Confessions of a Silver Optimist

The historical high for silver was set 531 years ago in 1477, topping at (using the purchasing power of 1998 dollars) a princely $806 an ounce. By comparison, the price of silver less than $19 an ounce today. Thus, investing in silver is what the Mogambo calls a "no brainer".

There are signs of stupidity and panicky desperation everywhere, such as the Dow Jones Industrial Average index going up last week when earnings fell to $132.14 from $146.15! Earnings went down, but the shares went up because there were more buyers than sellers! Hahaha!

If you think that the fall in earnings to $132.14 from $146.15 is a lot, then congratulations! You are right! It is a huge loss of 9.6%!

So, earnings fell almost ten-freaking-percent, yet the underlying stocks went up? Hahaha!

I know what you are thinking, as I am thinking the same thing; we can use this to show our supervisors that we are valuable employees because in producing losses, we make the company more valuable! Therefore, we deserve a raise! A big raise, instead of being placed on Probationary Status!

And we, as valuable employees, are sick of having to park on the other side of the parking lot, and want nice spots right up front, too!

Deep down, you know this is not going to work, but stocks astonishingly rising after they start making less money is a fact. And so faced with such a paradox, you look around to see if you are in a bar somewhere, which would explain why you are so drunk out of your mind that you have misunderstood something important. But you are not, and immediately you then think, "I have had another medication error, or a stroke or something, because nothing makes sense anymore! Stocks are going up when their earnings fall!"

In case you are not impressed with a 10% fall in earnings, maybe you will be impressed that as a result of earnings falling and prices going up, the price-to-earnings ratio is now a stunning 87, when the long-term average P/E for stocks is about 12, and where stocks usually top out at a P/E of about 21! Hahahaha! Who are these idiots buying these stocks?

Of course, a little of this buying had to do with some panicked short-covering as lots of guys looked around and saw that the government’s frantic search for a scapegoat for our economic troubles are, with some justification, looking at the flagrant abuses in short sales, and being short could mean A Bad Day at Black Rock.

Perhaps as a result of all of this corruption and stupidity, I never seem to tire of thinking about silver, and thinking about ways to get some more silver, and how I don’t have any money to buy any silver unless I cut back on the food that I feed the kids (I can’t eat that cheap, nasty crap myself; it makes me sick. But it’s obviously okay for them! I mean, they’re still alive, right?), or get them jobs in some illegal sweatshop by making them pose as illegal immigrants willing to work for less than minimum wage. Or both!

But the wife says "no" to that fabulous plan, and to many MORE other Mogambo Good Ideas (MGI), too. And that kind of constant negativity is why I would love to just get the hell away from all of them and their ceaseless, selfish, suffocating demands, like, "Please come to my birthday party, daddy!" and, "Just tell us that you love us, daddy!" Ha! All I need is some silver, so when it finally explodes to the upside, it’s "Sayonara, chumps!"

And while I don’t know when that will happen, I do have an idea how high silver will get in price. The historical high for silver was set 531 years ago in 1477, topping at (using the purchasing power of 1998 dollars) a princely $806 an ounce. By comparison, the price of silver less than $19 an ounce today, and was only about $5 an ounce in 1998, after having bottomed at under $4 an ounce in 1992.

Now, fast-forward to today as our 2008 dollars, which have fallen 50% in purchasing power since 1998, means that the all-time high price for silver, set in 1477, now stands at $1,012 an ounce, measured in the buying power of 2008 dollars! Over a thousand dollars an ounce! For silver! Whee!

In case you ain’t noticed, we’re unmistakably coming off the lows of a 530-year bear market in silver and, theoretically, entering a long bull market, which ought to be exciting to people who have a lot riding on silver gaining so much in price (me), or even just keep up with this kind of thing, like, for instance, Israel Friedman, writing at InvestmentRarities.com, who notes that there are 5 billion ounces of gold sitting around someplace in the world, but that there are only 2.5 billion ounces of silver, even though 5 times as much silver is mined every year than gold.

Therefore, silver is being consumed at prodigious rates, which is why Mr. Friedman says, "Silver is needed to maintain and improve future standards of living. Gold is needed for luxury and emotional reasons. Silver is for the optimist, gold for the pessimist."

In that optimistic vein, Mr. Friedman says, "I honestly believe that silver must eventually sell for five to ten times what the price of gold may be."

And that is just the kind of profit that I need! Whee!

Until next time,
The Mogambo Guru
for The Daily Reckoning
July 28, 2008

Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter – an avocational exercise to heap disrespect on those who desperately deserve it.

The Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning and other fine publications.

Readers unfamiliar with modern macro-monetary theory would probably like to stay that way.  But that doesn’t stop us from limbering up in order to pitch the system at you.

Last November, Wachovia Bank of the Tar Heel State was worth more than $100 billion.  Two weeks ago, it was worth $20 billion – after confessing a loss of more than $8 billion in the second quarter.  Buy yo ho…last week it was back up to $37 billion.

What’s going on?  Well, many people will tell you that the banks are coming back.  Don’t believe it.  The boom in finance is over, as the vast majority of our speakers at last week’s Agora Financial Investment Symposium pointed out. Two more banks failed over the weekend – First Heritage of California and First National of Nevada.

In his speech at the Symposium last Tuesday, The Rude Awakening’s Eric Fry quoted Charlie Munger, vice-chairman of Berkshire Hathaway:

"Include me out. A lot of rot has crept into the financial system…we’ve got plenty of scandals coming."

Even the survivors will never recover to the glory-days levels they had a year or two ago.  That doesn’t mean they won’t have some spectacular bounces.   As they say on Wall Street, even dead cats bounce.  But it will be a very long time before the big banks enjoy the kind of profits they made back in 2003-2007 – when they made billions by lending to people who couldn’t afford to pay it back.

Let us explain how the financial industry worked.  A guy borrowed some money from some other guy who borrowed the money from some other guy who borrowed the money from the Fed at a lower rate than the going rate of consumer price inflation.  Then, the lender booked a profit on the transaction and paid himself a bonus…while selling the loan on to someone else, whereupon both of them booked a profit and paid more bonuses.  Then, the loan was packaged up with similarly infected credits, rated AAA by Moody’s, and then sold on again – and again, everyone involved in the transaction, including the cleaning lady, booked a profit and got a bonus.

"The leveraged stupidity of the last few years was perpetuated by the ratings agencies," Eric explained to the 800+ attendees, "They wanted to quantify things that are unquantifiable. People did not really know what they were getting themselves into."

In the four years leading up to the credit crunch Wall Street’s big banks paid themselves $250 billion in bonuses.  It didn’t seem to matter to anyone that the source of the wealth was largely a swindle…and that real profits would never be realized.  Now, the banks are writing off the bad loans…and turning to the taxpayer for a handout.  But no one has offered to return a bonus, as far as we know.

Of course, this is just the genius of modern Anglo-Saxon capitalism – the most capitalist institutions pay out their capital in bonuses.  Then, when they get in a jamb, they turn to the taxpayer for relief.  Of course, the taxpayer spent all his money too.  He’s lucky to be able to fill his gas tank – with a credit card!  Which is why Hank Paulson is so eager to deceive the world.  He knows that if the foreigners ever catch on to what a scam the United States is running, they’ll stop lending it money.  And then, Wall Street, Washington, and the lumpenconsumer himself are all up the creek.

"The common thinking among Americans is comparable to wearing a string bikini on a polar ice fishing expedition," quipped Eric, "look good until you perish."

"It’s time to sell risk and buy caution."

The average lumpenhouseholder is getting whacked coming and going.  Inflation smacks him on one side…and a deflationary slump wallops him on the other.

Page 3 of the weekend Financial Times presented two headlines:

"EDF raises electricity prices 17%" said one.

"Economy now contracting, analysts say," reported another.

How can a giant utilities company raise prices during a slump?   Foreclosures are running at twice the rate of a year ago.  And homeowners are finding it harder and harder to refinance.  With mortgage rates rising and house prices falling, only 3% of homeowners qualify for refinancing, according to one estimate, as compared to 30% a year ago.  House prices have fallen 10 months in a row.  They’re down 18%, according to Case/Shiller.  And they’re only about half the way to where they’re going.  That’s Nouriel Roubini’s guess.  He says that ultimately, credit-related losses will swell to between $1 and $2 trillion, and that a recession will last at least a year.

The big market news last week was the fall of the price of oil.  It fell to $122 by Friday.  Has the black goo topped out?  Maybe.   But as we explained, the bubble in oil is not like the bubble in tulip bulbs or dot.coms.  Oil is probably the most essential commodity in the modern world.  And as near as we can tell, the number of people who want it is going up, while the amount of it readily available for sale is going down.  It might go up.  It might go down.  But it’s not going away.  And when all is said and done, the real price for oil is likely to stay higher than it was before 2003.   Which is why utilities are raising rates…and airlines are losing money.  They were hoping oil prices would quickly abate.  They haven’t.  And they probably won’t go down too far – even if the peak has come and gone for this cycle.

The whole world bobs on a frothy sea of cash – which makes it hard to know what anything is really worth.   The dollar rose a little last week – but at $1.56 to the euro, it is hardly what you’d call a "strong" currency.

Still, Treasury Secretary Hank Paulson says a strong buck is "very important" to the United States.   The top man at Treasury understands how dependent the United States is on the kindness of strangers with familiar money in their pockets.  There’s some $13 trillion outside the U.S., says Jim Rogers.   And the Gulf States alone are adding to their pile of cash at the rate of $1 billion per day.   If these foreigners ever decided to dump the dollar…there would be pandemonium in the currency markets.  The dollar would collapse…and the United States would be unable to borrow the money it desperately needs in order to continue living beyond its means.

*** Our Lufthansa flight from Vancouver to Frankfurt was cancelled.  "That’s only the second time that’s happened in four years," said the clerk.  Eventually, we made it onto a flight to London.  Then, a strike by ground staff in Paris delayed our departure another three hours.  When all was said and done, we got back home a day later than expected.

"I hate flying," said a colleague.  "When I was young, I used to look up and see airplanes and wish I was on every one of them.  Flying was an adventure.  And they treated you so well.  I remember flying on PanAm many years ago.  They treated you as though you were an important person.  But now, it’s a nightmare.  Waiting in lines.  Getting searched…screened…questioned.  I’d rather take the train."

In America, taking the train is tough.  There aren’t many.  But James Kunstler is sure there will soon be more.  Mass transit, he believes, will be forced upon us by the price of energy.

We’re not sure trains really use less energy than automobiles.  By the time you get people to the trains, have them wait, build the train itself…and the rails, employ ticket takers and engineers, and so forth, saving energy is no sure thing.   Then too, trains do not always operate at full capacity.  It may be a waste of energy to have a single commuter in an automobile.  But imagine a train with a single passenger!

In a free market, we wouldn’t have to worry about such things.  The price would tell us all we needed to know.  The more energy intensive a form of travel was, the more it would cost.  But with so many government subsidies, price controls and regulations in place, price alone no longer gives you a clear picture.

Nevertheless, our guess is that rail travel is going to make a comeback in the United States – for other reasons.  We suspect that the U.S. government is going to want to spend a lot more money.  Already, we’re estimating deficits as high as $1 trillion in the coming Obama administration.  We’re in an advanced phase of empire.  The mobs want bread and circuses.  That’s why Obama is so popular – people believe he is more ready to give it to them than the cranky, old McCain.

But even $1 trillion deficits won’t be enough.  Here’s what is happening: the consumer economy is rolling over…because the consumer is rolling over.  As he realizes that he has no money, the consumer must cut back.  This will cause a big drop in demand…leading to a big drop in sales, output, earnings and employment.  A recession, in other words.  And since the consumer has gotten himself so deep in debt over so many years…and since he now faces the stage of his life when he most needs savings…this consumers’ strike will go on for a long time.

If the consumer doesn’t spend, who will?  There are only three broad possibilities.  Either the consumer does it, business does it, or government does it.  If the consumer turns his back on the heavy lifting, it’s up to business or government to spend.  Business?  What business is going to expand in the face of a major consumer pullback?   That leaves it up to government.  Of course, the government has no money.  And spending more – when you are faced with a $1 trillion deficit already – is almost suicidal.  But when the mobs yell for more bread…and more circuses…the government obliges – especially when the pols can hand out juicy contracts to friends and contributors.

What will government spend money on?  Health care…certainly.  War?  Yes, but people are getting a little wary of war.  Infrastructure?   Of course!  Who will want to oppose huge new infrastructure spending?  It will put people to work, they’ll say.  It will make the country "greener."  It will save energy and contribute to U.S. independence.

Whether a massive infrastructure-spending program will do any of those things is doubtful.  But one thing it will do is sure – it will help bankrupt the nation.

*** Getting back to air travel…the trip over Canada was a pleasure.  The sky was clear.  We were sitting next to a window and spent hours looking out.

First, we flew over the coastal range…with white capped mountains…valleys and turquoise lakes.  It was breathtaking.  We wanted the plane to land so we could get out and have a close look – it was so beautiful.  We crossed a wide valley, with green fields, some yellowish green – probably rapeseed – and others darker green.  Then, the Canadian Rockies rose up like jagged teeth…red in the evening sun, as if they had just eaten raw meat.   If a giant meteor ever collides with the earth, we hope it hits here.   These mountains will chew it up.

More tomorrow…

Bill Bonner
The Daily Reckoning