Gold And Silver Tell A Clear Story

Thursday, March 30, 2006

Regular readers will have noticed that the frequency of my postings has become less regular this year. This is a result of browsing the archive and finding out that I have covered every major economic theme that concerns the ongoing redistribution of wealth. Having made clear my preference for precious metals, crude oil and markets like India I now find myself in the position where things are just about to develop as I have been forectasting it for a while now.
Looking at the string of deteriorating US and EU economic indicators which are best summarized in the growing current account deficits in the West and an unprecedented accumulation of assets in the East there is nothing that can change my position.
As long as the current occupators of the White House do not change their aggressive policy against the rest of the world for the fear to run out of oil there will be attempts to counteract against American interests. It will not go on forever that the USA can borrow the money to wage resource wars all over the world. The major consumer of all commodities will have to come to terms with the fact that it has to bid among other giants for the resources it needs.
Seeing all this unfolding I guess it is best to lean back in the armchair and remain patient, being long precious metals.
Gold and silver, for millennia the best indicator for acual political uncertainty, tell a very clear story: The world is up for major changes and the dependence on crude oil for energy and industrial purposes leaves few options for all oil importers than to face higher commodity bills.
It would be interesting to peep into the minds of the Arab world. The attitude to gold as a safe store of value is probably a lot more prevalent thant in the West. Recent downturns on the Arab bourses and money for nothing from high oil prices may be one reason for the advances in gold.
Silver currently looks mainly driven by the expectation of the new Barclay's silver ETF, but the rally from $9 to $11.70 leaves me speechless. Readers of precious metals websites will certainly have read about the speculation that there is actually far less silver above ground than gold and come up with figures that tend to fizzle out at the billion ounce mark. If these reports turn out to be true see silver rocketing. This could become the biggest bull market in history. In my opinion silver below $30 will be seen as cheap in a decade from now.
Platinum is worth a look too. The metal reached a new record today and political uncertainties in Zimbabwe may lead to temporary shortages if despot Robert Mugabe proceeds with his expropriation plans.
Oh, and palladium... I should have bought it when one of the major metals gurus compared observing palladium with watching paint dry. That was at $190. Last price: $342.

The Mogambo Guru Sees A Silver Lining On The Horizon

Wednesday, March 29, 2006

Now don't say that higher prices are all that bad. While the Mogambo Guru never tires to warn us of the fatal dangers of inflation, he still loves to see precious metals going up. Silver zooming past $11 per ounce even managed to pull him out of his perma-paranoia and secretly I hope he doesn't make too much money from this rally, fearing he might end like so many good investors: Guzzling cocktails in the Caribbean, surrounded by sexy island girls and not even thinking about writing another column.
Before you get your weekly dose of the Mogambo Guru, remember that I favor silver above all other commodities worth buying at current prices too.
Better Stock Up On Silver
by The Mogambo Guru
I was surprised to see that Total Fed Credit was not exploding last week. I was even more surprised to see that Foreign Holdings of U.S. Debt held at the Fed was actually down by $8 billion last week, too. Even the banks were not making fools of themselves, as is their wont, by gobbling up huge fistfuls of government debt. It was, in a word, quiet. In the movies, when somebody remarks how quiet it is, the hero says "Too quiet!" and the next thing you know there are arrows and/or bullets flying all over the damned place.
So I nervously remark that it is, indeed, the proverbial "too quiet", because I know that there are enemies out there. For one thing, crude oil prices are up to around $66 a barrel, although to think that oil exporters would NOT factor in an increasing devaluation of the dollar into the price of oil, in the face of enormous American trade deficits, monstrous American budget deficits and stupefying rises in American business and household debt levels, is to insult their intelligence. And in that regard I will note, with a snide Mogambo sneer (SMS), that they were smart enough to grab the global real estate that had most of the oil, while we took the part that is next to Mexico and South America, places so corrupt and stupid that economic refugees are flooding into the USA to get away from there!
Bond Holders On The Losing Side
And for another thing, bonds are rising in yield, meaning that bonds are falling in price, meaning that all those billions of people around the world who own US bonds lost some money and are getting ready to lose some more as interest rates keep rising. Beyond that, two other noteworthy things happened last week: The Federal Reserve has now officially stopped reporting M-3, the broadest measure of the money supply, and we have the new Treasury Statutory Debt Limit of $8.965 trillion, up by the $781 billion approved last week by Congress at the last minute. Potent stuff!
Microscopic Bank Reserves
I hear a rustling in the bushes off to my right, and my trigger finger spasms. This is the economic enemy of loans/leases at the banks increasing to a record $5,569 billion, and savings deposits also soaring to a record of $5,238 billion, yet Required Reserves in the banks fell to a microscopic $40 billion. Hahaha! The record low was in 2001, when Required Reserves sank to $38 billion, which was the "insurance" against losses in their much, much, MUCH smaller books of loans/leases and deposits. You wanted fractional-reserve banking carried to ludicrous extremes? Well, brother, you've got it now!
$100 Billion New Debt In 24 Days
Off to my left I see figures furtively sneaking around, and it is the action in the Treasury Department. These guys have borrowed, in the first 24 days of March alone, almost $100 billion dollars! In three weeks! My eyes have a glassy look in them, and I am gurgling incoherently as my puny little Mogambo brain (PLMB) refuses to accept the fact that the government is borrowing money at a rate that equals, on an annual basis, 10% of GDP! Gaahhh!
Too Much Money Is Magically Created
All of this ties in with Ben Bernanke, the new chairman of the Federal Reserve, the evil place from which too much money (TMM) is magically created, which pushes prices up, which destroys economies and countries, which is the Iron-Clad Lesson Of History (ICLOH). But this is not about how the Federal Reserve has destroyed America by creating so much money and credit, but about Ben Bernanke. On Money.cnn.com I read where Ben Bernanke said that the "global saving glut helps to explain both the increase in the U.S. current account deficit and the relatively low level of long-term real interest rates in the world today."
A Savings Glut Everywhere - Except In The USA
I see reporters suddenly bolting for the doors and cowering under the seats, because they all think that The Mogambo is going to go freaking Mogambo ballistic (FMB) over this "savings glut" remark by Ben Bernanke. But, you will be surprised to learn, I am NOT one of those pooh-poohing this "savings glut" thing, as he is exactly right; there actually IS a "savings glut"! And it IS responsible for the "relatively low level of long-term interest rates in the world today." Parsimonious foreigners are saving their money instead of spending it all, like their insane American and British counterparts.
Hot Mamma Jamma Bar Takes Care Of My Savings
But, hell, in comparison to America, even The Mogambo has a "savings glut" just because they threw me out before I could spend my last dime buying another round of tequila shooters for me and my hoodlum friends at the Hot Mama Jamma Bar, whose charming motto is "Cheap women, cheap thrills and cheap liquor for cheap scumbags like you! No cover charge!"
But this is not about how funny I looked as the bouncers tossed me into the parking lot, or how everybody laughed when they called me a "stinking pervert", but about how the big freaking question (TBFQ) is "Where did these foreigners get all this glut of money to save?" Instantly, the lightning reflexes of the Mogambo (LROTM) spring into action, and I hit the answer button! The buzzer sounds, and I triumphantly shout out the answer "Ultimately, from the Federal Reserve, Alex! Hahaha! The damned Federal Reserve has created so damned much money and credit over the last couple of decades that it spawned a huge stock market boom, plus a gigantic bond market boom, plus an explosive size-of-government boom, and a monstrous housing boom! All this money piled up overseas, thanks to the trade deficit! And, since we are talking about the horrible things that the Federal Reserve has done by creating so much damned money, it also created the 'savings glut'!"
Begging For Gold Won't Be Of Help
Out of the corner of my eye I can see the cameraman trying not to laugh, and Alex Trebek sneers at me and says, "Wrong! Sorry, Mogambo, but Jeopardy rules require that your answer must be in the form of a question", and the sound-effects guy makes a rude "awwwk!" sound, and then the whole Jeopardy audience and the other two contestants are laughing at me. My face stinging with shame as their hooting derision rings in my ears, I am thinking to myself "Go ahead and laugh, you stupid bastards! Just wait until this whole Federal Reserve/fiat money economic piece of crap explodes, and gold and silver and commodities soar! I'll be so rich that Mister Big Shot Alex 'Jeopardy' Trebek himself will be begging me, on bended knee, for some gold or silver, and I'll laugh with scorn (LWS) and say "Wrong! Sorry, Alex, but the Mogambo rules say that your plea must be in the form of beautiful naked ladies!" And then I'll bend down until my nose is almost touching his, and I'll scream that horrible sound at him, "Awwwk!" And then I will laugh - Hahaha! - and slam the door in his face!
But this is not about how I was cruelly cheated out of my chance to make some big money on Jeopardy because Alex Trebek acted like a real butthead about his precious "rules", but, rather, about the glut of savings in foreign hands. In that regard, my answer was perfect: Thanks to Alan Greenspan's 18 years at the Federal Reserve, money has been pouring out of the Federal Reserve and out of the government's checkbook into (mostly) the economy of the USA, and, by virtue of the trade deficit, the money pours right back out and into foreign countries, and into the hands of people who make the stuff we are buying with that trade deficit, who then save the damned money. Thus, the Federal Reserve created the "savings glut"! Hahaha!
Bernanke Likes To Quote Himself
And speaking of Ben Bernanke, George Ure of UrbanSurvival, commenting on Ben Bernanke's first speech, noted that Bernanke cited himself as an authoritative source! And not just once or twice, either! Mr. Ure says that Bernanke "included himself in 4 out of 7 notes - a remarkable 57% of the time." Hahaha! What arrogance!
But I love this novel approach, and I can't wait to use it myself! "I call, for my first witness, me!" Then I will testify how I, as an expert, pronounce me sane, sane, sane, and the only insane people around here are my family and neighbors who are trying to get me locked up! And I will also testify, as an expert, that if they are NOT being driven crazy by all of these central banks creating outrageous amounts of credit and money, then THEY are either crazy or too stupid to have an opinion about anything! And, therefore, they probably knocked over their own stupid birdbaths and spray-painted their own houses with the words "Our money is being destroyed by the freaking Federal Reserve!" And if that is not enough evidence for the judge and jury, then I will call myself to the witness stand again, time after time, citing even MORE of my expert testimony!
The REAL China Boom Is Only Beginning
But if the "savings glut" starts disappearing, then I know where the money is going to go. Notice how I astutely surmised this from Steve Sjuggerud's commentary at DailyWealth, where he said his buddy Jeff Clark told him that "About 10 weeks from today - maybe sooner - Federal Ban 18 will be lifted from Chinese Law. On that day, Chinese companies listed on American exchanges will be allowed to return home - and sell shares for the first time in history on the local markets of Shanghai and Shenzhen. And for the first time in history," he says, "Chinese citizens will be allowed to buy them. That’s when the REAL China Boom begins."
Soft Commodities Should Catch Up
An article by Patrick Barta in the Wall Street Journal quotes a Macquarie Bank report that suggested that after looking at the data for the last 100 years, "All commodity prices tend to move in tandem. So when oil, gas and metals prices surge, agricultural commodities eventually should follow." Now, they figure, with the current prices of food being so low, we "could be at the start of sustained rally" in agricultural commodities, too!
And let's be sure we differentiate between his "rally", by which investors get rich by investing in commodities, and "inflation in food prices", by which we working poor proletariat slobs get poorer by buying commodities, mostly because food costs so much, but arrogant Social Services workers won't let you put your stupid kids on subsistence rations, but instead want YOU to play less golf and use the money to buy them food!
And if you want another way that inflation destroys the economy, I found out that the Sonny's Barbeque restaurants in Orlando have now fired their cashiers, and are simply making the waitresses take care of the money, too. Unemployment and heavier workloads DO result from inflation!
You Can't Escape Inflation, Death And Taxes
Steve Saville, writing the essay "The Non-Stop Inflation" at SafeHaven, notes that "The correct definition of inflation is an increase in the supply of money that CAUSES a decrease in the purchasing power of money, but we usually define it as simply an increase in the supply of money." I say the same thing, but leave it at that. But Mr. Saville actually does real work, and goes to the hassle of looking at the total US money supply, as measured by M-3, from 1959 through to January of 2006, a period of 47 years. In conclusion, he says "apart from a very brief and shallow dip below zero during the first half of 1993, the year-over-year change in M3 has been positive throughout this entire period. The point is that inflation is a constant."
Inflation is a constant? At this terrifying news I started whimpering in fear, and my pitiful sobbing grew to a scream of mortal dread when he went on to say "The things that change are the rate of inflation and the parts of the economy that are the main beneficiaries of the inflation."
Go The Golden Way To Escape Inflation
This is the worst news I have ever heard! Taking the coward's way out, I am putting the barrel of a pistol in my mouth, when it suddenly occurs to me that maybe I have a reason to live after all! Maybe I can make some money on this! How? Sadly, I discover that I have no freaking idea, so I put the barrel back in my mouth, and just as I was pulling the trigger, Mr. Saville reveals how! He says "When confidence in governments and the money they make legal tender is in a long-term decline - as is the case right now - then the inflation will boost commodity prices relative to equity prices and boost gold prices relative to commodity prices." Ah! Making a fortune in gold! My reason to live long and prosper, just like Mister Spock told us to! Thank you, gold!
And in case you plan on living a long time and survive the coming economic cataclysm, then you will want to know when to get back into equities and bonds. He says "when confidence is rising, the inflation will boost financial assets (stocks and bonds) relative to hard assets (gold and commodities)."
The Government Creates More Inflation
And for another look at how inflation in housing is affecting the economy, thanks to the housing boom which has driven the cost of housing to ludicrous extremes, companies and schools all over the place are complaining that they can't attract employees because the cost of housing is so high! The Washington Post reports that "Police departments around the country are contending with a shortage of officers and are trying to lure new applicants with signing bonuses, eased standards, house down payments and extra vacation time." Signing bonuses, house down payments and extra vacation time all mean higher costs and higher taxes, as does lowering the "standards" in the hiring process, which were put there to curtail a previous problem with unqualified, expensive, dangerous people being cops. Hahaha! Welcome to the world of inflation, chumps!
And there is (to show you that the misery of inflation never stops and that is why it is important not to let the damned Federal Reserve create so damned much money in the first damned place) also a tragically-irresponsible push to again increase the federal minimum wage, meaning employers will have to pay higher wages, and then employers will have to charge higher prices to recover their higher labor costs. And the higher labor costs of their suppliers, too, means that supplies will cost more, too, which means that the employer has to charge even higher prices to recover his higher materials AND labor costs!
And why do they want a higher minimum wage? To offset higher prices! But if they get higher wages, then prices will go yet higher! Now, if it stopped there, then I would have no problem with it at all, but it does NOT stop there. In fact, the overwhelming majority of the people in this country don’t have jobs, and so they are NOT going to get higher wages. The young, the old, the sick, the handicapped, the unemployed, and the criminals are CERTAINLY not going to get higher wages to offset higher prices! It just makes them worse off! Worse off and angrier!
Beware Of Higher Wages
Well, there has already been a lot of suffering, thanks to inflation in prices, thanks to inflation in the money supply, and now the idiot people think that mandating higher wages will "make it all better"! Hahaha! Idiots! Prices are too high, but making prices rise higher will "make it better!" Hahaha! America is a nation of first-class morons, and that is why we richly deserve the misery we will be getting!
In the March 25 issue of Economist magazine we have a photograph of Ben Bernanke that accompanies the article "Bernanke Ponders His Course." If you look closely at Bernanke's face, you can clearly tell by looking at his eyes that he is thinking "Oh, my God! That Mogambo idiot was right! We ARE freaking doomed!"
The Atlantic Divide In Monetary Policy
But the real news was the following article, entitled "The Issing link", which takes a look at the "huge divide in monetary policy thinking between Europe and America" such as any emphasis on money and the money supply. The article says "Yet, the odd thing is that the standard academic models used by most economists ignore money altogether. Inflation instead depends simply on the amount of spare capacity in the economy. Nor does the money supply play any role in monetary policy in most countries, notably America." The good news is that mainstream economic opinion is swinging back around to, again, keeping a lid on the money supply.
Money Supply And Inflation Move In Tandem
Of course, America and "most countries" are wrong, wrong, wrong, and a handy 30-year/40 countries chart of the inflationary effects of increasing the money supply, included in the article so there is no mistaking it, shows an almost 1-to-1 correlation! Therefore, increase the money supply by ten percent, and you will get ten percent price inflation!
Now let's turn to the tables in the back of the Economist magazine, and take a gander at the changes in the money supplies of those countries of the Anglo-Saxon persuasion, and we are looking at some with 2% growth in their money supply, and some with 6%, and some with 8%, and some with 12% and one in the 26% range, too. Bad news!
All Central Banks Are In The Business Of Re-Inflation
And it's not just me, either! Jim Puplava at FinancialSense writes "If you look at global money flows around the globe there isn't one central bank that isn't re-inflating at rates 2 or 3 times or 5 times their economic rates. So, what is happening now for the first time is you're seeing currencies depreciate around the globe against the real standard of money which is gold. I think what you're going to see first is stagflation, and eventually leading to hyperinflation. There's no way with $51 trillion of unfunded Medicare, Medicaid, and Social Security liabilities that we're going to go on some austerity program in this country. It's just not going to happen."
Long-Term House Price Appreciation Is A Paltry 0.4%
And if you think that houses are going to be your salvation, then think again, as we learn from Rob Peebles and his Random Walk column at PrudentBear. He writes that Robert Shiller, a Yale professor, "looked at housing data from 1890 to 2004. After looking at it, he and his calculator concluded that the average annual price increase over that period, adjusted for inflation, was a paltry 0.4%." Hahahaha! Owning a house provides, investment-wise, a long-term 0.4% gain? Hahaha! It's so low that it is in the range of statistic error caused by rounding!
As bad as this is, Mr. Peebles goes on to say that "The return would be even more pathetic if housing had not taken the baton from the withering stock market in the Great Asset Inflation Race."The same thing was reported from the history of houses on the Herengracht, a famous Dutch canal, that have been very popular ("location, location, location") since 1628. It short, it was boom and bust, cycle after cycle, resulting in a long-term gain of "just 0.2% a year adjusted for inflation." Hahaha! As if there could be any other result!
90% Of Silver Have Been Consumed Already
For a daily dose of Mogambo screaming about silver (MSAS), I offer this interesting PR Newswire bit of news. "Experts maintain that about 40 billion ounces of silver has been mined throughout all of human history, and that about 90% of that has been irretrievably consumed by industry, jewelry, and photography."
I stop the tape, and caution you to write in your notes that they said that 40 billion ounces have been mined in all of history. Secondly, they note that 36 billion of those 40 billion ounces of silver have been consumed and are now irretrievably lost.
Most Silver Left Is Held By Indians
I re-start the tape. "Most of the approximately 3-5 billion ounces of silver left is in the form of jewelry, mostly held in India." I don't know where you live, but around here the news that most of the silver is in India is like saying it is on the moon. The question on everyone's minds is "So how much silver is available for me to buy, so I can get in on the coming silver bonanza?"
While obviously deploring my raw greed, they nonetheless answer by saying "Silver that is in the form of above-ground, refined, deliverable, identifiable silver is about 150 million ounces, mostly held at COMEX." I am always surprised by this statistic, as the proposed Barclays silver ETF, alone, is supposed to suck up about 130 million ounces of silver! And there are other silver ETFs in the works around the world, too, and they could suck up hundreds of millions of ounces more!
What Happened To The Treasury's Silver?
As perspective, they write "The U.S. government once held up to 6 billion ounces of silver, but around 2002, the U.S. ran out, and had to buy silver on the open market for its Silver Eagle coin program. The COMEX once had up to 1.5 billion ounces of silver about 10-15 years ago, but today has less than 1/10th of that: 117 million ounces. Conclusion? If there really remains less than 150 million ounces of silver in above ground refined form, then there is about half of an ounce of silver per person in the U.S., which means that if you have a single ounce of silver, the SUA might say that you have 'more than your fair share.' "
If you want your investment advice mixed with the dreary recurring history of the world, era after era, then the guys at DailyWealth are just the guys you are looking for. They write "As the world's developing economies like India, Brazil, and China get richer and more developed," they say, they will probably "still have the desire to blow each other up. We wish it were not so, but the producers of guns, missiles, tanks, bullets, and fighter jets are doing a brisk business." As evidence of that, they note that "With America leading the way with a proposed $440 billion defense budget in 2007, defense contractors like Northrop Grumman (NOC), Lockheed Martin (LMT), and General Dynamics (GD) are enjoying a bull market in the $1 trillion global arms industry ... driving the benchmark Spade Defense Index to new highs."
This may have something to do with George Ure of UrbanSurvival reporting that, suddenly, ammunition is very, very scarce. Ugh.
****Mogambo sez: The unusual action of silver and gold here lately is the result of lots and lots of guys, businesses and banks on the hook for billions and billions of dollars in short sales, year after year after year. The rise in the prices of gold and silver means financial death for them. So buy them with confidence, perhaps even with a little malice against those creeps, as they can't keep it up for much longer, and the prices of gold and silver will shoot to the moon when they finally give up.

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.

Fed Will Crunch Debtors Further

Tuesday, March 28, 2006

And you thought the Fed will pause anytime soon? The latest FOMC statement says the opposite and anchors the expectation of more to come. On Tuesday, the Fed unanimously raised the Fed Funds rate another 25 basis points to 4.75% and this will certainly not be the last step this year.
Persisting inflationary dangers may appear anytime soon on the horizon, according to the statement.
"As yet, the run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation, ongoing productivity gains have helped to hold the growth of unit labor costs in check, and inflation expectations remain contained. Still, possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures."
All these potential footholds for inflation will keep the FOMC on its toes with more babysteps to be expected.
"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."
The Fed certainly cannot be accused of being to cryptic. I still keep to my expectation that Fed Funds will be between 5.25% and 5.75%, looking at today's rally of crude oil which trades above $66 per barrel. Get on autopilot until May 10, the day of the next FOMC meeting.
Indebted Americans will feel the crunch as soon as their adjustable rate mortgage is up for readjustment. Read blogs like Calculated Riskfor your daily dose of bad real estate news that show all is not well in the property world and that a slowdown of consumer activity may be around the corner.

Forex Day?

Thursday, March 23, 2006

With little news in the way forex markets have been quiet in early trade. A barrage of top brass speakers from the ECB may change that later. 4 Eurozone central bank chiefs, ECB president Jean-Claude Trichet and hawkish ECB economist Otmar Issing are expected to climb to the speaker's desk later this day. See the International Economic Calendar in the sidebar for exact dates.
While the ballooning current account deficit appears to be the biggest threat for the greenback, inflation worries on both sides of the Atlantic may force the ECB to reduce its extremely accommodative policy stance later this year, assuming that oil prices above $60 per barrel are here to stay.

Euro/Dollar Chart

GRAPH: The US dollar has recovered from his lows but the time of strength has passed since last summer.
Higher rates in the Eurozone will lead to a further reduction of the spread between Euro and dollar investments, possibly pushing the dollar into a competition for fresh capital. But the ECB walks a fine line as Europe is accumulating a current account deficit too while the economy languishes in most member countries. Continued rate hikes could bring the Eurozone's economy to a screeching halt and endanger consumers who have to repay their real estate purchases.
Don't expect too many hawkish comments therefore as speakers will also be relieved to point to the recent downturn of oil prices and use this argument to push the unpleasant idea of the next rate hike into the near future.

The Mogambo Guru Is Horrified By The Debt Outlook

Wednesday, March 22, 2006

Not even waving a cold beer can trick the Mogambo Guru into leaving his bunker where he hides from the financial disaster to come. With the Fed and the Treasury collaborating to flood the world with more credit the Mogambo Guru takes another route and recommends to buy all commodities. He easily can, never having repaid those countless fivers he borrows from everybody who happens to cross his way.

Debts Will Take US Down
by The Mogambo Guru
I am sitting, alone, in the Impenetrable Mogambo Bunker Of Ultimate Defensive Posture (IMBOUDP), and voices that insist they are my "family" are begging me to open the blast-proof door and at least give them back the TV remote control. So I decide to ask them an easy question to find out if they are really my family or, as I suspect, nefarious imposters. So I shout out, "Hey! Morons!" and someone shouts back "We don't like being called morons, daddy!" And so I say, "Okay, Einstein; do you know what the Federal Reserve has done to the value of your money since the Fed was created in 1913, only faster and faster and faster until you can't catch your breath anymore? Huh? Do ya, moron?" And they admit "Well, no. But we know that's why you have locked yourself in there with the TV remote!" Triumphantly I exclaim "Then you're all morons!"
Nine Huge Trillion Dollars
Please notice that I asked them an easy question, when I could have asked them something more difficult due to its recent-osity, such as "Do you know how much more debt the Congress just authorized to be loaded onto our breaking backs?" The answer is, in case you were wondering, $781 billion, bringing the total official Treasury debt limit to just under nine trillion dollars. In case you, for some reason, like seeing all the zeroes, it is written out as $9,000,000,000,000.00. That's nine huge, insanely gigantic trillion dollars, which comes to roughly about $90,000 for everybody who has a job in the whole freaking country. At 5% interest, your government will pay out $450 billion a year just in interest payments alone! Which is, again roughly, about $4,500 for everybody who has a job.
Anyway, the Senate Finance Committee Chairman Charles Grassley, who is, they say, a Republican Senator from Iowa, said that they are passing the huge increase in the national debt limit because "It is necessary to preserve the full faith and credit of the federal government." Hahahaha! Meanwhile, this same Senator and his fellow Senate buddies have also, according to the Associated Press, been working on their proposed version of next year's budget, and have "adopted a $2.8 trillion budget blueprint that anticipates deficits greater than $350 billion for both this year and next."
Wait a minute! The government he so proudly represents budgets only a $350 billion deficit for the next fiscal year, and yet the same government, at the same time, allowed the Treasury to issue $781 billion in new bonds, which is only enough to last them about a year? More than twice as much? Hahaha! This is too rich! "Full faith and credit!" And this is the Senate Finance Committee Chairman saying this! Hahaha! "Full faith and credit!"
Bernanke Banks On The Fed's Reputation
Wiping bitter tears of laughter from my eyes, I next read that, as a kind of comic coda, Ben Bernanke, chairman of the horrid Federal Reserve, has announced that the sheer reputation of the Federal Reserve will be enough to keep interest rates lower than they otherwise would be. Hahaha! Another example of "full faith and credit." Hahaha!
This is the same Federal Reserve that, last week, created another $4.7 billion in Total Fed Credit, which itself is the subject of the popular Mogambo Scout campfire song, "Fount of Fiat Money from Thin Freaking Air", which ends with the famous Mogambo death chant (MDC) "We're all freaking doomed! We're all freaking doomed!"
I laugh because this is true "theater of the absurd" at its absolute best! It reminds me of one of my first junior-management jobs, when I proudly proposed that we tell the stockholders that we are going to have a $30,000 deficit (which sounded better than "That damned Mogambo idiot produced a loss after only three weeks on the job"), but instead we borrow massively against the "full faith and credit" of the company to get as much cash as we could get our filthy hands on, more and more, until it added up to a freaking fortune for each of us, and then we all quit the stupid, now-bankrupt company and it's board of directors, and retire in splendor!
Like Senator Grassley, R-Iowa, I thought it was a great idea! Maybe my greatest Mogambo idea (GMI) ever! Alas, my budding career as hot shot executive and "world's youngest zillionaire" was cut tragically short by the pandemonium in the boardroom following my presentation, what with the chairman slumping in his chair, clutching his chest in pain and pointing his stupid finger at me, screaming "He's the anti-Christ! He's the anti-Christ!" But this Grassley dork gets re-elected time after time for the same damned thing! See? I TOLD you everyone is always out to get me!
Hear The Treasury Talking About Integrity
Forbes magazine reports this as Treasury Secretary John Snow warning Congress that they had better pony up $781 in new borrowing authority because it was "critical to provide certainty to financial markets that the integrity of the obligations of the United States will not be compromised." Hahaha! Integrity? At the last possible minute the debtor got his creditors to extend more emergency credit, and THIS is your "integrity?" Hahahaha! Or maybe "integrity" is the government lying about inflation, which tricks somebody into loaning their money too cheaply to the lying government, and thus the USA pays back the loans with cheaper dollars, thus screwing the lender out of precious buying power. Hahaha! "Integrity!"
This is also the same Treasury department that, the day after President Bush signed the enabling legislation, somehow sold $78 billion in government debt in ONE FREAKING DAY, taking us from $8,270 billion in national debt to $8,348 billion! Hahaha! Ten percent of the entire increase in the debt limit, in one lousy day! Hahaha! "Integrity!"
Afterwards, instead of having a cigarette and telling me that he will respect me in the morning while pressing cab fare into my hand, Mr. Snow complimented Congress for "protecting the full faith and credit of the United States" by allowing him to plunge the massively over-indebted nation further into debt by another $781 billion.
Parenthetically, why $781 billion? I explain thusly: Because $780 billion would be too little, see, and $782 billion would be too much. Thus informed, you think to yourself "Gosh! Ya think so?" Well, no, I don't, and I don't think that the Washington Post does either, which reports "Mr. Bush has managed to rack up more new debt during his five years in office than the entire debt amassed by the United States through 1988. And there is more to come: The president's budget envisions the debt rising to $11.5 trillion by 2011."
Debts Will Continue To Explode
Well, it looks like the President and The Mogambo disagree as to what we "envision" the national debt rising to by 2011, because I say it will be a HELL of a lot higher than another $3 trillion (30% higher) in 5 years! Look at the graph! It's exploding! We're talking another $5 or $6 trillion! At least! So much debt makes me howl like a banshee in my fury! OwwwwWWWwwww!
Okay, I see that the police have arrived, and are demanding that I stop screaming at the top of my lungs "We're freaking doomed!" over and over, and to come down off the roof. My lesson plan shows that I was going to launch into a senseless and ceaseless Mogambo tirade (SACMT) about how increases in debt and money lead to price inflation and economic collapse. But all is not lost! You can learn the same lesson if I turn things over to Doug Noland, of the Credit Bubble Bulletin at PrudentBear, who calmly reports "The February Consumer Price Index was up 3.6% y-o-y. February Import Prices were 7.4% higher than a year ago."
Import Prices Suggest Higher Inflation
I pause on my way down to pay attention to the response of the crowd to this terrible news about inflation in import prices. Nothing! Instantly, I return to the studio and hit the "replay" button, and sure enough, Mr. Noland clearly and unequivocally said "February Import Prices were 7.4% higher than a year ago." And yet there was no response from the crowd! Somebody coughed nervously. Otherwise it was eerily silent, except that in the background you could faintly hear The Mogambo screaming "Noooooo! 7.4% inflation! We're freaking doomed!" as they dragged him into the back of a police car. And then it was quiet, and finally everyone went home.
Real Estate Takes A Nosedive
If you want something ELSE to worry about since you are already frightened by the monetary nightmare that is happening to your money and your economy, then consider the essay entitled "Our Worst Nightmare - The Bubble Has Burst!" by Dudley Baker & Lorimer Wilson. Seat belts on? Okay, abstracting slightly, let's go! "
  • Housing Starts Up 14.5%.
  • Building Permits Up 6.8%.
  • Applications for Purchase of New Homes Down 1.2%.
  • Index of Pending Existing Home Re-sales Down 1.1%.
  • New Home Sales Down 5%.
  • Existing Home Sales Down 2.8%.
  • Inventory of Unsold Existing Homes Up 2.4%.
  • Inventory of Unsold New Homes Up 1.2%.
  • Median Home Prices Down 2%.
  • Affordability Down to 14 year Low.
  • Foreclosures Up 27%.
  • California Home Sales Down 24.1%.
  • Massachusetts Home Sales Down 21%.
  • Massachusetts Listings Up 41%.
  • Florida Existing Home Sales Down 19%.
  • Alabama Existing Home Sales Down 21.5%.
  • Alabama Listings Up 17%.
  • Pennsylvania Existing Home Sales Down 17%.
  • Minnesota Home Sales Down 7%.
  • Minesota Inventory Up 35%.
There Simply Are No Positive News
Your challenge, to claim the fabulous prize awaiting you behind Door Number One, is to find one thing, one tiny little thing, one eensy-weensy thing in that whole damned paragraph that could possibly be considered the least bit positive to the economy. Especially to an economy where more than half of growth in GDP is directly attributable to people taking equity out of their still-inflating, over-valued houses (by the brain-dead expedient of merely going farther into debt) and spending the money, and who were engaging in that strange and ridiculous behaviour because, as perverse as it sounds, it made a strained kind of sense, because every one of those things in the whole paragraph was the exact opposite from today!
Mortgage Lenders See Heavy Declines Ahead
Bill Bonner of DailyReckoning hears me talking about this, and offers the news that "The Mortgage Bankers Association expects mortgage originations to drop off by 20% this year; it says refinancing should fall by 40%." My face goes ashen, but Mr. Bonner doesn't notice my slipping into Mogambo Panic Mode (MPM), and casually goes on to quote Angelo R. Mozilo, the CEO of Countrywide, the big mortgage lender, who says "I would expect a general decline of 5% to 10% throughout the country, some areas 20%...and in areas where you have had heavy speculation, you could have 30%."
Mr. Bonner goes on to say "Remembering that homeowners extracted trillions of dollars worth of equity as their homes became 'worth' more and more as prices climbed, and they spent it, increasingly, over the last decade or so. Now their debt is higher, and their houses will be worth less. And I cannot imagine the horror that is going to be unleashed if houses drop."
All the other reporters were dutifully writing all this down, but I stood up in the back of the crowd and loudly proclaimed "I, The Mogambo, can easily imagine the horror, Bill! I mean, Mr. Bonner, sir!" I was going to tell him about the horrors of the increases in horrible poverty as standards of living horribly fall and fall, as prices horribly rise higher than wages, as taxes horribly rise higher than wages, too, and pretty soon there are horrible riots in the horrible streets and horrible burglaries are on the rise and horrible gangs of horribly desperate people wander aimlessly, ransacking everything. But he ignores me, and doesn't ask me for my stupid opinion, maybe because of that accidental-familiarity "Bill" thing, or maybe he's still peeved about the twenty bucks I borrowed and promised to pay back, but never did, and when he called me on the phone about it, I thought he was just another creditor, and so I automatically said "Screw you, bloodsucker!" and hung up, which I realize now was probably a big, BIG mistake.
So I'm thinking about this as Mr. Bonner goes on, "For one thing, all of this consumer-spending-via-debt is considered responsible for somewhere between 40% and 80% of economic growth last year."
For another thing, a more terrifying thing, local governments took in more ad valorem property taxes, and voters allowed more people to tax my property (I now have ten different groups taxing my house, ranging from schools (three), City taxes, different water agencies (three), juvenile welfare, a "planning council", and buses), and all of them took all this new tax money from higher housing values and they massively increased spending, year after year, which they should not have done. And the counties and the states and the federal government also took in huge wads of taxes, stamps, duties, assessments, costs and fees on all of it, and then they, too, spent every last stinking dime, which made more and more people dependent on government spending, further distorting and mal-investing the economy.
Inflation Will Lead To Hyperinflation
So I am laying there on the floor, gagging up blood from hearing this horrible economic news, and everybody is tripping over me and kicking at me, saying "Go home and sober up, Mogambo, you idiot!" Out of the corner of my eye I can see Mr. Bonner saying to the adoring crowd "The U.S. is running a current account deficit of 7% of GDP - and rising. If we could tell anything from reading history's other financial farces, we would guess that what awaits the U.S. dollar is inflation and then hyperinflation."
I feel my heart go "Urk!" Did he say "inflation and then hyperinflation?" I am suddenly cold and sick, partly because of the terrible retribution that awaits the world as a result of the insane monetary policies of the Greenspan years at the Federal Reserve, and partly because it appears that one of the people kicking me is my own wife, and she's screaming, "take that, you disgusting pervert!" like I don't get enough of that verbal-abuse crap at home or something. Maybe it was a hallucination, but it seemed so real!
Paranoia Attack
Sometimes I able (with my eerie Mogambo powers of ESP (EMPOESP)) to predict when I will have a flat tire, such as when I drive up to my house and one of my stupid neighbors has clearly had enough of my waking them up at 4:00 a.m. and screaming "Your money is being killed! Prepare to die!" crap, and now the whole family is out on the front lawn shooting at me with rifles as I drive by. When that happens, I can somehow sense that one of the tires will go flat, and sure enough, it usually does! Pow! Weird!
Well, from Reuters we get one of those EMPOESP moments, as Reuters writes, "the dollar slipped to session lows on Wednesday after a Treasury Department report showed that net capital inflows into the United States in January failed to cover that month's record trade deficit." Not only that, but it was "the second month in a row that net inflows into U.S. assets failed to cover the country's trade gap." Now we really ARE screwed!
Death Threats Against Judges
An Associated Press article by Gina Holland says that Ruth Bader Ginsberg and Sandra Day O'Connor, present and former Justices of the Supreme Court, have "been the targets of death threats." I say, "Welcome to the club!"
The article goes on to report how "Over the past few months O'Connor has complained that criticism, mainly by Republicans, has threatened judicial independence to deal with difficult issues like gay marriage." Hahaha! She thinks that she and her Supreme Court brethren are to be exempt from criticism? Hahaha! No wonder they have been getting death threats! She sits on the Supreme Court, making all these wacky decisions and staunchly upholding erroneous Supreme Court decisions of the past. The kid with the freckles in the front row raises his hand and asks "Like what, Mister Mogambo?" I glare at him, gruffly ask, "Mister Mogambo, what?" and he damned near craps in his pants, but finally he blurts out "Mister Mogambo, sir!"
Judges Against The Constitution
So I look a the class, and say "The worst decision the Supreme Court has ever made was when they ruled that it was, perversely, Constitutional for our money to NOT be made of silver and gold, even though the Constitution clearly requires that it SHALL be. With that one traitorous action by the Supreme Court, all of today's economic troubles were born."
Noticing the blank look on their faces, I cleverly switch to the patented Mogambo Educational Tirade (MET), meaning "To get louder and louder while degenerating into a personal attack of the listener and how stupid their parents must have been to have produced a child so abysmally stupid." So, accordingly, I start out nice and sweet, and explain "If the government tried to run budget deficits with an economy using gold as money, see, then somebody had to buy the bonds by selling something else. And this took money out of savings and out of the economy, and the economy suffered, and the money re-entered the economy via government spending, which distorts the economy, and then things start falling apart and the dollar falls in value, and Congress learned the hard way that you can't do that kind of silly crap and expect to be re-elected."
I paused to let that sink in. I continue, the audience sitting spellbound, hanging on my every Mogambo word (EMW), "But the Supreme Court, in their most wretched hour of infamy, gave the FDR and the government carte blanche to create as much money as they want, any time they want, in direct violation of the Constitution! And every Supreme Court, and every Congress, and every President since the 30's has been criminally complicit in, in that they did nothing to rectify this despicable perfidy!" I leap to my feet, fists thrust defiantly into the air! "The ultimate economic outrage!", I thunder. "And the price of such economic treachery and stupidity is inflation! Grinding, terrifying inflation that will destroy your economy and eat your stupid guts out, you stupid little kids! Didn't your stupid parents tell you about this, or are you so stupid you just forgot?"
Rising Prices Are A Catch 22
Well, as you can imagine, the place immediately erupted with screaming, hollering and general panic, until the teacher finally jumped into the fray, all huffy and puffy, saying "Mr. Mogambo! Please stop! They are only children! Little five-year old children, you horrible man!" and I coldly replied "I KNOW they are only five years old, you stupid little twit, as I am looking right at them. But they are the future of America (FOA), and I have to make sure they learn this important Mogambo stuff (IMS) before you and your stupid, public-school education establishment Leftist yahoos start brainwashing them! Now, make them shut the hell up and start taking some notes!" Instead of answering my stinging charges, she abruptly claps her hands and announces it was "nap time" and sends the little tattletale Billie Fisher to fetch the school Principal.
But this is not about how it was a crying shame that I was too late to save some kindergarteners from public-school indoctrination, but about how the people on the Supreme Court are getting death threats. Let me make one thing perfectly clear: I certainly do NOT want to see anybody killed or even harmed, but I proudly admit that I'd like to drag the black-robed Supreme Court weenies and weenie-ettes out into the street by their hair and force them look at how much prices have gone up, year after year, thanks to them! Now the government is forced to provide (because prices have gone up so high that people can't pay them) welfare, Medicare, Medicaid, Earned Income Tax Credits, Social Security payments that FAR exceed what the recipients paid into the system, etc. Hell, the federal government is now forced to increase in the latest budget, by $3 billion dollars a year, money to pay the damned heating bills of the poor! And in Britain, things are no better, as an estimated 10% of the population can't afford to heat their houses now!
And how many more people are now, thanks to rising prices, relying on government handouts, or going without health insurance, or going without property insurance, or going without automobile insurance, or going without more and more things all the time? Lots! And why? Because the dollar has continually lost purchasing power, thanks to the horrible Federal Reserve constantly creating more and more money and credit! Which is so unnecessarily stupid that it is only allowed because the damned Supreme Court betrayed America and the Constitution!
I would thrust the faces of the Supreme Court at all this, and scream at them "THIS is the result of your actions, you horrid, gutless traitors! You have allowed the government to produce the horror of inflation, by letting them print up and spend more money, and all because you are your fellow scumbags at the Supreme Court betrayed your sworn duty to uphold the Constitution, which requires that money shall only be of silver and gold!"
And don't come running to me, whining and complaining about how this is torturing Supreme Court Justices because, fortunately, these kinds of torture techniques are now allowed by the Bush Administration if someone is your enemy. And worse, too. Much worse.
Arab Markets Plunge After Speculative Fever
I see that stock markets plunged in Kuwait, Saudi Arabia, the United Arab Emirates, Bahrain and Qatar. The total value of the stock bourses is estimated to be less than one trillion dollars, but it is down $150 billion (from their 2005 values) and $250 from the peak they had reached. On the other hand, these same Gulf markets increased almost 700% since 2001, as of all that glorious money poured in from around the world by selling oil at $60 a barrel versus selling it at $25 a barrel.
There were "angry protests" that the stock markets went down, and the Kuwait Investment Authority, which is the state investment arm, came out and promised to inject cash into the market! Hahaha! You don't get market-rigging any more blatant than that! Hahaha!
Arabs Will Buy Precious Metals
Mark Lundeen looks at this and says "When a rich Arab pulls his money out of the stock market, don't expect him to do what the Americans did in 2001 and use real estate to leverage his portfolio. Gold and silver will be much higher a year from now."
Now, before I can say anything (like "Can I borrow some money to buy gold and silver?"), Roger Wiegand of TraderTracks hears this talk about gold and says that with or without Arabs' stock market problems, "Extreme demand pressures on gold are building, supplies are diminishing precisely as demand is going parabolic. In 2004, four mines producing 400,000 ounces of gold or more, either closed or expected to shut down. Africa's current gold production is no more than it was 80 years ago. It has slipped badly. New gold mines and expansions of older ones are expected to add 3 million ounces for 2006."
Gold Exploration Investment Rises Strongly
In response, "North American gold exploration investment has shot up from $193million in 2001 to $521million through 2004 and undoubtedly is much higher for 2005. Those are USA dollars invested in the gold mining industry exploration budgets for Canada and America. With lead time for new mine development being roughly eight years, explorers must be in for the long pull." And what will this price of gold be, lo those many years hence that are referred to, in the aggregate, as "the long pull"? Well, he is too wise to tread into that tricky swamp, but he does give you the starting place to begin your analysis. "Inflation adjusted gold should be $1,700-$1,800 today."
All Commodities Will Go Higher
I can almost feel Ken Gerbino, of Kenneth J. Gerbino & Company, sneering that my vision is too narrow when I look at gold and silver.when writes that it is ALL commodities that are going higher and higher, especially copper, nickel, platinum, zinc and lead. "We are in an era where India and China need 5-6 times more raw materials than Europe and the U.S. did during the 30 years of booming economic expansion after WWII. However, the inventories of metals in the world's major warehouses (Comex, London Metal Exchange and Shanghai) are down by more than 80% in the last three years and all the easy mineral deposits found near surface over the last century have been mostly consumed. Minerals and metals are becoming more scarce."
He thus lights a roaring fire under the boiler of the steam-powered Mogambo profit-seeking machine (SPMPSM) when he says that "Three phenomena are converging right now that offer you a unique opportunity.
  1. Prices are going up for gold, silver, copper, nickel, zinc, lead, uranium, and the platinum group.
  2. Supply will be constrained for 5-7 years.
  3. Warehouses are almost empty."
Rising demand against inadequate supply for years and years and years? Wow! Count me in! This is true "ground floor" stuff!
Mr. Wiegand offers one another clue as to the price of gold, and writes "Last year oil was dominant. From 2006 through 2009 gold will over-power oil prices on a two to one basis. Both gold and oil are in short supply." And if you want another source of demand for gold, he also says "The Russian central bank gold reserves are now up $2.3 billion (US) for just last week alone."
I wasn't even thinking about hedge funds, but he says that maybe I should, because (and I paraphrase), that the rise in gold prices will attract speculators, and then more speculators, and then investors, and then the sharks, and hedge funds are no different than the rest of us when it comes to sniffing out profit-potential, and he says "We think those funds are going to buy in 2006 with a vengeance."
Campaign For M3 Data
Ron Paul, our heroic Congressional Representative from Texas, has introduced a bill to require the Federal Reserve to continue publishing M3, the broadest measure of the money supply, and one that they plan to start hiding from us. It is called "Sunshine in Monetary Policy Act (Introduced in House) HR 4892 IH." I am sure that your elected representative would be interested to hear how you feel about that.
On the other hand, with those idiotic new electronic voting machines that leave no trail, are un-auditable and thus make election fraud easy to do and impossible to prove, maybe your elected officials don't have to care anymore what in the hell you think or don't think. Ugh.
****Mogambo sez: I notice that the gold lease rates posted at Kitco are again converging to a rough singularity. In fact, short rates are actually higher than longer rates! If this resolves like it usually does, then soon the price of gold will shoot up and the lease rate spread will widen. It works to the advantage of the market manipulators in the same way that the yen-carry trade works, except that the rate spreads in gold are easier to manipulate, move a lot more, and move a lot faster.
And a late Tuesday breaking news item at GoldSeek reported that the SEC has approved the Barclays' proposed silver Exchange Traded Fund! Let the fun(d) begin! Hahaha!
But these are just mere trading observations, when the obvious truth is that any time is the right time
  • a) to be in love and
  • b) to buy silver, gold, oil and damned near any commodity you can name. And for a long time, too!
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.

Russia's China Gas Deal: It May Get Cold In Europe

Russia's deal with China to build two natural gas pipelines within 5 years sends shivers through Europe. According to a report in ChinaDaily, the pipelines, originating in Siberia and Russia, will have an annual capacity of up to 80 billion cubic metres and cost $10 billion.
In 2004 China consumed 39 billion cubic metres. Russia is the world's biggest natural gas producer, pumping 578 billion cubic metres or 22% of world supply, according to the CIA.
Russia and China will also do a feasibility study for a $11.5 billion oil pipeline from East Siberia to the Eastern Pacific Coast, the report said.
Europe now has to fear that Russia will not be renew long-term gas deliveries in the future. Europe imports 24% of its natural gas demand from Russia. European leaders are expected to address the issue at their summit meeting in Brussels this week.
According to eurogas consumption in the EU rose 1.9% to 492.5 billion cubic metres in 2005. Europe's natural gas suppliers counted 103 million customers in 2005. Most urban households use natural gas for heating purposes.
Russia had cut gas imports to Europe by 40% for a couple of days around last new year's, citing problems with illegal drains in the Ukraine. This move reminded Europe of its high energy dependence towards Russia.

Bernanke Rather To Err On The Easy Money Side

Tuesday, March 21, 2006

When in doubt, wait for the next set of data. Federal Reserve chairman Ben Bernanke will face an uphill struggle if he wants to establish a hawkish reputation. Attributing the inverted yield curve to lower term premiums that would reflect stable long-term investors' expectations and helped further by the global savings glut, Bernanke turned conventional wisdom upside-down in a speech on Monday evening.
He is confident that the $25 trillion market for dollar bonds is so large that it "should be able to absorb purchases and sales of large absolute magnitude with relatively modest changes in yields." Historically low long-term yields may influence the Fed's decision process towards more accommodation, Bernanke indicated. "To be consistent with a lower long-term real rate, the short-term policy rate might have to be lower than it would otherwise be as well."
Bernanke's outlook on future monetary policy was less confident. He said, policymakers would have too monitor multiple signals from financial variables. "Ultimately, a robust approach to policymaking requires the use of multiple sources of information and multiple methods of analysis, combined with frequent reality checks. By not tying policy to a small set of forecast indicators, we may sacrifice some degree of simplicity, but we are less likely to be misled when a favored variable behaves in an unusual manner," Bernanke said.

Ben and Dove

PICTURE: Fed chairman Ben Bernanke will rather keep rates too low too long, remarks contained in his latest speech show. Courtesy of kids.christianpost.com
I wonder whether Bernanke's emphasis on a complete monitoring of economic data allows the conclusion that the Fed board is as unsure of the future implications of global imbalances as the rest of the world. While saying that the bond market had weathered reduced foreign demand and offered low yields as proof, he never mentioned the record-breaking current account deficit once. His predecessor Alan Greenspan had been more outspoken on the sword hanging above the global economy.
Recent tame consumer price data may offer time for a breather but producer prices, expected later today, may confirm what markets are already expecting. According to David Altig's Fed funds probabilities model the Fed will hike rates another 25 basis points to 4.75%. After that is is still crapshoot, he writes.
Tim Duy has rounded up all recent Fed speeches plus some comments and expects the Fed to pause after the next step.
My bets lie with a pause at 5% but I still see Fed funds between 5.25% and 5.75% later this year. Oil's 4% correction won't last long enough to ease inflationary pressures and higher producer prices especially for energy and raw materials will keep the pressure on the Fed if it wants to remain a credible inflation guard.

India To Float Rupee

The world's biggest democracy does the move the USA so impatiently expects from China.
India is ready to float the Rupee and will remove forex controls, enabling Indians to invest abroad, Bloomberg reported last weekend. India's official foreign reserves rose from close to zero to currently $144 billion sinced the early 1990s. Until now the Indian Rupee was only convertible for trade in goods and services.
India's flourishing economy, pacing ahead at growth rates in excess of 8%, has bolstered the currency. The Bombay stock exchange trades at historic highs thanks to deregulation, enabling foreigners to invest in Indian securities.

Rupee/US$

GRAPH: India's currency has reversed its multi-decade downtrend and stabilized against the US dollar.
A look at the Rupee/Euro chart adds even more appeal to the Rupee.

Rupee/Euro

GRAPH: The Rupee managed to eke out a gain of close to 10% against the Euro in the last 15 months.
There is one flaw in the rosy picture, though. While India has managed to hold inflation under control despite its higher energy bill, money supply shows the same runaway trend as in so many countries these days. Government figures show a year-on-year M3 growth rate of 16.4% in January 2006, overshooting projections of 14.5%.

Those Good Ole' Communists Build A Theme Park On Gold

Monday, March 20, 2006

Now this is a highly entertaining - and thought-provoking - piece of news. China will build a theme park on gold at a cost of 20 million Euros. ABC has this AFP report:
Gold-hungry China plans to open what it has billed the world's first theme park dedicated entirely to the precious metal, state media reports.
Construction of the theme park kicked off near a working mine at Rushan city, east China's Shandong province, the Xinhua news agency says.
When the 3.6-square-kilometre, $A34 million park is completed, it will allow visitors to watch gold being mined and processed.
It will also include a DIY area where the visitors themselves can be gold miners for a day, the agency says.
China is the world's third-biggest market for gold after India and the United States, the World Gold Council says.
Last year, Chinese demand for gold rose 8 per cent to more than 250 tonnes, the council's data showed.
Gold plays an important role in Chinese culture and is evident everywhere from temple decorations to the jewellery of newlyweds and the dental cavities of the rich.
Last year, the China Economic Daily issued a special edition, published in gold.
It came in two versions, with the more expensive priced at $A11,300 (6,726 Euros) and used 500 grams of gold.

This confirms my vision of a gold price exploding because investors worldwide will scramble for a few of the 4.8 billion ounces above ground.

A Golden Boy On The Federal Reserve Board

Compared to their counterparts in commercial banks Fed governors are a quite poorly paid lot with annual salaries in the very low six figures. All of the sitting governors can be called millionaires in terms of assets but the Federal Reserve Board's (FRB) true golden boy is Kevin Warsh whose combined assets with wife Jane Lauder are stated with a low end estimate of $65.8 million dollars and a hig end valuation of $116.5 million, reports Financial Markets Center (FMC). Most of the money is his wife's though.
FMC has the following on Lauder's investments:
The assets reported in Ms. Lauder's portion of the filing are organized into three trusts ("distribution trust," "accumulation trust" and "2003 revocable trust") and a personal account (A - B), each of which includes holdings in similar debt and equity instruments.
For example, each of the four collections of assets contains a large and nearly identical portfolio of municipal bonds pooled in a tax-exempt account.
In addition, Ms. Lauder's personal account has holdings in venture capital funds that invest in emerging companies, technologies and markets (particularly China).
Through an investment in Hope Capital Partners, two of Ms. Lauder's trusts hold shares in such well-known companies as Anheuser Busch, Comcast, Microsoft, Tyco and Wal-Mart.
The disclosure report also lists stockholdings in Bank of America, Citigroup and Shinsei Bank. Due to the depth and diversification of her portfolio, Ms. Lauder's investments include shares in Altria (parent company of Philip Morris) as well as New York and California bonds backed by payments from the tobacco industry's 1998 settlement with state attorneys general. (Interestingly, her husband once authored a law review article that discusses tobacco industry strategies for dealing with class-action litigation.)
FMC concludes:
On the basis of these marital assets, Mr. Warsh ranks as the wealthiest individual to serve on the Board in many years. In 2005, the income that he and his wife reported on their holdings was equal to more than three-quarters the total assets held by his six fellow governors (using high-end values as a basis for comparison). Moreover, the disclosure report substantially understates the true scope of those holdings.
For one reason, the reporting form does not ask filers to include the value of their homes. According to the New York Times, Ms. Lauder purchased a penthouse triplex in Lower Manhattan for $12.6 million in 2005. More importantly, the reporting form allows filers to record assets under the un-revealing category of "over $1 million" if the holding is "solely that of the filer's spouse or dependent children." This reporting classification can disguise the magnitude of very large holdings that otherwise would be reported in ranges such as "$25 million-$50 million" and it almost certainly has this masking effect in Ms. Lauder's case.
Warsh's annual income from this fortune is given at between $8.7 and $25.1 million. He by far outpaces next runner-up Susan Bies who is worth between $8.7 and $17.6 million, making up to half of a million from it. The others are coming in much lower with assets of not more than $6 million.
Is Kroszner Industry's Darling?
Randall Kroszner listed his net worth at between $2 and $4.2 million. The report says that Kroszner's own assets were a maximum of $2 million before he joined the National Economic Council. His money way split in a savings account and four Vanguard Index Funds.
His statement on his income is more interesting, reports FMC:
In addition to his University of Chicago salary of $265,777, Dr. Kroszner collected more than $135,000 in consulting fees and other payments in 2005. These revenues offer a telling illustration of the benefits leading conservative scholars can reap at the cash nexus of academic economics, corporate activity, consulting, litigation and public policy formation.
The report goes on to say that Kroszner's ex-campus work came mainly from three sources, namely Lexecon, the Lindsey Group and the Gerson Lehrman Group.
Let us hope that the new governors will be the first inroad of the lobbying culture into the Fed. Kroszner may be as closely associated with industry as Warsh may be with the big money on Wall Street.
Read all the details of the fortunes of the new Fed governors at this link (pdf).

Goldilocks?

Thursday, March 16, 2006

What do Hongkong, Jeddah, Moscow, Frankfurt, London, Vienna and New York have in common? Their share markets have all climbed to multi-year or even all-time highs!
Looking at stocks recent advances worldwide - Tokio being the exception after a strong start - the phrase of markets that love to 'climb a wall of worries' comes first to my mind. The global view offers an array of stock exchanges where investors drive share prices to levels never seen before.
Markets were able to feed on positive news recently.
Wall Street's surge to 5-year highs comes on the back of a good earnings season, last week's solid employment report and today's tame inflation figures. Treasury International Capital (TIC) data showed unabated foreigners appetite for US securities and the economic outlook was described as steady in the Fed's Beige Book.
In Europe recent indicators sparked glimmers of hope that the worst may be over, pushing markets to multi-year highs.
Unemployment in the EU fell from 8.9% to 8.3% year-on-year. Inflation slowed to 2.3% in February, industrial orders were up 2.5%, construction saw a light expansion and so did retail sales in Europe.
Britain is different.
Unemployment, currently at 5%, is on the rise while steady incomes led to a slowdown in retail sales growth.
Oh, and before I forget it: China, India and Russia are powering ahead at growth rates unheard of lately in the so called "industrialized world."
Talking of China please take note that the giant's inflation rate has come down to an annual rate of 0.9% in February. House prices were up 5%.
So are we looking at a Goldilocks economy where everything is just about right?
Hardly.
Global imbalances have only become worse recently
. Both Europe and the USA are running record current account deficits although Europe's deficit of 88 (2004: 18) billion Euros in 2005 pales in comparison to the shocking deficit the US has run up. In 2005 the deficit rose a staggering 20% to $805 billion or 6.4% (5.7%) of US GDP.
These deficits are financed the seemingly painless way: By printing ever more money.
US money supply M3 draws an ever steeper growth curve and has almost caught up with runaway M3 growth in the Eurozone. Latest figures show an annual rate of 8.3% for the Eurozone and 8.2% for the USA.
As long as there is so much liquidity added day after day stock markets will go up.
But the interest rate outlook may finally put brakes on the latest advances. In both Europe and the USA leading interest rates are set to rise more. Fed members have recently been as hawkish in their speeches as in their latest statements. Sky-high advances in raw material and energy prices are likely to ooze through into the Fed's beloved core inflation rate.
The same can be expected for the Euro area. The ECB does not get tired to warn of more inflationary dangers from persistently high oil prices and money supply growth.
Light crude trades close to$65 per barrel at this moment. Any spike in the wake of geopolitical developments will force the ECB to accelerate its rhythm of rate hikes, endangering fragile economic growth in the EU.
I am not going to rest my head on a few positive indicators, seeing that none of the structural problems will go away by itself as there are no attempts to balance the budgets on either side of the Atlantic. And one thing is guaranteed: It has never worked when trying to print a way out of problems.

The Mogambo Guru On The Fed's Monetary Regime Of Inflationary Horror

Wednesday, March 15, 2006

The Mogambo Guru is even angrier this week as normal. He is being outraged to see that excessive public spending will leave no other exit than higher inflation and fears that a breakdown of capitalism is imminent. In case you got infected with The Mogambo Guru's paranoia, put that pizza slice away. Read on to find out why.

The Fed's Monetary Regime Of Inflationary Horror
by The Mogambo Guru
Total Fed Credit went down by $5.4 billion last week, which was surprisingly out of character for the new Bernanke Federal Reserve Monetary Regime Of Inflationary Horror that is on record as officially actually wanting inflation, although they call it "targeting" inflation, which is sort of apt, as what they are targeting is my wallet in their crosshairs. But this is not about how the Fed and the rest of the government are all out to get me, but about how without constantly creating money (and low interest rates to entice people to borrow it), it seems that Bernanke is not just a complete moron, but an incompetent one, to boot! Hahaha!
And it is not just the Federal Reserve that is so brain-dead that it wants inflation. Paul McCulley, a heavyweight because he manages lots of bond money for PIMCO, is nonetheless a ludicrous and laughable putz who says "For the record, I support the Fed adopting an explicit numerical range for its long-term objective for inflation. The problem with the Fed's current implicit inflation target of 1% to 2% is that it is both implicit and too narrow. I'd suggest 1% to 3%, a range wide enough to warrant increased risk premiums for cyclical variability in inflation."
Three-percent inflation? My God! This halfwit numbskull actually WANTS price inflation to run at 3%? The last 6,000 years of damning historical evidence about the horrors of inflation mean nothing to him? Beyond that, he is saying is that he wants all those people who own the bonds he manages to lose lots and lots of money as interest rates rise in response to a rise in inflation? What a doofus!
But this is not about dorks who are in positions of authority, as they are so numerous that they are all over the damned place. No, what this is about is inflation, and in that regard the Federal Reserve is still trying to goose the economy, and the repo desk at the Federal Reserve did $27 billion in repo agreements one day last week, 3/9/06. In one day!
Breakdown Of Capitalism
If you want someone else's dismal take on the results of inflation, listen to Mark Faber when he says "I am convinced that the US Fed's monetary policies will lead to exponentially widening wealth inequity and impoverish the majority of US households, which will then lead to social strife, protectionism, war, and the breakdown of the capitalistic system."
Consumers Still Borrow Like Crazy
But the government is, obviously, not the only conclave of idiots. Consumer Installment Debt went up in January by $3.9 billion to a new record of $2.162 trillion. Non-revolving loans, like for boats and cars, increased by $2.2 billion to yet another new record. Revolving loans, like credit cards, increased $1.8 billion in January, too. Total household borrowing expanded an astonishing 12% during 2005, the latest record in a long string of new records of consumer debt for the last, oh, twenty years or so.
The surprising thing is that the interest rate charged by auto loan companies dropped to only 5.13%! The use of the exclamation point will becomes apparent when you learn that only two months ago, the rate they charged was 6.4%. So, interest rates are rising all over the place, around the globe, but auto loan companies have dropped their rates by 20% in two months? Wow! Things are worse than I thought! And in that regard the average length of the loans for these cars and boats increased to a new record, as far as I can tell, to 62.6 months.
A Quarter Million Bucks For A Compact Car
And speaking of cars, the average price for new cars is still over $25,000, which seems ludicrous to us old codgers who recognize inflation as the devouring monster that it is, because we remember back to our first cars, when you could buy a new Cadillac, loaded, for eight thousand bucks. A new Mustang? $2,700.00.
But today's young workers come in here, all boasting that they can do twice the job I do, and for half the money, and pretty soon everybody in the office is chanting "Mo-gam-bo, he must go! Mo-gam-bo, he must go!" So not only do these young punks get my stupid, thankless job, surrounded by hateful and spiteful people (who then wonder why I, in delicious Mogambo revenge (DMR), steal their lunches!), but they can also reasonably expect to live into their eighties and nineties, which means that in another forty years they can expect to pay ten times as much ($250,000) for a new car.
Joe Average Has No Retirement Account
And exactly how much do you have to put into your retirement account today? A hell of a lot more than we are putting aside now! John Mauldin of Frontlinethoughts writes, "a survey by the Federal Reserve Board's Survey of Consumer Finances offers us the most detailed recent look at the balance sheet of U.S. households. The median family has about $3,800 in the bank, do not have a retirement account, has a home worth $160,000 with a mortgage of $95,000. No mutual funds, stocks or bonds populate their investment portfolios. They make (jointly) $43,000 and struggle to pay off their $2,200 in credit card debt." And that is just the median figures, meaning half of us! He concludes "That means 50% of Americans are in worse shape than the above. It is not a pretty picture." As to where the money went, well, my wife spent most of it on useless crap for her and the kids, like food, clothing and medicine. I mean, I let them live in my house for free, and yet that was never enough!
Trade Deficit Is Only One Aspect Of The Whole Sad Story
From Bloomberg we learn "The U.S. trade deficit widened to a record $68.5 billion in January as the oil-import bill rose and Americans bought more inexpensive Chinese goods."
Bloomberg did not mention that the Merchandise Trade Balance went farther into deficit, but it did. This lack of merchandise manufacturing to export is perhaps underscored by the latest read of employment and the lack thereof. What I seem to gather from the numbers is that the entire gain in all non-farm payrolls (245,000) was accounted for by gains in government payrolls (40,000) and service payrolls (200,000). Not one of these jobs actually created anything to sell to foreigners. Not one.
And to further makes a mockery of the whole thing, Bob Wood, of Kaizen Managed Assets, noted, "BLS just added in 116,000 using their birth/death gimmick."
People have been asking me "What the hell is going on with gold?" and of course I laugh at them for thinking that I could possibly know anything about anything. For example, alert reader Hunter R. asks "Why the recent correction when the bozos running our govt. are continually adding fuel to the fire that will eventually be consuming our fiat currency?" Good question! My reply was "Think of rats trapped in corners. To think that they would NOT resort to extremes doesn't make sense to a cornered rat!" which is a rather pithy and nasty, yet descriptively accurate, way to put it, if I do say so myself! In short, they have been manipulating gold all these years by selling gold short, are now on the hook for more gold than actually exists in the world, and you think they are, now, just going to stop and take their lumps? Hahaha!
U Bet The Gold Maket IS Manipulated
And if you don't believe that they have been manipulating the markets, then you ain't read how the Gold Anti-Trust Action Committee, known by their acronym GATA, wrote an interesting essay entitled "Bank for International Settlements Confesses to Gold Price Suppression Scheme."
They write "Alan Greenspan confessed to the gold price suppression scheme. The European Central Bank confessed to the gold price suppression scheme. Barrick Gold confessed to the gold price suppression scheme in U.S. District Court in New Orleans on February 28, 2003, The Reserve Bank of Australia confessed to the gold price suppression scheme in its annual report for 2003. And now the Bank for International Settlements, the central bank of the central banks, has confessed to the gold price suppression scheme by saying 'the provision of international credits and joint efforts to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful.' "
Leave it to the BIS, a shadowy collection of unaccountable international bankers and commie idiots, to think that manipulating prices, and thus distorting markets, all done with your money, is "useful." Hahaha! What a bunch of low-life creeps! No wonder I hate their guts!
Central Banks Keep Selling The Yellow Metal
But it may have been that they were asking the wrong guy about what is currently happening in the gold market. For instance, perhaps they should have been asking Toni Straka at PrudentInvestor, who suggests that the fall in price lately has been the result of central banks selling. "In the week ending March 3, three Euro area central banks sold gold for 133 million Euros after they had gotten rid of gold for 75 million Euros a week earlier."
But they are doomed to failure. Dan Denning of the Strategic Investments newsletter says that a higher price for gold is just part of the picture. "Soaring gold and oil prices will be accompanied by soaring interest rates and inflation. The convenient fantasy world where consumer prices don't rise and the dollar doesn't lose purchasing power will collapse. As oil rises in dollar terms - whether from geopolitical tension or the growing realization that Peak Oil is real - the run on the dollar will grow. Hard assets like gold won't just be fashionable: They will be indispensable to wealth preservation. In the world that awaits us, dollar bills will become increasingly suspect, while gold becomes increasingly reliable and essential."
Gold $13,000 - Silver $675
And it is not just gold! Listen to Greg Silberman at FinancialSense when he says "Silver had a low of $1.50 in 1973 and a high of $40 in 1980.
Projecting forwards, Silver has a price target of $675. That's a 6,600% increase from current prices.
Gold had a low of $35 (1971) and a high of $850 (1980). Projecting forward, Gold has a price target of $13,000. That's a 1,400% increase from current prices."
There Is So Little Silver On This Earth
And speaking of silver, Yusef S. wrote to say that the while there is some disagreement about much silver there is in the world, "The relevant point about available silver is not that there are 500 or 600 million ounces. Even if we magically double the amount of total silver in the market to a billion ounces, that's only $10 billion dollars worth of metal, an amount that's less than what Americans pay annually for pet food: $15 billion."
He notes "The informed minority has already started to stock up on silver, and increasingly the general public as well. In one bullion store I know, large amounts of gold are being bought. But silver is going like gangbusters. Just one of their customers recently put in an order for $300,000 of the stuff."
And as for the long-anticipated silver Exchange-Traded Fund, he notes that "The British already have approved a silver ETF. It's scheduled to start operations in a month on the LSE. And lest we forget, the Chinese and Dubai Gold and Commodities exchanges are also starting to trade silver."
Shanghai Exchange Will Trade Silver
Alert reader Ajit V. writes that this is exactly true, and says "The latest news is that China is going to open up Silver trade on the Shanghai exchange. The Shanghai Gold Exchange is preparing to start silver trade, which will set the benchmark for Chinese prices. Industry officials expect the exchange to start the silver trade as early as June, since world silver prices have stayed at multi-year highs and investors were keen to trade." Hmmm! I mull over the phrase Chinese investors "were keen to trade" silver! Suddenly, I am more bullish than ever!
Dan sent the link to DollarCollapse, jumping to the FAQ, where you learn an answer to the question "What happens when the dollar collapses?" The short answer is, as they so pithily put it, "Many things, most of them bad."
Mfgnn Mmllunk Glb?
Mulling this over while biting off a few pieces of pizza until my mouth is so full that my cheeks are puffed out like a chipmunk, I casually ask "Mfgnn mmllunk glb?" They mistakenly thought meant "What bad things?", but what I really said was "Does that waitress have the biggest boobs you've ever seen?" Well, I was sorry for the miscommunication, because they replied with a barrage of horrors, starting off with "When foreign investors and central banks stop demanding dollars, U.S. bond prices will fall, which is another way of saying that U.S. interest rates will rise.
Mortgage and credit card rates will soar, bursting the housing bubble. Home prices in hot markets like California and New York will fall by 50% or more in a matter of months, bankrupting millions of over-extended homeowners. The U.S. government will respond by opening the monetary floodgates, printing as many paper dollars as necessary to keep the economy from collapsing. This surge in supply will send the value of the dollar through the floor. Prices for most things will skyrocket, and people whose life savings are in cash, bank CDs or dollar-denominated bonds, will be wiped out. Most U.S. consumer finance companies will be ruined, along with their stockholders."
When In Fear, Don't Eat Pizza
So, now I am sitting there with this big wad of pizza in my mouth, but am suddenly sick with fear. Turning this to advantage, this is where we learn another Mogambo Valuable Lesson In Life (MVLIL), which is "Don't eat while getting bad, bad, very freaking bad news, especially the kind where it means mass suffering and prolonged, destructive misery for everybody, because you will end up choking on it, and then gag it up, and you will end up spitting it all over everybody, and then they will get up, leave in disgust, and stick you with the check."
Stocks Should Correct 9%
It gets worse for the stock market, as we learn from Eric J Fry of RudeAwakening, who quotes Jay Shartsis as saying "A near-record number of days have passed since the last 9% correction in the stock market." He infers, therefore, that a " '9% correction - at least - is overdue.' "
He explains by saying "We are close to an all-time record, going back to 1950, regarding the time that has passed since the last 9% correction. The longest such stretch came between the 1990 bottom and a 9.7% correction in the first quarter of 1994, a period of 1,280 days. Presently, we are at 1,113 days, the second longest stretch recorded in 55 years."
Dollar Needs To Decline 30%
Paul van Eeden, writing at Kitco, says "A Chinese newspaper, called The Standard, printed an article that quoted Mr. Yu Yongding, a member of the monetary policy advisory committee to the People's Bank of China, as saying that China should weaken the link between the yuan (renminbi) and the US dollar. The next day Mr. Yu Yongding was quoted by the same newspaper as saying that Chinese firms should get ready for a strengthening of the yuan (renminbi) during the next one to two years."
Mr. Eeden's take on that? "My expectation," he says, "is that the dollar has to decline roughly by another 30% or so before balance can be achieved in international trade. That decline will not be uniform against all currencies, but will be predominantly against the renminbi, the yen, and other Southeast Asian currencies."
A 30% increase in the cost of Chinese imports? Wow! This is even more than the imbecilic, suicidal 27% tariff that Senators Schumer and Graham want to put on Chinese imports!
But he says this is good news for gold! "Such a decline in the dollar will also cause the dollar-gold price to rise to around $850 an ounce, and by the time this has all played out, inflation could add another one or two hundred dollars to the gold price."
Unwinding Of The Yen Carry Trade Will Come To An Ugly End
The big news (and if you don't currently think it is big news, you will) is the announcement that Japan will end their longstanding zero interest rate policy!! Note the two exclamation points that I cleverly used to indicate emphasis. At Bill Fleckenstein's Daily Rap we read, "Overnight, the Bank of Japan officially ended its quantitative easing policy, with the announcement that it would cut the amount of reserves available to the banking system by about 80%." Cutting reserves in the banks by 80%! I am astounded! And frightened! Where in the hell are the banks going to get money to lend?
The Japanese zero interest rate policy is the basis of the whole carry trade: Borrow money from Japanese banks at zero percent, and buy T-bonds which pay four percent! Jim Willie CB of the GoldenJackass site writes "The yen carry trade unwind is probably the biggest potential change factor in the financial world this year, whose unwind will last for at least two years with fits and starts. When it unwinds, the damage will be pervasive to investments bought with speculative borrowed money." He then quoted another guy, an HSBC analyst, who said "[The yen carry trade] is going to come to an end later this year and it's going to be ugly, even if we haven't reached the shake-out just yet." And an economist from Monument opines "The world has never been through this before, so there is a high risk of mistakes." Of course the world has never been through this before! Nobody has ever been this stupid before!
But my wife is in the room, so I don't want to talk about stupidity around Jim Willie, because it always comes around to her inevitable comparisons of how he is so smart and I am so stupid, and how she is crazy not to just pack her bags and leave, and I say "Go ahead!" and she says "Maybe I will!" but she never does, and then I have something ELSE to be grumpy about. Instead, he says "Down the road a vicious secondary cycle is certain, marked by rising rates, housing pain, economic strain, price inflation pressures, gold gains, and US$ suffering."
Gold Demand Hits A New Record
But the flight into gold has already begun, as Roger Wiegand of TraderTracks reports "The World Gold Council’s GFMS report update said gold demand hit a record of $53.6 billion in 2005 with a 26% rise in investment tonnage demand. Jewelry demand was overall 14% higher, in spite of those higher prices. What impresses us very much is the institutional demand which means the big boys and the big money are coming into the gold game.
"Since the current one began in say 2000," they continue, "we have possibly ten more years of bullish gold and other commodities moving through an inflationary and volatile period of time. With each year we advance, gold prices can only go higher faster."
Marc Faber of the Gloom, Boom and Doom Report hears this and says "My target is for gold prices to rise to between US$5,000 and US$10,000 in the next 10 years."
None of this is lost on the miners, as David Bond of SilverMiners reports that the 74th annual Prospectors and Developers Association of Canada convention at the Toronto Metro Centre drew "Fourteen thousand people, people! Seven hundred exhibitors. Mining is indeed back! And with a vengeance."
Higher Rate Begin To Bite Mortgage Lenders
Ajit V. also sent a forward from ElliottWave, which reports that a hell of a lot of mortgages have been taken out with adjustable interest rates, and that means "2006-2007 is when the initial period ends and the 'interest-rate resets' begin - 'reset' being the euphemism for mortgage payments that 'shoot up between 10% and 50%' ", and thus they figure this means that about "1.4 million of those households face a jump of 50% or more [!] in their monthly payments." Note his use of the exclamation point! This horrifying estimate is actually optimistic, as it assumes that "home prices stay around current levels and interest rates don't rise sharply."
Alert reader John D. writes that "5 or 6 people have mentioned their homes to me and they all want to sell and either rent or downsize. Foreclosures in the paper are running about 20 per week compared to 3 or 4 last year. The federal court is full of bankrupts here according to a friend who says most are in their 30s and are homeowners." He also notes that "Sam's club was very slow after Christmas and now the restaurant waitresses and food store clerks are saying the same thing." And to underscore those anecdotal reports, he himself has "noticed empty shelf space in stores."
As if to underscore that, The Detroit News reports that mortgage defaults are zooming in Michigan, and that they hold a record of sorts: "Wayne County ranks worst in the nation for foreclosures." Mish, of Whiskey and Gunpowder.com, hears me muttering about this and says, "Michigan is but a drop in the bucket of what is to come. Expect to see the same scenario played out in California, Florida, Arizona, Nevada, and every current bubble area."
Public Borrowing Exploded In 2005
The Grandfather Report asks "QUESTION: How much of our economy is controlled by federal, state & local government? ANSWER: 43% of our National Income ($13,568 per man, woman and child - or $54,272 per family of 4)."
Now, as horrific as that is, it unfortunately "does not count added economic control by un-funded government-mandated regulatory compliance costs of 14.9% of national income ($4,680 per person). Therefore, government spending plus its mandated regulatory costs means 58% of the economy is government-controlled, amounting to $18,248 per person."
Perhaps this is why, in 2005, state and local government debt exploded 11%, and borrowing by the Federal government went up by 7%."
An Oil-Natural Gas "Cheapness" Calculator
Matt Badiali, writing in DailyWealth newsletter, notes that "6,000 cubic feet of gas is equal to 1 barrel of oil. So, if your favorite oil company lists their reserves as 60,000,000 cubic feet of natural gas, you can calculate that volume in barrels of oil by dividing it by 6000. We can also use this ratio to compare the actual price of oil to natural gas.
"Here's how our ratio works," he says, "with today's prices: A barrel of crude oil is trading for around $61. Its 'equivalent' in natural gas is trading for around $6.65. At a ratio of 6, analysts consider natural gas and oil to be roughly of equal value. When the ratio is above 6, natural gas is cheap compared to oil. When the ratio is below 6, natural gas is expensive compared to oil."
If you are like me, you are wondering to yourself "I sure could use a crunchy taco right about now, and what in the hell does this oil/natural gas thing have to do with making money in the markets?"
Apparently they were just getting to that part, and they continued "In December, natural gas was very expensive. At the peak, it sold at a 54% premium to oil, the equivalent of $92 per barrel. Right now, natural gas is selling at an equivalent of $39 per barrel while oil is up around $60. That's really cheap natural gas." And even though Mr. Badiali has not addressed the important issue about yummy tacos and where I could get one right about now, but he does suggest a way to make some money by buying natural gas! Then we can buy all the tacos we want! Hahaha! I love this investing stuff!
No Signs For A Slowdown In Federal Spending
Doug Noland notes that things are no better with the government's finances. "February's federal deficit," he writes, "jumped to $119.2 billion, the largest ever for one month. Fiscal y-t-d Receipts (5 months) of $873 billion are running 10.5% ahead of last year, with Individual Income Tax receipts up 10.8% and Corporate Income Taxes up 29.6%. At $1.090 Trillion, Total y-t-d Spending is 7.6% ahead of fiscal 2005." What he does not mention is that this is a sham of a budget that doesn't even count whole swaths of expenses, like the wars in Iraq and Afghanistan, or the entire haul of excess Social Security taxes that are, actually, an increase in debt.
Interest On National Debt Is Up 28%
He then quotes John Connor from Dow Jones, who says "The Congressional Budget Office said outlays for net interest on the national debt were up 28% in this period from a year earlier. The budget office projected that outlays for net interest will be about 20% higher at the end of the fiscal year than they were last year. Net interest outlays for the first five months of the fiscal year were estimated at $92 billion, compared with $72 billion a year earlier."
And it gets worse, as Mr. Noland has taken a look at the Z.1 Flow of Funds report. He reports that "During the quarter, Total (Financial and Non-Financial) Credit Market Debt (TCMD) expanded by a seasonally-adjusted and annualized record $3.827 trillion, a growth rate of 10.1%. TCMD expanded $3.340 trillion during 2005 to $40.230 trillion."
Paul Mampilly of Capuchinomics says that anybody thinking that common stocks are a good investment, and that you can retire in comfort by buying them, is nuts. Well, he doesn't actually say that, but he does say "A purchase of the Dow at year-end 1999 has netted a loss of approximately 7% as of year-end 2005. That's a pathetic 6-year record. The Dow's performance has been so poor that it has even underperformed the lowliest of asset classes: cash." Ugh.
****Mogambo sez: Peter Spina of the Gold Forecaster newsletter says that he believes that the fall in the price of gold recently "is a healthy correction presenting 'buying' opportunities." And I think that the whopping rise in silver is a buying opportunity, too, as the pleasant price increases in that particular metal is just getting started. So I say "Buy 'em both. And oil!"

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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