India - What A Difference 25 Years Can Make

Thursday, August 17, 2006

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

Summer Break

Thursday, August 10, 2006

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

Holi festival of colours

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

Thursday, August 03, 2006

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

The Mogambo Guru - Gold Is My Only Hope

Wednesday, August 02, 2006

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

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

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

Paulson Sees Energy Security As Biggest Threat In Debut Speech

Tuesday, August 01, 2006

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

Wikinvest Wire