver being 10.49 g/cm^3, this means a cubic foot of silver would be 297045.5 g which when divided by 31.103477g = 9550.23 troy ounces. At 13 bucks a shot, that's 124,153 bucks a block."
Safe Haven Treasuries? HaHaHa!
If you have any doubts that idiots infest the world of investments, then a headline from Bloomberg ought to dispel them. "Treasuries Rise as Investors Seek Haven While Rates Increase" it read. Hahahaha! Bond prices go down when rates increase, and yet these morons are going to buy Treasuries as a "haven"? Hahaha!
One of the peculiar things about anti-psychotic drugs is called Metabolic Syndrome. What happens is that there are a couple of long-term ugly side effects, the first of which is steadily-increasing obesity, which leads to diabetes and obesity-related problems, and the other side effect is steadily-increasing elevated triglycerides and cholesterol, which leads to cardiac disease, high blood pressure, and the tripling of the risk of strokes and coronary heart disease.
So the tradeoff is to choose between taming schizophrenia, or having a heart attack while you are on your way to have the last bit of your legs amputated. Interesting choice!
Anyway, this whole unpleasant business is a Mogambo Medical Metaphor (MMM) for the actions of the Federal Reserve, which is always administering "medicine" to the warped, bizarre monetary schizophrenic idiocy of Americans.
Sure, with the constant administration of the "medicine" of lower interest rates, new debt and new money, the Fed "cures" a slow economy temporarily. But the Metabolic Syndrome of it is that you get a bloated, fat-clogged, diabetic basket-case that needs constant injections of more monetary medicine, and an early death.
Bill Bonner of DailyReckoning conjures up the excesses of the French Revolution when he writes "When the lumps figure out what has happened to them, they are likely to have revenge on their minds...and a rope in their hands." And truer words were never spoken, as history is completely devoid of any example of bankrupted, destitute, desperate people NOT taking violent action against somebody or something.
Non-Market Inflation
Remember how Bernanke was saying that inflation in "non-market" costs were not included in inflation? Well, I was at a little shop here recently, and I noticed a sign that read "We no longer accept credit cards or debit cards." I was kind of surprised, and asked the owner about it. "Does this mean you will take only cash or checks?" I casually remarked, and he said "Yes."
And so, curious, I asked the next obvious question, "What are you, some kind of idiot or something?" He answered "No, you rude, creepy bastard. Most of my sales are for small amounts of cash anyway." Eager to ask him another question and noting his British accent, I queried "Then why don’t you accept credit cards, you stupid Limey trash?"
He reached under the counter, took out his latest statement from the people who process his credit card and debit card transactions, and shoved it into my face, saying "Because the fees are so high I lose money with every sale, you despicable American bit of stinking dog crap."
This Is Ridiculous!
Taking the statement in hand, I see that since he stopped taking credit and debit cards he has accrued $162.51 in credit/debit sales, and for that he paid a total $42.94 in fees and charges. There were a total of six mysterious fees, which are batch closure fee, authorization fee, settlement statement fee, credit batch settlement fee, customer service fee, a mc/visa minimum fee, plus a 2.2% "service charge" on the total amount of each sale! This works out to 26.4% of gross sales!
But his gross profit on each sale only ranges from 6-20%! So if he sells an item where his gross markup is only 6%, then if he accepts a credit card in payment, he will lose 20.4% on each sale! His best-case scenario is if he sells, on credit, an item with a 20% markup, because he only loses 6.4% for each one of those he sells!
This prompts the Mogambo Essay Question Of The Day (MEQOTD): "How long do you stay in business if you lose money every time you make a sale?" You will get extra credit if you can possibly work "Make it up on volume" into your answer and somehow make it funny again.
And you want to hear something else? You know those credit cards where they give you, the card holder, "up to 5% cash back" for each time you use the credit card? Well, guess what? They charge the 5% cash back to the retailer!
And, in the real world, just to keep from going bankrupt the retailer has to start charging higher prices, which we common, scumbag, hateful little Mogambo-type people (CSHLM-TP) immediately recognize as price inflation. The thing that has always destroyed currencies, people, economies and countries.
Suddenly, I throw back my head and laugh demonically, startling everyone in the store, my loud, obnoxious voice eerily echoing as if resounding from the depths of hell. "Welcome to the ugliness of price inflation, you stupid earthlings! Price inflation! Hahahaha! The inevitable consequence of monetary inflation by the Federal Reserve! And what inevitably follows price inflation is a horror that only befits a country so foolish, so insane, so deliberately stupid, so typically American as to disregard its own Constitutional requirement that money be only of silver and gold! Hahahaha!"
And as I walked out, he was screaming at me "And next time, I want to see a green card!"
Toni Straka on his PrudentInvestor site has juxtaposed two quotes. "EXCERPT FROM THE US CONSTITUTION, Article I, section 10: No State shall ... coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts."
And the other contrasting quote posted right under it was "FROM THE US TREASURY WEBSITE: 'Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything. The notes have no value for themselves, but for what they will buy.' " Ugh.
****Mogambo sez: To all of those whose selling made the price of gold and silver fall, I send a Hearty Mogambo Thank You (HMTY)! Now those whose education is more extensive, and can thus see the folly in selling, can buy those metals at bargain prices! HMTY!

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.

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