'Oil Bust' Headline Makes a Good Punch Line

This week, the Mogambo calls the local newspaper to see why they’re dropping the ball with regards to reporting inflation. Well, as it turns out, it may very well be the receptionist’s fault.

Just when I thought I had completely lost my sense of humor, I ran across a MoneyNews.com article titled "Lehman Bros. Report: Oil Bust in the Cards". Hahahaha! Thanks, Lehman!! Hahaha! I needed the laugh!

Perhaps part of the humor is that this comes at the same time as the price of gasoline went up 3 cents to another record high of an average of $3.70 a gallon. This is up 22% from this time last year! 22 percent! 22! Hahahaha!

It gets even funnier when Lehman is not just predicting lower prices, but "Lehman is now predicting prices at $83 a barrel in 2009 and as low as $70 in 2010." At this point I am laughing so hard that my stomach hurts, and since I am on the verge of pooping in my pants, I am desperately trying to stop laughing by sticking my own thumb in my eye, but it does no good! I just keep going, "Hahahaha! Oww! Hahahaha! Oww!"

But $70 a barrel of oil? Hahahaha! Oww! Hell, the cost of production is higher than that! So does Lehman think that production costs are going to go down? Hahahaha! Oww!

Bill Bonner here at The Daily Reckoning, taking no notice of my anguish or my thumb, says, "Ten years ago, China imported 165 million barrels of oil per year. Today, the total is more than 1 billion. Wonder why the price of oil hit a new high last week – above $126 a barrel? Well, China is a big part of the answer." A whopping 600% increase in ten years, and yet Lehman thinks that oil will go down in price? Hahahaha! Oww!

Kevin Kerr at Whiskey and Gunpowder says, "According to the most recent data from the U.S. Energy Information Administration, oil demand for countries in the Organization for Economic Cooperation and Development – which includes developed nations like Japan, Germany and the United States – has gone up 14% since 1980. Oil demand for the rest of the world, however, has skyrocketed 43%. That’s more than three times as fast!"

And yet Lehman thinks that the price of oil will go down? Hahahaha! Owww!

So, handily summing up, you can take it from me, the Loudmouth Mogambo Prognosticator (LMP), the guy with the ready laugh and the sore eye where somebody keeps sticking his thumb in it, when I tell you that there is no way, absolutely no way, absolutely no freaking way in hell that oil will be that low next week, next month, next year or ever! Hahahaha! Oww!

I was going to go to the medicine cabinet to find something that would stop my eye from mysteriously hurting, when it fell on Sean Brodrick at MoneyandMarkets.com writing, "According to the International Energy Agency, China’s overall oil demand rose by 7.8% in February from a year earlier, much higher than earlier estimates of a 5.3% gain. And gasoline demand rose by 22.8%!"

Careful Mogambo Scholars will take particular note of the use of Mr. Brodrick’s use of exclamation points in highlighting the rise in gasoline demand, as this means to me a rise in the use of internal combustion engines, meaning that a lot of work is being done, which means that a lot of raw materials are being consumed.

In fact, he reports, "As a result of that surge in demand, China’s crude oil imports rose 15% in the first quarter and 25% in March. Its imports are rapidly accelerating!" Again one notes the use of the exclamation point!

And in another very populous country, India, he says that "oil product sales – a proxy of demand – surged by 10.9% in February compared to a year earlier." Yow! Eleven percent in one year!

The interesting part, which is a euphemism for, "the price of oil is going to go through the freaking roof one of these days real soon, and for a long time after that, too, and if you want to make a lot of money, then get your worthless butt in gear and go out and buy things connected with oil" because all of this gigantic surge in demand is coming at a time when supply is shrinking.

This is made manifest when Mr. Brodrick reports that "oil production is already shrinking in 60 of the world’s 98 oil producing countries. So it’s no surprise that in March, global oil supply fell by 100,000 barrels per day, led by lower supplies last month from OPEC, the North Sea and non-OPEC Africa."

And Kevin Kerr agrees, too. "Unfortunately" he writes, "there’s no way for supply to keep up." As in "no way, absolutely no way, absolutely no freaking way in hell, just as The Mogambo put it in a previous paragraph", which he could have said but didn’t.

This is important stuff, so I call up the local paper and tell them that I want one of their stupid little reporters to come over for my news conference so that I can tell the world what is happening. The little receptionist asks, "Is this The Mogambo?" and I proudly say, "Yes, it is!" Then, suddenly, the line goes dead! So I call back, and the same little receptionist asks, "Is this The Mogambo?" and I proudly say "no!"

Then she says, "Is this about inflation?", and I say, yes, it will impact inflation, and before I can say another word, she says, "It’s you, you Stinking Mogambo Idiot (SMI)!", and hangs up again!

So, if you never read in your newspaper how inflation is going to kill all of us, especially inflation in the price of energy, then blame the stupid little receptionist.

The inflation you can blame on the corrupt Federal Reserve, and the corrupt Congress (except Ron Paul), which encouraged them, and the corrupt Supreme Court, which let them continually ignore the part of the Constitution that requires that money be only of silver and gold.

Until next time,

The Mogambo Guru
for The Daily Reckoning
May 19, 2008

The Mogambo Sez: Being as sweet and brief as I can manage, under the circumstances, if you aren’t buying gold and silver, you are a moron.

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.

Last week, the price of oil hit $127 a barrel. Oil imports to the United States cost 67% more this year than last. Imports other than oil rose more than 6% – or three times the Fed’s key lending rate. Steel has shot up too – almost 50% in the last 12 months. And gold rose a full $19 on Friday…it’s practically back at $900.

Naturally, the papers are squawking about inflation today. The Financial Times worries that inflation is going to undermine pensions and retirement plans. The International Herald Tribune, meanwhile, says inflation is undermining central banks’ efforts to…well…cause inflation!

Wait – we know what you’re thinking. Something is very wrong with a world where central banks cannot cause inflation any time they want to. Next, they’ll be telling us that you can’t have a cigarette when you want one…

But the papers are full of remarkable things…so why not? Besides, there are so many petards in central banking anyway; Bernanke and company were bound to get hoisted on one of them.

A society has no more real savings (resources set aside) than it actually has. And it sets interest rates (the price of those savings) as it sets any other price – on the basis of supply and demand. When the Fed intervenes with artificially low rates, it is merely pretending that it has resources available that it does not actually have. That is the trick known popularly as "inflation," in which the supply of purchasing power is inflated with money that doesn’t exist.

Since the beginning of the credit crisis last summer, Fed policy has been purely inflationary – intended to convince people that they had more money and credit than they thought…and that they should spend it and invest it. But that policy can’t work forever. Eventually, consumer prices rise sharply. Then, the game is over…the Fed has to "lower inflation expectations" before it can inflate again. The hocus pocus only has a positive effect, in other words, as long as people are misled…once they catch, the jig is up.

And here we beg readers’ attention of a moment of deeper thought. This classical, cynical view of inflation seemed to be wrong for so long people began to think it was wrong forever. An entire generation has grown up with 1) a dollar with no connection to gold, 2) a dollar that actually rose against gold for 20 years, 3) Wal-Mart’s Every Day Low Prices, 4) apparently inexhaustible supply of cheap labor 5) globalized markets and supply chains and 6) falling bond yields. No wonder people began to think that inflation was no problem…and never again would be. Central bankers claimed they could now control economic cycles so as to have growth without inflation…boom without bust…forever. But forever seems to have come to an end already.

"The specter of inflation has risen over financial markets…" begins the IHT story.

Central banks can only get away with making money easier to get when consumer prices are under control. When prices for gasoline, milk and margarine begin to rise, people get fussy. They want their central banks to stabilize prices. And central bankers themselves look at their lending rates and get a little embarrassed. "How come you’re lending money so cheap?" economists ask them.

The fear is that if inflation is allowed to get "out of control," it takes harsh policies to bring it back in line. Harsh policies are what everyone wants to avoid…especially before an election.

Classical economics tells us that an asset price bubble is always followed by an asset price bust. Inflation is followed by deflation, in other words.

But in our funny, complicated world, we get both inflation and deflation at the same time. The last two big bubbles – in residential housing and the financial industry – are deflating. Prices are going down for both assets. But inflation-sensitive commodities, most notably oil and gold, have soared. And now prices seem be working their up all along the chain…from the oil wells, to the shipping containers, to the Chinese sweatshops, to the shelves of Wal-Mart. A photo in today’s paper, for example, shows a pump at a filling station in New York with diesel fuel over $5.

What this means to central bankers is that they have to watch it. They can’t cut rates so freely…not while consumer prices are rising. Instead, the pressure will be on the other side – to raise rates.

To the man on the street it means that he has to prepare to pay higher prices for everything.

And to investors? What does it mean? It means inflation will do the work the bear market hasn’t been willing to do – that it will reduce the real value of stocks and bonds, even if nominal prices remain steady. Tim Bond, of Barclay’s Capital says, "investors have to be prepared for a few very unpleasant years. Bonds of all types – aside from index-linked – have no place in portfolios at current yields. Equity exposure should be narrowed to resources, energy, industrial goods and services – and once the write offs are completed – financials."

*** Being the world’s leading hegemon is mostly thankless. You have to maintain military garrisons all over the world and try to keep the barbarians under control – which is so expensive you are almost guaranteed to go broke. And when a competitor challenges you, you have to meet the challenge. Cartago delenda est (Carthage must be destroyed), as Cato put it.

The only benefit of empire is also a curse: you get to tell others what they should do. Thus did the U.S. president lecture the Mideast yesterday, says today’s paper. Unfortunately, your earnest attempts at world improvement are seen by others as nothing more than hollow vanity. "You want to be a winner," you say to the wogs and wallywallies, "then be like me."

Everyone wants a little edge…a little extra grandeur…the feeling of superiority that comes from being among the elite. (There is also the hope of catching a few crumbs as they fall from the grand table.) So, typically, subject peoples try to sidle up to imperial race…and imitate their speech, dress, and manners. During the Roman era, for example, the local people of Londinium wore togas, spoke Latin, gave their children Roman names, worshipped Roman gods and angled for jobs and gratuities from their Roman masters. Later, the British Empire brought out the same fawning sycophancies. Even though the English tried to keep their culture to themselves, it was not uncommon to see a freed slave in Jamaica or an uppity native in far Mandalay speaking English and wearing a waistcoat.

We are reading a book about an English slave trader on the Gold Coast in the 18th century. The man thought he was doing the Africans a favor by selling them into slavery in North America. First, because their prospects on the Dark Continent were so grim…and second because – as he saw it – the benefits of Christianity and Western civilization were so bright. Captain William Snelgrave provided an illustration to prove his first point. He went to visit a local chief (presumably to buy slaves). There, he saw a small child tied to stake, in miserable condition. When he asked what was going on, he was told that the child was to be sacrificed (and eaten) in order to appease the tribes’ gods. The captain promptly told the chief that his God would not permit such a thing. After some tense negotiation, Captain Snelgrave was able to buy the child and restore him to his mother. (The storyteller is not explicit about what happened to them later; we have to use our imagination. They were probably sold both to a cotton planter in Louisiana. Today, their descendants may be spread all over the United States of America, rigging local elections in Baton Rouge, studying marketing in Boston, and struggling to keep up with sub-prime adjustments in Modesto.)

Today, the U.S.A. is in the number one position. Whatever the cost, Americans have bragging rights to the imperial position…and the right to tell others what to do.

The president of all the Americans – George W. Bush – took full advantage of this privilege yesterday. According to the IHT, while making a speech in Egypt, he "presented Arabs with a lengthy to-do list." Of course, the list came not from any particularly deep or novel reflection on his part. Instead, he merely urged them to be more like George W. Bush.

Democracy is a key to peace, said the U.S. President, offering no evidence. He added that economies couldn’t flourish unless opportunities were offered to women, perhaps forgetting the first hundred years of the Industrial Revolution.

Meanwhile, the U.S. Army apologized for using the Koran for target practice.

*** Uh oh…and what’s this?

"Global food supplies at risk," says a headline in the IHT. "The brown plant hopper, an insect no bigger than a gnat, is multiplying by the billions and chewing through rice paddies of Southeast Asia."

*** Jules came back from Los Angeles last week, where he was working as an intern as part of a university film program.

"What do you think…are you going to work in Hollywood?" we asked.

"I don’t think it’s for me… It’s a strange business…and a strange world. And there are so many different things going on that it is hard to generalize. I was reading scripts. But only some scripts. If we got a script in the mail, from someone we didn’t know, we weren’t allowed to read it. We couldn’t open it. Because, the studio is afraid that it will be charged with stealing someone’s idea. So we send them back unopened.

"But when we got one from an agent…or someone they know…then, they’d give it to us to read. If we rejected it, they’d throw it away. But if we weren’t sure, they’d take a look themselves. Almost always they were terrible…just one stupid cliché after another. They all come from struggling screenwriters. All young. All with the same ideas, more or less. And all with the same awful writing.

"But the real trouble – and why I don’t think I’m cut out for a career in Hollywood, at least not as a screenwriter – was that I realized that my own writing was just as bad as theirs. I’m just like they are."

Until tomorrow,

Bill Bonner
The Daily Reckoning