A Guaranteed 130% Profit Waits To Be Realized

Monday, July 31, 2006

US pennyUS Nickel

That Nickel and Penny jar in your kitchen is slowly becoming a money-spinner. John Trudgian from Williams Inference alerted me today that pre-1981 pennies now contain metal worth 2.3 cents, guaranteeing you a 130% profit when you bring it to the smelter instead of the candy store (are there still candies for a penny around?)
A nickel is worth 6.17 cents to the smelter at current metal prices. "The USA now has 2 of the 5 coins they make for general circulation wherein the metal value exceeds the face value. So we shall expect to see proposals for zinc or aluminum Nickels before long," says Trudgian.
Copper currently trades at $3.52 per pound, Nickel at $12.01 and Zinc at $1.49.

Euro-Inflation Remains At 2.5%; Current Account Deficit Doubles YOY

-- UPDATED --
ECB president Jean-Claude Trichet and his fellow council members may be in the position to announce another pause in the rate-hiking process after their meeting on coming Thursday. According to Eurostat's consumer price flash estimate inflation in the Eurozone remained stable at 2.5% in July.
The Eurozone economy could certainly need such a shot in the arm. Eurostat today also released figures on a dramatically growing current account deficit. "According to the latest revisions, the EU25 external current account recorded a deficit of 36.7 billion euro in the first quarter of 2006, as compared to a deficit of 17.1 billion in the first quarter of 2005 and a deficit of 29.1 billion in the fourth quarter of 2005."
The worsening is the result of a net goods trade deficit of 47.8 billion Euros (Q1 2005: 20.8 billion Euros) whereas the 11.5 billion (Q1 2005: 9.3 billion) surplus in services stems mainly from financial services.
The Eurozone runs current account surpluses with the USA (32 billion Euros), Switzerland (1.5 billion Euros) and Canada (2.9 billion Euros.) Deficitis occurred in trade with Japan (minus 6.1 billion Euros) and "other countries" (67.1 billion Euros.)
Eurostat will release GDP growth rates for the second quarter of 2006 on August 14. A second estimate for growth in Q1 2006 from July 12 had shown growth of 0.7% compared to Q4 2005, well within the means of statistical error.
Low growth or no growth - place your bets.
I'd rather tend to project another growth figure with a zero in the front for Q2 2006 as private consumption does not get back on its feet in Europe due to high savings rates - as much as 10% of disposable income in Austria and Germany - and permanently high energy prices.
Consumers may want to run for even better cover in the months ahead as they will be burdened by rising energy prices and VAT hikes in Germany and Hungary from next year.
Politicians Fight For Influence In The ECB
Although summer heat has brought life in Europe to a standstill market chatter circles around EU initiatives that would give EU politicians another forum to press their wish for stable intererst rates. According to the chatter the EU finance ministers want to establish a regular meeting session just before the meetings of the governing council. Politicians and industrialists have been speaking out this way since last year, hoping that historically low rates may help lifting the EU economy out of the doldrums. They are disregarding inflationary dangers.
it is believed that Trichet completely opposes such a high level forum as it would compromise the mandate of the ECB which is only responsible for keeping inflation low but has no mandate to stimulate the economy.
UPDATE: Jim Picerno has a highly recommended post, looking at the expansive trend in US money supply M2; now that we do not have M3 around anymore. Picerno observes a contradiction: Both M2 and interest rates are rising, a more than unusual anomaly as economic theory says that higher rates lead to lower liquidity.
My two cents are the same as always: It never worked to try to print your way out of problems. I want to add that I consider the unusually high US treasury purchases from the Caribbean banking centers in recent months are quite a mystery. Purchases in the billions by "anonymous" buyers contradict the knowledge that the USA has been sifting through SWIFT (scroll down) money transfer data. Why is it that US authorities never manage to find out the securities buyers of the really delicate transactions, e.g. the put options purchases ahead of 9/11?
Back to the Caribbean: Wouldn't it be an all too easy game to loan unlimited amounts to those Caribbean operators in order to prop up the dollar and keep yields low? I have no proof, but my mind keeps wandering...

Now This Makes A Good Read

Wednesday, July 26, 2006

In the absence of the Mogambo Guru who is probably somewhere hangin' out in ill-reputed bars I came across this fantastic article by Lew Rockwell Jr., president of the Mises Institute. Headlined "The Case for the Barbarous Relic" Rockwell has produced an intriguing story highlighting the dire consequences of what is going wrong in the USA which I highly recommend.
Click here for the article and enjoy your lenghty Wednesday reading.

NYT: SEC Wants More Control On Hedge Funds

Wash me but don't make me wet. The Securities and Exchange Commission (SEC) has made a half-hearted plea to the Senate Banking Committee on Wednesday, asking to adopt measures to regain the authority it lost a month ago, when a federal appeals court ruled that the SEC could not require hedge funds to register, reports the New York Times.
Hedge fund is a new name for an old game. In the 1920s they were called investment pools and the most important denominator of the two vehicles is that they lack any regulation, making them prone to cut corners in an investment climate that has changed since 2000. According to the NYT hedge funds nowadays account for as much as 30% of trading activity. It is estimated that the almost entirely unregulated investment pools manage more than $1 trillion in assets.
While all this is a recipe for market manipulation, SEC chairman Christopher Cox has declined to ask Congress for for additional authority to police the industry.
From the NYT:
Among the measures Mr. Cox will recommend to the commission is changing the rules on who can invest in hedge funds, increasing the net-worth threshold for an individual or couple to $1.5 million or more from $1 million today.
"I am concerned that the current definition, which is decades old, is not only out of date but wholly inadequate to protect unsophisticated investors from the complex risks of investment in most hedge funds," he said.
But when pressed by senators about whether he needed more authority to regulate hedge funds, Mr. Cox replied, "I am not prepared to say yes or no. Our review of our different authority is still ongoing."...
...The commission has the authority to investigate any kind of fraud it suspects, but the court's decision to throw out the registration requirement limits its ability to conduct routine exams and improve its understanding of the industry.
Some lawyers said Tuesday that they were not surprised that Mr. Cox did not ask Congress for more authority.
"I think there is some reticence by regulatory agencies overall to admit a need for, or affirmatively ask for, help from Congress,” said Jim C. McCarroll, a partner at the law firm Reed Smith who focuses on hedge funds and funds of hedge funds. "They prefer to exercise their individual regulatory authority before seeking a legislative fix."
Mr. Cox explained some of steps he would ask the commission to take to reclaim some of the authority it had lost when the court declared its registration requirement invalid.
For example, the Investment Advisers Act has strict rules on what books and records must be kept to back up performance data. The registration rule required hedge funds to have those books and records after the funds registered, but exempted them from having them for periods before they registered. Mr. Cox said he wanted that exemption to be reinstated.
Mr. Cox also said he would introduce a measure to permit the commission to sue managers on behalf of investors in the fund.
Mr. Cox said 10 hedge funds had withdrawn their registrations since the appeals court decision, but more had registered. "Although these are early returns and may not be indicative of the final outcome, we have actually experienced a net increase in the hedge fund registration," he said.
The Treasury Department, meanwhile, has formed a group to examine potential risks in the industry, including the exposure that many large banks could have to certain trades. The group, which first met a few weeks ago, will work with members of the hedge fund industry and the banks who manage their accounts.
The 1998 near-collapse of the hedge fund Long-Term Capital Management was invoked several times during the hearing.
In his testimony, Randal K. Quarles, under secretary for domestic finance at the Treasury Department, asserted that the conditions that had led to that spectacular near-collapse were not as prevalent today.
"There is reason to believe there is less risk posed by the hedge fund industry than in the past," he said, including less leverage, less concentration of risk and more awareness by the banks that manage the hedge funds' accounts.
He said one risk he saw was embedded leverage, or bets that hedge funds have taken with derivatives that are less apparent on the balance sheet.
I think it is obvious that leveraged hedge funds/investment pools pose a risk to markets in the climate of an inverted yield curve. Why is it that the USA - so eager to police each and everything around the globe - takes a hands-off attitude towards these potential market manipulators?

Global Madness Explained In 4 Minutes

Tuesday, July 25, 2006

This video is self-evident. How much did you give this year? Hat tip to Past Peak and compliments to Ktkuda.

FOMC Minutes Talk Shop

Friday, July 21, 2006

What a difference to Fed chairman Ben Bernanke's testimonial the latest FOMC minutes make.
Ahead of midterm elections it is clear that Bernanke's appearance on Capitol Hill was dominated by a strategy of staying out of president George Bush's firing range.
The FOMC minutes from the June meeting sound different altogether. Slowing growth and persisting inflationary pressures put the Fed between a rock and a hard place.
Some quotes:
  • ... growth of economic activity in the second quarter slowed substantially from its rapid first-quarter pace.
  • The expansion of consumer spending softened, and activity in the housing market continued to cool.
  • Gains in nonfarm private payrolls averaged 112,000 over the three months ending in May, a pace considerably below the average of about 170,000 jobs...
  • For the year to date, manufacturing production advanced at a rate significantly below its rapid fourth-quarter growth rate but only a bit below its average pace of expansion since mid-2003.
  • Real consumer spending appeared to be on track to decelerate noticeably in the current quarter...
  • The level of nominal wages and salaries beginning in the fourth quarter of 2005 was revised down considerably, and rising consumer prices held down the gains in real disposable income.
  • Higher interest rates also likely restrained spending.
  • Residential construction activity moderated over the past few months but remained at a historically high level.
  • The U.S. international trade deficit widened in April, reflecting a large increase in imports coupled with a slight decline in exports.
  • Headline inflation picked up in April and May, driven partly by sharp increases in the prices of petroleum-based products.
  • Core price inflation rose less than headline inflation in April and May but above its pace earlier in the year.
  • ...participants observed that housing construction activity had declined notably in recent months as indicated by lower housing starts and permits; moreover, higher inventories of unsold homes, a sharp rise in cancellations of new home sales, and reports from construction companies suggested that the weakness was likely to be extended.
  • Participants also observed that the evidence to date indicated that the slowdown was orderly but were mindful of the possibility of a sharper downturn in the (real estate) sector.
  • The growth of consumer spending had dropped off significantly in the second quarter from a robust pace earlier in the year. The slowdown was attributed in part to higher energy prices and also to a likely downshift in home price appreciation and higher interest rates.
  • All meeting participants expressed concern about recent elevated readings on core inflation.
It appears the FOMC finally acknowledges there are problems with inflation, housing, and consumer spending, given the sharp words with only a few drops of hope in and between.
Confirmed by the weakening trend in economic data the Fed finds itself confronted with the need for the impossible in the run-up to the next FOMC meeting on August 8. Lower growth expectations rub with inflationary pressures nobody sees going away in the short term, which would need a cut and a hike at the same time.
Including seasonal factors like the increased appearance of market drops in autumn I would not be surprised to see the Fed continue its 17 steps long path of 25 basis point advances at the next meeting to be able to offer some temporary comfort at a later stage, once consumer sentiment nosedives.
The rate trend will stay the same and probably accelerate once investors rediscover the meaning of the term real interest.

The Mogambo Guru Smells A Lot More True Inflation

Thursday, July 20, 2006

Had he been reading this blog regularly, the Mogambo Guru would not have to quote from elsewhere to come up with the basic advice to buy what China buys and to sell what China sells. Otherwise we are being presented with such a grim outlook for the future this week, one could not be shocked more by the Mogambo Guru's own appearance in the current heatwave. In case you disagreen you won't be wrong looking for him behind a bottoms-up beer bottle.

Mad About True Inflation
by The Mogambo Guru
The policeman was yelling through the megaphone, "What are you so mad about, Mogambo? Come out of the famed Mogambo Bunker (MB), nice and quiet, with your hands up, and let's talk about it!"
So I fire off another burst of machinegun fire over their heads to recapture their attention, and shout through the gun port, "Don't pretend you don't know about how the Federal Reserve reversed course from their previous outsized $11 billion injection of credit into the banking system, you stinking lying cop! So don't insult me by acting like you were completely unaware that Total Fed Credit fell by $6 billion last week!"
As I am jamming home a fresh clip of ammo, I shout "And what about Japan finally raising interest rates from zero to 0.25%? Rates have been zero for six years, you idiot Gestapo pig!" I squeeze of another long burst.
How could I explain to this government goon squad about the strange and scary perturbations in the flow of economics? Can they even be made aware of such things as the frightening levels of activity in the bank repo market, where $11 billion per day is now expected! With spikes into the high $20's of billions! Per day!
Then I realize how to connect with them! I shout "What about oil, you nasty bastards? The price per barrel is up around $75 a barrel, and the price zooms up and down by a buck and a half a day sometimes!"
And it is not just the money, but that such sudden, wild fluctuations are completely out of character for stable systems. And the terrifying thing about breakdowns in smooth, laminar flows is that a chaotic, catastrophic breakdown soon appears.
At this point everything became confused and chaotic, as suddenly my wife and children were, for some reason, there in the bunker with me, bathed in a strange, wavering light, urging me to heroically shoot it out with the fascist goons and die like a proud martyr to Austrian economics and the gold standard. Suddenly, I awoke!
It turns out that I was only dreaming the whole thing! Whew! But the statistics, my panic and the bullet holes in the walls of my neighbor's houses are all too real, as are their vicious, lizard-like lawyers.
Industrial Prices Up 19.5% YOY
But the slimy schemes of the Federal Reserve are one thing, the paranoid hallucinations of The Mogambo are another, while actual inflation is yet a third thing altogether, making, in all, three. And on that note, and because I don't want you to miss so much as a single syllable, I pick up my Mogambo High-Powered Megaphone (MHPM) and fairly scream through it "The JOC-ECRI Industrial Price Index jumped in July, rising to 130.17 from 128.18! That one-month gain of 1.6% in prices is a lot of inflation in one month! What is even more interesting, if you think that being eaten alive by inflation is 'interesting', is that the index is up from 108.95 a year ago at this time, which is an inflation rate of 19.5%!"
In an odd, almost tangential way, Frank Holmes, CEO and Chief Investment Officer of U.S. Global Investors, has a few words in the annual report, entitled "The Rise of The Chinese Consumer". He writes "China's energy consumption is expected to be 69 percent higher in 2010 than in 2002, according to the Federal Energy Information Administration. That growth rate is five times higher than the estimate for the United States and more than 15 times higher than Europe. China, in the midst of a massive infrastructure build-out, used half of the world's cement and 40 percent of the world's steel last year, according to government statistics."
Now, as a pop quiz, take out a clean sheet of paper. After paying particular notice to his use of the phrase "in the midst of a massive infrastructure build-out", combine that with the statistic that China, alone, was responsible for half the world's consumption of cement and steel (and a lot of other things, too!) last year, to derive the longitudinal extrapolation of this exponential trend to arrive at probable price predictions (PPP) for various assets, upon which we could make a big pile of money (MABPOM) by investing in them.
Congratulations to those of you who demonstrated True Mogambo Attitude (TMA) and contemptuously said "Screw that!" As luck would have it, Mr. Holmes immediately went on to give the answer to that very problem when he said "But because of years of low commodity prices and other factors, exploration and development of these now-coveted resources have not kept pace with global population and GDP growth. That has created an Economics 101 scenario - demand is greater than supply, so prices climb."
And if you are not content with merely owning gold and silver to participate in the general rise of prices, but want the excitement of daily wheeling and dealing and trading to make the Big Money Fast (BMF), then Mr. Holmes has the perfect investment philosophy for you: "Whatever China needs, get long, and whatever they have as surplus, get it out of the way, because China will just dump it."
I can personally testify to this last point. Mogambo Money-Grubbing Enterprises, Inc. (MMGEI) has the distinction of being the only stock in the world that actually has a negative worth, as even one share of this despicable company is considered too many, and people actually take a loss to pay other people to take the stock off their hands. Well, the story is that last week one lousy share of this toxic stock accidentally got misfiled in the portfolio of a Chinese woman, see, and desperate to get rid of it, her hand moved so fast throwing it out that it went through the time barrier! Talk about being dumped! Hahaha! The rest of the story is, with her hand in the future like that, that she can scratch her own butt before she knows it itches! Hahaha! How handy!
Overseas Construction Boom
But Mr. Holmes is apparently not remotely interested in old women scratching their butts or how despicable both my corrupt company and I personally seem to him (and apparently) everybody else, and although I agree with him about the butt scratching thing, he calmly goes on to note that the continued gobbling of resources by China for years to come is written in stone, as "China plans to build 14 express highways, six railways and a dozen new seaport facilities before 2010." In three years!
And it is not only China, but he also says that "India invests 3.5 percent of its GDP on power plants, roads and other infrastructure and the government there is financing 'industrial townships' to promote more manufacturing. Even Bangladesh, one of the world's poorest countries, is building hundreds of miles of highways, as well as schools, water systems and the like."
I jump up and say "Hey! Mr. Holmes! Hey dude! How about an analogy so that we can, you know, like, get a taste of the economic results?" He looks at me with the usual disgust and revulsion, and with a voice dripping sarcasm, asks "Do you even know what an analogy is?" and I say "No, but that was not my question! So do you have an analogy, yes or no, and why are you motioning to the security guards like that?"
Without even pausing for a moment's reflection, he says "A good example of this is when the U.S. built interstate highways in the 1950s. This construction work absorbed more than half of the world's commodities." Yow! What an amazing statistic! And what a nice economy it produced, too! I was so stunned by this that I reacted too slowly to the sound of someone yelling "Get him, boys!" and I was soon unceremoniously hustled toward, and dumped into, the hallway outside.
China Is Screwed Too
And a good thing, too, as down the hall I heard Stephen Roach, of Morgan Stanley, saying that China "has a central bank that was reorganized in 1998 along the lines of America's Federal Reserve System." And they have a fiat currency! In other words, China is screwed, too!
I laugh contemptuously ("Hahaha!") at these Chinese doofuses for their incompetence and stupidity for copying the same stupid mistakes in monetary policy that everyone else made, namely listening to America when we, slopping around in our stupidity and greed, extolled the siren-song virtues of a fiat currency and the powerful currency derivative of electronic digits in bank computers, all multiplied by an extraordinarily lax fractional-reserve banking system. Morons! Just like the rest of us! Morons!
That means that China and India will also experience the horrifying inflation in prices, too. And so the next time you hear me say "We're all freaking doomed!", remember that the category "we" includes the Chinese.
And while I am not sure if this is directly related, Doug Hornig at KitcoCasey.com caused my heart to spasm when he reported that "Nickel remains the story, as inventories dropped precipitously. The LME reported a decline of nearly 500 tons (5.5%). Stocks are down a cumulative 76% on the year." Supplies of nickel are down by more than three-quarters? Wow!
Reader Pete K., familiar with buying and selling on eBay, recently went to see what things were like, and thinks it is unmistakable that sales and bids are down. "Only the finest collectibles (unlike my junk) had any bids on them at all. The rest was all just sitting there, like dead bugs on the floor."
From this he gathers that "the money that has been gushing through eBay, washing all sorts of junk into people's pockets, has stopped." Oops! Another spigot of liquidity is now drying up!
And if that news about inflation was not bad enough, the Aden sisters, who publish the eponymous Aden Forecast, write "Barring an accident, there's little question that inflation will ultimately be the dominant economic force and that's why metals prices will continue to rise, and stocks and bonds won't, looking out to the years ahead."
In the exact same vein concerning prices of stocks and bonds, Mark Faber writes "Whenever central banks create excess liquidity, symptoms of inflation will show up somewhere." Exactly! And the big question is always "Where will this inflation show up?" He says "Sometimes wages and consumer prices will react the most to expansionary monetary policies (for example, the 1960s and 1970s), but in today's world where, given the low wages in China and India, an almost unlimited labour arbitrage can take place, easy monetary policies drive asset prices such as homes, commodities, equities, art, and so on, higher, while wages and consumer prices rise only with a lengthy time lag (once commodity prices begin to be passed on in the prices of finished manufactured goods). Therefore, it should come as no surprise that, when liquidity growth is slowing down, asset prices begin to cave in first."
From AP we learn "The Labor Department said Thursday that applications for jobless benefits totaled 332,000 last week, an increase of 19,000 from the previous week, exceeding market expectations. The four-week moving average for claims increased to 317,250 from 308,500 in the previous week." Remember that it was recently considered conventional wisdom that if that number stayed comfortably below 300,000, then there was nothing to worry about!
"Three Steps And A Stumble" No More?
And I guess that is why you never hear about unemployment from the talking heads of the world, or why you never hear the old adage "Three steps and a stumble" anymore, which is the Wall Street folklore that if the Federal Reserve raised interest rates three times in a row, then the stock market would fall. Now that the Fed has raised interest rates 17 times in a row, things are, apparently, different.
Reader Stephen G. writes to say that people who take out reverse-mortgages will not necessarily be on the hook when, at the end of the reverse-mortgage when you sell the house, for any drop in the value of the house, and he included several sites that explain the whole deal.
Thus we learn that while the explanation of the contract explicitly says that "When you sell your home or no longer use it for your primary residence, you or your estate will repay the cash you received from the reverse mortgage, plus interest and other fees, to the lender."
If you read carefully, you will notice that the money that you get every month sounds suspiciously like nothing more than an increasing-balance, home-equity loan to you, upon which the bank charges interest. So while it is called a "reverse-mortgage" loan, it is actually just another run-of-the-mill equity financing scheme with a new name.
So, if you got a total of $100,000 in payments, but you can only sell the house for $40,000, won't you have to repay $60,000? Yes and no, it turns out: These are, as Mr. G. points out, Home Equity Conversion Mortgages, and are non-recourse, meaning that the bank can't come after you for the sixty grand, even though you owe it to them. How to reconcile the two?
Well, for one thing, the bank makes you buy an insurance policy to cover any shortage in the value of the house! "Borrow some money and buy an insurance policy, making us the beneficiary!" Hahaha! Thanks for clearing that up, Stephen!
And, of course, since you are "selling" your house piecemeal, I'm sure that they can (and will) cut you off before things get to that point.
Bill Bryan of MarketPulses.com probably wonders how a complete buffoon like me could come up with the winning investment strategy of accumulating gold, silver and oil. But since he is too polite to actually accuse me of stealing someone else's idea, he merely adds "A few words on Gold, Silver and Oil. While we maintain our core positions in each, we continue to view the climate as a secular bull with much, much further to go."
How much farther to go? He figures "Gold=$1,500; Silver=$40; Oil=$100-125 minimum 3-Year targets", but that "perhaps some further consolidation will be necessary before the next major up leg ensues. Nonetheless, for those seeking protection from the machinations of the US Fed and central banks worldwide, pullbacks may provide wonderful long-term buying opportunities."
Anthony M. Cherniawski, of The Practical Investor newsletter, has an interesting technical trading tip. He writes "Lowry's has already told us that the month of June contained the highest intraday market volatility that they have recorded in 55 years. The VIX is simply telling us that volatility may be coming back in spades. In this case, the bottoming of the VIX pattern may be considered an inverse signal for the market since, in more cases than not, a rising volatility index often spells trouble for the stock indexes. Do I hear growling nearby?"
The famous Bill Bonner of the equally famous DailyReckoning.com has another bit of immortal technical analysis for you, too, as he writes "We remind you, dear reader, of an Essentialist Economic Principle: A slump is opposite and equal to the fraud that preceded it. The recession of the ‘70s was the worst one since the Great Depression."
And although Mr. Bonner is too refined to mention it, our current economic excesses and imbalances now dwarf anything the world has ever seen, and far, far worse than what preceded the Great Depression!
Soaking The Rich
To illustrate the bizarre, simplistic thinking of the Wall Street Journal, I quote from their July 12 editorial "Soaking the Rich", where they wax enthusiastic about the falling budget deficit, which was reduced by about $115 billion stinking dollars, thanks to an unexpected increase in tax remittances. We still had a deficit of $300 billion, but somehow this reduction from a deficit of over $400 billion is supposed to be such terrific news or something. Hahaha!
The WSJ crows "The real news, and where the policy credit belongs, is with the 2003 tax cuts." Hahahaha! They admit that "Monetary policy has also fueled this expansion, but the tax cuts were perfectly targeted to improve the incentives to take risks among businesses."
The Economist magazine, to its credit and to the embarrassment of the Wall Street Journal, came up with several other alternative reasons why an extra $115 billion in tax revenues could show up, including the fact that wages have been weak, and the savings showed up as profits to corporations, and indeed, capital gains and dividends have soared, which are taxable. Or maybe it was that a bunch of tax breaks for investments expired at the end of 2004, and now those investment expenses are taxable.
Or perhaps it was the unusually big profits of small businesses are taxed at the individual level. Or maybe it was the growing income inequality and the progressive tax system, where the rich got richer (but paid more taxes) and the poor got poorer (but paid the same level of taxes). Or any of a lot of things.
But nobody but the true patriots at Radio Free Mogambo (RFM) made the connection that, for 2005, total credit (debt) expanded by $3.34 trillion. To get a lousy $125 billion in extra taxes out of a $3.34 trillion increase in debt, which increased tax revenues by a miniscule 3.4% of this amount, is hardly a ringing endorsement of the Laffer Curve, as the Wall Street Journal editorial presumed when they said that the cuts "succeeded even beyond Art Laffer's dreams." Hahaha! In YOUR dreams, Wall Street Journal!
To those unfamiliar with the Laffer Curve, it is the idea that for every level of tax revenues, there are two tax rates that will produce them. One is very high, and the other is very low. The high rate produces the tax revenue directly, and the low one increases economic activity so much that more tax revenue is produced. The morons of the world immediately and consistently misinterpret this to mean that every time you reduce taxes, you will always get more tax revenue! Hahahaha!
So pardon me if I do not break out the party hats and balloons to learn that in America, in total, at least $3,400 billion was borrowed and spent last year, and the government got a piddly $115 billion in "extra" tax revenue out of it. Hell, looking only at the government's budget, the national debt went up by $569 billion in the last twelve months, exploding to $8,408 billion, all to satisfy the government's insatiable, insane, bankrupting, ravenous craving for spending. Thus the national debt increased by $7.3% in the last twelve months. Hahaha!
And besides, the Economist magazine also said that profits everywhere around the world had unusual growth and gains, too.
Reader Adrian S. alerted me to a January 2005 issue of the Richebaecher Letter that contains probably the only other point where I disagree with the famous Dr. Kurt Richeb├Ącher about anything. As serious scholars of the Life Of The Mogambo (LOTM) know, the first thing we disagreed about was that that he thinks that I am the most worthless economist and human being in the world, and I, in strident rebuttal, think that there is probably someone, somewhere, more worthless than me, although I can't think of anyone right now.
Anyway, our second disagreement took place recently when he was asked "What do you think of gold?" Dr. Richebaecher replied "I do not really like to talk about gold. Of course, some of my best friends are gold bugs. And while I respect their opinions, I do not agree with them. They say gold is the only real money. No, it is not the real money. The term 'real money' for me is something irrelevant. The money you pay with is fiat money. Call it fiat money or not." I think to myself, "Jeez! Talk about taking theory to the extreme!"
"Yes," he admits "the system was better under the gold standard. But the gold bugs are missing the point." Missing the point? I may shoot at your hat and miss the point to the dismay of your haberdasher and your next of kin, but as a raving gold bug myself, I am suddenly insulted! Naturally I leap to my feet, stick my finger right at his face and shout, like I do when I am talking to crying babies, "Shut up! Shut up! Shut the hell up! Maybe YOU are missing the point, old man!"
He doesn't say anything, but calmly and coolly continues as if I wasn't there, which further infuriates the hell out of me. He says "The key component of the gold standard was not the gold. It was the fact that the rules of the gold standard did not allow credit excess. It was the rules tied to the gold, not the gold itself."
Suddenly, I am thinking to myself, "Uh-oh! He's right and I am wrong! He's going to make me look like an idiot!" I felt a little better after I remembered how many times a damned day, every day, other people effortlessly make me look like an idiot, just because I am an idiot, and how it is almost like they take some weird, perverse pride in picking on a poor, pathetic mental cripple like me. And that is why I hate them all so much, and that is also why I punish them by stealing food out of their lunches when they are not looking.
But this is not about how the world is cruel to me or that most people pack terrible lunches, but that he is right: It was the strictures on the creation of money and credit that gold placed on banks that was the magic. It prevented the banks from creating more money!
So, I am standing there ready to apologize for getting in his face like that and losing my temper, and I was going to offer, by way of an apology, to give him the one thing that he is always asking for: For me to go away and never call him, write him, mention his name, or even think about him for the rest of my nasty, wasted, stupid Mogambo life (NWSML).
But before I could make my generous offer, he set me off again when he said "So the truth is there is no serious economic argument for gold. It is all psychology." The fact that gold has held its value for millennia apparently means nothing to this guy!
So I grow increasingly hostile as he winds up with the phrase "But I find it interesting that so many people in America are looking at gold. I believe they realize that Fed policy is irresponsibly inflationary. And they believe gold is the obvious and only alternative. They do not think about foreign currencies."
Well, by this time, steam was coming out of my ears as a terrific rebuttal immediately flowed fully-formed into my Tiny Mogambo Brain (TMB), but before I could say it, the door slammed shut right in my face! Wham! As I stand there, stunned, through the closed door I can hear his muffled voice screaming, over and over, "Release the attack dogs! Release the dogs now!" and I took off running.
But as I bounced along, I was thinking "Yes, Dr. Richeb├Ącher, we gold bugs 'realize that Fed policy is irresponsibly inflationary' and we also know that gold always, always, always holds its purchasing-power value in any inflation, in perfect safety, too, and that is why we are buying it!"
I also remember that I had a lot more to say, a lot of it real snotty, too, including my disdain for foreign currencies, since those other countries are also doing that same stupid damned inflationary thing of creating more and more money and credit, which causes inflation in the money supply, which causes inflation in prices, which is registered as a loss in purchasing power. I was even intending to say "It's bad enough with the dollar and Americans, but buying foreign currencies is a really stupid thing to do, too."
And besides, I would rather deal with Americans and our dollar, as I can understand Americans when they speak, and they can understand me ("Up yours, too, you ugly little troll!"). So why compound my misery by including foreigners and their stupid inflations, and the losses in purchasing power I would sustain by holding their stupid-looking money?
But after furiously running like a lithe Olympic sprinter at top speed for (I estimate) about ten feet, I was completely exhausted, my heart was pounding and I was gasping for air. But you get the drift.
In the end, in any currency, inflation means that you spend your time fending off 1) governments who want to increase your taxes, and 2) desperate, dirty people who are frantic to get some money because they are being slowly starved to death by the horror of inflation, when dealing with my own hateful family is plenty bad enough. In short, who needs the aggravation when I can prevent it all by merely owning gold and sufficient firepower?
The latest issue of the St. Louis Federal Reserve Bank of St. Louis Review, July/August 2006, 88(4), pp. 235-49, has caused a real stir, especially the article by Laurence J. Kotlikoff entitled "Is the United States Bankrupt?" In fact, Edmund Conway, Economics Editor for the Telegraph.co.uk, called it "an extraordinary paper published by one of the key members of the country's central bank."
And extraordinary it is! I have seen many references to this article popping up all over the place, but nobody but the vicious Mogambo tried to satirize the government's unconcern for elderly people by using his innocent quote "The most the government can do for the elderly is to set h equal to (1 + r)w/r." I still think it is funny!
But there is more than that. He goes on to write "Let's assume the government does this. In this case, the government impoverishes each generation of young from time 0 onward in order to satisfy the claims of time-0 oldsters. In the words of the Oxford English Dictionary, we have a country at the end of its resources. It's exhausted, stripped bare, destitute, bereft, wanting in property, and wrecked (at least in terms of its consumption and borrowing capacity) in consequence of failure to pay its creditors. In short, the country is bankrupt and is forced to reorganize its operations by paying its creditors (the oldsters) less than they were promised."
So if you were asking about the future of Social Security, this is it. You will get less than promised. A lot less.
A Gap 5 Times The Size Of GDP
As to the bankruptcy question posed in the title, Prof Kotlikoff said: "The United States has experienced high rates of inflation in the past and appears to be running the same type of fiscal policies that engendered hyperinflations in 20 countries over the past century."
It all stems from our long-term "fiscal gap", namely the difference between all promised future government/retirement spending and all future receipts. The shortfall will grow very wide, especially as spending soars as the Baby Boomer generation retires. How big is this gap right now? About $65.9 trillion! Prof Kotlikoff said: "This figure is more than five times US GDP and almost twice the size of national wealth."
Almost as a Theater of the Absurd, he hypothesizes that "One way to wrap one's head around $65.9trillion is to ask what fiscal adjustments are needed to eliminate this red hole. The answers are terrifying."
And he wasn't kidding! Being forced to rely exclusively on the budget process yields truly terrifying results. "One solution is an immediate and permanent doubling of personal and corporate income taxes. Another is an immediate and permanent two-thirds cut in Social Security and Medicare benefits. A third alternative, were it feasible, would be to immediately and permanently cut all federal discretionary spending by 143pc." Hahahaha!
So a budget solution is out of the question. Now it is up to Ben Bernanke and the Federal Reserve to destroy the currency instead. In short, yes, my Darling Mogambo Junior Rangers (DMJR), we are bankrupt, and everything else soon will be, too. Ugh.
****Mogambo sez: There will not be a Mogambo Guru newsletter next week, due to a confluence of an unforeseen family situation and my appearance at the Agora Financial Wealth Symposium in Vancouver. But this issue of the MoGu was extra long.
And don't look for one of those filler "Best Of" substitutes by publishers, because they have all looked, and there isn't a single issue that ever rose above the level of "awful and stupid", which I think says something more ugly about the people who publish or read the Mogambo Guru newsletter than it does about me.
So use the time wisely: Buy more silver and gold.

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

Fed Has Not One Word About Fiscal Deficits

Wednesday, July 19, 2006

Amidst a general advertisement for the strength of the US economy and persistent reminders that inflation is here and will likely not go away that easy, the Federal Reserve's testimony to Congress lacks an important memo to the government. Ben Bernanke, at his first appearance as Fed chairman on Capitol hill, did not once utter a word about fiscal deficits or address the government in any other way. The Fed under Greenspan was a constant reminder that something should be done about unsustainable double deficits.
Not so in Bernanke's initial address that offers too much comfort and too little in critical analysis.
No word on deficits, no word on Fannie Mae and Freddie Mac. OK, not that the White House has in any way heeded Greenspan's advice, but the Fed going completely silent on pressing matters under a Bush regime that strictly bars any dissent I begin to wonder how much value will lie in future information.
I wonder if overstretched real estate users (does one really own a place mortgaged to the bank?) will find comfort in the Fed's take on consumers:
"The slowing of the housing market may restrain other forms of household spending as well. With homeowners no longer experiencing increases in the equity value of their homes at the rapid pace seen in the past few years, and with the recent declines in stock prices, increases in household net worth are likely to provide less of a boost to consumer expenditures than they have in the recent past. That said, favorable fundamentals, including relatively low unemployment and rising disposable incomes, should provide support for consumer spending. Overall, household expenditures appear likely to expand at a moderate pace, providing continued impetus to the overall economic expansion."
From "Core" To PCE
The Fed also signals a more dovish take on inflation. From "core" it shifts its eye further to the Personal Consumer Expenditures (PCE) indicator - to be exact the "core" PCE - which paints an even softer picture and is seen between 2.25% and 3% this year and 2% to 2.25% in 2007. A dove greets.
Real GDP growth is seen at 3% to 3.75% in the running year and the Fed expects growth to slow 2.5% to 3.25% next year.
Rates? Bet For Worse
Reiterating its view that future rate policy will depend on incomaing data I still see no reason why the Fed should step off the accelerator. Take note that "other" commodities next to energy have inched up the watchlist of the Fed.
"Inflation has been higher than we had anticipated in February, partly as a result of further sharp increases in the prices of energy and other commodities,"
said Bernanke, describing what drives prices higher. Looking at oil prices and gold's reaction to Bernanke's testimony I see more trouble ahead than the benign Fed.

Volcker Feels Pity For Bernanke

Monday, July 17, 2006

Former Federal Reserve chairman Paul Volcker feels pity for Ben Bernanke. In an interview for Bloomberg TV's show "Political Capital With Al Hunt" Volcker warned that inflation should be taken most seriously and that an improvement in this year's budget deficit would be wiped out by permanently higher social spending on an aging population. Oh, and don't forget that "is is critical that we maintain confidence in our currency," Volcker said.
Excerpts from the interview:
Paul Volcker, who took over the Federal Reserve a generation ago at a time of soaring prices and stagnant growth, said the current central bank chief, Ben S. Bernanke, faces an even tougher challenge.
"It was easier for me," Volcker, 78, said. "While the economic situation was much worse, it was easier to act because it was clear what the enemy was."
...The U.S. economy will slow from 5.6 percent growth in the first quarter to a pace of 2.8 percent in the second half of this year, according to the median forecast in a Bloomberg News survey of economists.
Consumer prices rose at an annual pace of 4.2 percent in May, up from 3.5 percent a month earlier. Excluding food and energy, prices rose 2.4 percent, compared with 2.3 percent in April.
"I worry about people getting too relaxed" on inflation Volcker said. "I don't think it's out of hand today, but it is obviously creeping up."
Skeptical About Inflation Targets
Volcker was skeptical that inflation targeting, a device for anchoring inflation expectations embraced by Bernanke, would be helpful.
"That's a little too precise for me," he said. "The inflation rate is bound to go up and down a little bit and it should go up and down a little bit. But I would like to see stability as the target."
He suggested that Bernanke, who has championed better communication through transparency at the central bank, may be communicating too much.
"It's kind of ironic," said Volcker. "Mr. Bernanke seems to be criticized for a little too much transparency."
While he said the global economy is doing well, Volcker voiced concern that the good times can't last.
"We are skating along quite nicely," said Volcker, though "the ice is not as thick as I would like it to be."
The U.S. current-account deficit exceeded $208 billion in the first quarter. The figure, which includes trade as well as transfer payments and investment income, declined from $223 billion the previous quarter. It was still the second-largest on record and requires the U.S. to attract $2.3 billion in foreign capital each day fund the gap.
"We are consuming too much and investing too little," said Volcker, who also indicated that higher taxes may be needed to narrow the budget deficit.
This week the Bush administration cut its estimate of this year's budget deficit by 30 percent to $296 billion amid a surge in tax collections from corporations and wealthy individuals. Budget analysts say the shortfall will widen again as the aging U.S. population begins to stretch entitlement programs like Social Security and Medicare.
"Revenues have gotten too low" relative to what the government wants to spend, Volcker said.
Because of U.S. dependence on foreign capital to fund trade and budget gaps, "it is critical that we maintain confidence in our currency," said Volcker.
Caution on China
Some economists suggest the solution is a weaker dollar and stronger currencies for U.S. trade partners, especially China. Yet Volcker cautioned about pushing China to revalue its currency, which it has tightly controlled since abandoning a decade-old peg to the dollar a year ago.
China "will move and should move when they find it in their interest," Volcker said. "Pushing them to do things they don't want to do I'm not sure couldn't backfire in the end."...
Alan Greenspan said last year that oil above $60 would shave off 75 basis points of GDP growth. So what will $80 oil to the economy?
A question I still have no answer for is how commodities will behave in the face of a slowing US economy. So far my take is that there will be a short-lived sell-off before Chinese demand - based on domestic consumption - will pick up any slack.
For the week ahead I would be very cautious as political markets can surprise with big volatility. Keep the leverage down and the news channels on.
Inflation figures and 2 speeches by Bernanke can provide even more fuel for turmoil in the markets.

World Cup Trophy For Sale - Tale On Physical Silver Prices

Tuesday, July 04, 2006

Play or pay!
It was not my intention to get sucked into World Cup mania, but while watching a rather eventless Germany-Italy game - score still 0:0 - I checked prices on ebay for physical gold and silver and found this offering from an anonymous seller. Starting at 25,000 Euros ($32,000) he offers an 18 carat copy of the original FIFA World Cup Trophy 2006, weighing 1.5 kg.
Goldbugs and football (soccer) fans could make a double killing (I am in no way affiliated with this offer.)

World Cup Trophy 2006 (Copy)

The bullion value of the trophy stands currently at 17,800 Euros/$21,800 with a gold price of $622. The seller claims that 5 copies of the trophy were made about 30 years ago and were stored in a safe since, remaining in mint condition.
So if you fancy to show off your own - slightly smaller than the original - World Cup Trophy you don't need to get in shape, just click here and start bidding. Still let your friends only look at it: the genuine trophies are made of massive gold.
So What Is The Real Silver Spot Price?
Checking silver prices on ebay I also found out that physical silver gets traded at sometimes hefty premiums vs. spot. Standard 1 kg bars sell between 335 and 390 Euros ($430 to $500) whereas the silver spot price would only justify a price of 282 Euros ($360). This is a markup between 19% and 38%.
As theses are actual trades of physical bullion it is interesting to note that prices remained stable when silver went from $12.50 to $10/ounce in the past weeks. I am left with the question: Where is the real silver spot price to be found?

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