Crazy-Making Cognitive Dissonance

Double-digit commodity inflation, soaring cost of energy, producer prices at a 9-year high…and yet Greenspan’s posse insists that no, there is no and will be no consumer price inflation. The mind reels!

The CPI increased by 0.3% in February, and the news flash was slipped to me under the door of the Mogambo Bunker, as I had been dreading the announcement. One of these days we are going to see not only inflation, but roaring price inflation, which is guaranteed by all the monetary inflation.

The Associated Press tried to find a little silver lining in the news, and reported that "The increase in the Consumer Price Index marked a slowdown from the 0.5 percent jump registered in January." Ain’t dat nice?

Then the press all apparently went to lunch and got real drunk and bought some mind-altering drugs from some guy on the street named Carl on the way back to their offices, and this allowed them to continue in Greenspan-speak. I can imagine that they spoke with slurred voices, swaying unsteadily on their feet, their pupils alternating between dilated and constricted, as they said that "Excluding energy and food costs, ‘core’ consumer prices rose by just 0.2 percent in February for the second month in a row. That suggested the prices for many goods and services were fairly stable."

Price Instability: Same Inflation=Price Stability?

See? If inflation is the same for two months in a row, no matter how much higher prices are, then prices are stable. Wow! See how simple this stuff is when you’re the government and you can’t be fired for saying something so stupid that you would slap your kid if they dared insult your intelligence like that?

Of course, the press included the obligatory corroboration that "Federal Reserve Chairman Alan Greenspan and his colleagues said inflation is not a problem for the economy." What they meant to say is that Greenspan and his colleagues said that disguising and lying about inflation is not a problem for the economy, because it is not a problem for them, and they figure that they ARE the economy! So, no problem! Yet you can’t pick up a newspaper or hear the news or listen to one of your irritating neighbors these days without hearing a whole lot of whining about the high cost of things.

And almost at the same time, we have this Greenspan person telling us that prices are not going up! It makes you crazy at the cognitive dissonance, when supposedly educated and trustworthy people are telling you that what you are seeing with your own eyes is not happening right in front of your own eyes!

On the same day last week, crude oil went over $38 a barrel, commodities zoomed in price, and gold jumped $4.50…so it looks like these are examples of things that are NOT "stable" in price.

Similarly, the Economist magazine notes that their dollar-based index of commodities has risen by 28% since January 2003. The yen-based inflation is right behind it, at 17%, followed by the sterling index at about 12%, and then by the euro-based index, at 10%. The lynx-eyed among you will no doubt notice that in every single instance the inflation in commodities was in double-digits.

Then, and I hope you are sitting down for this and have an IV inserted into you arm that is dripping some kind of powerful tranquilizer into your veins by the quart, the long-awaited PPI came out, and the guy who delivered it to me must have glanced at the page and noticed that it said that prices were up strongly. It doesn’t take a genius to realize how that kind of news is going to affect me, so he just tied it to a rock and heaved toward the Bunker du Mogambo. It hit the door with a thud and lay there on the ground. I fired off a few bursts from the Mogambo Machinegun System (MMS) to suppress any incipient hostile activity, and I quickly opened the door to the Mogambo Fortress of Solitude and snatched the report up off the ground and ran back inside. Quickly slamming the door shut, throwing all the locks and activating the Mogambo Monitoring and Surveillance System (MM&SS) into Full-On mode, I gobbled down a few nitroglycerin pills as a wise precaution, and then leisurely read that prices were up for the month, and by 0.6%. In March, the Philly Fed’s prices paid component surged 9.7 points to 53.4. The ‘prices received’ subindex climbed 3.7 points to 22.6. Both are at the highest levels in nine years.

My immediate reaction was an involuntary tightening of my trigger finger as I staggered about clutching my heart, and then, according to expert testimony, was enveloped in a confluence of outrage, fear, and panic in doses that were, according to sensitive instruments developed specifically for the purpose, off the charts!

Price Instability: Prices Going Up Doesn’t Mean Prices Went Up

Of course, there was the rush by government wonks and the stupid class of people in America, which is the class known as "American economists," who all decided that prices going up did not mean that prices went up, and even if they did, then it is okay, and it is nothing to get worried about, and that it actually meant that this was the perfect time to buy some stocks or bonds or houses or something.

And then the next day, in the WSJ column "Ahead of the tape," by Aaron Lucchetti, we read that "The big question for bond investors is whether factories and other ‘producers’ will eventually pass on some these small, but growing, price increases to consumers." Then we are treated to the opinion of an American economist, namely Michael Ryan of UBS Financial Services, who thinks that maybe these producers will not be able to pass along those price increases to consumers. He says that while there is a historical tendency for consumer prices to rise following producer prices rising, "It doesn’t always transfer."

"Historical tendency." I like that.

Well, I am here to tell you and Mr. Ryan that rising producer prices rising are always paid by somebody. Either the consumer pays them, or the stockholders pay them in the form of reduced profits. Either way, somebody pays, and they take the whack to the head.

Christina Wise of Investors Business Daily wrote a column entitled "PPI Rose 0.6% in Jan; Prices Up in Pipeline," and it shows that she is on the same page as the Mogambo, too, as she writes, "Others see inflation ahead, saying eventually higher production prices will be passed on to consumers."

David Littmann, chief economist at Comerica Bank, pretty much agrees with me and Christina’s un-referenced "others," and says, "All commodity prices are up and I think that’s a worrisome sign because these wholesale prices do precede CPI. There’s no nice way of toning it down. It presages a great deal higher inflation next year."

So, will producers be able to pass along the higher prices? I am here to tell you that there are very few stockholders that are going to let the executive management staff sit around on their fat keesters, soaking up gigantic loads of perks and benefits and stock options, while the income of the stockholders goes down, all because the company is absorbing higher costs. Those managers who are still around next year at this time will have figured out some way, some ingenious way, some desperate way, to increase the prices that consumers pay. And if you want REAL "historical precedent," this is it.

Regards,

The Mogambo Guru
for The Daily Reckoning
March 29, 2004

— Mogambo Sez: Each day I wake up more scared than the day before.

Editor’s note: Richard Daughty is general partner and C.O.O. for Smith Consultant Group, serving the financial and medical communities, and the editor of the Mogambo Guru economic newsletter, an avocational exercise the better 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. If you’re inclined to read more, you’ll find the whole Mogambo here:

The Huge Flywheel and the Putt-Putt Economy

"Lapidation."

A woman had been caught in flagrante delicto with a man who was not her husband. The priest used the word ‘lapidation’ to describe what a mob was about to do to her when Jesus came along.

"Let him who is without sin cast the first stone," said the Nazarene.

That shut them up. They must have been looking forward to lapidating someone, but Jesus’ remark took the fun out of it. None of them could pick up a rock without his neighbors laughing at him.

Lapidation has nothing to do with today’s financial remarks. But we just learned the word and wanted to try it out.

Today, we have no new insights on finance. And as our market correspondents are otherwise engaged this morning, we bring you few new figures (though Eric promises an update from New York tomorrow). We only note, not particularly helpfully, that trends can carry on for generations and often carry much further than anyone can imagine.

We celebrated mass yesterday in a magnificent church, at the top of the Spanish Steps, built by Louis XV of France to the glory of God…and his own, of course. Typical of the many places of worship from the period, the interior is embellished by gold leaf, paintings, marble, carvings, and other do-dads. Too bad for you if you want to add a little garnish…every square inch is already taken up.

Our son Henry is being confirmed in St. Peter’s today. Yesterday, his class from Paris took over the Trinita dei Monti and conducted a sumptuous service in French. Henry served as an altar boy and looked as though he might choke on the smoke from the incense burners.

When the service was over, we looked around for Henry. But the seminarians have him for 3 days…and shuffled the boys off quickly before parents barely had a chance to say hello.

Here, on the banks of the Tiber, for hundreds of years, masons, stone cutters, and hod carriers must have sweated like marathon runners. In every direction you look, there is something big they left behind. Even after 1500 years of robbery, looting, erosion and neglect, the place is like an antique shop you can scarcely turn around without knocking something over. Old stones are everywhere, as common as the sins they were meant to punish.

There was a time when these stones were the most precious on the planet. Rome was the center of the Empire…and the Empire was the center of the world. At least in the Western world. No surer investment could have been found than real estate around the coliseum or the forum.

Who would have thought…when Rome was at its peak under Trajan’s reign…and the bricks and stones were being laid up all over the city, building princely villas, mausoleums, arenas, baths…that the place was about to enter a bear market that would last more than 1,000 years?

The visitor to Rome today can imagine neither the city at its zenith nor at its nadir…for it is just a common city today, with an uncommon number of ruins, churches and pretty girls. But in the 1st century AD, the city had a population of 1,500,000 – the largest city in the world – and by far the richest, by far the most spectacular. No other city came close until 18 centuries later.

But Rome had a problem. It had once been a city of honest farmers and merchants. But by the time of Julius Caesar, Rome became an imperial city with a serious balance of payments deficit. The empire in general, and Rome in particular, no longer earned its way in the world. Instead, it needed forced tribute from its foreign possessions – especially grain to keep the mobs fed and slaves to provide muscle power and entertainment.

Rome’s bread and circuses were sustained by imports that the Romans couldn’t afford and couldn’t sustain. Rome had become a consumer society – like America today – living beyond its means. As time went on, more and more of what Rome needed was outsourced…including its soldiers, its generals, and eventually, even its emperors.

"There is a lot of ruin in a nation," said Keynes. Rome was a great empire. It had so much ruin in it that it took 7 centuries to squeeze it out. When it was finally over, that is when the husk of what used to be imperial Rome reached the bottom of its bear market, in the 7th or 8th century – the city would have been unrecognizable to Trajan. Where there had been more than a million people…there were only a few thousand. Where there had been immense stadiums, villas, monuments, statues, and palaces – there were just ruins. The people who had once carried off the Sabine women, and lived on the tribute from foreigners found themselves invaded by barbarians – who carried off everything they could carry…and destroyed most of what was left. By the 8th century, the dust of the 7 hills of Rome had returned whence it came…back to dust. And sheep once again grazed on the palatine. Marble had been stripped off the buildings…ancient columns had been buried in rubbish…the noses, arms and private parts of statues had fallen off.

Rome had become de-lapidated.

*** For our own Roman holiday, we booked a room at the Locarno Hotel. It had been described in the guidebooks as having an "Agatha Christie" kind of charm. What we discovered was that it had an Agatha Christie kind of plumbing. We decamped to the Piranesi, which suits us better.

*** All the hotels in Rome are expensive. Everything else seems reasonable, compared to London or Paris. But the hotels are twice as expensive.

*** The price of gold shot up $5.20 on Friday. But here’s a little warning to would-be coin buyers from our friend, Jim Cook:

"Just because a coin dealer has been recommended by a newsletter doesn’t mean they can’t fail and take your money down with them. Sometimes I’m amazed to see a big gold buyer sending a six-figure amount to a coin shop whose proprietor is probably behind on his car payment. The writer, John Kamin did a study and found that nine out of ten of these dealers fail every decade.

"The crazy thing is that most of the big failures and frauds in the past came when gold and silver were moving up in price and business was good. Many of those dealers played the futures market and lost everything. Human nature being what it is, a lot of people can’t handle a sudden influx of money. They get big headed and spend foolishly. The religious philosopher C. S. Lewis wrote that "pride is the greatest sin." I don’t know if that’s true, but I do know that in my life pride caused me to do the stupidest things.

"I’ve watched so many small dealers fail because of a sudden burst of success, that a year ago I came up with a saying to describe it. ‘Success carries the seeds of its own undoing.’

"One of the sure signs that a company will fail is that they constantly promote the lowest price. You can’t survive on such low margins, so another round of dealer failure is assured. Years ago I attended a monetary conference in California and at the closing banquet my wife and I were seated at a table with several other couples. Next to me was a brash Hollywood producer without a shred of humility. As the evening progressed, he determined I was a gold dealer and announced to everyone that he would never do business with me. He could get his Krugerrands cheaper from Jonathan’s, a well known Los Angeles dealer. Jonathan had achieved celebrity status and had his own radio show. Sometimes it seemed that Jonathan’s prices were so low they sold gold at no commission just to get the cash flow. My suspicions were confirmed when the company didn’t deliver a lot of the gold they sold and Jonathan was arrested. His customers were out millions. I always wondered if the producer was one of them.

"The precious metals trade is a tough, competitive, difficult business requiring highly skilled management and marketing. It has both honest dealers and a fair share of scoundrels. The failure rate is astronomical. I can count over forty failures just among the people who worked for me and went elsewhere during the past three decades. So a word to the wise for newsletter writers who blithely recommend a dealer without knowing a thing about their financial condition. You may be creating a monster and, instead of helping your subscribers, you can wind up hurting them.

"Usually, when a dealer fails, there’s no hope for their customers to retrieve anything. I can’t tell you how many hundreds of calls I’ve received from people asking for advice on how to get the coins they bought. Before you send a big chunk of money half way across the country to someone you don’t know, you should at least talk to their banker, or get some financial information."

*** Friday was Elizabeth’s birthday. We celebrated, again, Sunday night with dinner at the rooftop restaurant of the Hasler Hotel, a famous haunt of wealthy foreigners. The food was quite good…and the view was spectacular.