A Big Ol'Dumpola

The Mogambo Guru gives his dog a stool test…and discovers a big pile of steaming dollars!

The consumer price index for July went down by 0.1%, said the Labor Department. "The consumer price index was up 3% from July of last year," reported Bloomberg. "Excluding food and energy, it rose 1.8% from July 2003. The core rate, which excludes food and energy, rose 0.1%."

"So far this year, consumer prices are rising at a 4.1% annual rate, compared with a 2.1% increase at the same time a year ago," added Bloomberg. "Core prices are rising at a 2.4% rate, up from 1.3% in the first seven months of 2003." So prices are rising now.

"Energy prices, which account for about a 14th of the index, fell 1.9% in July, the first decline since November, after a 2.6% increase the month before."

So the Saudis and OPEC and Great Britain and Yukos and all the other producers of crude oil just have to pump their little hearts out and the price of oil goes down! Wow! Who’d have figured? But with refining capacity running around 95%, who is going to turn that icky black goo they all pump into premium high-octane go-juice for my car with the giant V-8 engine?

Impoverishment: More and More Oil

Now, and follow along carefully here, because this is the crux of my New Mogambo Plan (NMP): All the oil producers have to do is gradually pump more and more and more oil! See how easy this stuff is? But before you start clapping me heartily on the back and congratulating me on formulating this brilliant, brilliant plan to make the price of oil go down, let’s take careful note that the price of oil is up 14.3% over the last 12 months.

On another sour note, consumer spending grew again last quarter, but it grew at the weakest pace in three years because sales of autos and other durable goods slumped.

So let me get this straight: Energy prices and commodity costs are all higher, and a lot higher in some cases, and yet producers are not raising prices enough to cover these higher costs? So they aren’t making as much money? And yet people are buying and bidding up the shares of these companies? Yow! What am I missing here?

The worst news, in my book, is that the average weekly earnings of U.S. workers, after adjusting for inflation, rose 0.7% in July, after falling 0.8% the month before. This was the first increase in six months. So, at the end of the day, inflation is eating up the wage gains of the workers! Fabulous. Just freaking fabulous. It just gets better and better! I can only imagine with horror the declines in the real and imputed incomes of those who are, in effect, wards of the states and the federal government!

So everybody is getting poorer in real, inflation-adjusted terms.

Impoverishment: Incompetent, Mental-Defective Charlatans

And now I probably have to listen to another witless lecture about how Alan Greenspan and the Fed are NOT incompetent, mental-defective charlatans, and how it is a Good Thing (GT) that people are suffering falling standards of living, and how this is actually the earmark of successful monetary management or something.

Fred Sheehan, in his essay "Impoverishment: Then and Now," hits the nail on the head when he says, "The methodical impoverishment of the American people, particularly those who are living on the edge, has been one of the few U.S. government success stories."

Martin Weiss, of the Safe Money Report, took a look at the trade gap and said, "It JUMPED by a whopping 19% to $55.8 billion – the single biggest increase in five years…and the largest trade gap ever recorded in history."

So dimming the lights in the room, I turn on the slide projector. Instantly, the screen is ablaze with a photograph of my dog taking a big ol’ dumpola on the lawn in the backyard. I say, using a professional-sounding voice-over, "But the American economy is a huge, festering glob of government spending and monetary inflation, and represents a third of global GDP. As a result, piles of dollars are piling up all over the place."

Impoverishment: Good News/Bad News

With that, I click the button on the slide projector, and in a series of perfectly apt slides, I photographically present a sweeping, panoramic view of the whole back yard, and there are piles of "American dollars" everywhere! And if you look closely, in the one slide you can see my neighbor, Mrs. Kravitz, peering over the fence, still bitterly complaining about the smell of all those reeking piles of "American dollars." She is making a really rude gesture, just like she always does.

So you can bet your sweet butt that, to the rest of the world, our trade deficit is a good news/bad news joke. "Hey, the good news is that we sold more stuff to Americans. The bad news is that after inflation and getting paid in a devaluing currency, we ended up losing money! And by the way, whose damned dog is leaving these stinking piles of American dollars all over the place?"

Of course, as we have previously discussed, the world is divided into two kinds of people. There are, on the one hand, those guys who delight in cracking jokes like – "The Mogambo will be delighted to pick up the check!" and there are the people who say equally stupid/insanely ridiculous things like, "The price of energy doesn’t matter," or, "Deficits don’t matter," or, "The price of food doesn’t matter," or, "The trade deficit doesn’t matter." All of these things are, of course, wrong.

"As America’s external imbalance widened in mid-1987," said an analyst, whose name I can’t remember because I got my medications mixed up, "the dollar came under sharp downward pressure and U.S. interest rates were pushed higher. Those were the classic manifestations of a current account adjustment that many (myself included) believe were at the heart of the stock market crash of October 1987. Today’s external imbalances dwarf those of 17 years ago."

Need I say more?

Regards,

The Mogambo Guru
for The Daily Reckoning
August 23, 2004

People seem to think they get richer by selling their houses to each other…so do economists believe they get richer by setting fire to their houses so they can build them back up.

"Stimulus…" they say.

"Arson…" we reply.

When people reach the top of their optimistic delusions, everything that happens is cause for celebration. Back in the late ’80s, for example, when Japan was riding high, even an earthquake in Tokyo was interpreted as good economic news. It would provide a "stimulus" for rebuilding, said analysts.

Now, it is Americans who are delusional. In yesterday’s New York Times, even the soaring price of oil was reported as good news. An oil shock might provide much needed "economic stimulus," said the paper.

Stephen Roach notes that every previous oil shock was followed by recession. You don’t have to be an economist to figure out why. When people spend more for energy they must spend less for something else. Overall, spending goes down.

But along come the "all news is good news" analysts, and all of a sudden higher oil prices – along with war, pestilence, drought and traffic accidents – are "stimulating."

The logic of it is that catastrophes need to be corrected. After a war, for example, people get back to work rebuilding houses, roads and train stations. But they do not do so with nothing. They only do so by diverting resources – people, machines, energy – from other activities. In other words, they have to give up something, actually lowering their real standards of living in order to free up the resources. After a calamity, people typically scrimp and save…and work like galley slaves…in order to get back on their feet. That’s what a recession is, too…an interlude in which consumer spending goes down while people put things in order.

Oil is now heading towards $50 a barrel…and the U.S. economy is probably headed for recession. And, yes, it should be very stimulating…but not in the way most economists think. Higher oil prices should stimulate people to add insulation to their houses…or to buy a more energy-efficient automobile. If they had savings, this could give a boost to the economy. But since they have none…it is just another thing that must be financed by borrowing from foreign lenders…and another milestone along America’s road to ruin.

More news, from Baltimore…

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Tom Dyson, from the "gem of the Chesapeake…"

– Could this guy be the most shameless man in America? We couldn’t believe he was actually trying to sell the stuff, but that’s what it seemed like. His car radio was at full volume, and all his windows were wide open…

– Pine Ridge is one of the most scenic golf courses your editor has ever played. Cut into a pine forest and set along the edge of a reservoir, the view from the golf course was so stunning, it could have been made into a jigsaw puzzle. Your editor was at the driving range – with Porter Stansberry and James Boric – blithely slicing golf balls into a herd of grazing deer. Suddenly the tranquility was shattered…

– "Maybe you’re experiencing early sexual decline, or you’re at increased risk of sexual dysfunction," suggested the man on the radio. A gray-haired octogenarian was driving slowly past the range, turning heads with the loud commercial. Why was it turned up so high? Was the old man deaf…or did he want us to hear? "Are you experiencing a premature decline in sexual function, often called ‘stage 2 erectile dysfunction’? If so, you are not alone…"

– "Fortunately, there is a solution. It’s called Enzyte. Enzyte contains a proprietary blend of natural ingredients designed to improve the quality of men’s erections." This ungodly racket was drawing wry smiles from golfers all around. "Enzyte is nonprescription and contains quality, nonsynthetic ingredients. With Enzyte, you’ll have more confidence, improve size and increase stamina – all of which will make you happier and more content as a result."

– Much like the old stud’s wife, hedge funds have taken a bit of a pounding recently. About three months ago the influential Forbes magazine called hedge funds "The sleaziest show on earth." They accused the funds of being "rife with exorbitant fees, phony numbers and outright thievery." And last week Pimco’s Bill Gross did much the same, criticizing the "risky" deals and high management fees.

– So with hedge funds really taking the brunt of bad publicity, are investors being put off?

– It would seem so, as figures out on Friday suggest hedge fund returns may have fallen about 0.5% for July. This follows falls in both April and May. Hedge Fund Research, a Chicago-based data provider, says hedge fund income eased to $7.5 billion from April to June – in comparison to the average $21 billion in the previous four quarters. But is this finally well-deserved justice for those greedy fund managers?

– Oh, stop sniping from the sidelines, says MoneyWeek’s Tim Price. Yes, management fees for hedge funds could reach 2%. And yes, performance fees may be up to 20% – but it’s largely a question of net performance.

– Price reckons he’d be happy to have after-fee returns of 10% per year, rather than after-fee returns of minus double digits from the traditional managers. As for the "thievery" that hedge funds are accused of? Well, more than 30 mutual funds are currently being investigated by the SEC and other watchdogs. Ah, but those hedge funds are still unnecessarily risky, the analysts reckon.

– Not so. Look at the S&P 500 index, for example. The index saw annualized volatility – a measure of risk – of 15% from 1990 to 2004. Yet the HFRI Convertible Arbitrage Index, which tracks hedge funds, could only report annualized volatility of 3.4%. But despite this, everything’s not creamy in the land of the hedge fund.

– Hedge funds need volatility – something we’ve certainly not seen a lot of in the markets since April. But while we may be lacking volatility, there’s a lot of doubt around. There are U.S. interest rate doubts, surging oil price concerns, Iraqi fears and worry regarding a slowdown in the Chinese economy.

– Oil came pretty close to breaching the $50 mark on Friday, with U.S. light crude trading up to an intraday high of $49.40 a barrel before "dysfunction" kicked in and prices tumbled $1.10 to $47.60. The welcome slide in oil prices set off a relief rally on Wall Street…the Dow ended up 69, or 0.7%, at 10,110. The Nasdaq gained 18, or 1%, to 1,838. The S&P added 7 points to 1,095.

– "Hedge funds have never been good at managing transition phases in financial markets," Partners Advisers’ Luc Esterne said. "Going forward, hedge funds need volatility, and it will come with a good or bad surprise." And without this volatility, things have been rather stagnant in hedge fund offices.

– Hedge funds have only made year-to-date profits of around 2%. And the rivals? Well, benchmark indexes have done considerably worse, currently showing losses of around 6% in London and New York. In fact, hedge funds have done exactly what they’re meant to – they’ve made absolute returns in a bad market.

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*** America’s boom peaked out in the year 2000. New evidence from the IRS: "The overall income Americans reported to the government shrank for two consecutive years after the Internet stock market bubble burst in 2000, the first time that has effectively happened since the modern tax system was introduced during World War II, newly disclosed information from the Internal Revenue Service shows…"

*** Ooh la là…America’s attention is taken up by a curious and sordid spectacle: an argument over John Kerry’s war record.

Was Kerry a hero or a war criminal? By some accounts, Kerry’s heroism amounted to little more than chasing after an unarmed teenager in a "loincloth" and shooting him in the back.

But we are not about to judge the man. We weren’t there; nor have we ever been in a shooting war. We do our best to avoid them.

We take it for granted, though, that when you set out to kill a lot of people, you can’t be too careful about who ends up dead. Mistakes are always made. The difference between war and other activities is that mistakes in wartime are deadly. Which is why men with any sense don’t go to war unless they have a very good reason…and why both candidates for president are unfit for the role of commander in chief. Neither has the necessary apprehension…the proper respect…or the appropriate disgust for killing people.

*** A reader comment on buying stocks:

"For a long time, my investment philosophy has been best summed up by one of the more memorable film lines in recent years: ‘Show me the money.’ When I invest in a company, I expect to get a real, regular, dependable return – usually in the form of a dividend, or, in the case of an income trust, a distribution. In fact, I try to find companies with a history of increasing dividends! Why else would I want to buy a useless piece of paper otherwise known as a share certificate? If I’m buying a piece of the company, I want a piece of the profits.

"Of course, my friends think my investment ideas are old- fashioned and out of style. They assure me that the best strategy is to go for ‘growth.’

"Funny thing though, most (all?) of my friends lose money consistently; I make money pretty consistently. Not only that, but my dividend-paying companies seem to outperform their growth companies with amazing regularity – even in terms of ‘growth,’ although that’s not my objective.

"Show me the money, and throw in a little gold (real money) while you’re at it."

*** And another:

"This is just a response to Mr. Bonner regarding the chap who is in love with Farmington [New Mexico]. I’ll just say that I have no such feelings for this place. Granted, I’ve lived here a mere eight months now; but this place SUCKS. New Mexico is NOT the Land of Enchantment, but rather of Entitlement. I can’t wait to move."