Financial Earthquakes

The Daily Reckoning PRESENTS: If preventing inflation and boom/bust cycles is the reason the Fed took over the power of America’s money supply, why are we currently experiencing the negative effects of each of these economic phenomenon? Is there no one who will stand up and point out this injustice? The Mogambo Guru, ladies and gentlemen…


To tell you the truth, I disagree with the idea that only the rich can buy gold. When I see the enormous amounts of money the middleclass and the poor spend on pure trash every year, I say, “And you want me to believe that out of all that money, they can’t manage to buy a stinking half-ounce of gold a year? Or some silver? Hahaha! Don’t hand me that crap!”

I think that the important point is that gold is a “rich man’s escape”, which, by definition, means that rich people will be buying gold to effect their escape! And given the staggeringly huge amounts of money now in the world (mostly owned by the rich!), versus the pitifully small amount of gold in the world, this could be Really Big Time Stuff (RBTS) indeed, because 1.) History has shown that rich people always take their money and rush to the safety of gold at the inflationary ends of booms (like this one), 2.) Gold is essentially (like all markets) an auction market, and 3.) Rich people bidding against other rich people for a finite supply of gold, with unimaginable amounts of money, is the stuff of which auction history, and newspaper headlines, is made!

And the good news, the better news, the best possible news, is that gold is still selling at only about $660 a lousy ounce! What a screaming bargain when viewed against what is surely coming, just like it has always come! Unbelievable! But, “Whee!”

To a suspicious little creep like me, I naturally connect Mr. Embry’s point that there may not be enough central-bank gold to satisfy demand, to Bill Murphy of Le Metropole Café citing a Dow Jones report that “The International Monetary Fund has proposed to increase transparency in the gold market by publishing statistics that reveal the amount of gold loaned and swapped into the market by central banks.”

What? This surprises the hell out of me! Then I remember (and make some rude, disparaging noises) that the IMF has mismanaged itself, which comes mostly from the fact that no country needs to borrow any money from the IMF these days, as the entire world has long since gone completely freaking insane with creating all this excess money and credit in which the world is currently sloshing greedily around.

Now, with the slowdown in the “bail-out-and-meddle-in-your-sovereign-affairs” business, the IMF desperately needs more money with which to overpay themselves and maintain their expensive little lifestyles, empires and power, to which end they recently actually proposed to sell the gold (their capital) that the United States loaned them to fund the damned IMF in the first place! What thieving arrogance!

Rebuffed, I guess, this proposed new disclosure rule by the IMF to reveal the actual gold holdings of central banks is, I figure, just the usual slimy blackmail. “Give us more money, or we will tell what you did!” (Which is sort of how I ended up getting married, but that’s another ugly story, which I don’t want to get into because I will cry like a baby and get all embarrassed. And then angry. Very angry. And nobody wants that!)

Exactly what the central banks did (but not how much) is hinted at by the news that “Although they provide regular reports of their gold purchases and sales, central banks don’t currently reveal how much gold is loaned and swapped.”

But there are just too many tremors, and tremors in central bankers everywhere, not to think about predicting earthquakes in the gold market, and getting long gold.

And speaking of central bankers, from Bloomberg we read, “Federal Reserve Chairman Ben S. Bernanke said monetary policy is still aimed at combating inflation even though risks to economic growth are multiplying. ‘Our policy is still oriented towards control of inflation, which we consider to be at this time to be the greater risk,’ he told the Joint Economic Committee of Congress in Washington.”

Bernanke is reported to have said, with no hint of embarrassment, “uncertainties have risen, and therefore a little more flexibility might be desirable.” The Mogambo is also reported to have said “Hahaha!” in snarling disdain, and if you didn’t read or hear about it, it obviously means that this highly-illuminating Mogambo Editorial Comment (MEC) was censored by government goons, which that proves they’re all out to get me. And it also proves that snooping government agents and spies are prowling around in my bushes, probably right now, and thus I am fully justified in ruthlessly hosing down the shrubbery with withering machinegun fire until I feel safe again (or until I run out of bullets, whichever comes first).

Okay, well, maybe it doesn’t actually mean all that, but it DOES mean that the Fed wants to ignore inflation, although preventing inflation and attendant boom/bust cycles is the reason that power over America’s money was given to the Fed in the first damned place! They obviously haven’t done their damned jobs – I mean, look at the record! They’ve failed miserably! And now, they still don’t want to do their damned job; they want “more flexibility” to give us more of the same! This is insane! And yet Congress does nothing! Nothing! I am incensed!

But wait! I may be too hasty! With a sudden, powerful insight, I realize that I could use this unusual stalling technique to my own advantage: Since my Annual Employee Evaluation is coming up soon, I evilly twirl my mustache as I scheme to myself, “This ‘more flexibility’ thing could come in very, very handy indeed!”

Goals not met? I cry out “I need more flexibility!” Losses mounting? I wail, “I need more flexibility!” Employees and customers in open revolt at my arrogance and incompetence? With a tone of voice that speaks volumes about what I am going to do to my boss’s car if this Evaluation thing doesn’t work out for me the way I want, I say, through clenched teeth, “I need more flexibility!”

Another way of looking at it was provided by Bloomberg: “Bernanke said the central bank last week dropped its stated tilt toward higher borrowing costs because policy makers wanted more room to maneuver.” Thanks! Now I realize I need more room to maneuver, too! I need room to maneuver! For God’s sake, give me room to maneuver!

The message is clear; my boss now hates and fears me more than ever, and the Fed is clearly signaling that lots of inflation is in our future, as it is the price we must pay to bail out the blinding, incandescent incompetence of the Federal Reserve under Alan Greenspan, who created the housing bubble, which was created to bail out the busted stock market bubble, and the bond market bubble, and the size-of-government bubble that he also created. Grrrr!

Until next week,

The Mogambo Guru
for The Daily Reckoning
April 9, 2007

**** Mogambo sez: If GATA is right, and the gold market is being manipulated with the collusion of the central banks (and I have absolutely no doubt that it is, and would be stunned, absolutely stunned, to learn that it wasn’t), I again think of John Embry and his phrase, “the gold price is going to go ballistic” when central banks can’t meet demand.

My Mogambo Profit-Sensing Gland (MPSG) recognizes the screamingly obvious profit that will come when this kind of manipulation ends (as it must), and it squirts a jolt of “greed hormone” into my bloodstream. In response, I look at my pitiful stash of gold and silver, and I compare that to how freaking much wealth I want to have when the inevitable explosion in gold finally happens, and I wonder “Do I have enough?” which is Polite And Genteel Mogambo-Speak (PAGMS) for “Has my embarrassing, gluttonous greed and unspeakable depths of avarice been satisfied with this pathetic little pile of gold and silver?” Upon reflection, I find the answer is, of course, “no”.

Then I wonder, “Should I get a job, to earn some money with which to buy more gold and silver?” Again, upon reflection, the answer is, of course, “no”.

Then I wonder, “Should I make the wife and kids drop out of school, get second jobs so that they can buy their own food and clothes (saving me a bundle!), and maybe pay a little room and board around here (the little worthless, parasite freeloaders!), and then use the money to buy more gold and silver?” At last, I arrive at a solution I can live with. Even optimal, in its own way!

So while I don’t know how it works out for you, and you’ll do what you do, but whatever you do, you’ll find that you are usually better off if you do what you know you should do, as this gold and silver thing is “do it or it’s doo-doo!”

Editor’s Note: 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.

While your editor was enjoying a beer at a local bar recently, the gentleman sitting beside us was heard saying, “It’s just so hard right now, with this market. The party ended a year ago – but I’m still there.”

Our ears perked up. And as we eavesdropped and eventually involved ourselves in the conversation, we learned that our new friend owned a public record research firm – one that had fallen on hard times of late.

The company was started in 1996 and bloomed along with the tech boom – and the subsequent real estate boom. While his business offers a wide array of services, from corporate abstracts to copyright searches, for the last five years or so, the majority of business was a direct offshoot of the seemingly never-ending growth in the real estate market.

The past year, though, has been hard on the company, our companion disclosed, as he finished the last dregs of his Natty Boh. Fewer and fewer calls are coming in for the mortgage filings and chain of title searches that had made his business flourish.

Things are so tough that he admitted he was approaching a juncture where he may be forced to face the unpleasant reality that the demand just doesn’t exist for his type of business right now.

“It’s like a playground game of HORSE,” he said. “I have the ‘H-O-R-S’…do I get out now – or wait for the inevitable loss?”

It’s a problem that everyone faces…do you sit back and wait for the crisis to occur – or do you take steps to prevent a major meltdown?

Unfortunately for much of America, the damage of the real estate bubble aftermath has been done. The housing slowdown has not only curbed voracious spending on real estate, building materials, furniture and other items, reports the NY Times, but now state tax revenues around the country are growing far more slowly this year – and in some cases, falling below projections.

“For example,” continues the article, “New Jersey could face a $2.5 billion shortfall by mid-2008, Gov. Jon S. Corzine has said, and may lease its turnpike or its lottery to a private company to raise money.”

“It’s the year of the housing hangover,” said Sean M. Snaith, director of the Institute for Economic Competitiveness at the University of Central Florida.

As the slump is making it harder to extract equity from your home, we are seeing how much people were relying on their home equity lines of credit to make purchases. The Times article points out that “16 percent of new car purchases in Florida were being made with home equity loans in 2006” – and in California, that number was closer to 30 percent.

And then there’s the subprime sector, which has even slowed down the badass bikers at Harley Davidson.

MarketWatch reports: “Lehman Brothers analyst Felicia Hendrix said that in the wake of the subprime mess, she’s growing more concerned about a rise in credit losses and delinquencies at Harley, which could be compounded by tighter lending practices, which in turn could slow the bike maker’s unit growth projections.

“She adds that many of Harley Davidson Finance’s securitized loans ‘have underperformed, posting higher than expected credit losses and delinquencies.'”

The subprime story is nowhere near the end…in fact; we think that things will get worse before they can get better.

Now for the news…


Chuck Butler, reporting from the EverBank world currency trading desk in St. Louis:

“‘Why isn’t the economy growing when the jobs market seems so tight?’ BECAUSE IT ISN’T! I truly wish someone in the media would get their head out of the ‘feel-good sand’ and talk about this discrepancy!

For the rest of this story, and for more insights into the world currency markets, see today’s issue of The Daily Pfennig


Over to Bill, reporting from Brazil…

*** It is vacation time again in France. We are taking advantage of it. Over the next two weeks, we will not be commenting on the markets (we’ll be out of touch with them). Instead, we will write when we are able, merely to tell you what we are doing.

First, we had not intended to come to Brazil. How did we get here?

Ah, dear reader, when you travel, you have to be prepared for anything. And you have to accept what comes your way, without grumbling too much about it. Or you’ll soon be an annoyance to everyone, including yourself. Better to relax and, like a drunken boat, let the currents take you where they wouldst.

We’re on our way to Argentina for our after-Easter holiday. We have a son who lives there. Besides, we’ve been developing an interest in the place. We figure that America is headed towards a financial reckoning of some sort – and what the Argentines don’t know about financial crises isn’t worth knowing…so we are trying to learn something from them.

Every time we go to Argentina, however, we suffer some sort of injury. This time, we haven’t even gotten there yet and we are already on the list of ‘invalids.’

The trip began badly, and has so far continued in the same direction. Our apartment in Paris is undergoing renovation. It is in a sorry state, with building materials stuffed in each corner and dust everywhere. So bad is the disorder, in fact, that we felt uneasy leaving it. It was as if we were trying to do a high-jump in the mud. There was nothing solid to push off from.

But the tickets had been bought, and the plans had been made. The trip was on.

But no sooner had we arrived at Charles de Gaulle airport than the bad news was announced: The flight was ‘retarded.’ It turned out that the whole airline was retarded, but we didn’t find that out until later, after we had already flown to Madrid and arrived two hours late.

In Paris, we were assured that we would make our connection with Aerolineas Argentinas to Buenos Aires. Comet Air is owned by the same company and acts as a feeder line to the AA hub in Madrid. Surely, they would hold the flight to pick up a group coming from Paris.


The plane landed in Madrid at midnight. It was then that the BA-bound travelers discovered that the BA flight had already left. “What to do?” everyone wanted to know.

“Go up to the counter of Aerolineas Argentina. They have everything arranged,” said an agent.

A small crowd of tired wayfarers made its way to the AA counter. Alas, there was no one there. What to do now? A middle-aged Frenchman seemed to have become the group’s leader: “We’ll have to go back to Comet Air.”

At the Comet Air ticket counter, the agents saw us coming. They practically ducked under their desks. This was no ordinary group of vacationers. This was a mob.

“There’s no one at the Aerolineas Argentinas desk, what are we supposed to do?” said the mob’s spokesman in French. “We were scheduled to go to Buenos Aires tonight.”

“Your problem is not with us,” said the spokesman for Comet Air, in Spanish. “Your problem is with Aerolineas Argentinas,” as if he had barely met the company.

“What did he say?”

Another person took up the debate in Spanish, and it soon became a shouting match. “What do you mean…you take no responsibility? You’re the reason we missed the flight!”

“The Argentines should have waited…it’s not our fault.”

The dynamics of a mob are entertaining. We watched from a careful distance. One man made a legal case. Another pleaded pressing family business. One argued price while another argued quality. And a few were so outraged they began looking for a rope. But we didn’t see this shouting match getting us anywhere, so Elizabeth turned to another of the agents.

“What should we do if we just want to get where we’re supposed to be going?” she asked.

“Oh…go down to the Comet sales desk,” came the reply, in troubled English. “See the fat man down there?” he said, pointing. “Ask him…”

We left the mob. Over at the sales desk, the fat man had answers.

“Go to the Auditorium hotel. A bus will pick you up at gate 207, and will take you there. There is another flight at 3:15 tomorrow. It will take you. Your hotel will be paid for by us.”

He wasted not a single word. It was as if he had rehearsed it to be ready for the angry customers. But what was interesting was the way he delivered these words, without a trace of fear or doubt. He sounded like Sidney Greenstreet in the Maltese Falcon…sure of himself and slightly bored by the whole process.

We took the fat man at his word. He was right about everything. We spent the night in Europe’s biggest and least charming hotel. It also had he world’s heaviest windows. One came down on our fingers as we were trying to get some air; now, it is painful even to type.

We went back to the airport on Easter Sunday and signed in for the trip to South America. But the fat man had neglected a detail. The flight would take us to BA…but it would go to Natal, Brazil first. Altogether, the trip from our apartment to our final destination…a ranch in the Andes…will take almost 3 days – if all goes well from here.

More to come…