Fictitious Beneficial Inflation

Apparently the United States is not the only place where inflation is running rampant. All around the globe, inflation is bearing down like a storm that doesn’t show any signs of stopping. And sadly, there is one government that seems to be welcoming it with open arms. The Mogambo Guru ponders this curious phenomenon…

Doug Noland quotes Krishna Guha in the Financial Times as reporting, "In almost every corner of the world inflation is uncomfortably high, creating a giant headache for policymakers as they grapple with the threat to growth from the turmoil in global credit markets."

As an example, he cites various places as the source of things like, "In October consumer prices rose at an annual rate of 3.5% in the US, 2.1% in the UK and 2.6% in the eurozone – where November showed a jump to 3%. German inflation is at its highest in more than a decade. Prices are also gaining at an annual rate of 6.5% in China, with rapid increases in other emerging markets too. South African food prices rose more than 16% in October from a year earlier, a bigger jump than official figures show."

I am impressed to read that "the culprit" is identified; it’s the same culprit as it always is, namely the battle between supply and demand, as "rising food and energy costs, underpinned by surging demand from those fast-growing developing countries."

The Really Weird, Weird Part (RWWP) is that the article continued, "An intense debate is under way in central banks across the world as to whether the recent rapid rise in food and energy prices will continue – and what, if anything, they should do about it."

Naturally, this news that central banks are unsure what they should "do" about soaring food prices, "if anything," makes me scream in outrage! I don’t immediately jump to my feet, as it take a few seconds for the appropriate amount of boiling anger to build up, especially considering that these selfsame stupid central banks are also ignoring soaring prices of every kind, and the amount of anger that is rising up in me is huge, like searing magma in an erupting volcano.

Horrified that I am getting upset, Mr. Noland quickly jumps in and says that Bloomberg also reported that, "European producer-price inflation accelerated in October to the fastest pace this year, boosted by a surge in energy costs and the biggest increase in food prices in at least 15 years. Factory-gate prices increased 3.3% from a year earlier, the most since December 2006, after rising 2.7% in September."

I took the news like I take a punch to the jaw; I cried and whined, and starting begging for him to stop or I’d tell my mommy. No such luck, as he went on tormenting me by saying that Bloomberg also reported that, "Russian consumer prices rose more than expected in November as fruits and vegetables became more expensive. Prices gained a monthly 1.2%, compared with a gain of 1.6% in October… Consumer prices rose 10.6% in the year to date." Yikes!

Let me get this straight; grumpy Russians, in the midst of a gloomy winter, are experiencing inflation in food prices of 1.2% in a month? And prices are up 10% in the last 49 weeks, meaning that prices are still rising like a rocket? Yikes!

Let me amend that as saying that not only are the Russians grumpy, but their government is a clot of halfwit lowlife scumbags, just like the USA and almost all of the other governments in the whole freaking world, as Bloomberg has someone named Maria Levitov reporting on this Russian thing, and her name sounds Russian, so it must be true, that the Organization for Economic Cooperation and Development (OECD) concluded that "The Russian government’s ‘massive additional spending’ this year is pushing up inflation that is set to exceed the central bank’s target ‘by a wide margin.’"

My Tiny Mogambo Brain (TMB) was seized by the horror of the whole idea of "massive additional spending", and destructive 10.2% inflation in prices that is so terrifying that even the monumental stupidity of a central bank "targeting inflation" by actually pursuing policies that create inflation – some fictitious "beneficial" inflation – in prices is being exceeded! And by a "wide margin"!

Soon I am thinking to myself that this is such terrible news that I should not be out here in the open, and I should, instead, be securely locked down in the Mogambo Fortress Of Angry Solitude (MFOAS) against the inflationary horror that is descending down upon us like an incubus from hell, biting holes in your skin and sucking out your blood and guts.

Apparently, Ms. Levitov has been keeping an ace up her sleeve in case I ever succeeded in wresting control of the conversation away from somebody who knows what in the hell they are talking about, or at least does not have disgusting strings of spittle dripping off her lips and down her chin, and stuns me by reporting that, "Russia’s inflation rate may reach an annual 12% this year, the Interfax news service reported today, citing Deputy Economy Minister Andrei Belousov."

In a panic, I run back to Doug Noland, which was a big mistake, as he has taken a look at the Fed’s quarterly Z.1 "Flow of Funds" data, and he says, "I can’t recall a report as intriguing as this one. In the face of mounting financial crisis, Total (non-financial and financial) Credit growth accelerated from Q2’s 8.6% pace to a remarkable 11.1% annualized rate. The rate of Non-Financial Debt growth increased to 8.9% from 7.2%. The pace of Corporate Borrowings rose to 11.0% from Q2’s 10.3%, while Household Mortgage Debt growth slowed to 6.8% from 8.0%. Federal Debt growth expanded at an 8.8% pace, up from Q2’s slight contraction. The booming State & Local sector cooled somewhat, with debt growth reduced to 8.4% from Q2’s 10.3%."

Too, too many horrible facts and figures like that have stunned me to insensibility, and apparently taking my uncharacteristic silence as an invitation for more of this horrifying news, he goes on, "Importantly, Domestic Financial Sector borrowings expanded at an alarming 15.6% rate, up from Q2’s already overheated 9.8%. The Banking, Money Fund, GSE and agency-MBS sectors all accelerated, expanding at double-digit rates."

In short, he says (ignoring my blubbering incoherence at this awful news), "I believe the key insight to be drawn from the Q3 2007 ‘Flow of Funds’ is the recognition of the enormous scope of ongoing Credit creation now required to sustain the U.S. financial and economic Bubbles. In particular, I find it incredibly ominous that the Credit system has faltered so badly in the face ongoing financial sector expansion. Things can clearly get much worse."

Like when I finally regain my senses, I am going to be screaming and screaming and screaming in fear and outrage. So, yes, things can, and will, get much worse.

Until next time,

The Mogambo Guru
for The Daily Reckoning
December 17, 2007

Yes, dear, dear reader…now we have Win-Win Capitalism…

What’s "Win-Win Capitalism"?

Glad you asked.

It’s the system where no one loses. You make a trade – and there’s never anyone on the other side! Remarkably idiotic in theory…it is even more moronic in practice. Still, that’s what people think.

Since around 1980, investors have come to see capitalism as a benign force. It makes people rich…if they can only get enough of it.

"How can I get in on this capitalism thing?" they asked themselves.

Easy, peasy…buy some shares in the greatest capitalistic institutions the world ever saw – America’s publicly traded companies. Or, if you feel a little unsure with P/Cs, yields, and double-entry bookkeeping…you can buy a house. Yes, dear reader, a house…four walls and a roof…the ol’ home place…mi casa…my digs…the nest. Over the last five years a house was not only an investment…(which is to say, an opportunity to participate in modern capitalism at its finest) it was a leveraged speculation. When you took up a house with an interest-only ARM you didn’t buy it; you had an option to buy it sometime in the future…when you had the money.

Talk about win-win…you couldn’t lose with a house. Prices only went up – everybody knew that. You didn’t have to put any money down. And they gave you tax breaks too. Win…Win…and Win some more.

But what’s this?

The winners seem to be turning into losers. House prices are off all over the nation. And Lehman Bros. (NYSE:LEH) expects the number of foreclosures next year to be more than three times this year’s total.

Don’t worry. The feds are coming to the rescue. Bush, Paulson et al have already proposed a ‘teaser freezer’ package – holding rates at the low teaser levels until the homeowners can pay more…or until the press loses interest in the story, whichever comes first. And here comes the voice of age, experience, wisdom and treachery – Alan Greenspan – who says the government should provide more financial help to homeowners: "Cash is available," said the Sage, "and we should use that in larger amounts, as is necessary, to solve the problems of the stress of this."

Cash is available? What cash? All we see is deficits. Americans haven’t saved anything in many years. The government goes deeper in the hole every minute. He must mean the kind of cash that comes from printing presses, not the real stuff.

Let’s stop being so hard on the old geezer and return to the housing market…

We put the question to our own bro’ Jim, who has been working in the Charlottesville, VA, area for many years.

"Well, yes, prices are down," he said. "But I only deal with the top end of the market. There aren’t enough transactions to tell what direction prices are going. But you can tell that it’s not the same market it was a year ago. Sellers expect that they’re going to have to be flexible. And buyers expect sellers to give a little. The top of the market is special, of course. People don’t have mortgages. They pay cash, or they’re doing a very different form of financing.

"Here is something that you’ll be interested in…remember that piece of property you were going to buy down there, about five or six years ago? It was 300 acres. Beautiful spot. You were thinking you might buy it to live on when you retired. I guess that has changed now that your children seem to be concentrating over there on the other side of the pond, but that was the idea. You put in a bid of $900,000 just after you saw it.

"Well, you were right about the property. The guy who bought it paid about $1 million, I think. Then, a couple of years later, he flipped it for $3.5 million. And now some other fellow is building a house right on that knoll that seemed like such a perfect spot…it’s a huge house…maybe 9,000 sq. feet. He’s a speculator and he’s already listed the property for sale at $6.5 million."

The property was a very good buy at $900,000. At $6.5 million, it seems a little steep. Possibly, buyers won’t want to pay that much. Even at the upper end, speculators can still lose.

For not only do prices rise and fall, people’s attitudes change in subtle ways. No one noticed when Americans began to believe in Win-Win Capitalism. They’re not going to notice when they begin to believe in Lose-Lose Capitalism either.

Yes, dear reader…it is coming. More below…

*** The Dow fell back 178 points Friday. The dollar rose to 1.44/euro. Gold dropped below $800.

In the battle between inflation and deflation, the latter had the upper hand. It is still too early to know which way this fight will go. Inflation looks unstoppable. Deflation seems to be immoveable. We’ll have to wait to see what happens.

Our guess is that it is a fight that will become known as a bout of "stagflation." The economy will slump. Assets will fall in price. But consumer items -especially those dependent on energy and food – will rise.

This has been our guess for sometime. But it was given a setback this morning when we saw a headline from Reuters: "Greenspan sees early signs of stagflation."

Uh oh. If the former Fed man sees the same thing we see, we must both be wrong. But who knows? Greenspan’s record, so far, is practically unblemished by honest observation…the only major exception was when he saw stocks rising in a frenzy of ‘irrational exuberance’. Then, he was wrong about the phenomenon he was looking at; but at least he wasn’t lying. And now? Maybe he’ll be right…stranger things have happened.

On the ‘stag’ side of the coming economic equation is one headline from the Financial Times:

"Mortgage pain starts to hit spending."

On the ‘flation’ side are two more:

"World food prices rise set to hit consumers." And, "U.S. inflation surges to 4.3%."

Four and three-tenths of a percent doesn’t seem like much to us. But it’s a start.

*** USA Today tells us that 2008 will be a "bumpy ride" for investors.

The paper asked a group of Wall Street pros. Naturally, they said the year ahead would be full of "challenges" but that it is still a Win-Win system. Stocks may go down in early ’08, says Dan Chung of Alger Funds, but this will only set the stage for a "significant recover rally" later in the year, in which investors could get "double-digit plus gains." Or they could lose their shirts; but he didn’t mention it. In the new Win-Win Capitalism…there is only upside.

One of the analysts showed some sense, however. Richard Bernstein took up our theme: that it was all very well for the feds to come riding to the rescue, but they may be no more effective than a group of parking lot attendants trying to land the space shuttle. They can make money available to member banks, he points out, but "the Fed can’t force financial institutions to lend."

Why wouldn’t they want to lend? Because they’re not sure it really is a win-win system after all. Lately, the financial industry has been taking losses. It has found itself on the wrong side of trades that were supposed to be safe. But then, so has the entire nation…

*** "Hey Bill…" a cousin called yesterday. "You probably don’t know her, but one of our cousins has been doing some genealogical research. She discovered that we’re related to Barack Obama."

"Oh…that’s too bad."

"Well, it goes way back…to one of those old Maryland families I can never keep track of. Besides, Obama is probably not the worst of them."

We don’t follow politics, here at The Daily Reckoning. But, occasionally, politics follows us. At dinner last night, an old friend gave us an update.

"Obama is leading in the polls in Iowa. This could be important. He’s got a major TV personality behind him. Why that should make any difference is, of course, the story of modern politics. You’ve got to keep the messages, short, shallow and stupid…in order to appeal to the masses.

"It would be a shame if he wins. Poor Hillary has spent her whole life making herself into the thing she is – conniving, opportunistic, and cunning. She’ll say anything, do anything …to get elected. By rights, she should win the primary. And then, she could face Giuliani, who is her match when it comes to low, brain-numb demagoguery. He’s really squeezed this 9/11 claptrap for all it was worth. I don’t know which is worse, Hilary or Giuliani. It would be fun to see the two of them square off.

"But it looks like Bush has so tarnished the Republican brand, the Democrat is bound to win, no matter how bad he is…even if he is your distant cousin."

Until tomorrow,

Bill Bonner
The Daily Reckoning