The Mogambo Guru Sees Yields Skyrocketing

Wednesday, June 21, 2006

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 " 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 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 "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, 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 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


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