Fed Statement Sounds A Nuance More Hawkish

Tuesday, January 31, 2006

The FOMC has delivered a widely expected quarter percentage point hike in the Fed Funds rate. Comparing the statement with the one from December the only outstanding change is the dropping of the word "measured" and I may be in the minority when I interpret this as a move that gives room for rather more hawkish expectations. I arrive at this conclusion because the Fed still sees a solid economic expansion but emphasizes elevated energy prices.
As the Fed signalled "some further policy firming" instead of the measured pace announced in earlier statements I am ready to bet that the Fed Funds rate will not stop at the current 4.75% and that we will see Fed Funds zooming into the 5+ percentage range as there is no reason why energy prices - which have begun to eat into core inflation - should decline significantly, given the heightened geopolitical tensions surrounding Iran.
Incoming chairman Ben Bernanke and his voting members will have to digest a lot of economic data in the two-month period ahead of the next FOMC meeting on March 28 which will be followed by another two-month break. If inflationary pressures persist it is not unreasonable to keep the possibility of a 50 basis point hike on the radar, simply for the fact of the long time between the first 3 FOMC meetings of 2006 and no sign of softening commodity prices anywhere on the horizon.
Crude oil declined marginally today but the spike of gold above $570 per ounce is a clear indication that markets are anticipating higher inflation to come. The tensions with Iran are the single most important factor in this and they will not vanish in the next months. Expecting a strike against Iran this spring the Fed could find itself with a lot more inflation on hand than it can handle without sending stocks and bonds into a descending pattern.
Comparison Of The Last 2 Statements:
The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 4-1/2 percent.
The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 4-1/4 percent.
Although recent economic data have been uneven, the expansion in economic activity appears solid. Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained. Nevertheless, possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures.
Despite elevated energy prices and hurricane-related disruptions, the expansion in economic activity appears solid. Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained. Nevertheless, possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures.
The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives.
The Committee judges that some further measured policy firming is likely to be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives.
Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Jack Guynn; Donald L. Kohn; Jeffrey M. Lacker; Mark W. Olson; Sandra Pianalto; and Janet L. Yellen. (Regional Fed members rotated)
Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Richard W. Fisher; Donald L. Kohn; Michael H. Moskow; Mark W. Olson; Anthony M. Santomero; and Gary H. Stern.
In a related action, the Board of Governors unanimously approved a 25-basis-point increase in the discount rate to 5-1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Kansas City, Dallas, and San Francisco.
In a related action, the Board of Governors unanimously approved a 25-basis point increase in the discount rate to 5-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.

ECB Members Sold Only A Few Ounces Of Gold Last Week - EU Current Account Deficit Explodes

The member central banks of the ECB sold gold with a value of 18 million Euros in the week ending January 27 after a pause in the preceding week. The remarkable slowdown in gold sales since the beginning of the year continues with these figures, reported in the weekly consolidated financial statement of the Eurosystem.
The reduction certainly contributes to the steep advance of gold which today trades around $570 an ounce, 11% more than a month ago. Alert me to any investment instrument or market that has done better in January.
The Rich Nations Are Not That Rich Anymore
Looking at the current account deficit in the EU my belief that we have to change long-standing terms gets confirmed. With the US and Europe running current account deficits that are reflected in the current account surpluses of commodity-rich Russia and production powerhouse China the words rich and poor have to be exchanged in a geographical and monetary view.
Eurostat reported yesterday (pdf) that the 25 members of the EU have again recorded a current account deficit of 21.8 billion Euros in the 3rd quarter of 2005, the same as in the 2nd quarter. In a year-on-year comparison the trend looks quite bad: The comparison deficit figure from the 3rd quarter of 2004 is 9.1 billion Euros which means that the deficit has risen an astounding 140%. In comparison to GDP the current account deficit has doubled to 0.8%.
My guesstimate that European consumers are tightening their belts because of higher unemployment and rising inflation was confirmed in local export figures from Austria. Austrian exports have risen 44% since 2000.
As Austria has a strong machinery and special steel industry that is very successful in the Far East this corresponds with my anecdotal evidence which I get from wandering shopping areas in Vienna and talking to acquaintances who all say that their business is declining.
I have the impression that more and more mom-and-pop stores in the retail sector are closing. After standing empty for extended periods the new tenant is either a 1-Euro- or second-hand shop if not a Pizza takeaway or a Kebab grill. Retail in Austria has one reliable group of shoppers left, though: East Europeans. Welcome to the shifting new world.

The All-Dominating Handover

Monday, January 30, 2006

Let me first place a bet. US markets will go up in the first half of this week as I am confident the Fed will inject more than enough liquidity and the FOMC announcement will be leaning on the optimistic side.
The handover of the Fed chair from Alan Greenspan to Ben Bernanke is too important an event to allow anything else than greetings from the bull. Amidst growing fears that the current imbalances in the global economy are not sustainable - loudly voiced by ECB president Jean-Claude Trichet over the weekend - it would be a bad omen if declining asset prices would show otherwise. The owners of the Fed cannot afford a down-move in times of an anyway quite fragile economic outlook that is further burdened by exploding commodity and energy prices in the runup to a seemingly inevitable violent confrontation with Iran.
But the barrage of indicators (after last week's unexpectedly weak GDP data - although not all that unexpected because consumer credit data had shown that Americans were not storming stores wallets in hand recently) will pose an obstacle to the bulls as consensus estimates point towards a confirmation of slower growth. Surf to econoday for this week's macroeconomic indicators. And don't miss out on Tim Iacono's post about good ole' John Snow's attempt to calm the shock.
The strong surge of gold and silver prices over the past 4 weeks should also not be discounted when remembering the strong correlation of precious metals values and future inflation expectations. Gold started on a positive note in early Sydney trading.
While the Fed can be expected to continue its policy of baby-steps by raising the Fed Funds rate to 4.50% - at least this is what markets expect according to David Altig's Fed Funds expectations model - the statement will probably be very brief. Expect it to emphasize the point that future monetary policy decisions will be based on future economic data as Bernanke needs to start off a clean table at the next FOMC meeting at the end of March.
That leaves eight weeks where markets can ponder the pro's and con's for a pause or a continuation of the baby-step policy. In this period we will also get a clearer picture from the second and third reading of last quarter's GDP data. The Capital Spectator had a good post on this last Friday.
For my evaluation of Greenspan's legacy I recommend to scroll to the top and enter "Greenspan" in the "Search this blog" input box on the left side. If you lack time read at least the posts
Your reading saves me from repeating these valid issues one more time.
Rotations In The FOMC
In the Federal Open Market Committee (FOMC) the cards are getting shuffled thoroughly. While George W. Bush announced the nomination of Kevin Warsh and Randall Kroszner to the board of governors - where two seats have been vacant for months and will remain so for another couple of weeks - the annual rotation of voting members from the regional Feds will bring in the following new voters:
  • Jack Guynn (Atlanta)
  • Jeffrey Lacker (Richmond)
  • Sandra Pianalto (Cleveland)
  • Janet Yellen (San Francisco)
The backseats will be taken by the voters of 2005:
  • Richard Fisher (Dallas)
  • Michael Moskow (Chicago)
  • Anthony Santomero (Philadelphia, surprisingly announced his retirement by March 31 from his post last month)
  • Gary Stern (Minneapolis)
While we can be sure from last year's votes for a steady policy of "measured" steps that none of the outgoing FOMC voters exposed himself as either a dove or a hawk the new voters will certainly spend long hours digesting the data input fed to them by their economist teams before they establish their reputation.
This means that all options are open although I have problems to believe in a near end of the current rate cycle for two reasons.
  1. The weakening dollar has to be kept "attractive" to avoid a run to the exit.
  2. Prices are rising more than inflation data shows.
Sitting in the armchair I am happy to be able to offer another hand as well.
  1. If the coming economic data indicate that the Fed's baby-steps have been more effective than anticipated the FOMC will seriously discuss a rate pause in March.
  2. The world will never run out of wonders.
But let's not forget one all-important fact. Although the Fed raised rates 13 times in a row it has failed to close the liquidity tap as M3 figures clearly show. Stopping the publication of M3 will not make the problem go away.
Gentlemen, place your bets.

Warsh, Kroszner To Join The FRB

Friday, January 27, 2006

UPDATES WITH PICTURES OF THE NOMINEES
Bloomberg TV reports that George W. Bush is likely to nominate Kevin Warsh and former administration official Randall Kroszner to the Federal Reserve Board (FRB). For some background surf to this and this post.
The newbies have been groomed in Bush's administration already. Warsh has been one of Bush's special assistants on economic policy since 2002.
The National Economic Council (NEC)at the White House was created by former president Bill Clinton in 1993. In his 1992 campaign, Governor Clinton said that he wanted to create an "Economic Security Council" that would be similar to the National Security Council; later, however, he dropped the word security to avoid the possibility that security considerations might be seen as overriding trade and economic goals in dealing with nations such as Japan, Russia, or China.
Following his inauguration, Clinton promptly made good on his promise. On January 25, 1993, he signed Executive Order 12835, and the National Economic Council (NEC) came into being.

Kevin Warsh (and Jane Lauder)

PHOTO: Kevin Warsh (and Jane Lauder) at last year's Bloomberg party, considered "the hottest after-party in town" by Washingtonlife.com. Photo courtesy of Washingtonlife.
Warsh has been working as a lawyer at Morgan Stanley in the last 7 years.

Randall Kroszner

PHOTO: Randall Kroszner. Photo courtesy of aei.org.

Kroszner is currently an economics professor at Chicago university. Find his bio here (pdf).
The two new FRB members will need to take a good look at the Congressional Budget Office's (CBO) outlook on the budgets 2006-2016 which was published yesterday (pdf).
US Budgets 2006-2016

The CBO projects a deficit of up to $360 billion this year or 2.8% of GDP, assuming a GDP growth rate of 3.6%. Good luck.

A Mixed Bag Of News - And They Are All Important For YOU

Being confident that fellow bloggers in my Blogroll will deliver fascinating comments on the weaker than expected US GDP figures and the higher than expected GDP deflator I take the liberty to sum up several important pieces of news that have been overlooked in most other media or have not been reported anywhere else than in this blog. Read the whole post for a disturbing potpourri.
EU Moves To Control Individual Gold Transactions
EU members are silently preparing laws that will introduce a surveillance of individual gold transactions. Having been at a bank today to pick up another gold coin I was told that Austria prepares a law that will require people to identify themselves when buying or selling gold. The new law will also include sales of other precious items like expensive watches, jewellery etc.
I cannot verify that this move in Austria will be enacted in other countries in the EU as well, but experience tells me that big brother in Brussels might stand behind this new piece of legislation.
Once these news spread around it is likely we see a run on gold in Europe. After all it is the only currency that has kept its purchasing power over the last 6,000 years. I would be most grateful if European readers have some additional input on this issue. Please post it in comments.
On a sidenote: The ECB's member central banks have not sold any gold in the week up to January 20. This is the first time that gold sales have come to a complete halt and another indication that Europe's central bankers begin to realize that selling off their hardest asset might not have been such a good idea after all. Return to this blog for this week's sales figures on coming Tuesday.
US Homeland Security Prepares Restricted Access To Safety Deposit Boxes
Internet forums like Democratic Underground carry plausible reports that the US Homeland Security is silently preparing to control access of citizen's safety deposit boxes at banks.
From one of these reports:
A family member from Irvine, CA (who's a branch manager at Bank of America) told us two weeks ago that her bank held a "workshop" where the last two days were dedicated to discussing their bank's new security measures. During these last two days, the workshop included members from the Homeland Security Office who instructed them on how to field calls from customers and what they are to tell them in the event of a national disaster. She said they were told how only agents from Homeland Security (during such an event) would be in charge of opening safe deposit boxes and determining what items would be given to bank customers.
At this point they were told that no weapons, cash, gold, or silver will be allowed to leave the bank - only various paperwork will be given to its owners. After discussing the matter with them at length, she and the other employees were then told not to discuss the subject with anyone.
It has to be noted that Diebold has introduced new access systems for cutomer's bank vaults that require electronic fingerprint identification. Diebold also supplies voting machines... So don't be surprised if your fingerprint will not work exactly at the moment you will need the contents of your safety deposit box most.
US Public Debt Surpasses The Debt Ceiling - No More Updates Since
US public debt stood at $8,185 million millions - you can also call it $8.185 trillion - on January 24. The debt ceiling at $8.184 trillion would require Congress to enact a raise. I have not come across such news. Of note is also that the Treasury's webpage, called "The Debt To The Penny", has not been updated since. Usually they provide this information with a delay of one day.
Weak Results At The Treasury Auction
Bloomberg reported on January 25 that treasury bond prices were falling as a reaction to the weak demand at a $22 billion government auction.
From the report:
U.S. Treasuries fell as the government's sale of $22 billion in two-year notes drew the weakest demand since April. The declines pushed yields to the highest in more than a month.
The sale came less than a week before the Federal Reserve is likely to lift its target rate a quarter percentage point to 4.5 percent, according all 39 economists surveyed by Bloomberg News. The securities drew a yield of 4.427 percent, above the 4.416 percent pre-auction average estimate of four bond-trading firms surveyed by Bloomberg.
"You can't call it a good one,'' said Ray Remy, head of fixed income at Daiwa Securities USA Inc. in New York. The firm is one of the 22 primary dealers of U.S. government securities that are obligated to bid at the auctions.
Are foreigners suddenly realizing that there is no way the USA could ever repay the biggest mountain of debt ever accumulated on earth in history?
Pensions? Only For Board Members
The Wall Street Journal, not exactly known for its progressive role in the class struggle, had a report (by Michael Schroeder) on deferred compensation plans for board members.
From the report:
Rankled by the rich retirement payouts many troubled companies make to executives, Congress is moving to block such companies from funding the lavish packages.
The provision, tucked into legislation that would shore up the federal agency that provides a safety net for private-sector pensions, would keep financially troubled companies from setting aside any special pension benefits for top executives if their pension plans for rank-and-file employees weren't adequately funded.

Pensions? Only For The Top Brass
GRAPH: At the same time when most companies are looking to get rid of their pension plans for Joe Average they are upping the plans for their board members. Most plans for the board are designed in such a way that members will also receive a pension in the event of a bankruptcy. Graph courtesy of The Wall Street Journal.
To continue from the report:
"We've heard too many stories of top executives of bankrupt companies sticking workers with unfunded pensions while running off with millions of dollars of so-called nonqualified pension benefits," says Senate Finance Committee Chairman Charles Grassley, an Iowa Republican...
The House plans to press for language in the measure that would block payment of new benefits to every manager covered by a troubled company's executive retirement plan. The Senate and the Bush administration, according to House and Senate staff members, believe the new rule should apply only to the company's highest-ranking executives. If a troubled company were to go ahead and fund its executive plans anyway, it would face stiff tax penalties...
Over time, the plans added generous benefits and covered a greater number of salaried employees. Now, more than 90% of the largest companies offer nonqualified deferred executive compensation plans, according to a new survey of the 1,000 largest companies by Clark Consulting, a Chicago benefits consulting firm. Most companies have expanded the programs to include all managers with annual salary and bonus exceeding $150,000, benefits experts say...
I have always been critical about the lavish levels of personal security managers have been awarding to themseves because they always argue that their generous pay packages were a compensation for the higher risk exposure they face. Now I ask: Where is the risk when they drive a company against the wall and will still be rewarded with more money for their failure?
Why Is The EU/ECB So Confident About An Economic Upturn?
In Europe politicians have recently shown more optimism that the EU will continue on an upward economic path. Looking at the figures in the ECB's statistical handbook (pdf) I wonder about their confidence.
Industrial production came in at an annual growth rate of 0.2% in October (September: 1.2%) but nominal turnover was reported 1.4% (September: 4.8%) higher.
I read from this: Sluggish activity burdened with higher prices, i.e. INFLATION.
ECB: M3 Growth Slowed A Bit in December, M1 Is Up Again
The ECB today published the latest money supply growth figures. According to the press release, M3 growth slowed to 7.3% (November 7.6%), but M1 growth accelerated again to 11.3% (November: 10.4%) or the highest rate ever recorded for the common currency. M3 grew again on the back of increased government and consumer borrowing.
The growth of M1, which consists of cash and deposits on checking accounts, is particularly puzzling. Is this a sign that drug traders are increasingly demanding Euros in their transactions? As the biggest Euro bill has a 500 mark printed on it, it is far more convenient for large cash transactions than the $100 bills, one of which is worth only some 82 Euros today. I recently read somewhere that the most 500 Euro notes circulate in Spain. This country is the major landing point for smugglers coming from Morocco and Latin America.
Does The US Prepare An Airstrike Against Iran?
I finish this list of news with the notion of unconfirmed reports that the US army has already moved 70 attack aircraft to the Iraq/Iran border. That is pretty much for an attack on Iran's nuclear facilities.
For all this I sign off with my perma-message to accumulate more gold as the odds for statistical tail events are definitely much higher this year than they were in 2005. In times of growing uncertainty gold has always proven to be the ultimate safe heaven.

Check Out The Indians' Perception Of Gold

Sunday, January 22, 2006

I repeat myself when saying that India is the biggest buyer of gold since years, now to the tune of 600 tons per year or 100 tons more than the Western central banks are selling.
Watch this BBC newspiece that packs the Indians' perception of gold in a nutshell.
Add in that the Islamic world is pursuing a gold dinar and post your (dis)agreement that we are still in the early stages of the best bull market this decade will see.
9 days before the handover of the Fed from Greenspan to Ben Bernanke I would not rule out very erratic movements in all markets, though.
The long-term trends may get very distorted over the next 10 weeks as Bernanke will have to prove his hands on steering these wobbly markets and the Fed is increasingly considering asset prices in its monetary policy. At least on the East coast. Janet Yellen (Fed San Francisco) has the opposite view.
So far the easy money fraction has the upper hand, latest M3 figures show.
All this leaves 2 options: Turn into an insomniac as me and watch your positions 24/5 or stay aside for a while, sleeping soundly on some bullion.

Information Overload

Friday, January 20, 2006

Sorry. I am suffering from a huge bout of information overload.
  • Money supply exploding all over the world
  • GE net profit declines 46 %
  • Inflation figures are up everywhere
  • Gold does not correct
  • In 11 days Bernanke will become the skipper of the Federal Reserve
  • The time Iran needs to build a "nucular" bomb (Bushspeak) has shrunk from a decade to a few months according to MSM (commercial mainstream media.) Reminds me on Tony Blair's statement that Saddam could poison European targets within 45 minutes.
  • Crude oil steering towards all-time highs
  • GOP plagued by scandals, scandals, scandals
  • Ford plans to cut another 25,000 jobs
  • Bush needs to keep the liquidity-tap open in order to secure the mid-term elections
  • Housing bubble begins to pop
  • Bond prices are falling
  • The US wants Google's search records. Great! They wanna know what I think about. Remember, this data would give the administration a realtime clue what you are thinking about.
  • Why do MSM ignore the biggest bull of all: GOLD (exception: Bloomberg)
  • The presidential cycle (see picture below)

  • 4 year us equity cycle

Due to my annual health check I will not be able to post until next Friday.
Recommendation: Stay with gold, accumulate if there is a dip in the first quarter.

The Mogambo Guru On The Money Printing Excess

Wednesday, January 18, 2006

The world has become a split place it seems. While 99% of mainstream economists completely ignore the explosive growth in money supply, contrarians are all over the place warning that the ever faster money printing of governments worldwide will lead us into an inflationary disaster. Well, if I would not agree with them you would not be able to read the dire warnings of the Mogambo Guru here every week on Wednesday, by now renamed by a reader to Mogambo Guru Day (MGD). Enjoy this week's column.

The Money Printing Excess
by The Mogambo Guru
I knew something was wrong when I woke up Friday morning. Not only was my Wall Street Journal missing, but my wife was acting real nervous and suspicious, and the damned kid was hiding behind the couch. What the hell is going on? I soon found out, and, as obviously predicted, was highly frightened to see that Total Fed Credit actually declined by $17 billion last week! The ability, or actions, of the banks in creating money out of thin air was, gulp, lowered by $17 billion dollars? In one freaking WEEK?
To be fair, reversing the excesses of the customary end-of-year monetary goosing by the Federal Reserve is pretty par for the course, as it happens every year about this time. But meanwhile, the money supply is still growing quite handsomely, as reported by Bill Bonner at DailyReckoning, who writes "In the latest reported week, more than $25 billion was added to the nation's money supply. If this were to continue, it would add more new money in 18 months than the present value of all the gold ever mined." Hahaha! The money supply is going up faster than the growth in the economy, which means that prices will increase (to absorb all that money), and the supply of money is increasing, in one lousy freaking year, more than the value of all the gold in the whole world? And now you wonder if gold is going to go up in price? Hahaha! It's not IF gold will go up, my darling little Mogambo larva (DLML), but how freaking MUCH it is going to go up in price! And I am betting gold will go up a LOT! And if it does not, then I will be surprised as hell (SAH) because this would be the first time in all of history when gold did NOT rise mightily in price when faced with the enormous economic idiocies, like the ones that currently bedevil us, especially when using a fiat currency as money!
M3 Close To Growing At The Speed Of Light
But we aren't here to talk about gold and how freaking much money is going to be made in gold, although it is one of my favorite things to talk about. Instead, we were talking about the money supply, and almost as if by accident I happened to come across the essay "The Fed's Money Supply Armament Is Underway" by Robert McHugh, which was posted on Financial Sense. He writes that the money supply figure known as M3 "has been launched into outer space, up another $56.3 billion last week, up $92.4 billion over the past two. This is some real horsepower. Over six weeks," he says, M3 is "up $177.8 billion. These annualized growth rates are 28.7 percent, 23.6 percent, and 15.3 percent respectively."
The Mogambo Statistician Man (MSM)
As soon as I read that, I gulped, suddenly nervous and edgy. He then soothingly adds that "Those are the seasonally adjusted figures." I think to myself "Whew! That was close! I coulda had a heart attack!" Now I am starting to relax a little, because adjusting "seasonally" and "annually" are two of my favorite statistical tricks. For example, suppose my wife starts up with that same old whining crap of hers, and says "You are a lazy, mean, worthless slob and I am sorry I married you, blah blah blah! And now I am going to make your life miserable, you smelly, horrible, disgusting creep blah blah blah."
In the past I would have suffered the humiliation like a manly Mogambo man (MMM), as she is (I am ashamed to say) right. But nowadays, things are different! Instead, I duck into a convenient phone booth, and emerge, seconds later, masked and caped, as Mogambo Statistician Man (MSM), whereupon I cleverly cut out her diabolical, hate-filled heart by brandishing real statistical proof (RSP) that she is a lying, hateful demon from hell.
"Wrong, hateful, lying she-devil (HLSD)!" I dramatically say. "I am NOT smelly, as I took a shower this morning! And adjusting the last few hours to an annual rate, I am thus proved to be ALWAYS fresh as a damned daisy, you hateful old crab!" If she is not soon reeling by this powerful statistical onslaught, then I hit her with my backup statistical proof, and triumphantly declare, "And as for seasonally-adjusting, you nasty old biddy, since I took a shower today, historically this is very early in winter for me to be taking one. Seasonally adjusting the statistics, usually I have taken only 0.0042 baths so early in the year, and so I am waaaAAAaaayyy over trend here, so just shut the hell up! Shut up, shut up, shutupshutupshutup!" which does NOT, in case you are wondering, shut her up. Even though you just PROVED that she was an idiot who doesn't know what she is talking about! Sheesh! Women! Who can understand 'em, eh?
Money Creation Sure Got Easier With Computers
But this is not about how the heroic and long-suffering Mogambo tries so hard to be a good husband and father and how he is rewarded for his magnanimous efforts by treachery, although it DOES prey on my mind. Seeing that I am temporarily distracted, suddenly Mr. McHugh springs the trap, and says "The raw, non-seasonally adjusted, figure is up $293.3 billion over the past 12 weeks, on a pace to add $1.2 trillion in money to the economy." Bam! Right between the eyes! Stunned, I had to read that sentence several times, as my mind kept refusing to comprehend what I was reading, probably because I was screaming in fear. This kind of wild increase in money and debt gives me a case of the Screaming Mogambo Willies (SMW). Then he says, calmly, "Wow." That's it. Just "wow."
Outraged, I leap up and, utilizing my famous Mogambo Editor's Pen (MED), write in big, red letters on the wall, "Exclamation points missing! Exclamation points missing missing missing!!!" and I am angrily stabbing the wall with the pen for additional emphasis.
Profligate Unbelievable Monetary Inflation
In fact, now that I think about it, this will be my entry into this year's hotly-awaited contest, the "International Most Egregious Lack Of Exclamation Points Competition"! In correct Mogambo literary style (CMLS), it should have read "Wow!!!!" which, when applied to economics, is your signal to buy more gold and wear a sidearm for the next couple of weeks, just in case. I urge these precautions because this kind of incredible, profligate, unbelievable monetary inflation means that we will get a corresponding price inflation after a just a little while, and people typically go berserk ("freaking bananas") when they can't afford to even live anymore because prices are so high, and then the kids start getting hungry and whiny and crybaby boo hoo hoo, and they think that just because I am their father that I am just going to, I suppose, voluntarily pay more money for food, like I have a magical money tree in the backyard or something.
To Say It One More Time, "We Are Freakin Doomed"
But if you are sick of hearing me run my big, fat mouth and you want some hard, real evidence of inflation, then I can think of only two good sources.
  • Me grabbing you by the front of your shirt and screaming at you, while little drops of Mogambo spittle (LDOMS) hit you in the face, and your ears are ringing ringing ringing with the noise, and you cringe and struggle and cry, but I don't stop until you admit that you truly believe that inflation is up dramatically, up horrifically, up destructively and you agree that "We're freaking doomed!"
Wholesale Prices Rise Fastest In 15 Years
The other, less fun way, hereby denoted as
  • 2), is to read things like the article entitled "Energy costs drive US inflation" on the BBC website. It read, "Wholesale prices in the US rose at their fastest rate in 15 years during 2005, as the effects of soaring energy prices took their toll." The fastest rise in price inflation in fifteen freaking years? My hands shake at the prospect.
The actual numbers are no picnic themselves, in that "The Labor Department producer price index (PPI) rose 5.4% in 2005, driven by a 23.9% hike in energy costs. For December, the PPI - which gauges price changes before they reach the customer - rose 0.9%, the biggest jump since September's 1.7%."
Vegetable Prices Soared 22% In One Month
Not only that, but "Food costs moved up by nearly 1% in December, following a 0.5% November gain." If you are a carnivore, then you're in better shape than those poor vegetarians, who got clobbered in December as the price of vegetables "soared 22% during the month, the biggest gain in more than a year." But even we vicious, meat-eating, super-predator omnivores are looking at inflation in food prices that are, annualized, 12% a year! This is the stuff of Nightmares on Federal Reserve Street, which is not a movie, but if it was, it would scare the hell out of you, and you would die of a heart attack just from watching the fearful effects of inflation caused by creating too much money and credit, which is why they don't make the movie.
OPEC will Cash In a Cool (Hot) $522 billion This Year
And speaking of rising energy costs, Doug Noland passes on the news from the Financial Times, where Carola Hoyos writes that "The oil revenues of the Organisation of the Petroleum Exporting Countries, the cartel that controls 40 per cent of the world's oil supplies, will increase by 10 per cent to a record $522bn this year, the US Department of Energy forecasts."
Now, I am sure that you noticed that they didn't say that OPEC was going to be pumping 10% more oil, mostly because OPEC ain't a-gonna be pumping no 10% more oil. And in fact, if Peak Oil is here, they will probably be pumping LESS oil. So the increase in "oil revenues" that OPEC will be making must, by process of elimination, be because of higher prices. Yikes! So prices are going to be 10% higher?
Stealing Cars To Extract Platinum And Palladium
Or, if you want more proof of inflation, how about Jeff Clark in the Rude Awakening column? He writes that "palladium and platinum are becoming so valuable, the St. Louis Post Dispatch reports, that they are become the target of thieves, who are stealing cars in order to extract these precious metals from catalytic converters."
So I raise my hand and say "Hey! Here's an idea! How about starting a company that manufactures booby traps for catalytic converters, so that if somebody tries to steal it, it blows their damned arms off?" A look of horror crosses his face, and taking a few steps away from me in disgust, he hurriedly goes on to say "The fundamental argument for owning palladium is growing stronger by the day. That's because industrial demand is growing stronger by the day. (And it probably doesn't hurt that commodity funds are continuing to pour money into the precious metals sector). Palladium can perform many of the same industrial uses as its sister metal, platinum. Therefore, in the palladium market, it is important to pay attention to the price relationship between these two metals."
Palladium Will Narrow Its Spread To Platinum
"Hmmm!" I think to myself. "Is he talking about some linkage of the two metals that I can exploit? And maybe make a zillion dollars by exploiting this linkage between the two metals? And then maybe I can pay back some of the money I have borrowed from people all these years? Nah! But can I exploit the price linkage to maybe make a zillion dollars anyway?" Well, perhaps! Listen, as I did, as he explains, "Throughout the late 1990s, these two precious metals tracked each other pretty closely. But in 2000, the price of palladium spiked due to supply disruptions from Russia. As the palladium price soared, many industries began substituting other cheaper platinum group metals. So by the time Russia resumed shipping palladium, industrial demand had disappeared. The palladium price plummeted from more than $1,000 an ounce in 2000 to less than $200 an ounce by 2003. But palladium finally started inching up again late last year. This appears to be the start of something big." Why? He explains, "I expect industrial demand to continue booming, as long as the price spread between platinum and palladium remains as wide as it is currently." Oh! That's why; the linkage we were looking for, with which to make that zillion dollars! So buy palladium! I love this investing stuff because it is so easy!
Anyway, the bottom-line upshot of all of this is that today, right now, is the perfect time to buy palladium, as he more than intimates when he says "With platinum at $1,030 per ounce and palladium at $270 per ounce, the price differential between the two has reached a record-wide spread."
The Uncertainty Barometer Gold Doubled Since Bush Took Office - And Will Double Again Before He Goes Home
Bill Bonner abruptly comes out of his office, sniffs the air, and says "What in the hell stinks around here? Is the stupid Mogambo in the damned building again?" I pop up and say "Hi, Mr. Bonner!" and he demands to know who let me in, and I tell him we are talking about gold and palladium as I was just leaving. He looks me right in the eye and says that if you want to talk about gold, then we might be interested to learn that "The price has doubled since George W. Bush became president." Yes, that was sort interesting, but as an old-time Republican, I am ashamed and embarrassed to talk about it. Or Bush. Or neo-cons. As dispiriting as that is, my attitude is immediately improved when he goes on to say "Our guess is that it will double again before he leaves office"! Suddenly, without warning, the great grasping greed gland of The Mogambo (GGGGOTM) squirts out some hormone into my bloodstream ("squeeeshhhhh!"), and I instantly realize that
  • if the Constitution is still in force and
  • if the election goes off when planned, then
  • gold will double in a little more than two short years from now!
Hahaha! And the shares of mining companies ought to, what? Triple? Quadruple? Hahaha! Bonanza! I love this investing stuff! It's so easy when central banks act so stupidly!
Doug Casey, in an essay on the DailyReckoning.com site, gets into discussing government, and says "Frankly, I never expect anything good from government. And here I refer to the institution itself. How can you, considering that its main products are wars, pogroms, prosecutions, persecutions, taxation, regulation, inflation, and assorted idiocy?"
Tariffs On Chinese Products Would Boost Inflation Immediately
As if to prove the point, Bill Bonner reports that "Senator Max Baucus of Montana, along with many others, think there is something wrong. It seems to them that China must be getting away with something. They're not sure what it is that China is doing wrong, but they're determined to put a stop to it. 'Washington may take measures,' Baucus warned the Chinese."
Like what? Well, how about "Among the measures Washington may take is a trade tariff"? What is the effect of a tariff? It "would increase the cost of Chinese exports by nearly 30%." Hahaha! A thirty percent price inflation! Punishing the Chinese by making things more expensive for us? This idiot can't possibly be serious! I howl in my outrage! OwwwwWWWWwwww!
The House-As-ATM Financing Strategy Is Crumbling
Bill Bonner is much more dignified when he says "What are the poor lumpenhouseholders to do? They pay more for energy. They pay more for healthcare. Their house-as-ATM financing strategy is breaking down. And they earn less money than they did two years ago. About the only thing they have left are those Everyday Low Prices on manufactured goods from China. And now, along comes a U.S. senator with a plan to force prices up."
Free Market Economy? Government Now Accounts For 46% Of GDP!
But, then again, that is what government does! And it just keeps getting worse and worse because there is so much, so much, so much, so damned much government. And how big is the damned government, anyway? In a clever attempt to demonstrate with gestures, I stretch my arms out real wide and say "Bigger than this, even!" Carla Howell, writing the essay "Big Government Is Even Bigger Than You Think " on LewRockwell.com, laughs in contempt at my puny Mogambo efforts (PME), and has a better way of demonstrating how big the government is. "Federal, state, and local governments together," she writes, "directly spend a whopping $4.8 Trillion - every year." Assuming a $12 trillion dollar economy, this is 40% of GDP! Note the use of an exclamation point.
But then there is also the "off-budget" money. She writes "Conservative estimates give us total off-the-books federal, state, and local government spending of at least $700 billion annually. Add this to the on-the-books spending, and you get government spending of $5.5 trillion - every year!" Again assuming a $12 trillion dollar economy, this is 46% of GDP!! Note the use of the rare double exclamation points.
Hell No, Government Accounts For Even More Of GDP!
"Big Government mandates - compels us to spend - another $1.5 trillion to $3 trillion every year. This is the externalized cost of government, i.e., the amount that governments force businesses, non-profits, and citizens to spend to comply with government regulations. Combined direct and mandated government spending may well exceed $7 trillion." Yikes! The government spends more than half of the entire economy!!! Note the extremely rare triple exclamation points! This is big-time stuff in the category of "Economic insanity."
So how would you describe how big government is, but without actually using numbers? She thinks about it for a moment. "Big Government in America is so huge," she says, "it boggles the mind and numbs the senses."
The 10 Commandments: 179 Words - Regulations On Sale Of Cabbage: 26,911 Words
And if you are thinking "What in the hell do they do with all the money?", then welcome to the club. Well, perhaps Robert B. can help enlighten us when he writes "The 10 Commandments: 179 words. The Declaration of Independence: 1,300 words. The US Government regulations on the sale of cabbage: 26,911 words. "Hahaha! Now you know what they are doing with their time!
Can Gold Confiscation Happen Again?
There has been a lot of consternation lately about whether another "confiscation" of gold, like FDR did in 1934, is right around the corner. To be accurate, I will quickly add that no gold was actually confiscated, as the owners of bullion gold took the gold (worth $20 dollars per ounce) to the bank, and the bank took the gold and gave them twenty bucks in cash for it. Remember, the purpose of rounding up the gold in 1934 was to "free up" idle wealth (in the form of gold tucked under the mattress) and put depreciating dollars in people's pockets, so that they would (theoretically and hopefully) spend some (increasing aggregate demand), and put some in the bank (creating bank reserves).
And another big, burning question for The Mogambo (BBQFTM) is "What about numismatic coins that are so rare that they acquire premiums over the melt value of the coin and were exempted from the FDR 'confiscation'?" The real reason that rare and valuable coins were exempted from the gold round-up was that the government would have to pay the higher prices, as the Constitution prevents the government from merely taking your coins, but has to pay full market price for them. So, paying $20 an ounce for 24K raw, bullion gold was plenty enough, but picking up one more stinking ounce in the form of a rare coin valued at $5,000 was another thing all together!
And besides, there weren't that many rare and valuable coins, and it wasn't worth the hassle nor expense, especially since Mogambo-hardened sharpies like you, seeing that the government had boxed itself in, would have colluded beforehand to bid up the price of rare coins, selling them back and forth between us, back and forth, around and around, driving the prices to astronomical levels, which the government would be, by law, required to pay. And THAT is why valuable and rare coins were exempted.
Santa Claus Is A Bill Collector Wrapped In A Chinese Flag
I don't know why, but it struck me as real funny when Chris/Super says "That guy bringing all those gifts over the years wasn't Santa Claus, but a future bill collector wrapped in a China flag."
Glenn K. also sent me the something else that confused me. It was a news bit from Reuters that read "Increased globalization has lessened the usefulness of concepts such as output gaps or capacity restraints for monetary policy-makers, Dallas Federal Reserve Bank President Richard Fisher said on Friday. The concepts of output gaps for economists or capacity constraints...are rendered nonexistent." Huh? I am so confused that I don't know what to think. I include it because I am not only nonplussed and, thus, at a complete loss to even vaguely comprehend what he means, but also because it seems somehow important to know that such gibberish came out of the mouth of the president of a Federal Reserve Bank.
Rick Ackerman of Rick's Picks actually used the phrase "global annihilation" in the context of something economic, like "We're freaking doomed to global annihilation, just like The Mogambo said we would! He is a god! Fall on your knees and worship Mogambo! All hail Mogambo!" Well, okay, truthfully, he did not, you know, actually use those EXACT words. But he DID use the phrase "global annihilation", which is bad enough!
Anyway, then he asked "Where is Klaatu when we need him?" Hahahaha! But is it entirely coincidental that Mr. Ackerman brought up Klaatu from the movie, "The Day the Earth Stood Still"? You be the judge: It is a little-known fact that if you play the famous phrase "Klaatu barada nictu" backward, you hear "Run for your freaking life, Klaatu! These people are freaking morons!" Which could, and probably does, explain why Mr. Ackerman mentioned both "global annihilation" and Klaatu at the same time!
Use The Correction To Buy More Gold
Adam Hamilton of Zeal LLC.com and appearing on SafeHaven hears me talking about gold, and says "prices trading near 25-year highs. The core tenet of successful investing is to buy low and sell high. So if an asset is trading at a quarter-century high-water mark, then odds are its price is pretty darned high at the moment and therefore a bad buy, right?" I silently nod my head like I understood what in the hell he was talking about.
Then he says "But gold, believe it or not, is still a great contrarian investment even at today's quarter-century nominal highs. How is this seemingly absurd thesis possible?" Everybody is suddenly looking at me to supply the answer, as if I had any freaking clue. But being the classy guy that he is, Mr. Hamilton saves my bacon and immediately goes on to say "The answer is the measuring stick for any investment pricing, the US dollar, has radically changed in the last several decades. A dollar today is worth vastly less than a dollar was 25 years ago, the last time gold closed over $550."
The Dollar Is A Wreck
He says to take a look at prices in the early 1980s. "They were almost trivial compared to what we face today," he writes. "The median home price in the US was $76k. You can hardly even buy an empty lot in suburbia for this today, let alone a house. The median American income was under $18k. Today $18k is actually below the official US poverty line for a family of four! A first-class postage stamp ran 15 ¢. The average new car was about $7k. So a quarter century ago the $550 it cost to buy an ounce of gold went a heck of lot farther in terms of buying real goods and services than it would today." Exactly, my man!
Faster Money Supply Always Resulted In Higher Prices
Then, because he is such a nice person, I suppose, he sums it up by stating the truism "Anytime the money supply of a particular era or place grows faster than the supply of goods and services on which to spend it, general prices are inevitably driven relentlessly higher. This financial law is as immutable as gravity."
So, how is gold doing in terms of gains in buying power over the intervening, inflationary years? "Gold last closed above $550 nominal on January 23rd, 1981," he says, "almost 25 years ago to the week. Yet adjusted for inflation, an ounce of gold was really worth $1266 that day in purchasing-power terms. Thus, in order to truly see the quarter-century gold highs that the financial media is wailing about, gold in today's dollars would have to head north of $1250." So gold is priced at less than HALF of its record price! Wow! What a bargain! Hahahaha! It's like oil selling for less than $30 a barrel! What a freaking bargain!
And with the relatively-near future value of the dollar being an estimated 30% lower than it is now, then gold is so cheap (audience yells out, "How cheap, Mogambo?") that if you are NOT buying gold, then I laugh at you, and disparage the intelligence of your parents that you are so stupid, and insult your significant-other that they are so completely worthless that they have to love a stupid clot like you, because nobody with any smarts or standards would have anything to do with you or them. And it sounds like this: "Hahahaha!"
And since we are talking about gold in terms of its buying power, he further calculates that "From the mid-1970s until the mid-1990s gold rarely went below $500 in today's dollars, so $500 gold really is historically cheap. Today gold would have to challenge $1000 before it started getting expensive and it would have to rocket up near $2200 to hit all-time real highs."
Since 1980 Global Money Supply Ballooned 5.4 Times
Then, saving the best for last, he says "Assuming these growth rates are roughly correct, and compounding them for the 25 years since 1980, the world's money supply has ballooned by 5.4x. Meanwhile the global gold supply is only up 1.3 times. Dividing these 25-year growth estimates yields a ratio of global-fiat-currency-supplies-to-gold-supplies of about 4.2 times. Now there is 4 times as much fiat paper floating around relative to gold as there was in 1980! The $850 spike high in January 1980 multiplied by this ratio yields an all-time gold high of $3,570 in today's dollars."
Get Ready For A $3,570 Forecast For Gold
My ears prick up when he says $3,570 an ounce, but by this time my brain is numbed to senselessness by all these numbers whizzing about, and in a state of stunned semi-consciousness I am drooling down the front of my shirt. Disgusted at the sight, Mr. Hamilton tries to distract himself by trying to think of a way to impress upon dullards, like me, at least the bare rudimentary essence of what he was trying to say. Finally giving up, he merely says "My core thesis that gold is cheap today in real terms."
Gold ETF's Are Sucking In All Central Bank Sales
And if you wanted yet another reason to buy gold (although I personally find it hard to stand upright under the weight of the sheer tonnage of damned good reasons to buy gold right now), then Peter Spina of the Gold Forecaster-Global Watch newsletter has one for you. He writes that the gold market is changing, "Suddenly the Exchange Traded Funds took control. StreetTRACKS Gold Trust saw its holdings jump by an enormous 10% in the year to date (2006)! These volumes are sucking in all the Central Bank Sales and some. On the other side, no one wants to sell."
He then reports some impressive movements of gold into the Exchange Traded Funds. "The week to 2nd January saw them adding a 17.8 tonnes, followed by Wednesday, Thursday and Friday bringing another inflow of 23.5 tonnes, taking total gold holdings to 384 tonnes. This is an enormous rise." Yes, it IS enormous, Mr. Spina, and it means that demand is increasing dramatically, but since supply cannot increase, that means that the price will continue to go up and up and up as long as demand outstrips supply!
Inflation Hits Even Oil-Rich Venzuela
From Doug Noland we get the chilling news that Bloomberg News reports "Venezuelan President Hugo Chavez said he plans to increase salaries for government workers by as much as 80 percent this year." I hate to be a stickler here, but notice the lack of an exclamation point, which one would naturally expect when the government has just announced that they are going to shoot you, and everyone in your family, with a machine gun. Oops! I mean, when the government has just announced that they are going to destroy the money and the economy, which is just about the same thing.
The point is that if you know anybody in Venezuela, tell them that The Mogambo has put out an Important Mogambo Bulletin (IMB) that was obviously censored by the media since nobody seems to have read it, that the money of Venezuela is going to get destroyed with price inflation and government-expense inflation, and that I'll bet that smart people in Venezuela are screaming "The Mogambo was right! We're freaking doomed" and are buying gold right now, and I mean right freaking now. Anyway, that's what I would do. Ugh.
****Mogambo sez: Mogambo him say oil go up. Oil go up. Mogambo him say gold go up. Gold go up. Mogambo him say silver go up. Silver go up.
Mogambo him big medicine. Mogambo now say too buy heap big oil, gold, silver.

The Mogambu Guru's straightforward writings are made possible by The Daily Reckoning.
Richard Daughty aka The Mogambo Guru is general partner and COO of the Smith Consultant Group and can be emailed at scgcjs@gte.net.

Expensive Oil? Not When You Can Pay With Gold

Stop whining about high oil prices immediately! You are only using the wrong currency, be it now dollars, Euros, Yen or whatever else pieces of fiat money you carry in your wallet.
Would you pay your crude oil bill in the universally accepted currency of the last 6000 years - that is gold - your barrel would have become 28.4% percent cheaper since the nominal record high reached last August.

Oil Priced In Gold Became A Lot Cheaper Since Summer 2005

GRAPH: Dividing the price of crude oil with the gold price is yet another clear sign that the yellow metal has not lost any of its inflation defensive qualities. While a barrel of Western Texas Intermediate crude cost 0.162 ounces of gold last August it now takes only 0.116 ounces of gold to get exactly the same barrel of the black gold. Chart courtesy of Stockcharts.com.
Please note that the data ends with January 13. Gold has risen 1 percent since then while crude rose only today 3.3%.
And now, ahead of Wednesday's new inflation data let's all chant, "There is no inflation, there is no inflation, there is no inflation..."

Euro Central Bank Gold Sales Come To A Virtual Halt

Tuesday, January 17, 2006

Gold sales by the member central banks of the Eurosystem have come to a virtual halt in the last week. According to the weekly consolidated financial statement of the Eurosystem only one member of the Eurosystem has sold gold with a value of 7 million Euros in the week ending January 13. In the week before gold sales amounted to 77 million Euros.
The sudden slowdown in gold sales can be interpreted that the central banks have finally found out that it is not such a good idea to sell of the their hardest asset class which certainly has shown the best performance over the last 12 months.
But beware, my broker informed me today that the German Bundesbank, holder of the second largest gold reserves behind the USA might finally give in to the demands of the government and sell off up to 500 tons. According to most recent available data from the ECB Germany sits on a gold hoard of 110.207 million troy ounces that represent a dollar value of 61.716 billion or 47.925 billion Euros according to the official ECB valuation of 434.856 Euros per ounce.
Major banks and investment houses have mostly upped their gold price projections for 2006, with most of them seeing an annual average price at or above the current level of $560.

US M3 Growth Exploding In Line With Oil Prices

Monday, January 16, 2006

US money supply M3 - the figure the Fed will stop publishing by the end of March in order to save 0.00000699% of its annual net income - shows an alarming trend. In line with rising crude oil prices and exploding public debt M3 grows faster and faster.
M3 Growth 2nd Half 2005
GRAPH: M3 weekly changes in billions of dollars in the period from July 4, 2005 to January 2, 2006. Data: St. Louis Fed
While M3 grew 8.37% over the last 12 months, the speed of the Federal Reserve's money printing press gained speed in line with rising crude oil prices.
In the last 6 months the annualized growth rate of M3 crossed into the two-digit area, coming in at 10.09%.
Over the last 3 months, when oil prices retreated for a few weeks below the $60 mark, M3 grew at an annualized rate of 9.38%.
But now don your hardhat before you read on: In the last month M3 growth exploded to an annualized rate of 17.19%!
Being educated in the old European monetarist school that the rate of M3 growth minus GDP growth results in the true inflation rate I will buy more gold on the next dip after the yellow metal rose to another 25-year high last Friday, with the February future closing at $557.90. Gold marched on further in early European trading, the spot price advanced another $1.30 to currently $557.40. There is a very high correlation between the gold price and future inflation expectations. Inflation rates normally follow the development of the gold price with a time lag of 14 months.
Also take note that the strong M3 growth coincides with the strong rise in energy prices. Is it too far-fetched to conclude that the oil price does not really matter to the USA because ist is just a matter of printing/electronically creating more greenbacks in order to pay the bills?
Remember that the end of M3 publication coincides with the opening of the Iranian Oil Bourse which will boot up its computers in April. For much more information on M3 and the Iranian Oil Bourse browse the archives of this blog a nd the earlier posts of this month where all the links are provided.
I finish this post with the reminder that no nation in history has ever managed to print its way out of its debt problems.
I cannout find the source anymore. But over the weekend I read somewhere that every try to replace gold with some fiat money that can be created at will has always ended in hyper inflation, strengthening the people's craving for the precious metal ever more. Do you think it will be different after 6000 years of monetary history? Then sell me your gold today!

The Bull Of This Decade Goes By The Name Of Gold

Friday, January 13, 2006

I have not yet come out with my forecasts for the current year but regular readers know that I've been promoting gold investments since the $420 level.
Seeing the yellow metal taking out the $550 high with ease on the back of geopolitical worries still stuns me. I have been waiting for a 4-5% correction since gold broke the $500 mark and always advised to add to your position on dips but never attempt to try and short this market. If you followed this advice you are probably in the same position as me right now: Feet up on the desk, watching the heat-up in the biggest bull market this decade will see.
The fundamentals are all speaking for gold.
  • The US is losing two wars in Iraq and Afghanistan and is on the verge of entering into a third one with Iran. Iran's president would not be so cheeky if he would not see his country well prepared for a fight with an already worn out US military apparatus.
  • The world needs a new currency for commodity purchases. Why should China, India and Russia have to rely on the US dollar for their daily energy and raw material needs?
  • The estimated gold stock is 4.8 billion ounces while there are 6.4 billion people. Do you need more data input for the equation?
  • No fiat currency has worked for more than a human's lifespan. At 93, the Federal Reserve Dollar looks exactly like an old man limping along on a walking stick that is increasingly dependent on the help of others. In the dollar's case I mean foreigners willing to accept ever more IOU's from the biggest debtor in the world.
  • The age where the finite supply of commodities could be purchased with paper money will come to an end soon.
  • Gold has been the only universally accepted currency since mankind evolved from bartering to a monetary exchange system. The last 35 years will only be seen as an erratic blip in 6000 years of monetary history.
  • The world's center of power is shifting from the white western world to the east where the majority of the global population is striving for a higher living standard. And those folks have a fundamentally different perspective of gold. 1.2 billion Indians hold basically all their savings in gold jewellery.
Oh, and before I forget it: Forecasting a remonetarization of gold I see even bigger potential for silver. Currently the gold-silver ratio is at 1:60, in the very long term it was 1:15. I begin to believe the very small minority that sees a dramatic shift of that ratio.
And now my CAUTIOUS forecasts for 2006:
  • Gold will spike above $650.
  • Silver will move above $12.50.
  • Crude oil will trade between $50 and $90.
  • The S&P 500 will retreat below 1100 points.
  • The $ will fall to 1.30 Euros.
  • The US will enter into a recession in the fourth quarter of 2006.
And now I will put my feet up on my desk again and watch the gold price a little longer. The February future just hit a new contract high at $558.90, up $10 for the day.
UPDATE: Watching the press conference of George Bush and German chancellor Angela Merkel: Can please somebody tell the president that it is "nuclear" and not "nucular" weapons he is worried about. What place does history reserve for this guy?

Real Money On The Way - US Will Mint 24 Karat Golden Dollars

Thursday, January 12, 2006

It took a little longer than originally planned, but now the USA is ready to create some real money again. According to the Presidential $1 Coin Act the Treasury will begin to issue two series of gold dollars, .9999 pure.
Under the legislation, one-third of all $1 coins minted will be Sacagawea dollar coins (Golden Dollar). The Mint will issue four different $1 coins a year in the order of the period of service of each president starting with George Washington, beginning in 2007. The legislation authorizes the Mint to sell $1 proof coins and uncirculated versions. There was no information about the purity or weight of the new golden dollars.
But the best is only coming:
The U.S. Mint will also produce a 24K gold bullion $10 coin honoring the spouses of former Presidents. The new half-ounce gold coins will be produced in sequence with the $1 Presidential coins. The gold coins will have an image of the First Lady, and the reverse will feature an image emblematic of the First Lady's life and work. The legislation authorizes the Mint to sell proof and uncirculated versions. The act authorizes the Mint to sell bronze copies of the gold bullion coin. The legislation also requires the Mint to produce a new 24K gold bullion 1-ounce $50 coin. For the first year, this coin will bear the classic Indian Head 5-cent coin or "Buffalo nickel" design.
Funny note here: The new golden coins, expected to vanish in collectors vaults as soon as they will be sold, shall help to reduce the budget deficit, said the Congressional Budget Office (CBO). I wonder where the budget deficit would be today, had the USA never abolished the gold standard.
As the US so far only produces 22K American Eagles the CBO estimates that the new 24K Buffalo nickel will create much more demand. The CBO expects that the use of gold for coins will rise from 400,000 to 500,000 ounces p.a.
I hope I will be able to get at least one of the one-ounce coins as I expect there will be raging demand for them in 2007.
FYI only: The One-cent pieces will be redesigned (but not made out of gold of course.)

ECB Will Do - Nothing

The European Central Bank (ECB) will most likely leave its leading overnight interest rate unchanged at 2.25% at today's meeting of its governing council. ECB president Jean-Claude Trichet will base the decision on the slightly lower inflation rate that was calculated at an annual rate of 2.2% in a first estimate for December 2005. In November inflation had come in at 2.3%. I cannot withhold my skepticism about the official European inflation rates as they stand in stark contrast to my January bills. Probably I am eating too healthy, should stop heating my apartment and should cancel my health insurance to come closer to these official inflation rates.
Producer prices in the Eurozone fell 0.2% month-on-month in November, but rose 4.4% year-on-year. But suuuuure, all this inflation we feel is only a dream (nightmare) and certainly not true.
I would believe this if corporate profits showed a decline, but the European stock rally came on the heels of rising profits. So what is wrong in my obviously distorted picture?
Trichet's position of staying put is also helped by latest developments in Euro money supply. In November 2005 M3 has slowed to 7.6% (October 8.0%) and the 3-month average has been 8% as well. M1 slowed from 11.2% to 10.6%. I attribute the strong growth in M1 to cash-loving Russians and other non-Euro members who are swapping their dollar bundles for Euro stacks.
While all these figures at least show the right trend they still lie way above of the ECB's policy goals.
The ECB's mandate requires the Euro central bankers to keep inflation below 2% and has set the target rate for money supply at 4.5%. Both this targets have been overshot for half a year before the ECB changed rates last December for the first time in two and a half years.
So expect a lot of words about the positive economic outlook - as could be heard in the last 12 months - and don't expect any attending journalist to squeeze Trichet about the impact of high oil and record natural gas prices or the political pressure on the ECB not to fight inflation too much in the face of an 8.3% Eurozone unemployment rate. Bonjour tristesse.
NOTE: I am afraid I will not be able to cover the Q&A session of the ECB press conference. In December the webcast was cancelled.
UPDATE: Find a link to the webcast of the press conference at 1330 GMT here. There is also a link for a Podcast audio feed. Wow, they got (techno) style.

Discontinuance Of M3 Will Save Fed 0.00000699% Of Income

Wednesday, January 11, 2006

As the Federal Reserve has cited savings of about $1.5 million as one of the reasons for the discontinuance of the M3 money supply data set, today's press release about incomes and expenses at the Fed in 2005 comes in handy to requestion the true motives behind this move towards intransparency.
Comparing the figures with those of 2004 show that the Fed's total net income rose 10% to $23.521 billion, the biggest part stemming from a 30% rise in Open Market Operations to $28.959 billion. Other Income rose 17% to $386 million and Fee Income advanced 4% to $901 million.
Operating Expenses rose 4% to $2.116 billion while the Treasury can enjoy an annual check that has grown 19% to $21.454 billion.
The biggest relative winners are the private shareholders of the Federal Reserve. The dividend payout to this exclusive cercle of America's elite rose a staggering 34% to $781 million.
With the discontinuance of M3 data after March 26 the private owners of the Fed will certainly enjoy an ever bigger dividend for 2006. Saving $1.5 million by abolishing M3 data amounts to 0.00000699% of the Fed's annual net income of last year. These folks sure know where to save.
For the alarming trend in M3 growth I refer you to the posts
Least You Can't Say You Didn't Know
M3: This Is What Bernanke (And Others) Have To Say
ECB: M3 Slows A Bit, Gold Sales Continue - Worldwide Interest in Burial Of US M3
Fed Says US M2 Resembles Eurozone M3
ECB Very Worried As M3 Growth Is Risk To Price Stability
Fed Wants To "De-Emphasize The Role of M3"
M3 - Deafening Silence In The MSM - And The Federal Reserve
M3 - There Is Always A Funny Side To A Sad Story
Unpleasant Trend - Fed Counters By Stopping Release of M3 Money Supply Data
For a good read on the correlation between money supply and stock market performance surf to Robert McHughs editorial "The Fed's Money Supply Armament Is Underway", just in case you wondered about the strong performance of the US stock market.
UPDATE: The Fed's budgets for 2005 and 2006 can be downloaded here (pdf).

The Mogambo Guru Sees Debt Spinning Out Of Control

While I was enjoying a few days away from the markets and their gyrations, the Mogambo Guru was not able to shake off his paranoia, not even during xmas. I apologize for not publishing his last two columns but hope that his latest rantings will make you thinking even more about the most worrisome disasters to reach this world quite soon.

Debt Spinning Out Of Control
by The Mogambo Guru
Things are spinning out of control, and I have locked myself inside the Mogambo Bunker Of Raw Fear (MBORF), whimpering like the little crybaby I am. For example, the damned Federal Reserve is still cranking out the money and credit with both hands, which they figure is real clever, I suppose, although a retarded monkey could do as much, and for far less salary, and in its off-time it could entertain us by roller skating on the table. But this is not about hilarious monkeys wearing funny hats, but the damnable Federal Reserve, and last week they created another $6.4 billion in credit. The reason that I am all a-tremble is that all this money inflation that they have been creating for decades is showing up as price inflation, which is one damned good reason why gold is doing so well.
The Gap Between Inflation And All These Higher Prices
As proof, I demur to the keen eye of Mike in Dallas, who writes that an article in the Dallas Morning News business section listed some price increases and plans for them. Michelin, Goodrich, Uniroyal prices up 8%. Clorox 8%. Kleenex 5%. Cottonelle 6.5%. Glad bags 8%. He didn't mention health care, but maybe everybody knows that already.
And let's not forget the Postal Service, which increased the price of a first-class stamp to 39 cents, which is an increase of 5.4%.
And it is not just consumer products that will be going up in price, but lots and lots of things, especially in California, as we learn from the newsletter View From Silicon Valley, which shows that the politicians in California in general and Silicon Valley in particular are as ignorant and stupid as the rest of their loathsome political class of morons, and the have instituted the "millionaire taxes", whereby "Anybody getting a seven-figure W-2 in 2005 will be required to pony up an extra 1% (so $10K+) earmarked for 'mental health' in 2006'" and a new 1.7% tax for "universal day care." Hahaha! Public-funded babysitters!
And there is, I am sorry to say, more, as the Valley Transit Authority (VTA) wants another quarter-cent sales tax levy to further "improve service," which is supposed to raise $2B over 30 years, and another quarter-cent ($2 billion) for something else, buses or something.
To make everything work out on paper, the VTA somehow determined that there would be "5.8% growth in sales tax revenue over the next ten years, instead of the 4.8% previously estimated." Hahaha! That reminds me of how ten years ago I estimated for my wife, neighbors and children that I would be 10% less obnoxious in ten years, which was, as it turned out, a big fat whopping lie, and am at least 10% MORE obnoxious! But ten years down the road these arrogant fools think they can estimate revenue down to the fraction of a percent? Hahahaha! And I though the Fed was arrogant!
Labor Unrest As A Result Of Disintegrating Monetary Systems
As the Charleston Voice succinctly notes, "Labor unrest has always been symptomatic of disintegrating monetary systems." This naturally brings up the city of San Jose, which "agreed to a 12.9% pay increase for police over the next 24 months, on top of goosing pensions from 85% to 90% of final pay. The firemen are angrily demanding the same deal, and local nurses just won a pay increase (on top of hospital staffing concessions) of $150M over two years." This settlement of labor negotiations came at the end of, I note with a sneer of contempt, 5 years of declining revenues. "We ain't got the money, but you can have more, nevertheless!" Hahaha! California! What idiots!
And it is going to get worse, as the jackass-in-Republican-clothing governor of California is putting through another $50 billion in bond issues for road improvements! If Shelby Moore is correct when he says that we have seen a "war between austrian and keynesian economics" and that the next war is a "war between keynesian and socialist economics", then the socialists are obviously winning.
Even worse, much worse, is that there is going to be a state-wide increase in the minimum wage to $7.75. This puts total wages up about "$2 billion per year." That workers need the money, as wages have long lagged rises in prices, is damning testimony of the abysmal incompetence of the Federal Reserve.
Billions Of New Costs in Silicon Valley
The summary says it all "Counting new income taxes, new and increased parcel taxes, increased public employee salary and pension costs, increased debt service, additional sales taxes, increased minimum wages and utility costs, Silicon Valley residents will see literally billions of new costs in 2006." All of which means higher prices for everything else.
Rising ARM's Will Slow The Rest Of The Economy
Bill Gross of PIMCO has posted his latest essay, entitled "A Gift That Should Keep On Giving." Naturally, I thought he is talking about precious metals, pornography or a boatload of bourbon, but he was not. Instead, he says that homeowners with adjustable rate mortgages are going to be stressed. "As the cost of the ARM increases with higher short rates, your excess income available to spend on discretionary items begins to shrink. If that ARM rate goes too high, you hunker down even more by not eating out, going to movies, or taking a vacation to exotic destinations. The economy, in other words, slows down."
Perhaps this explains the latest news that Consumer Installment Debt went down, again, in November. So people are suddenly spending less. This ought to knock the hell out of VTA's estimate of how much revenue will grow! Hahaha! And since they say that 70% of the economy is consumer spending, then there are a LOT of other estimates of revenue that are getting the hell knocked out of them, too!
And I am telling you that increased costs mean increased prices. Or, as David Collum so pithily put it, "One man's wage increase is another man's price increase." And so all of this awarding higher wages will all be for naught, as prices will increase high enough to more than erase any and all gains for those workers.
Civil Unrest
And who is paying these higher prices? Me, for one. But Bill Bonner of DailyReckoning.com doesn't want to talk about how I mismanage money and am always broke mostly because I am a big stupid chump, but says instead that I should be cheered that I am not alone, and that "At the middle and lower ends of the economic food chain, people are having a hard time making ends meet." And there are lots and lots of these people at "the middle and lower ends of the economic food chain" who don't have any money or job or hope of ever having either of them, and you can bet that they are going to get really, really angry. Rioting, stealing, robbing and killing angry.
New US Muni Bonds Total 4% Of GDP
With a cry in my voice, I note that it is not just California, either. From Reuters we read that "U.S. municipal bond issuance set a record in 2005, soaring to $405 billion despite rising interest rates. This was more than 13 percent higher than in 2004, when sales totaled $357.1 billion. Last year's debt sales by states, counties, cities and towns topped the record of $379.3 billion set in 2003." What we did NOT read is that this $405 billion of NEW debt is almost 4% of the entire Gross Domestic Product of the USA! So you can bet that your state and local taxes are going to go up, and up, and up for the rest of your freaking life to pay for all of this.
If you want something else to worry about, George Ure of UrbanSurvival.com writes that (putting words into his mouth) even the Earth itself is rebelling at the degree of insanity, and that an earthquake that registered 7.1 on the Richter scale "was significant for more than its size. Notice its depth - 579 kilometers deep. That's a concern because when things shake and break down at that level you could be looking at the crust decoupling from the mantle."
Inflation/Deflation Debate
Among the many things that I am confused about is the inflation/deflation debate. Which will it be? Deflation is when the money supply gets smaller, and your money, so the theory goes, becomes more valuable as the money supply contracts. Okay, I will admit that the deflation thing will actually happen, if only because it is ridiculous to think that debt loads can grow to the moon. But my money becoming more valuable and going up in buying power? Hahaha! I am laughing so hard that my stomach hurts! Hahaha! But perhaps I could be persuaded if I could be given an example, just one measly example of a country's currency going UP in value when its economy implodes from massive debt loads, consumer stupidity and the overarching stupidity of a gigantic government-centered economy, all utilizing a fiat currency. Just one!
Money Won't Deflate - Prices Will
Here is another deflationist debate: "We have had a global asset bubble in real estate, stocks and some commodities. That bubble will have begun to pop in earnest by the end of '06 and will engender global economic contraction and overcapacity resulting in falling wages and prices, falling interest rates, falling stock prices, and quite probably a falling dollar." Falling wages? Whose? You never heard of the minimum wage? And as for falling prices, hell, their own argument is that the dollar will fall, which will make import prices go up, and as we import most of everything we consume, where in the hell are the falling prices coming from? Well, housing, maybe. And stock prices. And bond prices.
And as for falling interest rates, the mighty laugh of The Mogambo (MLOTM) shakes the windows and I snort in derision. America is being bankrupted and ruined because we act stupidly, and now foreign lenders are going to keep loaning us money and accepting a lower interest rate (implying reduced risk) from certifiable morons? Hahahaha!
Investors Will Wake Up To The Dollars Vulnerability
And you don't have to take it from me, mostly because nobody in their right mind listens to me anyway, especially when you can listen to the Texas Hedge Report, which writes that "We think 2006 will be the year that the average investor wakes up to the U.S. Dollar's vulnerability and begins to use gold & silver as a way to protect his savings. The Euro & Yen have proven their fallibilities as hedges. Gold is now available to be purchased through two ETFs (tickers: GLD & IAU) with silver about to join."
Foreign Central Banks Buy Gold
Martin Weiss of the Money and Markets newsletter agrees that "Foreign central banks aren't under any obligation to continue holding a particular percentage of their reserves in dollars. In fact, two major players are already starting to diversify out of dollars: Russia and China. Guess what they're buying: GOLD! And China has already announced it will boost its gold reserves by putting 2.5% of its trade surplus in gold - every year."
Now, I figure that 2.5% doesn't sound like a lot, and sure enough Mr. Weiss goes on to say "A 2.5% allocation may not sound like much." See? I told you! "But based on China's trade surplus last year, you're talking an estimated $2.5 billion going into gold this year alone. Since the physical gold market is tiny, $2.5 billion is more than enough to keep gold moving higher." How much higher? "Gold should easily soar to my next two targets of $618 and $740 an ounce" he quickly replies.
Now, all of this is just current events, but he sees central banks around the world "pulling out of the dollar en masse in 2006." I innocently ask, "Are you sure?" And he says "I expect they will." There was an awkward silence, and I know that he was waiting for me to ask a follow-up question, but being a real stupid guy, I just sit there like a stump. Exasperated, he finally blurts out "It will spell disaster for the greenback, setting off a financial crisis in the U.S. the likes of which has not been seen in decades." Now, if it was me, the word "disaster" would have made me end that sentence with an exclamation point! Like that one!
Physical Demand For Platinum And Palladium
Richard M. tried to go out again to buy more platinum, but "Once again, they had none!" But he says that "The sales lady told me they are still doing big business in selling actual hard assets", which explains the shortage of platinum, and that palladium maple leafs "are also quite popular among the local hoi polloi."
Global Daily Oil Bill: $5.5 Billion
If you want to talk about oil, then Toni Straka of the Prudent Investor blog notes that the world uses oil so fast that the globe has "a daily bill of roughly $5.5 billion for crude oil" at current prices.
Iranian Oil Bourse
Perhaps this huge use of dollars is what has everyone worried about the new Iran oil bourse (trading center) that is scheduled to crank up in March, and probably rightfully so. Instead of an American-controlled oil market and American friends and insiders getting rich making their slimy little backroom deals, now it will be an Iran-controlled oil market and Iranian friends and Iranian insiders making their little deals.
It's all mox nix to me, as oil is going to rise mightily in price anyway, but all of those American oil-business scumbags have families to care for, bills to pay and these big, fancy cars that speed by me as I sit with my "Will work for food" sign around my neck, and so you can bet that they are all crapping in their pants at the thought of the end of a very long, very cozy and very profitable deal. Ergo, you can certainly make a case that George Bush and the Congress will okay a plan to invade Iran and take over the place, because that is the kind of treacherous, thieving, murdering scumbag that my beloved America has become in its increasing desperation.
Invasion Of Iran?
Muckraker Report, which is from the Libertarian Party in Berkeley goes farther than merely hypothesizing, and predicts how it will actually play out. Firstly, the government "must portray the Iranian President, Mahmoud Ahmadinejad, as a threat to the region and the world. Finally, once naive American people are convinced the 'weapons of mass destruction' that were to be found in Iraq are actually in Iran, coupled with the almost daily media coverage of Iran’s nuclear power/weapons program aspirations, and what we will soon have on our hands is another fabricated war that will result in tens of thousands of civilian lives being lost, all because the political elected pawns in Washington DC lack the discipline to return our currency to a gold or silver standard, end the relationship with the foreign banking cartel called the Federal Reserve, and limit the activities of the U.S. government to those articulated in Article I Section 8 of the Constitution for the United States of America."
Wow! Nice going! I am impressed that they understand how money becomes money because of bank-created credit, so that someone could borrow some money, and then someone borrows the money from a bank, which turned the credit into money, and thus money = debt. But they get zero points when they say "If all debt were to be paid, there would be exactly zero U.S. dollars in circulation because it will have all been returned to the vaults of the Federal Reserve. This might seem hard to fathom, but it is the gospel of fiat money." Wrong-o. Actual cash can come into existence and not be part of any debt. All the government has to do is print up actual cash, and then use it to pay somebody for some goods or services. For example, if I finally get my dream job cleaning the toilets of the Treasury building (which is a much better job than the one I have now) and they pay me in cash, then money CAN come into existence without a corresponding debt. Not much. But some!
Early Warnings
Richard Maybury in his newsletter Early Warning Report notes that "81% of all the world's oil deposits" are in areas (which he calls "Chaostan") that are always kicking up sand with each other, and that his best guess is that "the Third World War and the war economy will last at least two more decades." He recommends that you load up on oil, gold, silver, platinum, defense industries, commodities and US rural real estate.
3 Disruptions In The Oil Flow Will Bring $5.32 Gasoline
Along the same lines, Gary North of DailyReckoning writes "Six months ago, an analyst group made up of former top-level U.S. government officials calculated a global oil scenario. In this extremely likely scenario, just 3 minor disruptions in the already-strained world oil supply chain cause $150-a-barrel crude prices, a $5.32 pump price for gas, more than 2 million jobs lost, and a 28% drop in the S&P 500."
Natural Gas Supply Will Decline Sharply
Well, if oil is going to get more expensive, what about natural gas? Les H. writes that a guy named Dr. Jean LaHerrere has models that "suggest that in about 4 years the supply of natural gas will be about 1/3 to 1/4 of today's supply." Another guy named Matt Simmons "has done extensive analysis of similar data and expects a severe drop in natgas supply soon." As an aside, we learn that "The Peak Oilers refer to this coming crisis as the 'natural gas cliff event.' "
Speaking of oil, Les H writes to say that "Dr. Colin Campbell has a Ph.D. in geology from Cambridge U points out that we now know the origin of oil. Ain't from dead dinosaurs. There were two very warm periods in the planet's history, one 140 million years ago and one 90 million years in which "huge marine algal mats grew and settled to the bottom of the ocean. Now, to make oil from dead algae, the algae must spend some time at least 7500 ft below sea level, but no more than 15,000 feet below sea level, to turn the residue into oil. Too deep, and it becomes natgas. Two shallow, and it is only oil shale."
Les steps in and extrapolates by saying, "But one thingee is for darn sure: one has to discover a natgas field before it can be produced, and the rate of discovery is falling rapidly. We now are fully utilizing every rotary rig in the US to try to find more fields. And for the last two years running, US natgas production has fallen about 4% per year. Dr. LaHerrere's analysis suggests that soon we will see a much more rapid decline."
And the problem ain't a-gonna get solved by more exploration and drilling, as Dr. Ken Deffeyes, professor emeritus of sedimentary geology at Princeton University, writes that "we have now found 94% of all the oil fields that have ever existed on the planet."
Trade Deficit Will Come Close To One Trillion Dollars
John Mauldin says, "in 2005 the United States is projected to run a trade deficit of $806 billion, up from $668 billion in 2004. The International Monetary fund forecasts that the trade deficit will rise to $890 billion in 2006 and then to what can only be called a staggering $980 billion in 2007.How in the wide, wide world of global trading can one country run an almost $1 trillion dollar trade deficit? What is the rest of the world going to do with all those dollars?"
Well, they could send them to me, but every time I suggest it, they hand up the phone on me. But Mr. Mauldin doesn't even slow down as he goes on to comment on Greenspan's big speech last year at Jackson Hole, where he actually admits that the central bank "will need to deal in greater detail with balance sheet considerations than was the case in the earlier decades of the postwar period." I know what you are thinking. You are saying to yourself, "What in the hell is this crap? The nation's monetary policy is being used to bail out some butthead companies who have acted irresponsibly?" In a word, yes.
Debt To GDP Ratio Now Higher Than 1929
Mr. Mauldin went on to quote Mr. Greenspan saying "The determination of global economic activity in recent years has been influenced importantly by capital gains on various types of assets, and the liabilities that finance them." This is the only instance that I know of where anyone connected with the Federal Reserve, or the laughable and mutant "mainstream" economics that has infested the USA, has ever suggested, or ever even hinted that the liabilities that have arisen in all this financial activity have any importance at all! In fact, the bizarre economic theory that the Fed operates under actually takes no notice of existing debt loads. Strange, but true. All that matters to them is interest rates, and everything economic is determined only by interest rates. This probably explains why the ratio of total liabilities to GDP is now somewhere between 250% and 350% of GDP, which is a record never even attempted anywhere else in history.
But instead of admitting that The Mogambo was correct when he is standing outside the windows of the Federal Reserve building and screaming, over and over, louder and louder, that "We are freaking doomed by all of this accumulated debt!", Greenspan actually confesses that the actions of the Federal Reserve will NOT change, and he actually says "Our forecasts and hence policy are becoming increasingly driven by asset price changes."
An Alternative Approach To Determine True Inflation
John P notes that just three costs faced by every American that probably determine 80+% of the true RATE OF INCREASE in the cost of living:
1. lodging, 2. health care, and 3. energy.
Looking at these things, he figures that the inflation rate "is at least 16% and actually north of 20%", which sounds about right to me. That is why I am accumulating gold and expect you to, too.
Gold Still Cheaper Than Dirt
And when speaking about gold, listen to Richard Russell, of the Dow Theory Letters, who writes "All the gold ever collected, panned or mined since the time of Jesus amounts to about 2 trillion dollars worth. The Fed is now producing dollar liquidity at the rate of roughly $1.5 trillion dollars a year. How high can gold go? I honestly don't know, but compared with what the Fed's been doing over the last five years, gold is cheaper than dirt. And investors around the world are beginning to recognize that thesis. The capitalization of all the legitimate producing gold mines on the planet earth is around $120 billion. You could trade 'em all for Google and have money left over. Now please get this straight -- we don't buy gold to build wealth, we buy gold to HAVE wealth. And that is why intelligent people buy and hoard gold." I include this because I am buying gold, and this is the only time in my life that anyone has ever said that I have done something intelligent.
And the opposite of "intelligent" is "stupid", and if there was ever a really, really, really stupid idea (RRRSI) which is so stupid that nobody else in history has ever even considered it, it is the RRRSI of "Let's disarm ourselves and make ourselves completely defenseless!" Well, it turns out that there are morons in Australia too, and Ed C, who is a police officer in Australia, says that in the twelve months since gun owners in Australia were forced by a new law to surrender their firearms (a program which cost $500 million dollars), the results are that "homicides are up 3.2 percent, assaults are up 8.6 percent, and armed robberies are up 44 percent! In the state of Victoria alone, homicides with firearms are now up 300 percent. While figures over the previous 25 years showed a steady decrease in armed robbery with firearms, this has changed drastically upward in the past 12 months, since the criminals now are guaranteed that their prey is unarmed. There has also been a dramatic increase in break-ins and assaults of the elderly."
In case you were wondering, similar results are always achieved anywhere people are deprived of the means to protect themselves. That is why the famous John Lott correctly entitled his book (as nearly as I can recall), "More Guns, Less Crime."
Commercial Gold Traders Are Massively Underwater
But we were talking about gold, and Mark Lundeen, independent economist, has calculated that the price of gold has pushed the commercial traders in the gold pits massively underwater. As he puts it, "The gold commercials are hurting. The only way to end this is for them to get gold to go back down, or get net long. But to do so they would have to buy back their positions and who knows what gold would do then? I smell blood in the water."
James Murphy of LeMetropole chimes in with "The Gold Cartel has lost control. Physical market demand is overpowering the bums – their diminishing central bank supply is just not enough at these price levels. The Gold Cartel and their allies know they are TRAPPED. The crooks and friends know the downside is limited too and are trying to cover as fast as they can. This is why we are seeing these dramatic price surges to the upside."
Gold Shorts Are Panicking
Murphy goes on to say "the shorts are panicking in order to extricate themselves from their short positions. How are they doing? Not so good. By my calculations all they covered yesterday was around 40 tonnes, max. The total short position is above 10,000 tonnes. If only 10% of the minimum number of shorts plan to cover, it will take another 25 days like yesterday. 25 TRADING DAYS!"
Silver To Move $1 In One Trading Session?
I raise my hand and ask "And what about silver?" Well, Mr. Murphy is visibly upset that I interrupted him, but says through clenched teeth that he figures that it is "Only a matter of time before there is a Commercial Signal Failure in silver too. We will observe silver move $1 higher in a single trading session." And Ted Butler, silver guru, predicts that we will soon see days this year when silver "goes up-limit", although he acknowledges that this is actually just a figure of speech, as there are actually no up-limits on the Comex other than temporary halts to trading.
And speaking of gold, James Turk author of newsletter The Freemarket Gold & Money Report writes "Everyone who has bought gold over the past 24 years is making money. My expectation is that we're going to see $600 in the first quarter of 2006, and sometime over the course of 2006 we're going to touch that $850 level."
Then he gets into the shadowy and scary new world of ETF's, and says "iShares Comex Gold Trust (IAU ) and streetTracks Gold Shares (GLD ) are not an alternative to owning physical metal. They're a convenient way to speculate on the price of gold. They don't prove that the gold actually exists in the vaults of the custodians and the sub-custodians with an audit."
I know that it is only a slip of the lip, but President Bush may be more truthful than he realizes when he said (thanks to 321Gold.com for the quote) "Our enemies are innovative and resourceful, and so are we. They never stop thinking about new ways to harm our country and our people, and neither do we." Hahaha! And appointing Ben Bernanke to the chairmanship of the Federal Reserve only underscores those convictions! Hahaha!
Monetary Flood - Just Look At M3 Figures
Puru Saxena of Money Matters had headlined his latest newsletter "Red Alert - Monetary Flood!" He writes "Despite what you hear on your local T.V. or radio show, we are living in highly inflationary times. How do I know? Easy – simply take a look at the rates of money supply growth over the past year - Australia + 9.8%, Britain + 11.2%, Canada + 9.8%, Denmark + 16.3%, US + 7.3%, Euro zone + 8.5%." He concludes by noting that "Central banks around the world continue to print money like there is no tomorrow."
Bob Hoye of Institutional Advisors hears talking about central bank stupidity and says "As history shows, central banking is fine when disciplined by a convertible currency and, when not, it becomes a tool of state ambition to confiscate wealth though currency depreciation. That the dollar has lost 90% of its purchasing power in only 50 years exceeds most princely devaluations and, like those, has been no accident. Regrettably, modern financial agencies such as the Treasury or Federal Reserve System have become as corruptible as their medieval counterparts.
Size Of The Economy: $11 Trillion - Debts: $40 Trillion
"The total American debt is roughly US$40trillion whereas the size of its economy is around US$11 trillion. So, the debt to GDP ratio is over350%! Similar imbalances can be seen in most advanced countries where households and governments are choking on debt. In the current scenario, the easiest way for nations to make this debt easier to handle is through inflation.
"We can be rest assured that the central banks of this world will continue to inflate. After all, the same method has been tried (without success) several times before in history." As examples, he mentions France, which plunged "France and Europe into a severe economic crisis!" Germany also adopted the inflationary route after the First World War and "decided to finance its war reparations by printing money. This action had a catastrophic impact on the German economy as its currency eventually became worthless due to hyperinflation." Plus, there was "Latin America in the early 1980's. Once again, the end result was the same - economic chaos and plummeting currencies."
India Is Biggest Gold Consumer Of The World
By this time I am bored as I was in high school, listening to somebody yammer yammer yammer about ancient history. What I want to know about is gold, and how much money I am going to make. Graciously answering my question, Mr. Saxena tells us that "supply is shrinking. On the other hand, gold demand from India and (to a lesser extent) China is going to the moon. Over the past year, the Indian gold demand grew by 47% and India also happens to be the biggest consumer of gold. Now, you can do the math yourself, but I can assure you that demand will rise significantly over the years ahead. In summary, we have a situation where new supply is tight and demand is rising - classic recipe for a bull market."
He also notes that "a new bull market has begun alright, but it isn't in stocks, bonds or property - it is in the natural world of commodities. In 2001, commodities (adjusted for inflation) were the cheapest they had ever been in the history of capitalism! Agriculture (adjusted for inflation) has never been cheaper in 200 years. Now, that's what I call value! Agriculture may not appreciate instantly, but you're not going to lose much even if you're wrong - that is the beauty of buying value on the cheap. Adjusted for inflation, this sector is now selling at a 90% discount compared to its peak - a fabulous bargain, don't you think?" Yes, Mr. Saxena, I DO think that!
The Bond Bull Market Comes To An End
As for bonds, he is less sanguine, and notes that "Interest-rates are now rising all over the world, so the ageing bond bull-market may be about to end. I suggest selling your bonds during periods of strength."
How to sum this all up? Mr. Saxena says "My advice - forget the short-term movements, simply buy gold on the dips for the long haul."
Doug Casey of the Energy Speculator newsletter projects that "The world's use of electricity is projected to increase by 66% from 13 trillion kilowatt hours (KWH) in 1999 to 22 trillion KWH in 2020."
That is why he is pounding the table for uranium, notes that demand for uranium already outstrips demand by 26%, and that the deficit is "not going away anytime soon" because uranium mines will have to double their current output, which is pretty tough.
If you are thinking that your house will protect you, guess again. From Taipan newsletter we learn "The last time rising interest rates collided with a real estate oversupply was in 1990. That year, the price of an average home fell around 10% - and the price of upscale homes declined by 40% to 50%."
Their assessment of it is "This means we're sitting under a black shadow of something about to topple. Over $2.5 trillion in 'paper money' - the so-called wealth created since 2001 by the rise in housing prices - will disappear."
Low End Borrowers Are Already In Trouble
Gary Schilling, of A. Gary Schilling & Company, writes that "low end borrowers are already in trouble as shown by the leaping delinquency rates for the usually subprime FHA insured mortgages."
Home Prices Could Halve In Some Areas
In that same vein, economist Dean Baker, co-director of the Center for Economic and Policy Research, believes that "when the bubble bursts, home prices could fall 11% to 22% nationally, 30% to 50% in some markets. That would result in home equity losses of between $1.2 and $5 trillion."
Kevin DeMeritt of goldcentral.com hears all this, and asks "So when real estate inevitably crashes...does that necessarily mean investors will make another jump, this time to gold? There may be little choice. Meanwhile, investors will be watching wide-eyed as gold and silver thrives on all the uncertainty."
John Chalcraft of ProActive Communications reminds us that "Investors are well aware of the soaring price of commodities such as gold and oil, but a fact going largely unnoticed in the investment community is that over the past 3 years the price of molybdenum has risen over 1000%."
The way people are trading in and out of the gold market reminds me of a saying by Rich U., who solemnly intones "Greed, the silent killer." If you are sitting on a profit and you sell, you have to pay the taxes, commissions and fees, meaning you will have less money when you get back in. If you are, instead, sitting on a gain and you DON'T sell, then all that money is still there to make more money when gold goes back up in price, which it will. Trading is for chumps. Buy and hold is the way to play the coming long bull market in gold. And as a big chump myself, I know what I am talking about. Ugh.
****Mogambo sez: Nothing has changed, except that I am bored, as making money by buying and holding gold, silver and oil is so unexciting. And it will be continue to be both profitable and boring for a long, long time, too. So shut up and deal. And send the kid out for another six-pack. And some potato chips.

The Mogambu Guru's straightforward writings are made possible by The Daily Reckoning.
Richard Daughty aka The Mogambo Guru is general partner and COO of the Smith Consultant Group and can be emailed at scgcjs@gte.net.

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