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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory

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From: russwinter11/27/2004 9:50:11 AM
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A long, but very good worth while rant read:

By Richard Daughty
"The Mogambo Guru"

November 25, 2004

Total Fed Credit, which is the fount of from whence springs all that magical, out-of-thin-air, fairy-dust money that is the hallmark of the Greenspan Fed, was up another $3.8 billion in the last week. The Treasury issued another $3 billion in actual paper-and-ink cash, which is NOT money made of fairy dust, but is, instead, money that is made from actual paper and ink, but which is just as phony-baloney. All of which is why the G-20 are all gathering in emergency session to try and figure out a way to manage this dollar crisis thing without any of THEIR citizens taking a whack to the head, and of course we are going to insist that no AMERICANS will take a whack to the head, either, meaning that they have to figure out a way of this mess where nobody has to take a whack to the head.

But this is why they pay themselves the Big Money: They sit around all day, drinking coffee, popping tranquilizers, and pondering the impossible How taxing it must be on their tiny little brains! But this only shows how incredibly stupid all twenty of these nations are, because the lessons of history are clearly outlined in the course syllabus that you were given on the first day of class, and if you have lost your copy of the syllabus, then you have learned another Valuable Mogambo Lesson (VML) that you can take from my class and gainfully use the rest of your life because it will serve you very well, which is, namely, that you should pay attention and shouldn't lose your stuff.

If you care to read your course syllabus, you will note that the Section Titles clearly indicate that there is no freaking way that the G-20 , or the G-100, or a G-5,000 or a G-zillion can EVER come up with a way to turn bankruptcy and ruination into a gain for all parties concerned. Life doesn't work that way. And while we are talking about Valuable Mogambo Lessons, here is another one that you can tell to the members of the G-20; when you abuse not only the American monetary system, but also the world's monetary system in collusion, then everybody is going to take a whack to the head! And their inescapable conclusion will be that it is Alan Greenspan, an American, who is to blame, and thus it is Americans who are going to pay the price for hiring him and for hewing to such monumental monetary stupidity that is the hallmark of the Federal Reserve System in general and the Alan Greenspan Years in Especial Particular.

But foreign central banks, desperate to try and keep the dollar from sinking any lower because they have foolishly tied their entire economies to a single buyer, the United States, bought up a staggering $7.8 billion in US debt, and stored it at the Fed, bringing their total holdings to $1.3 trillion dollars. To do this, they had to create money and credit of their own currency, which means that they are committing monetary inflation and guaranteeing price inflation for their own stupid citizens! Morons! They felt they "had" to do this because their citizens are drowning in a deluge of receiving more than $600 billion a year, in dollars, which equals the current account deficit of the United States. But their citizens don't want to keep dollars! No! They want their own stupid little currencies! They want their own currency because they buy things in the local stores in their own currency, their creditors send them bills denominated in their local currency, and bill collectors are calling on the phone day and night and sending me these letters that have this vicious overtones of latent hostility about some debt or another and they are always talking in terms of local currency and in terms of broken local kneecaps, and when their wives go out shopping they don't say, "I am going shopping now, jerk-face. I will need all of your dollars. So fork them over, bozo!" No, their wives say pleasant things like "I am going shopping now, my wonderful darling, and will need local currency, my precious little sweetie snookums!"

And the husband says "What a dilemma! I am pleased that I am up to my ankles in American dollars, thus waxing exceedingly wealthy, and thus can easily afford my beautiful wife's shopping trip. And yet, I am troubled because I need local currency to give to my darling wife, who never hits me over the head with various blunt instruments, unlike the Mogambo, but then, he deserves it, the nasty, horrid little man, so to hell with him!" Which shows why I don't trust ANY of those foreign bastards, but that is another story.

So the foreign exporters jump into their little foreign car and tootle on down to the their quaint local banks, avoiding the cows and chickens and peasants that crowd the roadways because everybody knows that all foreigners are stupid peasants who spend a lot of their free time walking down dirt roads for some reason, probably to catch the cows and pigs and chickens that are also walking all over the roads when they aren't out in the fields posing picturesquely. And then when they get to the bank,s they exchange the dollars into the local currencies, and then they jump back into their cars and tootle on home, and give it to their wives, and she says, "Oooh! So much money! Where did you get so much money?" and he says "The Americans! They will buy anything! Hahahaha!" and they are both very happy, and they all lived happily ever after, and they laughed at us when they thought we were not listening.

Of course, the guy is happy because he is making all this money selling stuff to Americans, and his wife is happy, but the central banks are not. The reason is that those damn exporters are all hanging around the lobby, wanting to exchange suitcases full of dollars into local currency, like it grows on trees or something, and their wives are all outside in their cars, honking the horns. But if the central banks simply allowed exporters to dump those dollars on the market, the dollar would sink like a stone! And since they are up to their freaking foreign ears in American debt and equities already, all those retirement accounts and investment accounts of all those foreign people in all those foreign countries would immediately suffer a capital loss! Oops! They get the loss because the dollar suddenly doesn't fetch as many local currency units anymore, and so that big fat account stuffed with American stocks and bonds, and real estate, and things denominated in dollars, would immediately be worth less local currency! And it is local currency that I am supposed to take home to the wife! "Oh woe is me!" says our foreign friend.

And here is where we learn that, as far as monetary policy is concerned, the foreign central banks are just as preposterously stupid as our own ridiculous Federal Reserve, and that their central banks just create more local money and credit, and then they buy up the dollars! Presto! More money and credit (monetary inflation)! And it is this increase in money and credit, especially when performed over a long period of time, that is guaranteed to lead to, with that coveted Mogambo Guarantee Of Freshness (MGOF), price inflation. And a corollary to the MGOF is that People Will Not Like Inflation (PWNLI). Only governments that are highly indebted like inflation. Remember that salient fact. It is important.

Thus, the central banks are creating more money and credit, just like us, to get the local currency to buy the dollars, thus expanding the money supply, thus giving the citizens insurance that inflation is on its way. And when the inflation finally arrives, more and more, every day a little bit more and more, these foreign dorks will all run around whining and wringing their hands in bitter, bitter consternation, and crying like the childish morons that they are, "Oh, dear! Oh woe! The people are mad because inflation is chewing the legs off their buying power, and the elections are coming up and they are threatening to throw me and my stupid butt out of office, and since I am obviously incompetent as hell, where am I going to get another job as good as this one? Who would hire a guaranteed loser like me? Oh, woe! Quick! Call a G-20 meeting!"

The Daily Reckoning people are as good at this economics thing as anybody, and better than most, and they write, "The U.S. Fed has not merely brought about an explosion in the number of dollars around the world; it has also lit the fuse of other currencies all over the world. The United States sells dollar debt. Foreign central banks buy it by issuing currency of their own. The result? A world flooded not only with dollars, but also with yen, kroner, euros, and pounds. The broad money supply in Australia is rising at a 9.7% annual rate. In Britain, the pounds pile up at a 9.3% rate. Canada multiplies its loonies at 9.1% per year. The Danes are expanding their money supply at a breathtaking 10.7%. Euros are increasing 6% annually. And the dollar - the U.S. broad money supply is only increasing at a fairly modest rate of 4.8%, a rate that is still far above the increase in GDP."

And yet, here the Congress is, authorizing another $800 billion in debt for their spending needs for the next eleven months, which will mean an additional increase in hundreds of billions of dollar's worth of foreign currencies, too, on and on, round and round.

These central bank guys, in toto, have proven themselves to be grossly incompetent boobs, year after year. And yet, nobody seemingly cares! I mean, if they were NOT incompetent boobs using a flawed and ridiculous economic theory that rests on absurd propositions, then why are we here now? Just look around you! Does THIS look like a bunch of economies that are healthy and the people are enjoying rising standards of living? The answer is no! Not only no, but also no, no, no, no, and no, which is a particularly childish and ridiculous way of commanding your attention, but that is part of the Recent Way Of The Mogambo (RWOTM). What we are looking at, and you might want to jot this down in your notes, is the OPPOSITE of successful economies! All thanks to the central banks in general, and Alan Greenspan in particular, whose monetary expansions have induced the same defensive crap around the whole freaking globe, and now there is so damn much debt, so impossibly much debt, that all economies before this that have gotten this indebted have imploded in flames by this point. So the central banks have proved what has always been known; it is entirely possible to delay the inevitable destruction of the economy when such monetary policies were pursued. The bummer is that it has never before been possible to permanently prevent the inevitable bust.

- You can learn a lot about what is going on by listening to the sound track. For instance, when I was a teenager taking a girl to the movies, I spent most of the time trying to get a kiss or touch her breasts or something obnoxious and teenager-like, and I would rely on the soundtrack of the movie to tell me when something exciting was going to happen. That way, I wouldn't have to watch the rest of the crappy movie, which was always people yammering at each other about something, or watching some guy on screen getting all the loving he can handle, which doesn't do ME any good, and, in fact, even monsters from beyond outer space were getting more loving attention than me, sitting in the dark with old what's-her-name here.

Now, for instance, if you listen very closely, you will hear the sound of a distant gong, echoing eerily, seemingly tolling some lonesome dirge for the dead, or nearly dead, or soon to be dead. Spooky! Your finger involuntarily tightens on the trigger. Bang! A shot rings out! People are screaming and sirens are blaring and everybody is dialing 911 and shouting that The Mogambo has lost it again! Blam! Blam! Blam! More shots ring out, as I shoot off a few rounds as my clever non-verbal way to tell them to calm down! Now, with your heart pounding in your chest, you are in the mood to appreciate that the Leading Economic Indicator, which is a crude measure of future profits, was down for the fifth month in a row. Let me rephrase that sentence into Mogambo-ese to read, "Now you are in the mood to be blasted out of your freaking mind in terror, because the dangity-blang Leading Indicator was down, falling, falling down and down, for the fifth, repeat fifth, freaking month in a freaking row! And if you are NOT spending all your time hiding in the back bedroom, loading fresh ammo into assault rifle magazines and muttering to yourself about how the world is coming to an end, then there is something very, very wrong with you."

Blam! Blam! Blam! Next, we have the Coincident Economic Indicator, which is a sort of rough indicator of current conditions, was actually up a little bit, which corresponds pretty well with anecdotal evidence that things are poking along and government economists are bullish and confident. But it was the (Blam! Blam! Blam!) Lagging Economic Indicator when the soundtrack exploded in a cacophony of kettledrums, and blaring brass, and people screaming, and the voice of The Mogambo screeching hysterically in a voice so high that he sounds like some whiny little kid, "We're all going to die horrible deaths! We're all going to die!" This Lagging Indicator is an indicator of costs and inflation. And it was up! Now you see why the soundtrack thing! Future profits are down, but inflation is up! Look at me when I am talking to you! Watch my lips! Future profits are dooooooonwwwwnnnnn, and future inflation is uuuuuuuuuupppppppppp! Both of which are Bad Economic News (BEN).

This is not some hypothetical crap like you get from government economists and their toady little playmates in the universities. If you are looking to add to your invaluable Mogambo Encyclopedia Of Investment Stuff (MEOIS), these obviously-trending indicators indicate, which is why they call them "indicators", that you want to sell (or be short) bonds, because inflation is going up, and that means that interest rates will eventually go up, which means that bonds prices will go down. And they also indicate that you should sell (or go short) equities, too, since future profits are going to be down, and there are very few people who will bid stock prices up when the company is having lower and lower profits, especially when those selfsame stock prices are historically grossly overpriced like they are right now.

On the other hand, the money supply as measured by unadjusted M2 and M3 continue to expand, meaning that somebody is borrowing those big bucks for something, and I am pretty sure that it is Friends Of The Government (FOTG) going into the stock market and the bond market, keeping them up, so they and other Friends of the Government can sell out and, hopefully, make a nice chunk of change. And I am betting that some of these Other Friends Of The Governments (OFOTG) are those foreign devils who are sitting on all those American stocks and bonds and dollars, and who don't like the prospect of losing so much money.

And let's not forget that the end of the calendar year is not far off, and income taxes and capital gains are calculated from the prices on December 31, and so the government has a very keen interest in making sure that nothing bad happens between now and December 31!

- Mark Rostenko asks, "If you hear a nasty rattling under your hood but your car makes it home alright today, tomorrow and two days from now, does that mean the car's running fine and will continue to do indefinitely? Probably not. Our economic engine continues to rattle under the hood, but with every passing quarter that nothing especially dreadful occurs, we grow immune to the rattling."

This is where Mr. Rostenko shows that he is old-fashioned, and is making his Big Mistake. According to the new economic theories of the Federal Reserve, and championed by the acadademic nitwits who infest the economics departments of most of the nation's universities, the fact that the engine did not quit is proof that it WILL go on indefinitely! And there is no proof to the contrary! That is the proof! It rattles, and yet it runs! It sputters, yet it runs! Ergo, it has always run, and so it is thus proved that the car will always run!

The etymology of this fabulous philosophy is that it originally comes from a group of mental defectives who lived in a lunatic asylum in ancient Mesopotamia. These ancient whack-jobs sat around picking invisible bugs off of themselves and scratching their bizarre economic theories into the floor stones of their cells, where they lay dormant for the next 5,000 years, until some bonehead at the Federal Reserve won a free vacation to look at some condominiums time-share deal, and while they were as lost in the desert as they are lost in modern economics, they tripped over the floor stones in the sand, and when they had it translated, said to themselves "Hey, guys! Listen to this! This sounds really neat!" The basis of the whole philosophy can be handily summarized as "More of what is killing you will cure you, if the dose is large enough."

This is the foundation of economics as practiced by the Federal Reserve and most of the idiot banks around the world.

In similar fashion, we come to the recent news item of the American soldier who shot an unarmed and wounded Iraqi in a raid on a fortified mosque. Did anybody bother to ask if the American soldier was an American economist? No, they did not! And this could explain it! Because if he was an American economist, then he can tell you that the Iraqi insurgent was suffering from too many bullets, and thus the cure is, according to the theory, more bullets! It's too bad they did not show the bullet being fired, because if you had seen it, then you would instantly know that the Iraqi jumped when the bullet hit him! And if he is jumping, he is not dead! And, by logical extension, if we can only pump enough bullets into him, then he will one day jump up, and then they can simply walk him off to jail, and then maybe we'll all go out and get some tacos. Maybe chug some brew.

So remember, that the new theory is more bullets, more jumping! And more jumping is growth! Growth and health and vitality! So before you "rush to judgment", consider: That brilliant American solider was giving him a good, healthful dose of good old American Monetary Policy! That stupid Iraqi bastard ought to be grateful for being shot!

- Stephen Roach of Morgan Stanley has taken a look out the window, and at the statistics, and at the horrified look on the face of the Mogambo, and figures that the odds for a recession in 2005 is about 40%. Somebody, I accidentally deleted who, said, "Recessions, on average, bring about stock declines on the order of 43%."

- Rob Peebles, writing an essay entitled "Eastward ho!" on Prudent Bear, reports that Californians are streaming into Texas after being priced out of the entire California real estate market, and these ex-Californians are driving up housing prices in Texas. This is, of course, complete news to Alan Greenspan, who has already told us jerkwater peasants out here that there is no such thing as inflation in houses.

More worryingly, however, is when he reports that, "Subprime mortgage originations have grown from something less that $150 billion in 2000 to more than $250 billion last year. This year, subprime lenders forked over $157 billion in the second quarter alone. That's double last year's amount according to the National Mortgage News. And get this--in the first half of 2004, subprime accounted for 19% (as in ONE - NINE with a percent sign) of mortgage loans, up from last year's 9.9% tally."

And if you look up the word "subprime"in you Mogambo Dictionary, it is defined as "People that nobody in their right mind would loan money to, especially big amounts of money, because they are almost certainly not going to pay you back." Fortunately, Fannie Mae can act as stupid as it wants, because it is a Government Sponsored Enterprise, (GSE) and they can act as stupid as the government, which is, if you have been watching, really, really, really stupid.

- I really like this guy Lance J. Lewis, because he has a way of so pithily explaining the proof of why Modern Structured Finance, or the New Economics, or Keynesian Enabler, or whatever they are calling the current bastardized economic theory that we are using, must fail in the end. He writes "If printing money were the way to prevent recessions, the world would have had uninterrupted growth since the beginning of time, during which all governments throughout history have eventually inflated away their currencies into confetti."

But it is what happens to the people and the economy and the whole country and the whole world when a currency is turned into confetti that is the crux of the whole thing! There are movies on TV right now, violent movies with adult themes and adult situations, although very little profanity for some reason, and very little nudity for no damn good reason that I can think of, with plots about what happens to people as their buying power goes down and down, month after month, year after year, as the Miracle of Compounding, (which is what Isaac Newton called it, which shows you that four hundred years ago they knew this stuff, too), now works in reverse. And if compounding working IN your favor is called a "miracle", then what do you call its exact opposite? And is that opposite called an antonym? I think it is, and for all of you who ever said, "Why do I have to learn the word 'antonym'? I'll never use it again as long as I live" believe me, I said this same thing when I was young, and sure enough, I never did, until right now! And now it has finally paid off! Education will pay off in the end! Wow! Who knew?

Sort of like holding gold, which will pay off in the end, too. For a long time you never had a use for the word antonym, and no beautiful woman ever came up to you in a smoky bar and looking longingly into your eyes, and in an exotic, breathy way said "I'm on the prowl for a man with a big antonym!" But gold is sort of just that way, too, and although you will never in your life have gold hit on you in a smoky bar, it will come in real handy one day. Trust me on this one, because gold has ALWAYS come in real handy one day. And the way things are going, that day will be very soon.

Similarly, John Myers of Outstanding Investments, writes that he is hip to what is going on, too, and can just as easily get up and go over to the window in his spacious office and look around and see just as clearly as The Mogambo, who is holed up in that stupid lead-lined bunker of his and peering in terror at the world through a periscope, and he says, "This is the exact type of environment that the nation went through nearly three decades ago. As we go through it again, the consequences will be the same."

Now, in case you, like me, can't quite remember how it was back then, he tells us "Namely, there will be a stagnant market in blue chip stocks, a miserable bear market in bonds and a raging bull market in commodities, especially the Big Three - gold, silver and oil."

And for those of you writing to The Mogambo and wanting me to give you advice that will guarantee that you will make big, big profits, here is a smattering of advice for you. Gold is guaranteed to go up in price, unless the governments of the world conspire against it, and even then, it will only be temporary. The run-up in gold will, theoretically, coincide with a bear market in bonds. Then, one day in the future, when bonds are paying 15%, or 20% or 25% or some unimaginable number and gold is selling at some preposterously-high price, that is the time to sell the gold and buy the bonds.

Then, later, as interest rates eventually revert back to the norm (fall), the price of the bonds will go up, and you will make even MORE money. Then, it will be time to retire in some wonderful place and live like kings and queens. This is the essence of The Mogambo Financial Plan (TMFP), and if it is good enough for The Mogambo, then it is good enough for you, as I am impossible to please, and I never have enough money, no matter how much I have, and sometimes I have as much as twenty whole dollars in my wallet! Twenty bucks! And yet I am not happy even then!

- Matthew Lynn at Bloomberg, who wrote the article "France's Sarkozy Should Let Economy Fix Itself" has a good idea how economics really works, when he writes, "In truth, what France needs isn't a finance minister who aims to fix all the country's woes single-handedly. It needs one with the courage to shut his office door, shrug his shoulders, and tell business it needs to start fixing itself." This is how Smith's "Invisible Hand" keeps things going in a healthy, maximizing way.

As an example of French economic stupidity, he reports that this French finance minister, Sarkozy, which probably means "economic nitwit" if you looked it up in one of those unabridged French dictionaries, decided to meddle in the economy, and "In September, he prodded retailers into cutting prices by an average of 2 percent as part of an effort to boost demand." Well, let me say right here that the increased demand created by a 2% discount is equally offset by a decreased demand from the guys SELLING the merchandise at 2% less profit! Net net, there is no gain! In fact, there is only a loss, in that the economy is just that little bit more distorted! What a loser!

Furthermore, Mr. Lynn goes on to say that "In the energy industry, he limited price increases by Gaz de France, the country's state-owned gas utility, to 4 percent, instead of the planned 8.2 percent, in a bid to boost consumer confidence." Confidence? Confidence in what? That their finance minister is a meddling old fool?

As a result, "The Bank of France has just cut its economic growth forecast for this year from 2.5 percent to 2 percent. Gross domestic product grew 0.1 percent in the third quarter, and isn't expected to grow more than 0.6 percent in the fourth quarter."

This is in addition, I might add, to unemployment that is higher than 10% and inflation of at least 2.3%. Nice going, Sarkozy! Nice going, French buttheads!

- Captain Hook, which you gotta admit is a great name, has a new essay entitled "Commercial Short Squeeze Underway" He writes that "At the moment, we are working on a macro-oriented study that will blow people's socks off when they realize the future implications." And I jump up to my feet and say "Socks, schmocks! My Mogambo Macro-Oriented Study (MM-OS) will blow your whole freaking head off like you got hit with a grenade launcher! I snort contemptuously at your puny socks!" He ignores me, and like I wasn't even there goes on to write "Here is a glimpse into the future for you now, where factors such as price inflation in foodstuffs has been relatively subdued literally since the birth of modern US modeled finance, but where it appears technological gains in production are finally to be overrun by global demand side constraints, with the net effect being a potentially large catch-up move in prices commensurate to the monetary inflation that has occurred over the past 80 years."

The good Captain then proceeded to show a graph of inflation-adjusted corn prices, and man, oh man, it looks scary, which probably is what prompted him to include the phrases "coiled spring" and "there's no free lunch."

"Corn, along with the rest of the grains complex, is very cheap at present from a historical perspective, especially considering nominal prices are trading at levels seen in peak instances back in the 20's."

Not only did he give us a nice tip to start amassing some corn and grain futures, but he has also included, at no extra cost, a nice little Technical Tidbit, and reveals that "gold has a non-lagged relationship to the PPI." Which means that as commodity prices go up, gold will march along with them in lockstep. Nice to know!

- Chuck Butler, the currency wizard who writes the Daily Pfennig at, says "John Snow has signaled to the markets that there is no floor on the dollar," which shows that John Snow is not as stupid as he sounds. In fact, Mr. Snow sounds downright educated when he says, "The history of efforts to impose non- market valuations on currencies is at best unrewarding and checkered.''

- If you are cruising around the Kitco site, and take a look at the gold lease rate. The various durations of the leases were kind of tending down, until November 15, when the year-rate went bananas.

- Addison Wiggin, who is also one of the big shots from the Daily Reckoning and who could crush me like a bug with just the emanations from his powerful brain, is actually in China, and I assume that he is buying me a nice camera, and he writes "While haggling for a digital camera in Beijing's famous pearl market, a cohort on the trip threw down $200 in U.S. dollars, rather than Chinese yuan. The woman sneered in disgust. 'Those no good. No good here.' We'd had become accustomed to U.S. dollars carrying a little extra bargaining power, but not here. She wouldn't settle for anything in U.S. dollars, demanding remminbi, the people's currency, instead."

When a vendor in the street won't take your money because she deems it to be of little value, you know you are in trouble.

In the same vein, Peter Schiff of Euro Pacific Capital says that interest rates around the world tell an interesting story. For instance, interest rates on "Hong Kong dollars (another pegged currency) are now negative. The last time this happened to a currency was the Swiss franc during the 1970's, when people all over the world were fleeing dollars. In other words, depositors would rather pay to own Hong Kong dollars than get paid to own U.S. dollars."

There has been a lot of speculation that since "everybody" is so bearish on the dollar, that the market's natural perversity should mean that the dollar is destined to go up, instead. And so, maybe this is the perfect time to go long the dollar? The problem with that is that there must be some huge group of people who want to buy dollars! Would you?

- There has also been a lot of loose talk about oil going down in price in the future. I laugh! If you were an oil producer, would YOU lower the price of your product when the price is denominated in a currency (the dollar) that is falling in value? Of course not! And neither will they.

- Phil Spicer, whom I was going to refer to as "my friend and pal" with the hope that he would feel obliged to buy me a tall frosty one and maybe let me come over to his house and maybe, you know, I could sort of hide out at his place for awhile until things, you know, kind of cool down, and maybe we could send out for a pizza because that would be nice, too, But he says that he prefers to be addressed by persons of my ilk as "Chairman of Central Fund of Canada Limited, listed on the Amex as CEF and Co-Chairman of Central Gold-Trust listed on the TSX as GTU.UN". Well, not only is he good at putting worthless people like me in my place, but he is also somewhat of a whiz on the calculator, and writes, "$5.89 in 2004 dollars equals the purchasing power of $1.00 in 1966."

Seeing how that kind of mathematical wizardry stuff impresses the girls, I cannot resist putting on a little of calculator magic show of my own. With a flourish I whip out my calculator, and proceed to compute that this dollar devaluation works out to, ummm, 4.77% a year. So, anyone who invested a dollar in 1966 had better get back $5.89 just to break even, in terms of buying power. And that is before tax! And since the government is going to insist on taking at least a quarter of that gain, you had better have made a hell of a lot more than 5.89% on your money!

He notes that the Dow was at about 1,000 in 1966, and that "The DJIA closed at 10,549 on 17 Nov 04, equaling 1,791 in 1966 dollars. Thus, the DJIA has advanced by 79.1% over 38 years in constant dollars."

And what is THAT inflation-adjusted return? It is a real, inflation-adjusted annual gain of 1.54%! Hahahaha! Less than 2% real return a year! Hell, the government will take more than that away in taxes! Which only proves my point: You cannot make money in the stock market over the long-term, and you have to save like hell just to be able to break even after inflation and taxes eat your guts out.

He asks the rhetorical question, "A decline in the DJIA to 5,890 would be equivalent to the 1,000 in 1966. Might the dollar and DJIA be proceeding towards such equivalency?" Sounds right to me!

Then to show why he is an a highly-paid big shot and I am just another guy in the back of a squad car screaming that I am innocent-- innocent I tells ya! --he finishes up by saying "The fiat dollar is not money. It is a vanishing denominator !" Hahahaha! Very cleverly put, and, to top it off, no truer words were ever spoken!

- An article in the Boston Globe written by Steven Syre has the intriguing title, "Advice From A Bear: Panic". Well, whenever I come across a bear, I always panic, but I did not know that the bear was giving me that advice! So, curious, I read on, and it was only then that I discover that he is not talking about real, literal bears at all. He is talking about stock market bears, which are merely figurative. He writes "Jeremy Grantham, Boston's most famous investing bear, exudes a kind of reassuring calm when he tells you that he has seen the stock market's future, and it's a train wreck." The author then goes on to say that Grantham's actual words are "Our summary advice on an absolute basis is much more painful to deliver though shorter: PANIC. Now is the time to lower risk and survive to fight another day with your assets as intact as you can manage."

Grantham says the SP500 stock index should fall to 725, about a 40% drop from here.

- Jim Puplava, writing an essay entitled "The Perfect Option" has the same fears that I do. He writes, "The economy will vacillate between periods of deflation and inflation, with each recession bringing forth a temporary reprieve from what will be an inexorable rise in the general rate of inflation. Eventually wars, deficit spending, a rising mountain of debt, and peak oil will lead towards hyperinflation in the United States."

- Bill Bonner, the affable and big-brained top dog at the Daily Reckoning, writes that the USA is no longer wearing the white hats. "In a contest of David vs. Goliath, who takes Goliath's side? That is the trouble one of the perverse curiosities of this world: You go to all the trouble to get on top of it, only to amuse your friends by falling off." Hahahaha!

- John Waggoner, in a column in USA Today entitled "Giant Sucking Sound Is Inflation" which I think is kind neat, because what inflation does is to suck the buying power out of your money, and so the "Giant Sucking Sound" thing is kinda cool and it is a nice metaphor and I wish I had thought of it myself, which only underscores my complete lack of creativity, and now I am envious of this Waggoner guy, who probably says things like "Oh, you thought that 'Giant Sucking Sound' thing was creative and clever? Ha! I create stuff better than that every day!" But when I started reading the article, and my initial elation and admiration turned to something else. He makes the surprising statement that "The average person might not mind a shot of inflation. Higher inflation means higher wages, higher real estate prices - and, if you have a fixed-rate loan, stable mortgage payments." Why in the hell he brings up the fixed-rate loan thing is beyond me, because it has nothing to do with inflation, and the whole idea behind fixed-rate mortgage is that payments are stable. In fact, every payment is identical!

I could not sit still another minute. I shout out "Look! Over there! A UFO!" and when everybody turned and looked out the window, I jumped up on stage and grabbed that damned microphone out of his damned hand. I said, "For those of you who do not know me…" and they all said, "We know who you are, Mogambo! Now shut up and sit down! And we are sure you remember what happened to you the LAST time we told you to shut up and sit down, but you didn't!" and as it turns out I DON'T remember what happened the last time they told me to sit down and shut up but I did not listen, but I recall that I woke up a few weeks later with some nurse right in my face, saying "You were right, doctor! He did live! I owe you ten bucks. Now I'll bet he doesn't live through the night' which reminded me that I have got to upgrade my health insurance policy. But getting back to this inflation thing, let me tell you and this John Waggoner fellow that his "average person" is NOT going to like anything about inflation. They never have, and they never will.

He further says that if you want to keep ahead of inflation, you should consider TIPS bonds, which I am here to tell you may not be such a hot investment, as their rates lag inflation, and they also use the government's calculation of inflation to set the interest rate on those bonds, which is all lies.

There was also an article in the Washington Post entitled "Upside of a Down Dollar" but I did not read it, since they wanted me to provide my identity before I was allowed to read whatever the hell it was that they wrote, and you know that The Mogambo doesn't give out any information to anybody unless I need something badly or they have the power to do something awful to me, and then only grudgingly. But it must have been a very short article, because there are not many things that stem from a "down dollar", unless you are a masochist.

- The Islamic Mint is issuing the Islamic Gold Dinar again. The gold coins are available in the United Arab Emirates and the Dubai Islamic Bank. The coin is 4.25 grams of 22 carat gold.

If the Muslims wanted to rule the world, all they would have to do is to insist on being paid for their oil with these dinars. The sudden demand would increase the price of gold, and so they would make money as their money went up in price! And with every new barrel sold, they would increase the demand for gold, which would drive up the price of their dinars some more!

Maybe I have said too much. If you are a Muslim oil producer, forget I even said anything.

- G. Lammert, who is a guy who appears on the site, writes "The overriding factor - the overriding factor- in a contracting credit system that makes the fractals so precise is the enormous debt that burdens the US and world credit system at this point in history- debt that must be serviced or attempted to be serviced. In the US there is an estimated 37-40 trillion dollars in financial, corporate, private and governmental debt. At an average of 5 percent interest this represents an annual debt service load of 1.8 trillion dollars in yearly interest payments in an economy growing only by 0.35-0.4 trillion dollars annually." So interest payments are five times total growth? And somebody thinks this is sustainable? Hahahaha!

From a slightly different perspective, the Daily Reckoning folks write, "On the surface of it, a modest 10% decline in the dollar would mean a loss of some $15 trillion - or more than the total GDP of the United States...and more than 30 times all the profits of all the publicly traded companies in America."

- In the Boston Herald, a writer named Brett Arends has written "Economic 'Armageddon' Predicted." He writes that, "Stephen Roach, the chief economist at investment banking giant Morgan Stanley, has a public reputation for being bearish. But you should hear what he is saying in private."

What is he saying in private? He is predicting that, "America has no better than a 10 percent chance of avoiding economic 'armageddon.' I say it is less than that. A lot less.

- Alert reader Jim E. sent me a New York Times article by a guy named James Surowiecki, who has written an interesting article entitled "Why Gold?" Jim thought the guy was the "dumbest SOB that ever lived" and of course I was excited to hear about a guy who was a bigger and dumber SOB than me! So I go to the link that Jim provided, and was sped, straightaway, to the very article to which he referred. In my mind I hope the guy really IS a bigger bastard than me, and so I am mentally shaking the guy's hand and inviting him over for dinner so that I can prove to my wife that I am NOT the biggest dumb bastard in the whole world, and in fact, here is a guy right here who is! That ought to shut her up!

I never heard of this Surowiecki guy, and I assume that it was some dumb filler by a new intern or something, but it was an interestingly told, but old story, with a distinct bias, about how gold is just a metal, and when you buy metal you are not investing in plants and machinery and production, and how gold is the ultimate in speculation and blah blah blah. He deems belief in gold as "a testament to the tenacity of popular delusion. What is gold, after all? Strictly speaking, it's a commodity." Well, duh! He then goes a step over the line when he dismisses me, as "Gold bugs are classic cranks". Although he did not mention me by name, if you read between the lines you could easily tell that he WAS talking about me! The bastard! So now there's ANOTHER name I have to add to the Mogambo Official Enemies List Of Official Enemies Of The Mogambo In List Form (MOELOOEOTMILF), because that is just the sort of over-the-top, bizarre and vaguely homicidal over-reaction that is so typical of my behavior here lately, probably as a result of my being freaked out of my mind.

The dispiriting thing is that he makes some valid points about gold. For example, "Gold's buying power has plummeted," he says. "In 1980, ten ounces of gold would have bought you a nice car. Today, it would get you a nice bike." I don't know where he buys HIS bikes, but around my house we don't spend $4,450.00 for no stinking bike, especially when there are so many perfectly good free bikes just sitting, abandoned, in neat little rows next to schools and playgrounds! Weird, huh? (I figure it is part of some space alien thing or another. My warning is "Watch the bikes!") But I am not going to begrudge the guy just because he can afford fancy-schmancy bikes while I am on this pink My Little Pony bicycle that is four sizes too small for me, but which does have this handy little white plastic basket in front, and featuring a smiling pony with a rainbow-colored mane.

But with a slightly different perspective, Peter Brimelow and Ed Rubenstein, of, write, "The remarkable thing about gold is that really has been a store of value. Adjusted for inflation, a dollar invested in gold in 1801 has fluctuated around about a dollar ever since. For now, the point is that, on the evidence of these charts, gold is hardly overvalued." And from the look on The Mogambo's face and the way he is pounding the table trying to convince you to buy gold, gold, gold, and silver, silver, silver, and oil ,oil, oil, there is also some evidence that gold is waaayyyy undervalued. Both these guys are saying so! And while we are talking about it, so is silver, which has the most compelling fundamentals of any asset on the planet.

But even Mr. Surowiecki admits that "So there's a little bit of the gold bug in all of us." Then he goes into the very reason to own gold, "Still, in a world of 'swaptions' and strips, gold's allure is increasingly atavistic. The idea of gold as a platonic currency, universally valuable across time and space, reflects a basic distrust of markets, a fear that in a world of paper money wealth is just an illusion" Yes! Yes! That's it exactly! Fear and illusion and distrust! And don't forget treachery and bankruptcy and ruination! That's the whole lesson of history of economics! And if Mr. Surowiecki doesn't like it, then that explains perfectly why he is writing in a Leftist newspaper, parroting the typical Leftist dogma that governments are to be trusted, and that the Founding Fathers were wrong when they insisted in the freaking Constitution itself that money shall ONLY be silver and gold! The guys who participated in the American Revolution and created the freaking government did not trust government, for God's sake!

Now everyone is looking at me and quietly arming themselves with baseball bats and those damned Tazer zappers because they can tell that I am getting pretty wound up here, and those little tattletale machines I am hooked up to are all going "beep beep beep!" With a mighty effort, a Mighty Mogambo Effort (MME), I calm myself down, my brawny chest and broad shoulders (or is that broad shoulders and brawny chest?) heaving mightily, and I take a deep breath, flip the selector to full-auto and shoot off a clip of expensive bullets into a bush that is acting strangely. He goes on to say "For gold bugs, paper money turns us all into Wile E. Coyote-we're running on air, and we'll plummet once we look down and realize there's nothing holding us up. The gold bug's apocalyptic mentality maintains that someday the global economy will look down and the result will be chaos. Gold is the only thing that will still be valuable after the bottom drops out." Yes! This is it! Get this Surowiecki on the phone! Ring ring ring! Damn. Nobody home, and he forgot to turn his answering machine on. So, if you see this guy, tell him that the Mogambo says, "Yes! Exactly right. Mr. Surowiecki, if that IS your real name! This is the reason that people own gold! And it is the reason that ALL thinking people eventually own gold, too, because all that stuff you talk about is what WILL happen, not only to Wile E. Coyote, but to us, too, because that is what DID happen ALL the other times in history, and that is why I am so sure that it will happen again, just as sure as I am that a fat dog will eat a hamburger!"

He sums up with "One could say that gold is the biggest, most durable bubble in history. Someday, even this one may pop." To that he is also right. But that day is a long way off, as we have not even gotten a good start on paying penance for the economic sins that we have committed, a particular circumstance for which gold is particularly suited.

And we committed these economic and financial sins against our own Constitution, against the Laws of Economics, against all of economic history, against common sense, and against the wishes of The Mogambo, all of which proves that we are a monumentally-stupid race of people. And if you examine the Laws of Nature, you will notice that she is not kind to the stupid. In short, we deserve to be eaten so that others, who are more economically fit, from a Darwinian perspective, may survive. And then, Mister Smarty Pants journalist, what are YOU going to do?

For the last 5,000 years in a row, all the people who needed an answer to that question always came back to gold, because there IS nothing else. But many will come to appreciate that fact too, too late. Ugh.

*** The Mogambo Sez: Just when you think it can't get more bizarre or twisted, it does. And if gold does not go up in response, it is a buying opportunity.
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