No Escape For Oil Markets - Now Venezuela Turns Up The Heat

Monday, February 27, 2006

There is no cheap way out for oil consumers. Now Venezuela turns up the heat, repeating its threat to divert US oil deliveries to elsewhere. China certainly waits behind the curtain as a hungry buyer. The New York Times has this piece by Juan Forero on potential non-Mideast tensions in the energy markets:
Venezuela's oil minister, in blunt comments published in a Caracas newspaper on Sunday, warned the United States that it could steer oil exports away from the United States and toward other markets.
The minister, Rafael Ramirez, said Venezuela, which is the world's fifth-largest oil exporter and supplies more than 10 percent of American oil imports, could act in the face of what he described as aggression by the Bush administration.
Although such warnings have become part of President Hugo Chavez's verbal arsenal against the Bush administration, the comments by Mr. Ramírez, coupled with the increasing sale of oil to China, are seen by oil experts and political analysts as a signal that Venezuela is serious about finding new buyers.
"Physically it's very feasible, and politically it's very feasible," said Lawrence Goldstein, president of the Petroleum Industry Research Foundation, a New York policy analysis group financed by the industry. "It comes with an economic penalty, but apparently Chavez is willing to pay that price."
That economic penalty comes in the increased costs to transport crude from oil-rich Latin America to as far away as China and India, two fast-growing, energy-hungry giants that are eager to buy Venezuelan oil. China is a 30-day tanker trip from Venezuela, while the United States is just 5 days away and is well-equipped to refine the heavy, highly sulfurous Venezuelan oil .
Export To China Will Double in 2006
Mr. Chavez's government, which has increasingly been sparring with the Bush administration over everything from the Iraq war to the Venezuelan leader's close ties to Cuba, is moving swiftly to forge energy ties with China. Venezuela has said that this year it will double exports to China, to 300,000 barrels a day. Venezuela ships about 1.5 million barrels a day to the United States.
Mr. Ramirez, in an interview with the daily newspaper Ultimas Noticias, played down the hurdles in replacing the United States as a buyer. "We're prepared to diversify our markets and will work toward that," he was quoted as saying. "The easiest thing is locating it. That will not be a problem."
Echoing Mr. Chavez's fears of an American attack on Venezuela, Mr. Ramirez said that Venezuela would respond by shutting off exports. To consume more Venezuelan crude, China would have to configure more of its refineries to process Venezuela's particular type of crude. Venezuela also would have to increase its fleet of tankers and build a pipeline to Colombia's Pacific coast.
The threats out of Caracas have not been lost on the White House, high-ranking American military officials and Republicans in Congress, who in public hearings and closed-door sessions have addressed both Mr. Chavez's warnings about diversifying oil markets and China's increasing role in Latin America.
Chavez Could Move Faster Than Anticipated
"I think they're not as quick to dismiss his bluster as they used to be," said Michael Shifter, a senior analyst at the Inter-American Dialogue, a Washington policy group that follows American-Venezuelan relations.
"His intention to switch his markets away from the United States is quite clear," Mr. Shifter said. "The question is, does he have the capacity to carry it out and how quick could he carry it out. The concern in the White House is that he's moving more quickly than they thought he was able to move."
Oil analysts say that if Venezuela does shift markets, the United States would be able to find other suppliers, but it would take time and cost more. "It's a global, homogeneous market, so if China gets supplies from Venezuela, then they're not getting supplied from the Middle East and elsewhere," said Mr. Goldstein of the petroleum foundation. "That all then becomes available. There's no change in supply. There's a change in redirection of supply, at a higher cost."

Sounds a little like "fill 'er up now" to me.

China Regains A Position Already Held 500 Years Earlier

Sunday, February 26, 2006

The New York Times has this most entertaining historical research on China's trade balances. Grim result: A few hundred years earlier the British got millions of Chinese opium-addicted in order to reduce their huge trade deficit. China had then - as now - no interest in imports from the occidental hemisphere.
The other newsclips come from Zimbabwe where the government prints currency in order to buy foreign exchange to repay IMF debts and dictator Robert Mugabe now wants to "print money, so people will not starve."
From Keith Bradsher's piece in the NYT:
China has such a huge stash of other countries' money that it could, in theory, hand out bonuses equaling half a year's wages to all 770 million of its famously low-paid workers.
The country will soon release statistics showing it has passed Japan as the biggest holder of foreign currency the world has ever seen. Its reserves already exceed $800 billion and are on track to reach $1 trillion by the end of the year, up from just under $4 billion in 1989.
But China, it turns out, has held a similar position before.
The current pile, much of it invested in Treasuries and mortgages on American homes, is a result of China's selling more goods than it buys, and of foreign money pouring in for the building of factories, apartment towers, office buildings and shopping malls. China is not alone; oil exporters are also piling up cash and trying to figure out what to do with it, leading to disputes like the one over a Dubai company's effort to run cargo terminals at American ports.
History offers parallels to the yawning United States trade deficit and the resulting accumulation of dollars in China. China sells to American companies almost six times as much as it buys, but this is not the first time China has been an export powerhouse. Ancient Rome, for example, found that it had little except glass that China wanted to buy. Pliny complained about the eastward flow of Roman gold along the Silk Road in exchange for Chinese silk.
Long-distance trade collapsed during the early years of the Dark Ages. But through the next several periods of rapid growth in international commerce — from A.D. 600 to 750, from 1000 to 1300 and from 1500 to 1800 — China again tended to run very large trade surpluses. By 1700, Europe was paying with silver for as much as four-fifths of Europe's imports from China because China was interested in little that Europe manufactured.
A longstanding mystery for economic historians lies in how so much silver and gold flowed to China for centuries for the purchase of Chinese goods, yet caused little inflation in China. Many of China's manufactured goods remained much cheaper than other countries' manufactured goods until the early 1800's, despite the rapidly growing supply of silver sloshing around the Chinese economy.
One theory is that Chinese output was expanding as fast as the precious metals supply; another is that the Chinese were saving the silver and gold instead of spending it.
The same phenomenon has appeared today, as dollars inundating China have resulted in practically no increase in prices for most goods and services (although real estate prices have jumped in most cities).
China has an even easier time preventing domestic prices from rising these days because modern banking techniques allow China's central bank to buy up the dollars and take them out of everyday circulation. The central bank has accumulated the country's immense foreign currency reserves in the process.
The British Empire figured out in the 19th century how to maintain a large long-term trade surplus with China. So far, however, nobody has suggested that the United States try to fix its trade woes using the British approach: getting millions of Chinese addicted to imported opium.
But of course it will be different this time.
And on to Zimbabwe. Take note that this story appeared in The Financial Gazette, a government controlled newspaper. Inflation has risen to more than 600% in the impoverished country with a dictator who seems to have lost touch with reality, quotes in the story prove. And remember, this is no satire but harsh reality stemming from hyper inflation.
From The Financial Gazette in Harare:
President Robert Mugabe once again came out to bat for those that believe that these are not ordinary times, and that such times demand extraordinary measures. Nobody is going to throw the big Economics book at the crisis, President Mugabe said. A pile of freshly minted cash would do just fine, he suggested.
"Those who say printing money will cause inflation are suggesting that you must fold your hands and say 'ahh, let the situation continue and let the people starve'. The Good Lord up there has given you a brain and a brain must function, not in a stereotyped manner, but in a flexible manner. So I will print money today so people can survive," the President said in a ZTV interview to celebrate his 82nd birthday.
Debate will now emerge on how much government intends to use this "flexibility" with the printing press.
Last week, Reserve Bank of Zimbabwe (RBZ) governor Gideon Gono disclosed that the printing press had churned out $21 trillion to buy the US$210 million Zimbabwe paid to clear its IMF arrears.
This suggests that RBZ was buying the greenback at an average $100 000 exchange rate since it started raising the money last year, well before the rate hit its current rate just below the $100 000.
It is possible that the RBZ paid much more than the $21 trillion, given that exporters could have used their considerably stronger bargaining power to squeeze out a premium.
While it helped calm that pointless row about how Zimbabwe raised the funds, the $21 trillion disclosure shed light on where inflation and the parallel market exchange rate have been drawing their momentum.
To the bookish, printing excess money is a big no-no. But President Mugabe, backing his argument, said the bookish - and he named Finance Minister Herbert Murerwa as one of them - always forgot the "all things being equal part of economics". The bookish demand that money supply growth should match real demand only worked, he said, when all factors were constant - not when an economy was under siege from an army of detractors.
To give a little more data: Broad money supply growth has been on a sharp upward trend, from 178% in January to 411% in November last year. Inflation this week surged to 613% for January from the December rate of 586%.

Next Fed Staff Notice: Warsh Sworn In By Cheney

Friday, February 24, 2006

Sometimes the things not said may be the interesting part of the news. Today the Federal Reserve Board (FRB) announced that Kevin Warsh took the oath of office - administered by Bush's vice, Dick Cheney - as the youngest Fed governor ever. Warsh's term ends on January 31, 2018.
And how about the other nominee, Chicago university professor Randall Kroszner? He went through the Senate's hearing the same day as Warsh but did not get sworn in today.
While Warsh has yet to prove his qualifications for the job, it is understandable that everybody at the age of 35 would be thrilled to get this position. Youthful optimism is certainly a good prerequisite for the giant task he faces.
Thinking again about governor Roger Ferguson's abrupt exit from the FRB and the advancing anti-Western tensions in the Islamic world, oil prices firmly established above the $60 level, today's surprise in durable goods orders - which fell 10.2% - that reconfirm the bleak economic outlook we seem to be up for some very interesting times.
Travelling cyberspace I take note that both the Iranian Oil Bourse and the discontinuance of M3 data are seen as possible catalysts for the breakdown of the over-extended US$.
I also take note that the majority of worries about the future focus on the possibility of either a war against Iran - participants have to be determined yet - or a financial fallout if (or when) investors will suddenly change their yield expectations in the light of a dramatically altered landscape where yesterday's borrowers have evolved into today's lenders.
The dependence on the greenback seems to slide to the status of a burden currency that will be held up some more time by the reintroduction of forex market interventions and a return to positive real interest rates. It looks as if the ongoing dollar dilemma first will have to overcome the "too big to fail" myth that has temporararily preceded most grave economic shifts before sentiment turned towards the point where nobody wanted to be out last.
Interesting times indeed.

Norway Wants To Trade Oil In Euros

With the opening of the Iranian Oil Bourse only a few weeks away Norway has come forward with the idea to establish an energy exchange where products would be traded in Euros. According to an article at NRK.no that was translated by energybulletin.net Bourse director Sven Arild Andersen said already in December that it would be advantageous to trade oil in Euros.
He sees such a venture as a strong competitor to the International Petroleum Exchange (IPE) situated in London.
From the article:
Bourse Director Sven Arild Andersen is fed up with Norwegian oil having to be traded in London and wants to have a commodities and energy bourse in Norway.
The Bourse Director believes that Norway already has the prerequisites for building up a Norwegian or Scandinavian energy bourse.
"This would in such case compete with the bourse in London. Why not have the ambition to outcompete the British petroleum bourse," says Sven Arild Andersen.
"Here, you could trade crude oil, natural gas contracts and establish derivatives for these products."
"In addition, we must set up a larger financial industry around this, as important in other large markets and employ many people. And which are important for the competencies that are needed beyond the extraction itself of oil and gas," says Andersen.
Andersen in of the opinion that Norwegian oil must be traded in Euros, which can be advantageous for international customers.
"We have performed market studies and both Russia, which is a large oil exporter, as well as the countries of the Middle East have large parts of their economies in Euros. They would be able to view such a bourse as a contribution to balancing their economies in a better manner than at present, where their products are traded solely in dollars," says Andersen.
The Bourse Director holds out the Scandinavian power bourse, Nordpool, as an example of how a successful bourse is constructed. And he believes that this ought to be included in a Norwegian or Scandinavian energy bourse.
"We currently have the leading power bourse in Europe. It is large, well-respected and efficient. Nordpool would be natural to consider as being important in the establishment of an oil and energy bourse," says Andersen.
The plans have been discussed for years, but have never gone past the stage of being just talk.
"We must get large Norwegian players onboard such as Statoil and Hydro, and even though the interest has been there, nobody has taken it further with great enthusiasm.
"There is now talk of a fish bourse in Norway and there certainly is no doubt as to whether we thus aren't in a position to build an energy bourse that would be much, much larger and for which we possess significant requisite competence to get up and running."
Does this rise the question when copper will be priced in Yuan?

Another High-Level Defection At The Fed: Ferguson Goes

Wednesday, February 22, 2006

What is going on that a Fed governor resigns from his post 8 years before the end of the term? According to a press release Governor Roger Ferguson submitted his resignation (pdf) from his post, effective April 28. He will not attend the next FOMC meeting on March 27/28. US president George Bush now has to fill the next vacancy at the Federal Reserve Board.
Ferguson is the second high-level defection after Fed Philadelphia president Anthony Santomero announced his intention not to seek re-election when his term ends in March.
It is suspicious that the White House has such a hard time to fill positions that carry the highest prestige - and privileges - in the financial world. It took Bush's helpers more than half a year to come up with Randall Kroszner and Kevin Warsh for two empty governor's seats. While Kroszner has an impressive bio, Warsh has become the "Kevin who?" person as only few people on Wall Street know Warsh who, at 35, would be the youngest person ever to become a Fed governor.
Something is smelling here as the second defection in only 2 months is certainly not an everyday event.
UPDATE: The WSJ Law Blog carries a post with Warsh's bio from quite sarcastic Peter Lattman. The comments are interesting too.

The Mogambo Guru's Disaster Schedule Hits Red Alert Level In March

Today's release of surging consumer prices - the CPI rose 0.7% in January - appear to be another confirmation of the Mogambo Guru's pessimism for the short- and long-term outlook for the American economy. While his recommendations to buy more gold, silver and oil are not exactly new, the Mogambo now comes forward with another idea for a surefire money spinner - agriculture. Read on to find out why. And - just in case - if you are not in the mood for bearish outlooks, read on anyway. At least you will get a glimpse of the Mogambo Guru's sex life;-)
Run For Cover
by The Mogambo Guru
I don't remember the sound of wolves howling in the distance, but it was a darkly inauspicious start to the beginning of the Bernanke reign of monetary terror and pain, as Total Fed Credit at the Federal Reserve shot up by $6.7 billion last week, which is a handy measure of the amount of excess money and credit are being created - poof! - out of thin air by the monstrous Federal Reserve.
But that pales in comparison to the biggest and most unbelievable fraud, which is NOT that I pretend that I am a decent, caring human being, but that the total debt of the United States is now at $8.248 trillion, which is $8,248 billion, which is $8,248,000 million, which is enough to make instant millionaires out of 2.8% of the population of the country! We owe, as a taxpaying nation, enough money to create instant millionaires out of almost 1 in 30 people in the country! My God! My eyes bug out of my head and my stomach churns, going gorp gorp ga-lorp, at the very thought of such monetary, financial, economic and social malfeasance, and I think to myself "Do I have enough frozen pizzas and ammunition to sustain me during the economic upheaval that is coming?"
A Major Crisis By The End Of March
Now you want to know, "What upheaval?" Well, on the WorldNewsTrust.org site we read "The Laboratoire européen d’Anticipation Politique Europe 2020 (LEAP/E2020) now estimates to over 80% the probability that the week of March 20-26, 2006 will be the beginning of the most significant political crisis the world has known since the Fall of the Iron Curtain in 1989, together with an economic and financial crisis of a scope comparable with that of 1929." I re-read and re-read and re-read that part about it being "comparable" to 1929, which is the year that the stock market crashed and ushered in the Great Depression. But there is, so these guys say, only an 80% chance of that, which is the exact odds my wife figured of our marriage lasting less than a week. They are obviously not interested in my matrimonial problems, and blithely continue "This last week of March 2006 will be the turning point of a number of critical developments, resulting in an acceleration of all the factors leading to a major crisis, disregarding any American or Israeli military intervention against Iran. In case such an intervention is conducted, the probability of a major crisis to start rises up to 100%."
Treasury Ignores The Law
Of course, I could not let it pass without a snide and sneering comment that the Treasury Department of the United States has now, illegally, put us $64 billion dollars farther in debt, in just a couple of weeks, than is authorized by law! As aghast as that makes me, I can only imagine with horror what foreign creditors make of this terrifying development, now that the damned Treasury Department has proved to the world that laws mean nothing to it, nor to the executive branch, nor to the legislative branch, who all sit there watching and doing nothing.
Real Unemployment Is Closer To 12.5%
Addison Wiggin at the DailyReckoning site thinks about that for a minute, and innocently asks "But you have to ask yourself, how much faith would you put in an IOU from a friend who has sinking job prospects, soaring credit card bills, a double mortgage, a chronic gambling problem and - it turns out - a bad habit of lying about how much money he has in the first place?" I thought he was talking about The Mogambo there for a minute, especially about that "sinking job prospects" thing.
So I asked, "What do you mean about 'sinking job prospects', Addison?" He answered, "If you use the real statistics to calculate unemployment, the way we used to calculate it back in 1980, the real unemployment rate is a much more devastating 12.5%." Yow!
Is Consumer Spending Up - Or Down?
The good news, they say (but they are wrong) is that consumer spending went up, even if nobody is working, by 2.3% in January. How to explain it? Well, it could be that consumers are still spending those gift cards they received for Christmas, I suppose. Or they may be out spending money because they are getting raises and bonuses I haven't heard about, and never hear about, because every time I go in and ask for a raise, they say "What? Are you still working here?" and then I scram, hoping to leave well-enough alone. And it's worked out very well all these years, except for, you know, the raise thing.
Or it could be that that consumers are spending by cutting back on other things. For instance, Tom Dyson, writing for DailyWealth, reports that taxi drivers, by dint of their conversing with so many passengers in their cabs, have a good idea of what is really happening. One driver told Mr. Dyson that he thinks "The economy is bad at the moment." Mr. Dyson sums up the cabby's assessment as "Business is hard. No one goes out anymore."
The driver also has friends in the restaurant business, and "They are struggling to make ends meet. It used to be easy, but nobody's spending anymore."
Then again, it may be (and I think it is) that consumer spending went up not because consumers are actually buying MORE stuff, but that the stuff they ARE buying merely costs more, which it is. Remember, the report says only that consumers spent more, not that they bought more stuff!
Inflation And Other Enemies Are Everywhere
Of course, being officially diagnosed with Mogambo Fear And Paranoia Syndrome (MFAPS) means I see inflation and treachery everywhere. For you non-medical professionals, MFAPS is the heartbreaking condition where you fear inflation as the greatest threat to mankind, because it is. Furthermore, you see enemies everywhere, mostly on the political Left, as that group of grinning morons actually believe that spending more money, and having a bigger government, and having more of the population dependent upon government spending and government support will (insert drum-roll) solve problems, which is so absurdly stupid that it is all I can do to restrain myself from actually tracking Democrat politicians down, one by one, grabbing them by the neck, and slapping their silly damned faces until they get some smarts. And in case anyone asks you, you can tell them yes, I am MORE than willing to keep slapping, slapping, slapping their stupid little smarmy faces for as long as it takes, too!
And since we are talking about inflation, for some bad news on the inflation front, the Producer Price Index rose 0.3 percent in January, and I am reminded that the PPI rose 0.6 percent in December, too. PPI is supposed to measure the prices paid to those who actually produce something, like factories, refiners and farmers, who then sell the value-added product to other intermediaries, one after another, until it gets to the final consumer, which is me, who has to pay a price high enough so that a lot of middlemen can make a profit, even as they, too, battle the dark forces of higher prices and higher taxes.
Producer Prices Spell A Bad Future
The Core Producer Price Index, which happily excludes food and energy prices, rose 0.4 percent in January. I gulp and open my eyes real wide in this cute and comical little way that I have, which I call the Mogambo Cute And Comical Little Way That I Have (MCACLWTIH), when I am getting ready to plotz from fear right here on the spot and probably soil my pants.
Bloomberg News, apparently thinking that I am real funny, replies with their own attempt at dry, weird humor, and they write "The report may raise concern that businesses will pass rising raw materials costs on to consumers." Hahahaha! What did they say? Hahahaha! Can you name ANY cost that is NOT passed along to the freaking consumer? Hahaha! This is too rich!
How in the hell can a business stay in business UNLESS they can pass along all the costs? Before I can get a good rant going, here comes Zapata George Blake, which is a hell of a terrific name, writing at FinancialSense, saying "If there are no profits, our corporations will cease to exist. Not all will cease to exist, but those that are engaged in high employee cost, or in manufacturing of items that are in direct competition with China, such as automobiles, steel, aluminum, light bulbs, television sets, etc. If you make it in a factory, you'll probably be out of business."
Buy What China Buys
Standing up and striding back the microphone, I was intending to launch into how this is a good thing for gold, and a bad thing for stocks, bonds and houses, but before I could say anything, Mr. Blake endears himself to the crowd by telling them how to make money on it! He says "The only surefire investment opportunity," he says " is to have the things that the Chinese must purchase, things that they don't have: oil, natural gas, copper, certain grades of coal, all of the base metals such as zinc, lead, and in particular uranium. Uranium will be in great demand. The other main class of items they will need is agricultural." Why agricultural? Well, he says the Chinese have "7% or the world's agricultural land, 24% of the world's population."
And although we are completely unrelated, notice how he, too, focuses on the exact same macroeconomic things on which I focus, the chief one being prices, including (and especially) the price of energy.
Energy Prices Will Soar Beyond Belief
"The rising cost of energy and the falling value of our dollar in world markets," he goes on to say, will make our energy costs "soar beyond belief."
"Beyond belief"? This is the most second-most horrible news that could befall you. The worse news is learning that I bought the house next door to you, which would explain the "For Sale" signs in all the yards on the block
Byron King, who does NOT live next door to The Mogambo and is disinterested in even thinking about it because he says it makes him "queasy", tells us that the oil problem of falling supply is not going away. It is getting worse: "Princeton Geology Professor Ken Deffeyes has come out with a new statement about the timing of Hubbert's Peak. According to his calculations, the world passed the geological peak of its oil production in December of 2005."
But this is not about energy and how higher energy costs are going to make prices rise, but about inflation, which is the measure of prices that have ALREADY risen. And in that regard, the Labor Department said that U.S. import prices climbed 1.3 percent in January!! Note the rare use of the double exclamation point, which, if you use your Official Mogambo Decoder Ring (OMDR), means for you to gather up your gold and your guns and get the car gassed and ready to go.
If It Has A Price The Direction Is Up
They say that the cost of imported petroleum shot up 6.4 percent, which is plenty bad enough, but (and you had better sit down for this) EXPORT prices also rose 0.7 percent! This export stuff is the stuff we are, and correct me if I am wrong here, exporting! This is the stuff that is supposed to be going down in price, thanks to a weaker dollar! Yet 0.7 inflation in one month, times 12 months a year, comes out to 8.4% inflation a year!
Well, about this time Bloomberg sees all the attention I am getting by reporting the horrifying inflation statistics, and they grab the microphone out of my hand and say that we ain't seen nuthin' yet, as "Costs of intermediate goods, those used in earlier stages of production, rose 1.2 percent last month and are up 9.3 percent in the 12 months ended in January." Gaaahhh! I'm screaming in fear! My heart is pounding through my chest and I feel woozy.
Raw Material Prices Rose 23.6% Year-On-Year
Then Bloomberg turns and sees me lying there, prostrate on the floor, ostensibly killed by the shock of the terrible inflation news. Poor, poor Mogambo! Then they decide to test me and see if I am really dead so they get the celebration started for real. So they soothingly say "Prices of raw materials, or so-called crude goods, fell 0.5 percent." At that, the lifeless body of the Mogambo stirred, the flicker of life kept alive by the desperate hope that maybe, just maybe, I've got this thing all wrong! Maybe everybody is right; I really DON'T have any idea what in the hell I am talking about! After all, "Prices of raw materials, or so-called crude goods, fell 0.5 percent." Maybe we are NOT doomed!
Encouraged, I struggle back from the brink of death and despair. As I slowly regain consciousness, I can hear my wife screaming and fighting with the paramedics "Pull the plug! He wants to die with dignity!" which only increased my desire to live, since dead men can't exact revenge. But then I forgot all about her, and gave up hope when Bloomberg admitted that the prices of raw materials "were up 23.6 percent in the last 12 months."
Costs Will Bring Profit Growth To A Crashing Halt
Even Eric Fry at the DailyReckoning admits that the stupid Mogambo was actually right about something for once. Well, he did not actually say those exact words, but you can get the drift of it when he says that Jim Rogers "correctly notes that 'costs are going through the roof' for many commodity producers, thereby reducing the profits they would be earning from the soaring prices of their products."
See? See? See what I mean about profits going down if you don't pass along your costs to the final consumer? Less profits! But I'll bet that his CEO and a couple of muscle-bound goons from security aren't going to go tramping down to Jim Rogers' office and chase him down the hall, zapping HIM in the butt with Taser stun guns and yelling at him "And don't come back, you stupid Mogambo idiot!"
Even Resource Companies Feel The Crunch From Energy Costs
Mr. Fry ignores them zapping me and my crying like a little baby, and casually goes on to report that "As anticipated, steel makers, copper miners, gold miners, fertilizer producers, chemical companies and many other types of commodity-based companies are all suffering from a toxic combination of high energy prices and mounting labor costs. Therefore, profit growth at many resource companies is, in fact, grinding to a halt."
And it is not just domestic producers that are going to make less profit. And if there is one thing that I am sure of, it is that foreign producers may be known for a lot of things, but being forgiving about making less profit is not one of them, as I gather from once working for a company that was bought out by a Asian firm, and they were always in my office, poking me with their chopsticks and saying "More profit! More profit, Mogambo-pig!" But, to be fair, I get the same treatment from any America producer so stupid as to hire me, too. In short, profit is ALL that producers think about.
Manhole Cover Thefts Are Surging
And if you what to see the kind of thing that you can expect from soaring inflation, Todd L. forwarded a news clip from Indianapolis that reports "High prices being offered for scrap metals have driven thieves to steal manhole covers from city streets and aluminum siding from homes. Now, the thieves have turned to stripping copper tubing from outdoor condensers on home air conditioners."
All That Money Being Printed Worldwide
Foreign holdings of U.S debt deposited at the Federal Reserve zoomed up by another $12.644 billion last week. This is strangely at odds with the news that Net Foreign Purchase of Securities fell to $56.6 billion in December, from $91.6 billion in November of last year. This is a drop of $35 billion, or, in percentage terms, 38%.
But foreigners soaking up almost thirteen freaking billions of dollars in one week helps explain why money supplies around the world are exploding. And that unholy thing means that when there is massive inflation in the money supply like this, then you will soon see inflation in the prices of some things, then inflation in the prices of a lot of things, and eventually in all things.
But, for some perverse reason that future historians will make whole careers arguing about, the moronic people of America think all of these price inflations are good! Hahaha! A nation of morons! I sort of remember a quote by Benjamin Franklin, who was asked, when they finished work on the Constitution, "And what kind of government do we have?" and he replied "A democracy, if you can keep it."
Only A Gold-Backed Currency Guarantees Fiscal Prudence
What he surely meant by that enigmatic phrase was if you let people decide tax policy, the numerous have-not people will always vote to give themselves somebody else's money. A democratic, majority-rule government always elects to provide a "free lunch" for everybody! Whee! Thus, democracy will ultimately destroy the economy. That is why the Founding Fathers wrote into the Constitution that money shall only be of silver and gold, which is the only thing that would possibly prevent it.
Unsustainable Deficits
But this tirade is NOT about how a nation of Leftist ignoramuses and big-heart-yet-small-intellect morons destroyed America via democracy, or how that same dank, dismal democracy guided the nation's fiscal policy (governmental taxing and spending), which, in turn, picked the people who ran the nation's monetary policy (the banking system). And then the government spent, and spent, and spent, and then the banks created the money, created the money, created the money to finance these perpetual budget deficits!* Notice the exclamation point AND the asterisk. This is a new Mogambo punctuation innovation (MPI), which I use to indicate that this is the most stupid economic idea that I, The Mogambo, have ever heard.
I can hear you thinking to yourself, "Big deal! That doesn't mean much, because The Mogambo is really ignorant about most things! Especially, for example, his appalling lack of social skills. And he eats like a pig!" To this I can only reply, "Touché!"
Fiat Money Always Ended In A Tragedy
But now you have fallen into my trap! Suddenly springing the snare, I call into evidence Defense Exhibit 327, the Bonner and Wiggin book "Empire of Debt", which is has not only been adjudged to be one of the top (I turn to the jury, stare at them, and repeat the word "top") economics books of 2005 by both the Economist and Barron's magazines and many other fine publications, but it also demonstrates, beyond a doubt (again I turn to the jury, stare them down, and repeat "beyond a doubt!") the ugly fact - FACT! - that there is no example of the success of this fruitcake idea of "free money for everybody" anywhere in history! In fact, history is full of, and I am talking freaking fuuuuuuullllllll of, countries that HAVE had governments that printed more and more money for the government to spend. And it ended tragically for ALL of them! The inflation in the money supply that produced inflation in prices destroyed them all!
I turn to the jury, fall to my knees, and raise my arms to them, as if pleading for them to please, please, please understand the enormous gravity of the situation, and I finish my brilliant testimony by saying "I weep for us!" and then fall, slowly, to the floor, sobbing.
With a flourish, I spring to my feet, spin around, face the judge and announce "I have no further questions of this witness!" And the judge says "YOU'RE the witness, you blockhead!" Then I say "Then the witness is dismissed, and the case is dismissed!"
And if inflation shows up in the price of food, then that is the time when you suddenly realize, to your horror, that The Mogambo was right about this monetary insanity thing, and how it always leads to inflation, and that leads to misery and degradation of the economy. And that leads to societal anger and desperation. And that leads to panic when you realize that you did NOT build a massive defensive fortress of steel-reinforced concrete and lead shielding in your backyard, and you suddenly get the idea that maybe you can come over to MY Mogambo Impregnable Bunker of Fear (MIBOF). And then you chuckle to yourself when you realize that, by now, there is nothing but scorched earth for a quarter-mile radius around my house and you couldn't even get close.
The Mogambo Guru And His Sex Life
A hand goes up in the front row. It's that pretty little reporter! I say "You have a question, my little pretty?" She says, "Yes, mighty, magnificent Mogambo (MMM)! From whence cometh the original money that financed all of this expansion of debt and government spending?" Seeing my opportunity, I tell her that I will have to discuss that with her personally, later, in my office, where we can be alone, and she says she'd rather slash her wrists, which I take as a "No." So I say to the crowd "Okay, the question was 'Where did all of the money come from that the government borrowed and spent?' which is, I might add, a very good question."
The pretty reporter smiles and blushes because she is pleased to be so complimented, and I figure that maybe she has changed her mind about, you know, the private office visit! So I look right at her, I raise one Mogambo eyebrow and provocatively lick the slobber on my lips, and she shakes her head to signify "no!" So I bid "farewell" to the foul temptress and her full, pouting lips, and I continue on as if she hadn't even been born by saying "The money came from the only place it CAN come from, you morons! You let the banks create credit out of thin freaking air, and then they loaned it out! That's how money becomes money, you idiots!"
Fear And Greed Index Is At The Level Of Mid-1987
Of all the reasons to sell stocks and bonds and houses now, before prices fall, Phil S. sent the DrKW "Fear and Greed Index", and it shows that we are heavily into the "greed" side of the chart, and about far enough to equal the middle of the year1987, just before the market, as they say, "crashed." Very interesting!
Fear The Inverted Yield Curve - Even If The Fed Doesn't
Thanks to Doug Noland for a quote from Bernanke's first appearance before Congress since he was appointed Fed chairman, where he is dismissing the importance of the inverted yield curve, even though this has ALWAYS signaled a downturn in the economy. "More importantly, in the past, when the inverted yield curve presaged a slowdown in the economy, it was usually in a situation where both long-term and short-term interest rates were actually quite high in real terms, suggesting a good bit of drag on the economy." Huh? Where in the hell did THAT come from?
But he does not answer my question, and instead he goes on to reveal the basic tenet of his whole, idiotic theory of economics, namely that interest rates are the ONLY thing that matter. Hahaha! What a buffoon! He virtually admits it when he says "With the real interest rate not creating a drag on economic activity, I don't anticipate that the term structure signals an oncoming slowing of the economy." Hahaha! And this laughable economic stupidity is the wellspring core belief of the majority of mainstream universities in America today! Debt doesn't matter! Budget deficits don't matter! Trade deficits don't matter! Energy costs don't matter! Housing prices don't matter! The value of the dollar doesn't matter! Only interest rates matter! Hahaha!
The Fed Will Remain On The Liquidity Trip
So you can rest assured that the Bernanke Fed is going to keep creating excess money and credit, and he will keep flooding the banks with it, and the banks will make more and more loans at cheaper and cheaper rates, creating more and more money as they completely debase the buying power of the dollar.
On Secular Bull And Bear Markets
And speaking of debasing your dollars so that they buy less and less, Gary Tanashian of BiiWii enunciates my thinking perfectly when he says "Therefore, the ongoing debasement of the dollar remains my fundamental reason for being bullish gold. We are in a secular bull market in resources, commodities and hard money. We are in a secular bear market in paper currencies, being led lower by the world's reserve currency, the Federal Reserve Note."
And let's not forget silver! As Jon A. Nones at ResourceInvestor writes "According to the analyst, of all metals, silver is nearest to Hubbert's Peak."
America: From Freedom To Fascism
Aaron Russo, bless his Hollywood heart, is releasing a new movie entitled "America: From Freedom to Fascism". The reviewer says that "Aaron Russo has created a compelling and troubling documentary that indeed gives the impression that America has already moved from Freedom to Fascism. Russo is a bulldog as he prowls halls of government trying to get someone to just show him the Law that says a working citizen in the United States owes an Income Tax, or just to acknowledge prior Supreme Court rulings on the subject."
Later, there is "Another interview with a former IRS Commissioner who, now a high-powered D.C. attorney, can't seem to make the connection between Supreme Court decisions on the Constitutionality of the Income Tax and how the IRS regards 'voluntary compliance' with a law he's unable to articulate." Ugh.
****Mogambo sez: Keep buying silver, gold and oil. One day you will be very, very glad you did, or very, very sorry you didn't.

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 RichardSmithGroup@verizon.net.

FOMC Minutes Emphasize Solid Economy - Expect More Hikes

Tuesday, February 21, 2006

The latest Minutes of the Federal Open Market Committee (FOMC) paint a rosy picture of a solid economic expansion that is seen on a steady path after a temporary slowdown in the 4th quarter of 2005. Repeated statements about the robust economy are likely to clear the path for further rate hikes, mainly because of inflationary dangers from persistently high energy prices which will affect the so called core inflation rate negatively over the course of the running year before subsiding again in 2007. But take note that the Fed has been hoping for oil prices to fall since they crossed the $40 level. Energy prices will probably remain the single biggest danger to economic growth and ongoing anti-Western protests in the Islamic world as well as the steadily rising tensions between the USA and Iran do not exactly appear to help ease oil prices.
Markets were slow to react to the FOMC minutes. Both bonds and shares held on to the slightly negative tone that had dominated trading before the release.
Key passages from the Minutes:
The staff forecast prepared for this meeting suggested that, after slow growth in the fourth quarter of 2005, real GDP would expand at a fairly robust pace over the first half of this year, boosted in part by spending on recovery activities associated with the hurricanes. Thereafter, real GDP growth was expected to moderate, importantly reflecting a reduced impetus to consumption from house price appreciation and some slowing in residential housing expenditures. Core PCE inflation was expected to be a touch higher this year than in 2005, largely because of the pass-through of higher energy and nonfuel import prices, but, with energy prices leveling out, core inflation was projected to drop back modestly in 2007.
In preparation for the Federal Reserve's semiannual report to the Congress on the economy and monetary policy, the members of the Board of Governors and the presidents of the Federal Reserve Banks submitted individual projections of the growth of GDP, the rate of unemployment, and core consumer price inflation for the years 2006 and 2007. The forecasts of the rate of expansion in real GDP for 2006 were in a range of 3-1/4 to 4 percent, centered at 3-1/2 percent, while those for 2007 were in a range of 3 to 4 percent, with a central tendency of 3 to 3-1/2 percent. These rates of growth were associated with projections of the civilian unemployment rate in a range of 4-1/2 to 5 percent, with a central tendency of 4-3/4 to 5 percent, in both the fourth quarter of 2006 and the fourth quarter of 2007. Expectations for the rate of inflation, as measured by the core PCE price index, were in a range of 1-3/4 to 2-1/2 percent this year, centered at about 2 percent, and in a range of 1-3/4 to 2 percent in 2007.
Participants noted that, while the pass-through of higher energy and other commodity prices to prices of core goods and services had remained subdued, there were continuing upside risks to inflation from these sources. Whatever the size of such pass-through effects, however, it was thought that they would probably be temporary in nature and likely diminish as energy prices flattened out, as long as inflation expectations did not move higher. In that regard, participants were encouraged that, despite recent energy price increases, survey measures of inflation expectations had notched down and longer-term inflation compensation in financial markets was little changed. Although high profit margins could imply some existing pricing power, they might also provide a cushion to absorb some future cost increases. Indeed, anecdotal reports suggested that the ability of firms to pass through higher input costs generally remained limited. Nevertheless, the increased prices of energy and other commodities and the possibility of a further rise in resource utilization, which some members viewed as nearly full at present, represented continuing risks, potentially adding to inflation pressures.
All in all the picture has not changed that much, but the hawkish tone detected in the statement from the last FOMC meeting got confirmed by these Minutes. See Fed Funds somewhere between 5.25% and 5.75% later this year.

Disruption

Sunday, February 12, 2006

This blog will be back on February 20.

If It's Got To Do With Gold - Buy It!

Friday, February 03, 2006

Not much time today as I am busy with an ebay garage sale (turns things that would otherwise go into the dumpster into hard cash.)
But looking at the weak stock market and the even weaker mining shares I feel tempted to load up with more gold (and silver) miners.
The Amex Gold Bugs Index today experiences its first correction in a while after it rocketed virtually uninterrupted from 250 to 348 points. Today it is down 3.6% at the time of writing although gold holds steady above $570.
If you need a couple of reasons why to buy anything related to gold I strongly recommend you download Chevreux' 56-page report on gold (pdf) which is a thrilling read and also the first time that a major (French) bank recommends to start hoarding gold as they see a remonetization of the yellow metal (hat tip to Mover Mike.)
As I have made a few ounces - I have begun to price things not in $ or Euros but in the universally accepted currency of the last 6,000 years - I see no reason why I should not tout my own holdings as listed below. Take note that I bought all these shares - and the bullion - between 2003 and April 2005. All stocks mentioned are strategic holdings that will not be sold in the foreseeable future. I am still adding to my bullion stake though as I see gold going way above $1,000 in the next 2 or 3 years too, mostly for the reasons stated in the Chevreux report.
Goldcorp: I bought the share last year around $14 because the company was then debt free and it is the lowest-cost gold producer I know. Goldcorp has added debt since for aquisitions which will allow the company to stay on a strong expansion course. I plan to add more.
DRD Gold: This is a turnaround play and the miner with the deepest mines in the world. So they have the knowhow to undig the yellow metal from anywhere - as long as it is there.
Redback Mining: My biggest bet. Redback is an Australian company, listed in Toronto, that turned from explorer into miner only last November and owns major claims in Ghana. I follow this company since 2 years and they have constantly overshot all the targets they had set themselves. Their calculations were based on a gold price of $375 per ounce.
Royal Gold: Although this is no miner I like their strategy. Royal Gold arranges the financing for miners and gets royalties on a sliding scale. The company last year made it the second time on the Forbes list of 100 junior stocks. The shares doubled recently but are favored by fund managers.
Western Silver: At $18 the company has proven and probable silver reserves of more than $70 per share. Any more arguments needed?
NOTE: Never buy a share without doing your own research.
Now, after baring my investing soul, come the key points from the Chevreux report, written by Paul Mylchreest:
We are raising our mid-cycle gold price estimate to USD900/oz from USD750/oz and see the possibility of a spike to USD2,000, or higher. Covert selling (via central bank lending) has artificially depressed the price for a decade.
Central banks have 10,000-15,000 tonnes of gold less than their officially reported reserves of 31,000. This gold has been lent to bullion banks and their counterparties and has already been sold for jewelry, etc. Non-gold producers account for most and may be unable to cover shorts without causing a spike in the gold price.
There is a supply deficit in the gold market of around 1,300 tonnes per year before any central bank selling and perhaps 700 tonnes per year after 'official' sales but before covert selling. This compares with world gold mine output of only 2,500 tonnes per year. Some central banks, notably Russia, are starting to buy gold.
Gold acts as an early warning of potential crisis such rising inflationary/deflationary pressures and general confidence in paper currency, especially the U.S. dollar. A strongly rising gold price could have severe consequences for U.S. monetary policy and the U.S.dollar. History suggests that gold always wins against an inflating paper currency (that is, one subject to excessive supply growth).
Gold and gold mining stocks are poised for an unprecedented rise in prices and profile. Investors in UK/European equities need to assess the implications for their portfolios..
I still recommend to read the whole thing. A worthwhile read for your weekend, definitely.

ECB Policymakers Remain Sitting On The Fence

Thursday, February 02, 2006

Ignoring the recent surge in energy and other commodity prices the ECB policymakers chose today the way of remaining on the fence in the face of mounting global imbalances. The governing council decided unanimously to leave the leading overnight rate unchanged at 2.25% after the hike by a quarter percentage point in December.
While ECB president Jean-Claude Trichet stressed the point that Europe's interest rate setting body remains increasingly vigilant he injected further confusioning statements in the webcasted press conference (where issues like exploding money supply and the sudden slowdown in gold sales were left unquationed.) When asked by an Italian journalist whether he sees interest rates at an appropriate level he answered, "I did not say that," but never went as far as to say they were inappropriate. This leaves room for two kinds of speculation. Either the ECB has lost oversight of the monetary policy or we have to get used to the idea that central banks can be "a bit pregnant."
Trichet is certainly right on the spot though when he sees the outlook basically unchanged. The EU is still haunted by the two ghosts that go by the name of high unemployment and slow growth.
In his introductory statement Trichet pointed out that inflationary risks and downside risks to economic growth existed mainly on the external side.
The most important remarks made in the introductory statement:
"Downside risks to economic growth, relating, in particular, to persistently high and volatile oil prices and concerns about global imbalances, still dominate on the external side...
Risks to this outlook for price developments remain on the upside and include further rises in oil prices, a pass-through of oil prices into consumer prices stronger than currently envisaged, additional increases in administered prices and indirect taxes, and - more fundamentally - potential second-round effects on wage and price-setting behaviour. It is therefore crucial that the social partners continue to meet their responsibilities also in the context of a more favourable economic environment.
Turning to the monetary analysis, the annual growth rate of M3 remains robust, even though it moderated further in December. This moderation can be explained in part by an apparent resumption of the unwinding of past portfolio shifts, which exerts a dampening effect on headline M3 growth. However, the trend rate of monetary expansion remains strong, reflecting the stimulative impact of the prevailing low level of interest rates. In particular, growth in the most liquid components of M3 continues to be very robust and the annual growth rate of loans to the private sector has increased further. Mortgage borrowing is particularly buoyant, implying a need to monitor developments in the housing market closely. Overall, strong monetary and credit growth in a context of already ample liquidity in the euro area points to risks to price stability over the medium to longer term."
I take note that the ECB downplays M3 growth. Calling an overshooting of the 4% target rate by more than double "robust" is a nice euphemism that was unfortunately not challenged by any of the journalists present in Frankfurt.
"To sum up, the economic analysis suggests that indirect effects stemming from past oil price rises and already announced changes to administered prices and indirect taxes can be expected to have an upward impact on annual HICP inflation over the coming years. It also indicates that risks to price stability over the medium term remain on the upside. Cross-checking the outcome of our economic analysis with that of our monetary analysis supports the case for vigilance to ensure that the risks to price stability over the medium to longer term do not materialise."
The recent surge in commodity prices could start to play tricks on the ECB. Note that Trichet did not rule out that Euroarea inflation, which slowed to 2.2% in December, could be hit by this factor in the near future. I am a bit weary as the ECB always stresses the long-term inflation outlook but disregards the short-term outlook.
Taking it from my very own experience January inflation should see a spike upwards. This is because most prices of long-term contracts (insurance premiums etc.) get changed at the beginning of the new year in Europe and when I look at my heating bills, car insurance, entertainment costs and ski passes I come nowhere near to the official headline inflation rate of 2.2%. Double of it would be more appropriate.

The Mogambo Guru's Pessimism Makes Him Rich

Wednesday, February 01, 2006

I was not able to post last week's contribution of The Mogambo Guru. For 2 reasons. First I was in the claws of stationary modern medicine and second, he attributed Austria's most famous son, Mozart, to the Germans. I cannot spread such low defamations any further. So his next fee will consist of a Mozart cake and some gallons of Austrian beer and I will not be the guilty one if his wife uses it to drown him.
Anyhow, after some slaps on the wrist of his writing hand under the clattering noise of some black helicopters the Mogambo Guru has become as reasonable as he can be again and I wish you a good time reading his latest column where he brags about how rich he is becoming by remaining pessimistic.

My Pessimism Makes Me Rich
by The Mogambo Guru
I am having a hard time believing that the Federal Reserve is not expanding Total Fed Credit. In fact, it went down last week by $4 billion. Even Currency In Circulation is down. For a bunch of guys who are so hell-bent on flooding the world with money and destroying the USA with inflation, the Federal Reserve is suddenly doing a very poor job of it!
It's almost as if they woke up one morning and had the sudden revelation of "My God! The Mogambo was right! We ARE a bunch of freaking idiots, and our stupid New-Age, warmed-over, half-Keynesian-half-stupid monetary policy, combined with an asinine Fascist/socialist/communist political hodgepodge, means we are really freaking doomed!" And then they all jumped up and ran to work, and immediately started acting like competent grownups for a change, and immediately stopped that suicidal excessive creation of money and credit, which eventually drives up prices so high that people can't afford to loan me twenty lousy bucks, and THEN where in the hell will I be?
USA Tops The List For Saving Futility
The real reason, I suspect, is much more prosaic, and that people have started stopping (as strange as that sounds) borrowing money, as suggested by a report on CNNMoney, namely that "Americans are among the world's most cash-strapped people, according to the latest semi-annual survey from AC Nielsen. Nearly a quarter (22 percent) of Americans have no money left once they've paid for their essential living expenses and spent their discretionary dollars. That puts the United States at the top of a list of 42 countries for saving futility."
I am going to gloss over the part where they seem to be saying how we ignorant wastrels out here have paid for "essential living expenses" and have also spent our "discretionary dollars", too! So, is the survey merely finding out who just got tired of spending money before it was all gone?
I dunno. Anyway, this goes along with the facts that about a quarter of the people have no health insurance because they can't afford it, and a quarter of homeowners have no homeowner's insurance because they can't afford it, and about a quarter of the drivers on the road have no automobile insurance because they cannot afford it, and 100% of the people I personally know cannot loan me any more money because they, so they claim, "can't afford it."
Debt Repayment Becomes A Priority
But life is not all bad, I am supposed to surmise, as they go on to say, "Some good news for Americans - the results were an improvement from six months earlier, when 28 percent of those surveyed had nothing left at the end of the month." Well, it may be some good news for "some" Americans, but it is bad FOR America, as this means that at the end of the month there is a lot of money left over that was NOT spent on goods and services. The change may be due, Nielsen suggests, to "an attitude change - 42 percent of Americans (up from 33 percent) now list debt repayment as their first priority for spare cash."
If my voice seems muffled at this point, it is because I am speaking to you via the cheap speaker-phone in the Mogambo Bunker Of Ultimate Defense (MBOUD) and I am locked in here shaking in fear, because this lack of spending is bad freaking news (BFN) for the economy. Spending is what MAKES an economy! An economy requires that people have to be out spending money, and making money, and borrowing money, and investing money, and loaning money, all of which it takes to make an economy go. And suddenly, we are "None Of The Above".
Well, at this point I need a heavy medication regimen to control my fear, and am typing this with my nose because my hands are clenched in useless fists, as I am so freaked out, and so without further ado we'll return to this very scary report as they say "Americans are saving more cash by curtailing some of their discretionary spending. Nielsen reports that 66 percent of those surveyed said they have cut down on take-away meals; 61 percent have turned down the thermostat to save on gas and electricity; 61 percent have cut back on home entertainment; 54 percent on new clothes; and 47 percent do less driving." Yikes! Yikes! Yikes yikes yikes!
Everybody Is Forced To Cut Down
So, if your fabulous, high-paying job is overseeing some vast global empire having anything to do with drive-through restaurants, giga-watt utilities, catering services, fabrics and/or petroleum, then your business is in a slump. And you are in a slump because of all us over-stretched, over-indebted, over-leveraged people out here have been forced to "cut down" on buying your goods and services. And then one morning you get to work and you learn that the board of directors has decided to make cuts in staff, and one of the cuts is either you or The Mogambo, and then one Friday when I am taking another of my famous three-day weekends that my stupid boss is always yammering about, I'm fired! For no reason! This is how recessions really hurt!
Housing Bubble Cools Dramatically
And now, worse, houses in some areas are suddenly not selling, or inventories of homes for sale is rising to historic records, or mortgage applications and originations falling or something, and the global bubble in housing also seems to be cooling dramatically.
Commodities Are Skyrocketing
But this is all about economic collapse and blah blah blah, while it is price inflation that really concerns me. And along this line of thought comes Doug Noland and his famous Bubble Watch column at PrudentBear.com, where he writes "The CRB index closed at another all-time high. This week saw copper, platinum and zinc all trade at new record highs. For the week, the CRB index added 0.5%, increasing y-t-d gains to 4.6%. The Goldman Sachs Commodities index declined 1.2% this week, with a y-t-d gain of 4.0%."
Now let's get up, whining and complaining about having to get up, and walk over to the Economist magazine and take a gander at what THEY show prices are doing, according to their "The Economist Commodity Price Index".
Hmmm! I see that, in the Dollar Index, over the past twelve months, we have "all items" up 21.6%! Food up 13.5%! "All industrials" up 30.7%! Non-food agriculturals are up 18.6% and metals are up 36.5%! Oil is up 33.0%! Gold, precious, lovely, value-protecting, wealth-conserving, butt-saving gold, is up 31.5%!
Inflation is EFW (Every Freaking Where)
And inflation is every freaking where (EFW), too! The Yen Index of "all items" has inflation at 34%, the Euro Index is up 28% and the Sterling Index is up 27%!
My God! If this ain't price inflation, then what in the hell IS it? And if we are not, as The Mogambo says, freaking doomed, then what in the hell IS going to happen? What in the hell else COULD possibly happen? Things will magically get better? Hahaha! Let the hollow scornful laugh of The Mogambo (HSLOTM) ring in your ears!
If, in the face of all of this, you are NOT buying gold and silver and palladium and oil and commodities of any kind, then you deserve what is going to happen to you!
Public Debt Shot Over The Limit
I had just gotten back from playing golf in the morning, and I am whining about my need for a mid-range wedge, you know, something a little more than a sand wedge, but a little less than a lob wedge, and wondering who I could borrow eighty-five bucks from so I could get one, when the phone rang. Somebody is calling me, and might be able to loan me eighty-five bucks! "Thanks, God!" I said. It was Barb of 321Gold.com, who was calling me to tell me that the National Debt was OVER the debt limit set by Congress. The damned Treasury voluntarily spent more money than they were allowed by law!
I quickly figured that with all this money floating around, see, maybe could come up with eighty-five bucks to lend me, but she said no. Now that we had that point of business out of the way, I politely asked "So, what in the hell are you yammering about?" She says to go to 321.Gold. I did. She says to click on "Fed Temp Bank Reserves". I do. I was taken to the page showing temporary changes in bank reserves and repo accounts.
So I scroll down, and sure enough, there are nine little round, red heads in a row, which is Barb's attention-getting device to draw attention to the fact that Treasury borrowings have exceeded statutory limits.
If you look closely, you will see that the little heads each have two little eyes and a little animated mouth, and are apparently chanting in unison. I am not an expert in lip-reading, but after awhile I was finally able to figure out exactly what these little animated heads were saying. They are intoning "The damned Treasury Department voluntarily went over the damned debt limit, as set by Congress! This is an outrage! This is a (long series of rude, deleted expletives) outrage! I think that the (another long string of deleted expletives) Mogambo should get into the (deleted expletives) Mogambo-Mobile of his and (del. expl.) go to Washington (del.ex.) DC, and strut around like he owned the (de) place, and kick a little (DE, DE, DE DEDEDEDE!) Treasury butt!"
Repo Volume Doubled Since 9/11
Then she says that since she has me on the phone and I am still seem relatively sober, she will show me how smart she is and how stupid I am, and I am thinking to myself "Crap! I get enough of this at home!" She says that has noticed two things.
  1. I am probably the biggest idiot she has ever seen, and she has known some real jerks in her time, and
  2. that before 9/11, the Federal Reserve repo market used to average about $3 billion a day. But ever since 9/11/ it is running at about twice that!
Hmmm! Interesting!
Well, no sooner am I off the phone that the wires are burning up with the screaming headline "U.S. IN TECHNICAL DEFAULT", which heralds an essay by Dr. M., who writes "In a shocking development, the Treasury Department website is openly stating that as of January 24, 2006 our national debt stood at $8,185.3 billion and on January 26th at $8,190.5 billion."
$800 Billion New Debt In Only 14 Months
So that is three of us that are outraged! Dripping with sarcasm, the mysterious Dr. M. continues "Since the debt ceiling has been raised 50 times over the past 40 years, I suppose we could write this off as merely an unsurprising development from a government that no longer bothers to even appear to be adhering to rules, laws and procedures, let alone actually doing so.
Nice touch! Anyway, he goes on to say "The last debt-ceiling adjustment was $800 billion and was passed in November 2004. Now, on January 24th 2006, it is entirely gone. $800 billion in only 16 months for an average of $50B a month."
This Translates Into $417 For Every Living American
Yow! The Federal Reserve is creating more than $50 billion a freaking month? The money supply is being directly increased by fifty freaking billion bucks (FFBB) a freaking MONTH (AFM)? And how much IS $50 billion a month, you ask? It's $417 for everybody in the country that does not have a government job. PER MONTH! Your insane government is indebting you by another $417 per month, every freaking month! And they have been doing this for years! And they will CONTINUE to do this, more and more, for more years! Hahahaha! We're idiots!
Buy Gold!
And you wonder why I am screaming "Buy gold!"? Hahaha! I am screaming "buy gold!" because this is insane!
And it is not just us! From Reuters we read, "commenting on U.S. reliance on foreign oil supplies, McCain told Fox News, 'We better understand the vulnerabilities that our economy and our very lives have ... when we're dependent on Iranian mullahs and wackos in Venezuela.'
Mr. Chavez himself was, I guess, too busy coming up with more idiotic socialist ways to destroy Venezuela, so the vice president was called on to tell Sen. John McCain that "he could 'go to hell' for suggesting that 'wackos' were governing the oil-producing South American country."
A Revolution Against The Free Market In Venezuela?
The Reuters article went on to explain "A former army paratrooper prone to quoting Ernesto 'Che' Guevara and Karl Marx, Chavez presents his revolution as a counter to U.S. free-market proposals for South America." Hahaha! A revolution to counter the free-market? Hahaha! The free-market, which is the only hope that any of us have, he is going to eliminate? Now I know what McCain means about "wackos" running Venezuela!
The article also says "He often accuses Washington of plotting his overthrow." Hahaha! If you see Mr. Chavez, you can tell him to relax on that score, because nobody in America wants to kill him. Everyone wants him to live! If he lives, he is going to destroy Venezuela with this insane collectivist drivel, and then America and other nations will be able to swoop in and pick up the pieces. Why in the hell would anyone want to kill him?
Earnings Of The Dow 30 Decline More Than 15%
That the stock market did not collapse into a big, stinking pile of crap is a big, big surprise for me. For one thing, one big thing, one Big Freaking Thing (BFT), earnings for the indexes went down. A lot! The DJ Industrial Average shows earnings dropping from $573.68 to $504.84. Yow! Hell, a year ago they earned $600.65!
S&P 500 Earning Stay Flat
The SP500 Index showed earnings falling from $66.76 to $66.57, which isn't huge, I'll admit, but it ain't growth, either. This lack of earnings dovetails nicely with the current drop in Consumer Installment Debt, because if nobody bought stuff, the guys who make stuff don't sell as much stuff.
DJ Utility Earnings Decline by 5%
But even the DJ Utility Average dropped from $22.34 to $21.40, which means, I guess, that if consumers aren't buying things, then they are not running home and plugging them in and turning them on and having fun playing video games or something. And of course this is mirrored in the falling earnings of the DJ Transportation index, which fell from $244.63 to $238.09.
And This In A Time when The P/E Is Around 20
And this is when the price/earnings ratios of these indexes are all 18, 19, 20, or 21 already! These share prices are at the historical high end, the very high end, the extreme high end of valuations for stocks, compared to earnings! To get the P/E back to some semblance of sanity, such as, oh, say, 14, then either earnings have to rise like crazy, or prices of the shares have to drop, and drop a lot, and somewhere in the neighborhood of half, or more. Much more!
Market Could Fall By Half
The reporters sit there in silence. The Mogambo looked around the room. Finally, in exasperation, the long-suffering Mogambo cries out "The stock market almost certainly has to lose more, a LOT more, than some piddly 50%!" Still, the reporters said nothing, standing there mutely, holding out the stupid little microphones in their stupid little hands. Tearing his hair out in frustration, the voice of The Mogambo rises to a shout "We just saw, for crying out loud, that earnings are NOT going up, and consumer borrowing is NOT going up! What in the hell is the matter with you stupid people? Can't you morons understand that your damned heads are going to be chopped off, even as you watch the blade of the guillotine hurtling down towards your stupid, geeky pencil necks?"
Earnings Will Continue To Drop
To make a dramatic point, I grab one of the smaller, weaker reporters, whose stupid little ID badge said he was a sixth-grader on a field trip from Skyview Elementary School, and I am right in the kid's face, shouting at him "And those earnings are going to keep on dropping, you little jerk! Month after month, year after year, earnings fall and fall as consumers continue to not spend, and companies not earn! And so the price of shares of stock has to drop that much more! Do you understand what I am saying, you nasty little bastard? The stock market will collapse, you stupid, stupid kid!"
Well, my stunning performance was, unfortunately, cut short when people are clawing at me, trying to drag me away from the kid, and that little twerp shook loose of my grasp, jumped up and starting crying, and everybody is yelling and running around, and my wife is offering a hundred bucks to anyone who will knock my "block off."
But this is not about how the enlightened Mogambo treats children as he treats adults, and thus hates them both equally, but how the damned stock market is going to go down, and take with it the retirement dreams of those many, many morons of the world (MMMOTW) who actually think that everybody can get rich by putting ten bucks into a bucket labeled "stock market", and then coming back later to take twenty bucks out of the bucket! Hahahaha! And to those people I laugh the stinging, scornful laugh of Mogambo contempt (SSLOMC), which, for those who haven't heard it, sounds sort of like a hyena retching.
The Debt Trap Closes
Bill Bonner of the DailyReckoning.com site hears me and my brutal style, and decides that he is going to show me how to say the same thing, and simultaneously wax not only philosophic, but lyrical and poetic, too! I'm thinking to myself "Well, I gotta see THIS!" Without even warming up, he says, right off the top of his head, "Oh Alan, Alan...what have you done? You have lured a whole generation into a debt trap from which they cannot get out. Debt service, as a percentage of income, is at a record high. Even with Mom and Dad both working, family expenses exceed income. What can the lumpenhouseholders do but pray for a miracle...file for bankruptcy...or cut back even more?"
With all due respect for Mr. Bonner, I say that, as a guy who has prayed for a miracle many, many times because I really, really, really needed one because I did something really, really stupid, the data is pretty conclusive: This is a zero-probability option, and your best shot is to sneak out of town in the dead of night with all the cash you can lay your hands on, and try and do better next time with a new name, and new spouse, and new kids, in a new state or country, depending on circumstances.
Dr. Kurt Richebacher, everybody's favorite Austrian economist, writes "The American idea that everything good comes from consumer spending is preposterous. And that is the key fallacy in America today."
Capitalist America Now Relies On Communist China
I thought I was the only guy around here who can't believe his eyes, but Dr. Richebaecher says "Because consumption has grown so far out of proportion to production, capitalist America relies on the generosity of communist China. Americans don't even realize how ridiculous and absurd this is. It's so absurd I can't believe it. I think this is the worst sign that I could imagine."
Well, I personally could imagine worse things, such as Godzilla rising up out of the ocean, shooting laser beams out of his eyes and smashing through here like he did to Tokyo many, many times before. THAT would be worse!
Net Investment Is Collapsing
Dr. Richebaecher looks at me like he can't believe I would say something so stupid, and says, like he is talking to some idiot child, "It means that net investment is collapsing." Again, he's lost me, as I continue to argue that some stupid drop in "net investment" is a whole lot better than Godzilla stomping around, smashing the hell out of my house and maybe me, too.
Apparently wanting to end this quickly, he summarizes "There is no way out."
Stock Brokers Start Touting Gold
I had lunch with Bob and Paul the other day, and Paul says that he hears stockbrokers starting to recommend to their clients that they hold some gold. The fact that gold shares (as represented by the HUI index) have exploded more than twenty percent this month alone means that those brokers are looking like geniuses. So expect more of the same, as more and more stockbrokers start recommending that their clients buy gold, and clients of stockbrokers start making money in gold, which will lead to higher and higher prices for a long time as they start bragging to their friends about how much money they have made in gold, and then more and more people start buying gold. So, is this a bubble in gold? Who knows? I'm betting that it is.
Hopefully You Already Drown In Silver
If you want another reason to buy silver, and by this time you should be up to your eyeballs in silver and you are praying to yourself, "Please, Mogambo! Don't recommend silver again! I'm drowning in the stuff!" So, in answer to your prayer, I am NOT going to recommend that you buy more silver. Yet.
In the meantime, I offer up the essay "Silver ETF Packs Punch" by the Texas Hedge Report, which is about the proposed Exchange Traded Fund for holding silver bullion. "With silver trading at around $9.60/oz, $6 billion in incremental investment demand would translate more precisely into about 625 million ounces of the grey metal. This would almost certainly wipe out the entire world's identifiable supply of above ground silver (about 550 million ounces according GFMS)."
All The Silver In The World Costs Only $6 Billion
Hahaha! You want an investment tip that is going to pay off in spades? This is it! Silver is so cheap, and so rare, that a measly $6 billion would buy up all the available silver in the world!
Okay, now imagine that you happen to HAVE $6 billion, and you are a ruthless, grasping Mogambo greed machine (RGMGM). You can buy that first ounce today at $9, and then you can buy more and more and more. And when you are getting ready to buy that last ounce of silver available in the world, do you think it will still cost $9? Hahaha! Not only "no," but "no indeed" That last marginal ounce of silver for sale, wherever it is on the planet, will cost hundreds, if not thousands, of dollars!
Your homework for tonight is to determine how much profit will you make on all those ounces you bought for $9. Hahaha! Welcome to the Mogambo Fantasy World Of All The Things You Can Do With Enormous Wealth (MFWOATTYCDWEW)! Fun, ain't it?
These Texas Hedge boys think that if an ETF "approaches anything close to the popularity of the other ETFs, then silver's run-up may be more spectacular than anyone can imagine."
They summarize with "Finally, if you were to ignore all of our ETF demand assumptions and look at the big picture, you should be even more bullish. The fact is that the entire dollar value of annual silver demand is peanuts."
They say that Alan Greenspan is going to open his own consultancy, which I think is a good idea. When the results of his disastrous monetary policy start becoming more and more obvious, angry groups of people will be thankful to know just where he is, so they can march down there as an angry, unruly mob, brandishing flaming torches and dragging him out into the street, given a quick kangaroo-court trial with me as judge and jury ("Guilty, you stinking idiot bastard!") and thrown into some stinking prison cell, sort of like my office, but not as drab or messy.
Greenspan Was A Socialist Keynesian Advocate
And it is not just me that is grumpy about Alan Greenspan. For example, listen to Adam Hamilton of Zeal Intelligence newsletter as he writes "History will rightfully remember Alan Greenspan not as an inflation-fighting hawk, but as a socialist Keynesian advocate of endless inflation. The bottom line is Alan Greenspan, despite his huge fan club today, is no different from the Communist party bosses of Russia before the Cold War ended. Rather than sitting back and letting the invisible hand of the free markets determine the price and growth rates of money, Greenspan chose to play God and horribly messed everything up like all other would-be demi-gods in history. In five or ten years from now once the full spectrum of the consequences of his highly-inflationary and moral-hazard-ridden policies become apparent, I suspect Greenspan will be remembered as a goat, not a guru, a blight on our great nation and economy."
Or as Morgan Reynolds, PhD, professor emeritus at Texas A&M University and former chief economist of the US Labor Department says, Bernanke "will be a disaster because he is wrong about virtually everything." Ugh.
****Mogambo sez: It's hard to be too gloomy when one is making so much money as gold and gold mining stocks rocket heavenward.

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 RichardSmithGroup@verizon.net.

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