Gold-Flavored Cannibalism

The Daily Reckoning PRESENTS: This week, The Angriest Guy in Economics meets up with gold, government blood drinkers, and his counterpart – The Mellowest Guy in Economics. No, it’s not a Scooby Doo rerun, it’s The Mogambo…

GOLD-FLAVORED CANNIBALISM

For a Christmas present, my wife gave the 17th edition of Bartlett’s Familiar Quotations, and I was delighted to see that Ludwig von Mises, the “Father of Austrian Economics”, was included, and further surprised to find out that his middle name was Edler, which seems strange to me, and like most people, I don’t like strange things because they scare me.

Well, in case you were wondering, there was nothing about how he got the middle name of Edler, but they do have four great quotes from him, including “Everybody thinks of economics whether he is aware of it or not. In joining a political party and in casting his ballot, the citizen implicitly takes a stand upon essential economic theories.”

From that, I am sure that Keynes would not be a Democrat, as he says that “Marxian Socialism must always remain a portent to the historians of opinion- how a doctrine so illogical and so dull can have exercised so powerful and enduring an influence over the minds of men, and, through them, the events of history” which, I note with ill-disguised Mogambo contempt, we are, again, having to re-live, in all its ugliness, because we are so laughably stupid as a nation that we cannot learn by merely listening to Mr. Mises, attend to the towering example of all of the world’s economic history, or even heed our own Constitution as clearly written.

But in talking about Keynes, as a happenstance, Philip S. sent an email titled “A Wise Insight” from President Gerald Ford, who said “A government big enough to give us everything we want is a government big enough to take from us everything we have.”

Keynes himself pointed out how they accomplish this in his “Essay in Persuasion” when he wrote, “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

Mr. Keynes did not explain what he means by “an important part”, but I, in my Irrepressible Mogambo Arrogance (IMA), am happy to officially explain that the “important part” that they take from you is the buying-power of your wealth, and you are left with the “unimportant part”, which is the paper it was printed on.

And if you want to make a lead-pipe cinch bet, then bet that the government will take everything we have, as they must keep spending more and more, as once you start down that socialist/communist path, there is never a place to ever stop, or even slow down. And the way to do that is to buy gold and silver.

But beyond these interesting tidbits, I am now denouncing the entire 17th edition of Bartlett’s because they did not include Mr. Mises’ most telling quote, which is how there is no way to prevent the eventual collapse of a sick, twisted and bizarre boom-time economy created with excessive creation of money and credit, and your only choice is to either have it implode either voluntarily (by immediately stopping that horrifying, insane crap right freaking now and voluntarily suffering the pain you deserve, you morons), or involuntarily (when the system collapses after trying to keep things going by creating hugely more excessive amounts of money and credit, making things hugely worse and worse, thus making the eventual pain so exponentially much worse, too). Interesting choice!

But, to add to their infamy, Bartlett’s did not have any quote by The Mogambo, including the most famous and true thing I ever said about economics, namely “We’re freaking doomed!”

All of which proves, as I have always alleged, they’re all trying to keep the brave, noble Mogambo down. I mean, my name is not that long, and the quote is quite short, so how much room could it take in their stupid book? And they couldn’t find room for me in 1,430 freaking pages? Give me break!

But while they ignored me completely, I notice that they had plenty of room for quite a few quotes from John Maynard Keynes, and, as is usual with crackpots, he sounds so good (for the most part). And he perfectly describes the state of affairs in the USA back when he was writing, vis-à-vis politics and the economic havoc they cause. The quote is that ignorant politicians and hack economists are, for the most part, “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”

You can almost hear the contempt and sarcasm in his voice, echoing my own. Now, fast-forward to today. It is, unbelievably, even worse! Much worse! It is so bad (Audience shouts out “How bad, Mogambo?”) that the chairman of the Federal Reserve himself IS a defunct academic scribbler! And the worst kind, too, as he was the head of the economics department of Princeton University, but nevertheless seems to have the insouciant opinion that the horrendous 18-year run of the disastrous, precedent-setting, unfettered monetary policies of the accursed Alan Greenspan is to be faulted only, I guess, in its restraint! Hahaha!

Like I said (and if you are from Bartlett’s, please pay particular attention here) “We’re freaking doomed (WFD)!”

The main reason why China does not really want a strong currency right now is analogous to the situation in Thailand, as MoneyMorning.com remarks “a strong currency carries its own problems – particularly when your economy still has a significant export sector.”

If you are an American, then you are understandably clueless as to what the phrase “significant export sector” means, since we don’t export much of anything anymore except weapons, things that can carry weapons, things that design weapons, things that can make, or be made into, weapons, and some of the best frozen pizza on the planet.

But MoneyMorning.com is apparently not interested in either blowing people to smithereens or tasty culinary delights (but what else is there?), but expertly continues to the point, which I had missed completely, which was that the importing nations (us Americans, for example) would experience higher and continually rising prices as the American dollar weakened against the foreign currency. They write “As Andrew Drummond says in The Times, ‘successful exporting companies were already starting to lay off workers as prices exceeded what Western buyers were willing to pay. Even the country’s rice market was in danger.'”

Being the end of the calendar year, Bill M, who bills himself as The Mellowest Guy in Economics, says ” I suggest you award first prize in the Moggie Competition (Mogambo Guru Great Idiocy in Economics) to the Bank of Japan for its outstanding effort in debasing not only the yen, but the fiat currencies of all countries with electronic means of communication with Tokyo.”

An excellent suggestion, Mr. Bill! My congratulations to the winners, and I proudly present it to them on behalf of all of us proletariat trash out here in the real world who will be ground up in the machinery of the government/central bank linkage, lubricating it with our blood, paying the agonizing inflationary price for such stupid monetary arrogance in order to pay for stupid collectivist extravagance!

Of course, the government drinking our blood brings us naturally to gold, and David F. particularly liked the essay by Gene Arensberg at ResourceInvestor.com, as he thought that it summed it up the bullish case for gold particularly well. I agree. It reads “A secular bullish perfect storm trend for precious metals continues. Rapidly escalating global investor demand, easier participation by investors via ETFs, conversion of Middle East petroleum dollars to gold, rising new demand from Asia, possible central bank buying partially offsetting central bank selling, conversion from dollars to gold by large U.S. dollar denominated foreign exchange reserves, declining gold production, increased political and NGO interference to bring new sources on line, rapidly escalating costs to produce, delays and shortages of equipment and manpower, previous two-decade bear-market-induced shortage of intellectual capital for miners, safe-haven buying to hedge strong, reckless, competitive dilution of under-backed fiat paper currencies, probably continued de-hedging and continued troubling global political and religious tensions are just some of the factors contributing to the long-term bullish winds now blowing.”

Him saying this means that “In real terms, gold remains undervalued versus nearly all other commodities and strongly undervalued as measured by the world’s fiat paper promises.”

In short, one more reason to buy gold. Now. Today.

And, I hasten to add lest I be remiss, even more so for silver.

Until next week,

The Mogambo Guru
for The Daily Reckoning
January 8, 2007

Mogambo Sez: Since it is customary at the end of the calendar year to toot one’s investing horn, The Mogambo Portfolio (TMP) is up there with big dogs, sporting a 24% gain, as being almost 100% in precious metals, precious metals mining stocks, precious metals-oriented mutual funds, precious metals ETFs, and a small percent in oil, paid off like freaking gangbusters again this year like it has for the last five years in a row.

Trained professionals and ordinary people, who know me for the complete idiot that I am, obviously realize that I just got lucky again. But other people, who do not know of my pathetic intellectual incapacity, are sometimes fatally curious to hear a Little Mogambo Investment Tip (LMIT) after learning of such seemingly stellar returns.

To those naïve, foolishly trusting people, The Mogambo smiles beatifically, and although the Mighty Mogambo Heart (MMH) is breaking at such pathetic financial desperation that you would feel a need to hear the stupid opinions of a certified bonehead like me, I say “I expect 2007 to show similarly hefty results, only more so.”

I pause for dramatic effect, and then add “Maybe a LOT more so! And wouldn’t that be nice for the people smart enough to have bought gold and silver at these low levels?”

They nod. I nod.

They smile. I smile.

They go home to buy gold and silver as a way of making a wise investment. I go to a cheap restaurant to buy a pizza as a way of having dinner while making a pig of myself.

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.

“The Financial Destruction of America’s Middle Class.”

You will not find that headline anywhere today. Why? Because it isn’t there. It is a headline from the future.

Instead, if you look through today’s papers, the headlines you get are reassuring:

“Job growth is strong, surprising economists,” says the New York Times.

“Fears of U.S. Slowdown Recede,” adds the Financial Times.

David Lereah, Chief Economist for the National Association of Realtors, says the worst of the housing slump is over:

“As the housing market recovers from its correction, existing home sales should be rising gradually during 2007 – it looks like we may have reached the low point for the current cycle in September. We’ve entered a more sustainable period of home sales now, and we expect greater support for prices over time as inventory levels are eventually drawn down.”

A man who likes his women fat and his investment margins thin must find America, 2007, an agreeable place. According to official statistics, the average voter is bigger than ever. But they are balancing on the tightest of tight wires. According to the financial news, never before have citizens had so little margin for error.

They read the headlines and are happy to believe them. “The bad news is behind us,” they say. “We don’t need any margin…because there will be no errors.”

Yet, this is not the first cycle in the housing industry. It is just the biggest and wickedest. Typically, says Max Fraad Wolff in the Asia Times, housing prices fall 30% in a downturn, over a period of about four years. If that is so, this one has a long, long way to go down.

Edward Learner, director of the UCLA Anderson Forecast, makes a more modest guess; he expects new house prices to go down 5%-10% in the year ahead. The average house in Los Angeles is now valued at $510,000. That’s about 50% too high, says Learner. It could take five to ten years to get prices back to normal.

Meanwhile, UBS says default rates on sub-prime loans have doubled…to 8% of the total. Since 2002, more than $1 trillion in such loans have been written. And now, many of them are going sour. In October, for example, foreclosure rates in the sub-prime market were running 42% greater than the year before. And in November came news that some of the packaged securities backed by sub-prime mortgage loans were being downgraded by Moody’s – barely six months after origination. Downgrades are common – mortgages go bad as people die, get divorced or go broke. But it usually takes longer than six months.

Behind this news is a story that won’t go away:

The Financial Destruction of the American Middle Class – this is the story we’ve been talking about for the last three years. The plot is very simple. Most people do not work for the finance industry. Most people do not get huge bonuses. Most do not own Picassos, nor do they have houses in Aspen. Most people earn ordinary wages. And they have not had a real raise in the last 30 years.

“If we use 2005 dollars and the CPI-U (consumer price index for urban consumers), average weekly earnings decreased by about $1 per week over the 30-year interval 1975-2005,” writes Wolff. “The folks have thus stopped saving and have taken on massive amounts of housing and consumer debt.”

Wolff continues:

“In 1999, total outstanding household debt was $6.4 trillion. As of the end of the second quarter of 2006 total outstanding household debt was $12.3 trillion.

“Household debt has increased by almost as much since 1999 as the sum total of all debt accumulated by all households across the preceding 220-year history of the [United States]. In 1999, household mortgage debt stood at $4.4 trillion. At the close of the second quarter of 2006 it had more than doubled to $9.33 trillion. In 1999, consumer credit outstanding was measured at $1.6 trillion.

“Today, this stands at approximately $2.4 trillion dollars, signaling a 50% increase in less than seven years. This is usually soft peddled and talked down by comparison to skyrocketing housing values. Household assets held as real estate increased by $9 trillion from 2000-2006. This might be called the mother of all modern bubbles. Yet household net worth struggled up by a mere $1.2 trillion. Net worth badly lags housing values because of waves of cashing out. When these waves crash ashore it will be with massive destructive force.”

The middle class still thinks it is the middle class. It owns one or two or three automobiles. It has children in college…a house with air-conditioning…maybe some mutual funds. But it is living on borrowed time and borrowed money…in a borrowed house.

Even though house prices were rising, owners’ equity as a percentage of household real estate actually fell from 58% to 54%. In other words, people ‘took out’ so much wealth from their houses that they ended up with a lower percentage of ownership than they had had before – even at today’s high prices. As prices go down, their ‘equity’ will fall even further. For many homeowners, it will disappear altogether.

“Americans keep refinancing and re-mortgaging. Why?” asks Wolff. “There really is only one answer: desperation. Freddie Mac informs all those who dare to look that 90% of its refinanced loans resulted in new balances at least 5% higher than the previous loan.”

Someday, perhaps soon, many middle class Americans are going to begin to realize that something has gone wrong. Their houses will be falling in price…while their debts are greater than ever. They will realize that they have been bamboozled.

And someday, a politician will begin to speak for these people. He will not tell them that they have been fools. Instead, he’ll explain that they have been betrayed by their leaders…swindled by Wall Street…conned by corporate CEO’s and flim-flammed by Republicans and Democrats.

He will be partly right.

More news:

————–

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

“The ADP report show negative, but the Bureau of Lies and Massaged Numbers, tells us that jobs creation in December was 167K! Alrighty then! That sure was nice to see… Not for the currencies… But for our economy.”

For the rest of this story, and for more market insights, see today’s issue of The Daily Pfennig

————–

And more thoughts and opinions…

*** A few readers wrote in last week, wondering about our argument:

“Imagine that the dollar is suddenly worth only 50 cents,” we wrote.

“People who thought they had nearly $9 trillion in assets suddenly realize they have lost $4.5 trillion. Where did the money go? Who was on the other side? The lenders are out trillions…while the borrower – the U.S. government – has achieved debt relief of the same amount. But it never actually had that amount of money; that is, it never had the money to pay back the loans…and never would have. In effect, the trillions would just be ‘written off’ like a bad debt. This doesn’t mean people are necessarily worse off…but they definitely would have less cash and credit – less liquidity – than they had before. And other asset prices would collapse.”

One reader’s question:

“I own one dollar of cash and one dollar of Google stock. In case Google goes down by 50%, my liquidity is still one dollar. If I buy additional Google, my cash is simply transferred to someone else.

“Therefore the liquidity glut is going to be here for a long time. Is it not?

“Back in 2001, I wrote an article for ‘La Tribune’ called: la fatalité des liquidités (not bad, hey…!)

“Now, I am wondering how the liquidities will disappear.

“There are only two ways:

“1. Inflation

“2. People reimburse their debts.

“Would you tell me if I am correct?”

Another dear reader takes up the issue from a different point of view:

“I don’t get your reasoning on what happens to assets if the dollar is devalued by 50%, as you write today.

“What really happens is dollar-denominated assets are re-rated upward in price to reflect the declining currency, and everybody feels happy because of rising markets – but it’s all an illusion. It’s really a secret confiscation of wealth, as incomes don’t rise at the same rate, and savings and purchasing power are destroyed.

“It’s just not realistic to expect the ‘credit bubble to burst’ and for assets to decline 50%. More likely they’ll go UP by 50%, but in real terms they’ll be down significantly.

“Personally I think this is what we’re seeing now, and it could go to unbelievable extremes…”

And yet another with the same point:

“I take exception to the concept below that you wrote about.

“Asset prices would double to compensate for the 50% drop in the dollar. It would take twice as many dollars to buy Intel’s stock. Stock prices would go up in nominal terms but not in real terms. If you left your money in the bank then you would really lose 50% of your money under your scenario above.”

The problem with talking about the dollar is the problem with the dollar itself – you never know exactly what you are talking about. You reach for it and find yourself grabbing at air. If it were fixed to the wall, you could keep it in sight…and notice how other things move around in relation to it. We speak of ‘inflation’ and a ‘falling dollar’ but we might just as well try to use a sextant to locate a five-year-old at a birthday party. Nothing sits still long enough to give us a good sighting.

In what is typically referred to as ‘inflation,’ prices rise as the dollar sinks. But not all prices rise at the same rate. In a period of consumer price inflation, prices of butter and gasoline go up; but prices of financial assets usually go down, at least in ‘real’ terms, adjusted for inflation. Why? Because inflation undermined the income streams one expects from financial assets, especially if they are fixed. Bonds tend to go down a lot, because the interest investors expected to receive will buy less; so it is worth less. Stocks tend to adjust to inflation better than bonds; owners can imagine that the business can raise prices to protect profit margins. In fact, not many can. Inflation tends to make all projections of future income less certain, thereby reducing their present value (and asset prices). Of course, this is often hard to see…because prices can go up in an inflationary period. If we recall correctly, stocks in Zimbabwe soared in 2005 – even as inflation ran to nearly 1,000%.

But the dollar isn’t at risk only because of consumer price inflation. It also changes hands on global markets…and it is priced in terms of other currencies and in terms of gold. This is what we were talking about in our little hypothetical above. If the dollar were marked down in the international currency markets, there might be little immediate effect – or even notice – in the United States. But overseas dollar holders would feel the pinch quickly and sharply. The Bank of China has one trillion in dollars. China cannot spend its dollars on hamburgers and shoe shines in New York. It has to trade them for other assets. If, suddenly, the dollar were to take a dive on the international markets, China would have less purchasing power. Much of its liquidity would vanish. Likewise, a crack-up in the derivatives, bond, or stock markets could wipe out liquidity. The dollars people thought they had would merely disappear. Remember, they were never in physical form. They were just accounting transactions…electronic representations of hypothetical ‘wealth.’ When dollar based assets go down in price, or the dollar itself goes down, there is less liquidity available. People do not have as much ‘money’ as they had before. They cannot buy as much.

We continue to think that this is the most imminent…and more important…threat faced by the world financial system: a deflation of its financial assets…and a general evaporation of liquidity.

*** 2007! We can hardly believe it. When we were ten years old, we wondered what life would be like in the 21st century. It seemed so distant, so remote…so impossibly far in the future.

But here we are…so deep into the 21st century, we already take the third millennium for granted. But each year, our fingers lag the calendar. We go to type 2007…and they hit 2006 out of loyalty to the old year…or even 2005…or 1999!

How quickly each year is discarded, thrown away like last year’s calendar, yesterday’s headlines and last week’s girlfriend! People just don’t stick with anything for very long. They are here…and then they are off…gone.

We were in a gloomy state of mind over the weekend. Another acquaintance of ours said he had prostate cancer. It seems to be going around like a bad cold. We even began thinking of our own funeral.

We had in mind a humble affair, naturally…just throw us in a ditch out on the prairie…with guitars playing lonely Hank Williams’ tunes. But when we spoke to Elizabeth, we found that she had another idea altogether.

“Look, if we’re going to have a funeral, let’s at least have a nice one. With a proper church ceremony…a requiem mass, yes, that would be nice…speeches…organ music… It should be grand, beautiful.”

“Wait…this is my funeral; I’ll do what I want to,” we protested.

“No, a funeral is done for the sake of the family; it would selfish of you to insist on doing it your way.”

Unable to agree, we decided to postpone it. If we can’t have the sort of going away bash we want, we’d just as soon not die. At least, not yet.