Something Strange in the Neighborhood

The Daily Reckoning PRESENTS: There’s a chill in the air…and it’s not just the change of seasons. The Mogambo’s economic nose is twitching…find out why, below…

SOMETHING STRANGE IN THE NEIGHBORHOOD

I don’t know if it was because Total Fed Credit was down again by $3.7 billion last week, or that foreign central banks pulled out $12 billion from their account at the Fed, or that my wife is getting suspicious about something, or what, but something unnerving is in the air. And at times like these I think of the lyrics of the song “Ghost Busters” that goes something like “Something strange in the neighborhood. Something weird, and it don’t look good!” And if you saw the movie, you know he was exactly right!

The sensitive economic nose of The Mogambo goes “sniff, sniff, sniff,” and I triumphantly announce that the stench is not my feet, as is commonly assumed, but the rotting, bloated, inflationary, gangrenous body of the economy, and it portends the dismal, bankrupted, angry, cataclysmic end of the stock/bond/real estate/debt/government bubble, but (sniff, sniff, sniff) apparently covered over with gravy and chocolate sauce.

Michael A. Nystrom, in his essay at BullNotBull.com titled “Dow Manipulation” seems to agree with me. He notes that the litany of bad news is overwhelming when he lists, “The yield curve has remained inverted for months; we had the first negative reading in the Philly Fed index in three years; national housing sales have plunged and prices are showing their first declines since 1993. The index of leading economic indicators has declined for seven straight months. Online advertising revenue is down; newspaper advertising revenue is down; the help wanted index is down. Across the board the economic news is terrible – everything is pointing to a recession.”

So why are the stock and bond markets rallying? Government manipulation! “It makes me consider,” he says, “that the only thing standing between this market and a crash are the November elections.” Then he says the one thing guaranteed to send The Mogambo into a fit of panic and screaming, namely that inflation is soaring. “Under normal circumstances,” he says, “today’s inflation report – the highest inflation reading in 11 years – would have absolutely creamed the market. There is, to put it mildly, something fishy about this market.”

And when something is “fishy”, it means that it will get older, stinkier and more “fishy”, as it always does, until it rots away. And that lugubrious day may be coming sooner than any of us realizes, as Susan Albright has an article posted on IndiaDay.com titled “US Stock market showing huge divergence – a sure sign of a coming multiyear bear market.” In particular, the Russell 2000 versus the Dow is behaving strangely, although she did not mention the divergences between the Industrials and the Transports, as does Richard Russell of the Dow Theory Letters. She writes, as does Mr. Russell in the final analysis, that these huge divergences are “a sure sign of a coming multi-year bear market”, and that these kinds of anomalies are a “technical analysis tool for calling major bear markets.”

Her analysis? “The prospect of the economy going into recession is high. The growth prospects are low. The liquidity driven market may have already seen its best days.”

In a related note, the trade deficit is now greater than the current account deficit, meaning that we are importing more and more stuff from overseas, but we are not “exporting” as much services, and/or foreigners are not plowing their money into the USA, with customary reckless abandon. So where in the hell all this money is coming from to keep the stock and bond markets elevated is beyond me. But somebody is in for a shock.

And in that regard, Bryon W. King of Whiskey & Gunpowder writes that in following the definition of “financial crisis” defined by “the great analyst Charles Kindleberger”, then “Financial crises are ‘associated with changed expectations that lead owners of wealth to try to shift quickly out of one type of asset into another, with resulting falls in prices of the first type of asset, and, frequently, bankruptcy.”

He profoundly goes on to write, “Thus, financial crises are a product of sudden alterations of expectations, rooted in reality or imagination. If you are looking for a way to avoid financial disaster, this is the key level of understanding.”

I was surprised that he did NOT immediately go into a Patented Mogambo Tirade (PMT) about gold, which I would certainly have done, as in one short sentence he combines “financial disaster” with “a way to avoid”! Fabulous!

I leap to my feet, knocking the plate of nachos I had in my lap to the floor, which unfortunately makes them gritty and hard to chew, and I shout, “And what other way IS there, except by buying gold? Financial crises and disasters, created by governments and bankers, ARE what propel all of history!” Unbeknownst to me, the security guards, in undercover mode, were sitting right next to me, and instantly I was being manhandled and hustled out of the room. But they had foolishly forgotten to bring the gag with them, so as I was being dragged out I was yelling, “Gold! In all of the crises in history, nothing has ever combined ‘financial disaster’ with ‘a way to avoid’ like gold! Gold has always treated its owners very, very well! Usually when everything else (and everybody, like your neighbors and family) treated you badly! Like your nasty little goon squad here!”

The good news is that this “changed expectations” is classic “alternative energy” at its finest, in that the poisonous gaseous vapors of the rotting economy are the high-octane fuel for the coming Great Gold Rally, where the world is divided into two camps. In one camp are desperate, panicky people selling everything in their stock/bond/real estate/debt/government portfolios to buy gold and silver and hard assets.

And in the other camp are the people who already own gold and silver, and are watching themselves getting rich, richer, richest as the price climbs, climbers, climbests, week after week, month after month, year after year! And all without lifting a finger! A finger! In fact, as will be indicated in your permanent file, that is what you gave your boss a long time ago because of the riches you made in silver. And now we are all retired, having the time of our lives, since I assume the wife and family will take half of everything and finally leave, since I am sure that I will have become completely insufferable, and I will fondly remember how I called out after them “I hate all of you!” and they will have yelled back, as they motored away, “We hate you, too, Dad!” which completely rules out any slim, slim, slim chance of reconciliation. So get more silver now!

We may be getting evidence of this sort from alert reader Matthew C, who notes that “the once plentiful supply of ‘junk silver’ available on eBay seems have almost completely dried up.” And alert reader Frank says “suddenly now very little gold or silver for sale on eBay.”

And speaking of silver, something big is coming, as we gather from David Bond at the Wallace Street Journal, who got it from Peter Spina at Goldseek.com, who got it from Ted Butler at InvestmentRarities.com, that “Barclay’s iShares filed Securities and Exchange Commission S-1 to acquire another 168 million ounces of silver.” Mr. Bond helpfully notes, “That would be 11,525,000 pounds, or 5,232,452 kilos, of the stuff”, which is roughly “one-tenth of the entire output of the Coeur d’Alene Mining District since the 1880s.”

Supposedly, this is more than the entire stock of silver in the Comex warehouses!

Until next week,

The Mogambo Guru
for The Daily Reckoning
October 9, 2006

Mogambo sez: If you are not buying more gold and silver at these ridiculously-low manipulated prices, then you are making the biggest mistake of your life. And that egregious mistake is why the rest of your life will be spent reading investment commentary, like the stupid Mogambo Guru, instead of drinking champagne at a fabulous luxury resort and hanging out with your rich friends.

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 world has gone mad today, and good’s bad today,
And black’s white today, and day’s night today…’

-Cole Porter, “Anything Goes”

How often does the world go mad?

The last time the world went really mad was in the 1930s. For some reason, never explained by historians, psychologists or sociologists, people in that decade seemed to take leave of their senses. Of course, in light of what had happened in the Great War and the period just afterwards, the two were barely on speaking terms already. WWI killed millions and toppled and bankrupted almost all the major governments of Europe. The worst outcome was in Russia, where the Bolsheviks took control and proceeded to turn the place into a prison; it remained a Sing Sing for the next 70 years.

No one knows why, but the absurdity didn’t end with the long, pointless war…it just seemed to pick up speed. And by the ’30s…practically every major nation was caught up in the farce. The only major exceptions were France, Britain and the United States. And in these countries, too, the institutions of relatively free societies were twisted into hideous new shapes. In all three, taxes were raised…robbing one group of citizens in order to spread the money out among another, more numerous, group. New ‘social welfare’ programs were imposed – following Bismarck’s example – which undermined private, voluntary institutions in favor of the power of the redistributive police state. But the changes were far worse elsewhere. Germany was taken over by the Nazis. Italy by the Fascists. Japan by Militarists. China by Maoists…Nationalists…and the Japanese! And, of course, Russia, by the Stalinists.

Spain fought a civil war to determine which group of miscreants and malefactors would rule the place. This weekend, we were reading a history of the Spanish Civil War, which prompted our current line of thinking. Included were photos of Spaniards lining up…or marching. Some lined up to join the Falangists. Others waited in line to sign up with the Syndicalists. Still others milled around to attach themselves to the Anarchist movement. Seventy years ago, in Spain, every idea seemed to have an organized group behind it…and every idea was idiotic. Men – and women too – seemed ready to do the most outrageous things for the most outrageous reasons.

No middle ground…no compromise…no muddling through was permitted. Every group seemed ready to take up arms to push its agenda onto the rest of the population. Monarchists, Republicans, Unionists, Troskyites, Stalinists, Fascists – when voting failed to get them what they wanted, they took to the streets…formed alliances…stormed the arsenals…stole weapons…commandeered trucks and artillery…murdered authorities and rivals…took revenge…and generally made a bloody mess of things.

Of course, some were more ruthless than others. But when the pot gets stirred up…it is the most ruthless who rise to the surface. In a free-for-all, civilized manners count for nothing. There is a time and a place for everything. Chastity is of no use to a prostitute. And the killer who declines to work on Sunday is at a disadvantage; someone less restrained is likely to put a bullet in his brain while he is on his way to mass.

Spain was relatively lucky. It got Franco. Germany got Hitler. Russia got Stalin. China got Mao. Cambodia got Pol Pot.

What are we going to get next?

What bothers us is that there is no satisfactory explanation for these periods of madness.

Many analysts traced Germany’s collapse into the hands of the Nazis to the collapse of the Deutschemark ten years before. It wiped out middle class savings and upset traditional values; what had been black suddenly became white. People didn’t know what to believe or what to expect next. Traditional beliefs and faiths were called into question. Germany’s role in the world…and Germans’ roles in their own country…were undermined. When Adolf appeared on the scene – sure of himself, with a tough plan to put Germany back together, and no scruples to hold him back – people found it appealing. Pretty soon, they were raising their right arms as if to salute a Roman emperor…flattering the little corporal and making fools of themselves. Who could have known what madness lay ahead of them?

Who knows what madness lies ahead of us – after America’s middle class is wiped out by inflation, mortgage debt, and Asian competition…

Now, for the news from our currency counselor:

————–

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

“The BLS has ‘uncovered’ 810K jobs that have been created since March! But they aren’t going to make the adjustment now; they are going to wait until February of 2007. Why? Well, with this little thing we call an election coming up…”

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

————–

And more views:

*** I couldn’t help but listen to the talking heads on CNBC discuss the joy of the Dow surging to an all-time high. Who cares? Justice is right — it is a ‘sucker high,'” quips our commodities expert, Kevin Kerr.

“The cure for high prices is high prices is what I say. Then, on the flip side of the coin, the same clown-like analysts they have on CNBC begin to call for $45 oil and for copper to fall through the floor. I beg to differ.

“Raw materials and precious metals have pulled back enough, and oil certainly has. Sure, there is ample supply of crude oil right now, but a lot can happen between now and January. Things with Iran are about to heat up even more, North Korea is getting set to launch a nuclear weapon, for God’s sake, Venezuela is arming all of South America and oh yeah, it’s an election year. Forget about the dirty message scandal with Foley – that’s just absurd (unfortunately, it seems there are several other congressmen under investigation for the same thing). No, the real concern is that after the election, we may have a stalemate between Congress and the White House, and that could mean a long couple of years.

“Commodities are in my mind taking a deep breath before the next leg higher – possibly much higher. I expect oil to be back up to at least $68 by the end of December and gold to rally in November and head back toward $700 in fairly rapid succession. Some of the other commodities that have been browbeaten too, like sugar and OJ, in some respects, are all in a position now to rally hard as we head into winter.”

*** Japan is finally pulling out of its 15-year slump. We don’t have any comment about it except to notice that these cycles are long. Japan – still the world’s second largest economy – was on top of the heap in 1989. That was the year its stock market reached its peak of 38,915. In that year, too, the grounds of the Imperial Palace in Tokyo were said to be worth more than the entire state of California.

But madness is not permanent. It is cyclical. Japan gradually came to its senses…while on the other side of the broad Pacific people began to get a little giddy. Japanese stocks crashed, eventually going down to 7,831 in April 2003, a drop of 80% from its high …real estate collapsed…and the economy entered a long, dark period of off-and-on recession and falling prices. Meanwhile, America’s stock market boomed…with prices shooting up 11 times from the bottom in ’82 to the top in 2000. Then came the Tech Bust…knocking the NASDAQ down.

Readers will recall that we have spent a lot of time discussing how the U.S. bust should follow the pattern of the Japanese. The NASDAQ did follow the Nikkei, as it turned out, but not the Dow. Nor has the U.S. economy followed the Japanese – yet – into slump and deflation. That is still ahead, we imagine.

America has been able to extend its boom into a kind of Indian summer – by greatly increasing the debt of its householders, its government, and its businesses. But, come the slump, Americans…unlike the Japanese…will have no reserves to fall back on. They will fall back – everyone must, sooner or later – but instead of hitting a nice, soft cushion of cash, the poor lumpenAmericanoes will hit the hard pavement.

The Japanese were able to sit through their 15-year slump in relative comfort. They had savings to spend…and with falling prices…could live fairly well. Their major industries – Toyota, for example – were still making things at a profit…and selling them throughout the world. The Japanese even had the biggest trade surplus in the world…and the biggest stock of U.S. Treasuries. Nor did they have foreign wars to fund.

What will happen when the United States hits its 15-year slump? There is no surplus – neither in the federal government accounts…nor the trade deficit…nor the current account…nor the private accounts of ordinary citizens. Will Americans not feel a bit overwhelmed…a bit forsaken…a bit betrayed? Will they take it in good grace…and get on with their lives? Or will they put on brown shirts…and turn to politics?

But we are getting ahead of ourselves…aren’t we? For the moment, oil is barely over $60. Gold is trading at $576. Stocks are near an all-time high. The sun is out. You can still get a mortgage for less than 7%. What are we worried about?