25-Cent Tacos Still a Pipedream

The Daily Reckoning PRESENTS: The Mogambo is a bit confused. How is it that gold exports are up, but our gold isn’t actually leaving the country? The answer to this question – and more – below…

25-CENT TACOS STILL A PIPEDREAM

I was looking at the Market Laboratory/Economic Indicators page of Barron’s this week, when I was struck by the fact that the six-month Certificate of Deposit is yielding 5.35%, and how this interest rate is way above almost every other listed money rate in the world.

“A Swap Story: Borrowed From The Bank of England”, an essay by Rob Kirby of KirbyAnalytics.com, is very interesting. Noting that the Commerce Department reported, “U.S. gold exports rose 55.0% in August from the previous month, and was up 83.0% from the previous year”, Mr. Kirby refers to an email he got that contained the interesting point that “with a deficit in gold supply worldwide, it is highly unlikely that this is U.S. owned gold leaving the country.” If you are like me, then you suddenly have questions, like “Huh? Gold exports are up, but our gold is not leaving the country? How can this be? And how come we can put a man on the moon, but we still can’t get a good 25-cent taco?”

The anonymous writer, rudely and foolishly ignoring my Important Mogambo Taco Question (IMTQ), answers the easier question (the gold paradox), by explaining, “You should be aware that when a foreign central bank repatriates its gold from storage at the Federal Reserve Bank of New York, it shows up as an export credit in the trade data of the [United States].” Wow!

So using this fabulous technique, when my snotty neighbor comes over here to angrily demand that I return his stupid barbeque grill that I am still storing in my garage after having “borrowed” it sometime last year (or maybe the year before, I forget which), I can now count the entire transaction on the books as a credit to me? Wonderful! Hahahaha!

This is terrific! Now, the next time someone – like my wife for instance – starts up with me about how I don’t make enough money to suit her, or the kids, or her friends, or her family, or the people I owe money to, or even complete strangers who reflexively just hate “me for being me,” I will whip out my thus-adjusted financial statements and shove that big, fat, juicy credit right in her hateful little face! “Chew on that, demon-woman!” Hahaha!

Apparently, no one is interested in my little victory here, and instead they want to know things like, “Why are they doing this?” Well, at last count, there were two prevailing theories. One theory is that the foreign central banks have (to their horror) deduced that “That Stupid Mogambo Loudmouth (SML) was right! Fiat currencies are crapola! We need to get our gold! And get some more, too! Otherwise, we’re freaking doomed!”

The other, more accepted (and probably correct) theory is enunciated by Mr. Kirby himself, who explains, “you can’t blame these ECB banks! When a nation drops habeas corpus and the Geneva Convention, a little matter like theft of other nation’s stored gold is not a stretch.”

Then Mr. Kirby puts dry numbers on the wet human face, and says that it’s “amazing to think that the U.S. Trade Deficit would have been another $2.5-3 billion worse without the inclusion of this ‘export’, ehhh?”

“Ehhh” indeed, the lying, manipulative, greasy bastards! Well, that’s what I think anyway. But Mr. Kirby is far too refined to scream insults until his throat is raw and sore. But instead, he makes the same point in a more roundabout way, like using “the words of former Secretary of the Treasury [Clinton Admin.] Robert Rubin as he revealed the motivation or drivers of crisis management in the interaction between himself, Lawrence Summers, the ESF [exchange stabilization fund], the IMF and presumably the Maestro at the Fed – during the Clinton administration.

“On pages 290-291 of his book, In An Uncertain World, referencing the Brazilian financial crisis of the late 1990s, Rubin outlines how very expensive ‘bad decisions’ can buy time. Sometimes, he asserts, these bad decisions have a great deal of merit because they can, ‘…probably defer the impact of the collapse for six or eight months, and that will more than justify the effort.'”

Wow! So applying Rubin Theory to a real life situation – suppose I go into debt to buy a very expensive custom golf bag, a very, very expensive set of golf clubs, and a very, very, very expensive country club membership, but I ain’t got no money, and ain’t a-gonna get any, either.

Obviously, I need to hide this from my wife for another six to eight months, at which time I will merely declare bankruptcy, start drinking heavily, maybe do some drugs, ruin everyone’s life, desert the wife and kids, try to collect welfare, get into a fight when they say no, end up in jail and die of a brutal beating from fellow inmates who, it turns out, hate me as much as my family and neighbors do. But I get six or eight months of free golf!

So, using Extreme Rubin Theory, if I cleverly kill anyone who knows I have these things, then it is worth it, because it bought me some time? Hahaha! Situational ethics at its finest!

Actually, this is an old idea. If you have ever watched any old Perry Mason episodes, starring Raymond Burr, then you know how many murderers confess, on the witness stand in the episode’s last minute, that they killed someone to get “a little more time!”

Thus life, and politics, and the economy, imitate television? Things are worse than I thought!

The good news, I suppose, was that “consumer prices in the [United States] fell last month by the most since November 2005, reflecting a decline in energy costs that may temper inflation in coming months. The consumer price index dropped 0.5 percent in September following [a] 0.2 percent increase in August,” the Labor Department said in Washington.

In response to this silliness, I am in the back of the room making rude noises that sound like flatulence, which may or may not have contained actual flatulence (depending on who you are talking to), and which may be what motivated them to admit that “excluding food and energy, so-called core prices rose 0.2 percent for a third month.”

Since no government agents stormed the room and kidnapped anybody to prevent bad news from getting leaked, they apparently felt emboldened to also admit that “today’s report also showed that core prices rose at the fastest pace in a decade in the 12 months through September, showing inflation has yet to dissipate.”

Still no government goon squad agents crashed through the doors to arrest everyone. You could feel their confidence rising as the report went on to say, “Core prices rose 2.9 percent from a year earlier, the biggest 12-month jump since February 1996, after a 2.8 percent gain.”

I gulp. By this time, my beady, rat-like eyes are nervously eying the locations of exits, mentally scoping out lines of retreat and the whereabouts of people I can grab to use as a human shield during my getaway.

Feeling stronger by the minute, they reveal, “So far this year, consumer prices are rising at a 3.4 percent rate. Core prices are rising at a 3 percent rate, after a 2 percent pace during the same period last year. Food prices, which account for about a fifth of the CPI, rose 0.3 percent in September after rising 0.4 percent the month before.”

Gaahh! By this time I am edging my way towards a window I can jump out of, as this is still terrible news! I can’t believe that the Bush administration would allow these Labor Department people to keep “poisoning” the American people with their vile, un-American exposure of the truth about the horror of inflation all around us!

Even though inflation is building and building, if you are retired, don’t look for Social Security to save you, as “today’s report also suggested retired U.S. workers receiving Social Security benefits will earn about $33 more each month beginning in January, a smaller increase than they received this year. The estimated monthly payment will rise 3.3 percent in 2007, compared with a 4.1 percent increase this year that was the biggest since 1990. The adjustment will bring the monthly average to approximately $1,035 from this year’s average of $1,002.”

And out of that $33 a month increase, Medicare Part B premiums will increase $5 a month, dropping the net increase to $28 a month. About four bucks a week. Whoopee!

In a related point, Dean S. who is a pharmacist, writes, “In the past, indigent and handicapped adults that qualified for Medicaid benefits were paid for out of state funds, a portion of which were provided by federal funds. Most of those beneficiaries are now in Medicare Part D plans paid by federal funds.” And so, even relieved of the expense of medical care for the indigent by dumping it on the federal government, the states are still spending like crazy? We’re freaking doomed!

Until next week,

The Mogambo Guru
for The Daily Reckoning
October 30, 2006

Mogambo sez: Even through the steel-reinforced concrete walls of the Big Blooming Mogambo Bunker (BBMB) I can almost feel the coming cataclysm, and pity those who have not moved their money into silver, gold and other commodities – especially oil – or have otherwise bet against the dollar and the preposterous U.S. economy.

But they will soon learn a valuable lesson, as have all stupid people who have foolishly entrusted a government to issue fiat money, and as have all stupid people who have foolishly allowed the banks to engage in such preposterous amounts of fractional-reserve banking, and as have all stupid people who have foolishly allowed their governments to grow so large as to actually become their economy.

And it is a cruel lesson that their children will learn first-hand, too, and their children’s children will learn second-hand. So there is, I suppose, an upside to it all, if increasing national smarts can be counted as increasing national wealth. Cold comfort, perhaps, but maybe better than nothing, which is what they deserve, and which is exactly what they will get.

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.

There are certain things we take for granted, even though we can’t see them.

Take gravity, for example. When we travel to Australia or Argentina we are on the bottom of the world, depending on how you look at it. Still, we don’t expect to fall off.

And debt. We take it for granted that when you borrow you have to pay back. “He who takes what isn’t his’n, pays it back or goes to prison,” is the old expression.

Or, on the other hand, according to the Denver Post, he who goes to prison, can take what isn’t his, and still not pay it back. Colleague Dan Denning – in Australia – drew our attention this morning to the following:

“Lenders supplied former inmates millions of dollars to buy homes that they never occupied at inflated prices.

“At The Villas at Cherry Creek in Aurora, a gated community overlooking Cherry Creek State Park, five former inmates bought 12 homes at inflated prices in four months.

“Neighbors noticed these homes remained strangely vacant – until 150 cars and hundreds of young people poured through the gates for a raucous party at one villa last New Year’s Eve…

“One house on that list, 14001 E. Whitaker Drive, was offered for sale at $525,000. The asking price then jumped $150,000, and Zion Development LLC, which owned the house, sold it for $675,000 to Taiwan Lee.

Zion was managed by Timothy Todd DeNeui, a Highlands Ranch businessman who serves on the advisory board to Global Connection International, a Christian missionary organization that works in Third World and communist countries.

Lee was 23 years old when Colorado paroled him in July 2004 on drug and escape charges…On Feb. 17, 2005, when Lee bought 14001 E. Whitaker Drive from DeNeui, he had been back in prison for seven weeks, according to the Colorado Department of Corrections…DeNeui sold 14034 E. Whitaker that day to Cindy Ingram, also wanted for violating parole on drug charges. She borrowed $1.8 million for those homes. Talita James, a convicted cocaine dealer, bought two villas across the street from each other in one day for $1.1 million, promising to occupy them both. Her brother Torrence James and Ervin Camack, both released from federal prisons in Colorado, each bought another villa.”

“Where did all the money go?” asks the Post.

Apparently, Torrence James and Ronald Fontenot, a man he met in federal prison in Colorado, became mortgage brokers in Colorado, which did not regulate brokers at the time.

Then, the Post tells us:

“James and Fontenot recruited buyers, supplied false loan application information, arranged to buy homes ‘above the listed sales prices’ and told sellers the homes would be appraised above asking prices, an indictment against them alleges.

“They also set up businesses purporting to make home improvements, which they instead used to siphon money at loan closings to themselves and pay kickbacks to the buyers…”

The lawsuit against the pair accuses them and others of taking $2.1 million on 17 houses sold at inflated prices, most of which have been foreclosed, and of stealing others’ identities and forging their signatures. It seems that De Neui, Torrence James, Fontenot and a broker would sell homes to “straw buyers or investors at escalated sales prices supported by inflated appraisals.”

And what happens to the shady loans?

“Critics say mortgage companies have little incentive to ferret out inflated sales because they bundle and resell their home loans to Wall Street investors, taking their profits and diluting fraud losses in large pools of mortgage-backed bonds.

“‘These securities get “sold in little pieces all over the world,”‘ said Lou Barnes, a Colorado mortgage bank owner. ‘It makes it very difficult to figure out who, if anyone, bears any responsibility for the flow of Colorado’s foreclosures.'”

And, there other schemes involved in the fraud. The Denver Post continues:

“One woman says her health and retirement have been compromised by an ID thief’s buying homes in her name…Jantz traces her troubles to the day in 2005 that she explored the idea of refinancing her home. She gave her Social Security number over the phone to several mortgage brokers whose offers sounded promising.

“‘My big mistake,’ she said.”

But she is not alone. Many Americans have been making mistakes almost as bad. In the five years since 2001, Americans have added $5.3 trillion to their indebtedness – up 77 percent. The longer the boom lasted, the more they took out – reaching a peak in the first half of 2006, when cash was getting taken out at the rate of nearly $700 billion per year.

But you can’t ‘take out’ forever. Eventually, you have to put back in. You have to pay back debt. So the ‘taking out’ phase, which is inflationary – meaning that people have more money to spend, which tends to drive up prices, is followed inevitably by the paying back phase, which tends to be deflationary; people have to cut back on their spending in order to send money to their creditors. The quantity of money should remain the same, but the amount of money available for buying things shrinks.

When a creditor lends money, he still considers himself in possession of wealth. But the debtor also has money to spend. Between the two of them, spending capacity has doubled. And when the money is paid back, spending capacity is cut in half.

Of course, no one expects American householders to actually pay back what they borrowed anytime soon. But three things are happening that must force people to cut back on spending. (Continued below…)

More news…

————–

Chris Gaffney, reporting from the EverBank world currency trading desk in St. Louis:

“The drop in energy prices has restrained inflation, and with this first estimate of third quarter GDP coming in weak, I expect the Fed to hold rates steady for the remainder of 2006 and into 2007.”

For the rest of this story, see today’s issue of The Daily Pfennig

————–

And more thoughts…

*** First, those infernal ARMs are being reset to higher monthly payments – about $1 trillion of them in a 12-month period. So, homeowners have to reach deeper into their pockets just to continue living in their houses.

Second, the housing boom created a mini economic boom; in many places it was the largest source of employment. Most recent figures show homebuilding activity falling at the sharpest rate in 15 years.

And third, as the boom in housing ends, the flow of credit to homeowners is squeezed off. They can’t continue spending as they used to.

Which is why the big news on Friday was that the U.S. economy is slowing down faster than economists had expected. Instead of growing at a 2.6% annual rate…as it was in the second quarter…GDP grew only at a 1.6% rate in the three months from July to September.

We were relieved to hear it.

Because we had begun to wonder. If the most basic laws of the economy had ceased to function…what else might be going wrong?

As spending declines so must a consumer economy – which is why we are happy to see GDP declining. It shows that the planet still turns as it should. And when we travel to Australia later this year to meet our colleagues, we won’t have to worry about falling off.

We also note small signs that consumer attitudes are changing. “50 Ways to Slash Your Grocery Bill,” appeared as a headline on the Compuserve portal this morning. During inflationary, expansionary periods, people aren’t concerned about the cost of food. Why worry about the cost of carrots when your house is gaining in value at $20,000 per year? But when the deflationary period comes, every penny counts.

Neither in love, nor in war, nor in economic bubbles do you stop to count the costs. It is only when the passion is over that the bills and regrets are toted up.

*** A man who has a lot of money is not primarily interested in making more. He has reached the point of ‘declining marginal utility’ of money. Another dollar means nothing to him. What really concerns him is not losing the money he already has.

He’s interested in capital protection, and tends to put his money into things that are not likely to lose him money – such as U.S. Treasuries, municipal bonds, large-cap stocks and utilities.

A man who has no money tends to be a speculator. He figures he has nothing much to lose. Besides, he needs big gains in order to build wealth fast. So, he looks for small-cap stocks, emerging markets, start-ups and get-rich-quick schemes.

Both approaches are usually dead-ends. The rich man is spared sudden, sharp losses…but he is practically guaranteed a slow, steady drain on his capital. After inflation, taxes, and the inevitable loss here and there, he generally loses a little each year. After a generation or two, his money is gone.

And the speculator? Sometimes he gets lucky. But even if he gets lucky a couple of times…eventually, his lucky streak runs out and the poor man ends up back where he started.

No, dear reader, neither protection nor speculation really work. What works is careful investment, which requires both knowledge and patience. It takes no knowledge at all to buy a U.S. Treasury bond. In fact, the more you know about the real financial condition of the U.S. government, the less likely you are to want to lend it money. Nor does it help when you find out more about a small company – except that you’re less likely to want to buy its shares.

Here’s a general rule: the more someone wants to sell you an investment, the more you don’t want to buy it.

At both ends – speculation and protection – there are salesmen. The expensive suits on Wall Street specialize in selling super-safe investments – such as U.S. Treasuries – to their rich clients. And the cheap suits in brokers’ boiler-rooms in Boca Raton specialize in calling poor clients on the phone to sell them a small cap. Both the cheap suits and the expensive suits need to earn a living. On Wall Street, the average salary is $300,000 – and that includes the janitors. As for the Boca Raton salaries, we don’t know, but Florida is no longer cheap.

But there’s more to it than just the cost of the intermediaries, or what Warren Buffett calls the ‘friction’ in the system. There is something more profound. Typically, the owner of an investment knows it better than the buyer.

Imagine a small company. The entrepreneurs who started it know it better than anyone. If it were such a good business, why would they want to sell it to complete strangers? If you could earn a decent return on equity, why share the equity? You will say they sell shares in order to get the money for expansion. But if the business were so good, why not just borrow money?

Of course, there are a lot of reasons to go public. And many good companies do go public. And many stock market investors do make money by buying shares. But the odds are stacked against the casual speculator. He is buying a share of a company he doesn’t really understand from someone who knows it better and has figured out that he’s likely to get a better return elsewhere.

This is only slightly less true with the big institutions that sell Treasury bonds. They must figure they make more money by selling them than by buying them.

More on this subject as the week progresses…