"We" Includes the Chinese

The Daily Reckoning PRESENTS: For reasons the Mighty Mogambo cannot wrap his head around, the Chinese, instead of learning from us here in the United States, have decided to mirror the mistakes we’ve made with monetary policy. So when the Mogambo tells us “We’re all freaking doomed” – he doesn’t just mean the United States…

“WE” INCLUDES THE CHINESE

The policeman was yelling through the megaphone, “What are you so mad about, Mogambo? Come out of the famed Mogambo Bunker (MB), nice and quiet, with your hands up, and let’s talk about it!”

So, I fire off another burst of machinegun fire over their heads to recapture their attention, and shout through the gun port, “Don’t pretend you don’t know about how the Federal Reserve reversed course from their previous outsized $11 billion injection of credit into the banking system, you stinking lying cop! So, don’t insult me by acting like you were completely unaware that Total Fed Credit fell by $6 billion last week!”

As I am jamming home a fresh clip of ammo, I shout, “And what about Japan finally raising interest rates from zero to 0.25%? Rates have been zero for six years, you idiot Gestapo pig!” I squeeze of another long burst.

How could I explain to this government goon squad about the strange and scary perturbations in the flow of economics? Can they even be made aware of such things as the frightening levels of activity in the bank repo market, where $11 billion per day is now expected? With spikes into the high $20’s of billions! Per day!

Then, I realize how to connect with them! I shout, “What about oil, you jerks? The price per barrel is up around $75 a barrel, and the price zooms up and down by a buck and a half a day sometimes!”

And it is not just the money, but that such sudden, wild fluctuations are completely out of character for stable systems. And the terrifying thing about breakdowns in smooth, laminar flows is that a chaotic, catastrophic breakdown soon appears.

At this point, everything became confused and chaotic, as suddenly my wife and children were, for some reason, there in the bunker with me, bathed in a strange, wavering light, urging me to heroically shoot it out with the fascist goons and die like a proud martyr to Austrian economics and the gold standard. Suddenly, I awoke!

It turns out that I was only dreaming the whole thing! Whew! But the statistics, my panic, and the bullet holes in the walls of my neighbor’s houses are all too real, as are their vicious, lizard-like lawyers.

But the slimy schemes of the Federal Reserve are one thing, the paranoid hallucinations of The Mogambo are another. Actual inflation is yet a third thing altogether, making, in all, three. And on that note, and because I don’t want you to miss so much as a single syllable, I pick up my Mogambo High-Powered Megaphone (MHPM) and scream through it: “The JOC-ECRI Industrial Price Index jumped in July, rising to 130.17 from 128.18! That one-month gain of 1.6% in prices is a lot of inflation in one month! What is even more interesting, if you think that being eaten alive by inflation is ‘interesting’, is that the index is up from 108.95 a year ago at this time, which is an inflation rate of 19.5%!”

In an odd, almost tangential way, Frank Holmes, CEO and chief investment officer of U.S. Global Investors, has a few words in the annual report, entitled “The Rise of The Chinese Consumer.” He writes, “China’s energy consumption is expected to be 69 percent higher in 2010 than in 2002, according to the Federal Energy Information Administration. That growth rate is five times higher than the estimate for the United States and more than 15 times higher than Europe. China, in the midst of a massive infrastructure build-out, used half of the world’s cement and 40 percent of the world’s steel last year, according to government statistics.”

Now, as a pop quiz, take out a clean sheet of paper. After paying particular notice to his use of the phrase “in the midst of a massive infrastructure build-out,” combine that with the statistic that China, alone, was responsible for half the world’s consumption of cement and steel (and a lot of other things, too!) last year, to derive the longitudinal extrapolation of this exponential trend to arrive at Probable Price Predictions (PPP) for various assets, upon which we could Make A Big Pile Of Money (MABPOM) by investing in them.

Congratulations to those of you who demonstrated True Mogambo Attitude (TMA) and contemptuously said, “Screw that!” As luck would have it, Mr. Holmes immediately went on to give the answer to that very problem when he said, “But because of years of low commodity prices and other factors, exploration and development of these now-coveted resources have not kept pace with global population and GDP growth. That has created an Economics 101 scenario – demand is greater than supply, so prices climb.”

And, if you are not content with merely owning gold and silver to participate in the general rise of prices, but want the excitement of daily wheeling and dealing and trading to make the Big Money Fast (BMF), then Mr. Holmes has the perfect investment philosophy for you: “Whatever China needs, get long, and whatever they have as surplus, get it out of the way, because China will just dump it.”

I can personally testify to this last point. Mogambo Money-Grubbing Enterprises, Inc. (MMGEI) has the distinction of being the only stock in the world that actually has a negative worth, as even one share of this despicable company is considered too many, and people actually take a loss to pay other people to take the stock off their hands. Well, the story is that last week one lousy share of this toxic stock accidentally got misfiled in the portfolio of a Chinese woman, see, and desperate to get rid of it, her hand moved so fast throwing it out that it went through the time barrier! Talk about being dumped! Hahaha!

But Mr. Holmes is apparently not remotely how despicable both my corrupt company and he calmly goes on to note that the continued gobbling of resources by China for years to come is written in stone, as “China plans to build 14 express highways, six railways and a dozen new seaport facilities before 2010.” In three years!

It is not only China, but he also says that “India invests 3.5 percent of its GDP on power plants, roads and other infrastructure and the government there is financing ‘industrial townships’ to promote more manufacturing. Even Bangladesh, one of the world’s poorest countries, is building hundreds of miles of highways, as well as schools, water systems and the like.”

I jump up and say, “Hey! Mr. Holmes! Hey dude! How about an analogy so that we can, you know, like, get a taste of the economic results?” He looks at me with the usual disgust and revulsion, and with a voice dripping sarcasm, asks “Do you even know what an analogy is?” I say, “No, but that was not my question! So do you have an analogy, yes or no, and why are you motioning to the security guards like that?”

Without even pausing for a moment’s reflection, he says, “A good example of this is when the U.S. built interstate highways in the 1950s. This construction work absorbed more than half of the world’s commodities.” Yow! What an amazing statistic! And what a nice economy it produced, too! I was so stunned by this that I reacted too slowly to the sound of someone yelling, “Get him, boys!” I was soon unceremoniously hustled toward, and dumped into, the hallway outside.

And a good thing, too, as down the hall I heard Stephen Roach, of Morgan Stanley, saying that China “has a central bank that was reorganized in 1998 along the lines of America’s Federal Reserve System.” And they have a fiat currency! In other words, China is screwed, too!

I laugh contemptuously (“Hahaha!”) at these Chinese doofuses for their incompetence and stupidity for copying the same stupid mistakes in monetary policy that everyone else made, namely listening to America when we, slopping around in our stupidity and greed, extolled the siren-song virtues of a fiat currency and the powerful currency derivative of electronic digits in bank computers, all multiplied by an extraordinarily lax fractional-reserve banking system. Morons! Just like the rest of us! Morons!

That means that China and India will also experience the horrifying inflation in prices, too. And so the next time you hear me say “We’re all freaking doomed,” remember that the category “we” includes the Chinese.

Regards,

The Mogambo Guru
for The Daily Reckoning
July 24, 2006

Mogambo sez: There will not be a Mogambo Guru newsletter next week, due to a confluence of an unforeseen family situation and my appearance at the Agora Financial Wealth Symposium in Vancouver. But this issue of the MoGu was extra long.

And don’t look for one of those filler “Best Of” substitutes by publishers, because they have all looked, and there isn’t a single issue that ever rose above the level of “awful and stupid,” which I think says something more ugly about the people who publish or read the Mogambo Guru newsletter than it does about me.

So use the time wisely: Buy more silver and gold.

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.

What we think is happening is what we expected to happen, and what should be happening: consumers are running out of money as fast as we are running out of similes and metaphors.

How do we know? Well, we don’t, but we can take a guess from the evidence before us. The Dow seems to have topped out. So have transports. Housing prices. And the economy itself. Retailers and homebuilders are clearly on their way down.

Of course, the rich are still getting richer. But that is little consolation to diaper salesmen, automobile merchants, or the vendors of any of the countless other things that keep a consumer economy in business. So, when you read that average incomes are up or that the average consumer has more money on hand, remember that these averages include Bill Gates and Warren Buffett. As the rich get richer, the average amount of money people have goes up. But the typical person is not rich and is not getting richer. He’s actually losing income. And now, with declining house prices, he may be losing “wealth,” too. He is also paying much more for gas and heating than he was a couple of years ago. And, he is also facing a higher mortgage payment now.

Generally, it is not rich people who buy houses with ARMs (adjustable rate mortgages). They’re not concerned with keeping their monthly payments low. They don’t think that way. What they’re interested in is the net cost. So, they’re likely to buy for cash or use simpler, cheaper financing.

A rich person might bid up the price of a fancy vacation, top-quality wine, or a luxury house in Greenwich or Malibu. But he buys about the same quantity of diapers, laundry detergent and gasoline as anyone else. And when he gets more money in his hands, he doesn’t spend it at Wal-Mart on jumbo boxes of breakfast cereal.

No, dear reader, the consumer economy does not rest on the spending of the rich, but on the spending of the average, the ordinary consumer. It is the average man who has given an ARM (and a leg) for his life-style. For, unlike the rich, lower- and middle-class consumers are very sensitive to marginal changes in income. They live without much in savings, and even a slight fall-off in earning must be made up, either with debt or reduced consumption.

Of course, people used to save money “for a rainy day.” But after Alan Greenspan took control of the weather, no one saw the need. Savings rates plummeted to zero. The lumpen householder spent all he earned…and then some. His standard of living increased, even while his income stagnated, or actually fell.

How was this possible? Very simple. His wife went to work and he borrowed. On the first point, we would merely like to point out that a non-working spouse represents a kind of savings. And an investment. The stay-at-home spouse, presumably, helps the children with homework, keeps them out of trouble, and shapes their minds and attitudes for success. We have no proof, but we’re prepared to believe that the children of an attentive, at-home parent do better than those of two working parents (To say nothing of single-parent households).

The non-working spouse provided a reserve for the family. If the breadwinner broke his leg, his wife could take a part-time job while he was on the mend. If the family suffered unanticipated expenses, likewise, the stay-at-home spouse could re-enter the workforce to make up the loss.

But now, both parents work. And expenses have been brought up to match the couples’ joint income. What will happen if one of them loses his or her job? Well, that’s what credit cards are for! Or mortgage refinancing!

At least, while the housing boom lasted, the consumer could feel wealthy even without making more money. He had something to borrow against. And he could tell himself that he was really just “taking out” equity that was really his.

But now that the housing boom is over – or making sounds like it is – debt looms not just for marginal consumers, but for the whole country as well.

Let’s check out what is brewing at the Desidooru Saloon

————–

Justice Litle has this post for your consideration:

“If Iran Kicks off World War III, and Iran’s clout is a product of $75 oil, and $75 oil is Easy Al’s indirect doing, does that mean we can prosecute Greenspan for war crimes?”
————–

And more thoughts from Paris…

*** The United States used a record amount of power during the hot spell. Another way to look at it – Americans paid a record amount for gas and air conditioning.

We’re still intrigued by the point we made last week: The major wars of the 20th century were not necessarily won either by the good guys or the smart guys. (In World War I, all the combatants were about equally wicked and equally stupid. In World War II, the Soviet Union was the big victor, but it could hardly be described as good. The Bolsheviks made their country more miserable, in many ways, than even the Nazis managed to make Germany.) Instead, the victories went to those who had oil. Especially, in WWII, strategies were determined by the absence or abundance of fuel. Germany and Japan had limited access to energy; so they had to turn their military forces away from purely military objectives in order to secure fuel supply lines.

Now, America is the world’s biggest importer of oil. It is she who worries about her fuel supplies, and she who bends her foreign policy toward oil fields. She puts her soldiers to work guarding gas stations.

*** Another Internet bubble? We hope so. The first one was so much fun.

Once again, the Internet money is flowing like cold beer on a warm day – $5.6 billion was put into new deals in the first quarter alone. Spectacular prices are being paid for Web sites with little revenue and no clear way to bring in more.

You’d think investors would have learned better. But investors are like voters. They can never remember more than four years back.

*** “Errors hurt 1.5 million,” says an AP headline.

Our theory, here at The Daily Reckoning headquarters, is that all things age – including empires. And as they age, parasites lodge in their nooks and crannies, taking away more and more of the organism’s energy and diminishing its effectiveness. As time goes by, more and more money is spent on, say, defense, while people get less and less real defense from it. The same could be said for many other institutional activities – corporate management, money management, health care, education, and government generally.

The AP continues:

“More than 1.5 million Americans are injured every year by drug errors in hospitals, nursing homes and doctor’s offices, a count that doesn’t even estimate patients’ own medication mix-ups….

“Perhaps the most stunning finding of the report was that, on average, a hospitalized patient is subject to at least one medication error per day, despite intense efforts to improve hospital care in the six years since the institute began focusing attention on medical mistakes of all kinds.

“The new probe couldn’t say how many victims of drug errors die. A 1999 estimate put the number of deaths, conservatively, at 7,000 a year. Also unknown is how many of the injuries are serious.”