Litany of Woe

Mogambo on Monday! A brave new world of woe…courtesy of your friends at the Fed.

Inflation.

Hardly a minute goes by when I don’t mention the dreaded "I" word. It freaking scares me to death.

Last week, USA Today offered an article entitled, "Bernanke Has No Fear of Diving In." The article confirmed that Bernanke was appointed to a 14-year job at the Fed. But it also provided a little information about the guy, such as, "In a break with Greenspan, Bernanke is prodding the central bank to adopt a target or range of acceptable inflation. He says such a target, mentioning 1% to 2% annual core inflation based on a preferred Fed measure as a reasonable bound, would give markets increased confidence the Fed will not let inflation soar too high nor plummet too low."

So, right off the bat we have a new Fed big-shot promising price inflation! Could anything BE farther from the goal of a central bank? And as a direct corollary, is there anybody who is LESS deserving to be getting an appointment to the Fed than this Bernanke creep?

The goal is supposed to be zero inflation, or, better yet, gently falling inflation, which would give people an automatic rising standard of living! But nooOOOoooo! We have a guy standing right there in front of you, appointed to a sparkling new 14-year term at the central bank, looking you right in the eye, who has the sheer gall to promise to use all the powers at his disposal to give you a constantly lower and lower standard of living, every year, for the rest of your life!

The article goes on to say how Greenspan disagrees. Oh, not about cramming a lower and lower standard of living down your throat by fostering inflation. No, Greenspan’s objection is that setting a strict inflation goal, "used by other central banks, could limit flexibility."

Ben Bernanke: "Flexibility"

Man, I love that word! "Flexibility!" So what else is Greenspan "flexible" on? Well, the Greenspan Federal Reserve has consistently broken every rule of responsible and prudent economics and central banking, so you have to assume that he is flexible on most everything, as long as it results in you getting whacked on the head.

And perhaps the ultimate in flexibility is permitting a jackass like Bernanke, who is promising you the one thing that is to be feared over all else, namely persistent, gnawing, cancerous price inflation, to be appointed to the Federal Reserve. It reminds me of a speech by Groundskeeper Willie of the Simpson’s TV show, who was testing a podium microphone and facetiously said, "And if elected, my first official act in office will be to kill the lot of you, and burn your town to ashes!"

Well, I’m happy to say, Groundskeeper Willie’s services will not be needed by most of the electorate. In fact, the litany of woes experienced by the lower-income classes is heating up, judging by the seemingly increasing number of references that I run across in the media. Whatever low- income group you talk about, somebody is speaking up about them and their escalating desperation. The homeless. The poor. The disabled. The immigrants. The minorities. The seniors.

I am sorry to report that the misery will continue to grow in breadth and severity, and it will continue to be more so in the future. Week after week you will be able to see it in graphs and charts and visual aides. Month after month there will continue to be strident calls for the government to "do something" to help these pathetic, desperate people. Year after year the big situation gets worse and worse, and everybody’s little situation gets worse and worse, and pretty soon the whole freaking enchilada gets worse and worse. And tempers will flare, and scapegoats will be found, and the excess population will be killed off.

Ben Bernanke: No One Has Come Close

I know I shocked you with that last part there, you know that part about excess populations being killed off. But, you know me: I am always trawling for the Nobel Prize in Economics, grubbing around in the gutter and sewers of the world of economics, and especially that million-dollar prize money. Or even just the money, if you want an example of how flexible I can get on this thing. And now, to my amazement, econometric guys are still winning the darn things, even though I get up and look out of the window and I see the result of them and their stupid cockamamie theories, and their damned stupid econometric models, and their damned stupid monstrously over-inflated egos, thinking they could make an healthy economy out of fraud and printing money, when not one other country in the history of the world has ever done it, and all of them tried to print their way of their stinking mess and none of them could do it! But Alan Greenspan, and Ben Bernanke, and all those Fed governors, and Fed big shots, and advisors, and researchers, and concerned bank presidents, and Congressperson meddlers, and computers, and computer models, and miscellaneous hangers-on and loudmouth bores, all smugly thinking that now – now! – after all these wasted centuries, now will our geniuses in charge make a vibrant, healthy economy based on fraud and printing money, and then forever preventing the collapse they so justifiably earned, when, as I said, everybody in all of history has else has already tried it, and NOT ONE OF THEM EVER CAME CLOSE!

Jeez, now I’m all worked up in a sweat and in a really foul mood! What were we talking about? Oh, yeah, my Nobel Prize- winning economics idea! Well, first we note that that poor brain-dead Terri Schiavo woman was ordered by a court to be left alone to starve to death. Why? For the money, stupid! It’s always about the money! Everything is always about the money! This brain-dead woman is costing somebody around a hundred thousand dollars a year, every year since 1991. And I don’t know where you come from, but around these parts $100,000 a year is a lot of money to keep a human vegetable alive.

And so killing off the old people and the disabled people and all the rest of those people gobbling up expensive government-provided money and services would instantly alleviate the stress on those systems. And then Social Security would always be solvent, since retirees would all be dead, and Medicare would always have enough money, since the sick would all be dead, too. And those smelly homeless people would all be dead, and not creating an unsightly mess by sleeping on the sidewalk!

But getting back to the point I was trying to make, which was about how the poor and the old and the disabled and all those static-income people get the old baseball-bat-upside- the-head treatment, or in this case let-them-starve-to- death treatment, when it comes to inflation. And I know it is inflation that is causing their problems because all the problems being suffered by these pitiful people are the one same problem: prices rose faster than income, and now they don’t have enough money to buy the things they need. They USED to have almost enough to buy the things they needed. But nowadays they do NOT have enough money to buy, you know, the things they need.

And I know this for a fact because history has shown that these are the people who ALWAYS feel it first, and then the misery travels up and up into the middle classes and chews their guts out awhile, and then pretty soon everybody else is looking at reduced real income.

Welcome to the Wonderful World of Inflation!

Regards,

The Mogambo Guru
For the Daily Reckoning

November 03, 2003

P.S. If there anything you can do to prepare yourself to enter this brave new world of woe? Well, you can get a copy of Financial Reckoning Day, hopefully a first edition. And by reading it and taking the necessary precautions, then you can easily afford the updated one they are going to print in a few years. Hopefully, that next book will contain more flattering references to the Mogambo Guru (total references in current edition: zero), and maybe they’ll even put my picture on the cover or something.

But right now the plan I have carefully laid out for you is to get a copy of Financial Reckoning Day, read it, underline whole passages, study it, comprehend it, color whole paragraphs in yellow highlighter, and pore over the graphs. The Mogambo looks down at the eager students, gently reaches out his open hand, and says "Listen and listen well, my little grasshoppers! I, the Mogambo, say to you that if your souls are indeed pure, if your purpose be righteous, and with the proper frame of mind, your course of study will be diligently done. And it is thus that your consciousness will expand until you will achieve Full Comprehension and Enlightenment (FC&E). And if you check the schedule, you will notice that there is a light buffet, and the next scheduled stop after that is Full Panic Mode (FPM)."

For this reason I recommend that you only read the book in the bright daylight hours, because if you read it at night, when everything is scary and gloomy and quiet, when all you can hear is your heart pounding in growing panic, the clock ticking hollowly in the hall, and the sound of CIA agents rustling around in the bushes outside the window, well, that’s what I did, and, I mean: Look at me! Do I seem normal to you?

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.

Halloween in New Orleans…ummm…team Daily Reckoning sustained heavy casualties.

But never fear, Addison is here on the job, safely back in Paris, writing on behalf of the whole équipe. (Bill, for his part, is on his way to Baltimore to look after his business interests. Eric Fry, one presumes, made it back in one piece to New York. We’ll try to rustle up some gory details from him tomorrow morning.)

If the weekend was meant for ghouls and goblins…somebody forgot to remind stock market investors what a scary time of year October can be. In fact, the Dow "put the finishing touches" on another winning month Friday after closing 2.3% higher for the week (at 9,801). The Nasdaq gained 3.6% and closed at 1932…ever-so-close to the psychologically important 2000. Since the end of August, the Dow is up 4.1% and the Nasdaq ahead by 6.7%.

"October wasn’t such a frightening month after all," wrote Eric over the weekend, "although it scared the daylights out of a few short-sellers."

Indeed, "sitting there with your morning coffee and the stock tables," begins another example of why the mainstream financial media can be hazardous to your portfolio, "you’re probably feeling all warm and fuzzy about markets in general and your portfolio in particular. And why wouldn’t you?

"Stocks have had a fine run over the past year," continues John Heinzl of Toronto’s Globe & Mail, "and sailed through the scary month of October without a scratch. Profits are surging. And the powerful U.S. economy is roaring back to life, which should pull Canada along for the ride.

"The soaring value of your home is another reason to feel secure about the future," Heinzl continues. Oh là là…what’s not to love? Well, the next tack on this guy’s course…

"Addison Wiggin is here to tell you," the Canadian writer continues, citing yours truly, "everything is not the least bit okay. You should be afraid, very afraid, because the coming financial cataclysm could smash your portfolio like a pumpkin."

Mr. Heinzl called last week to discuss our book…and ‘I’m here to tell you’, we said nothing of the sort.

Poor Mr. Heinzl. He didn’t even have to crack the cover of his complementary review copy to see that we’re not predicting financial calamity – rather, a "soft, slow depression"…an increasingly perceptible loss of wealth over a long period of time, aided by politicians, abetted by bureaucrats. And made all the more painful by lumpeninvestoriat in denial. Yet, that probably wouldn’t have made very scary Halloween copy for his newspaper.

It’s true that while doing research for his article, "Very Scary Stories," Mr. Heinzl appears to have absorbed at least part of a clue. "Each book [he talked to Bob Prechter and a few other so-called ‘gloom-and-doom’ authors, too] maps out a slightly different route to Hell, but they pass many of the same signposts: An American consumer bloated by debt, a U.S. Central bank handing out money like Halloween candy, stocks, real estate and other assets pushed to unsustainable heights and – perhaps most worrisome – widespread complacency about all of the above." Okay, so far so good…

But then…what happens? The article flips its cape around and comes back at us with a pair of bloody fangs. Rather, Mr. Heinzl lets his penchant for journalistic objectivity get the better of him…then offers himself up as Exhibit A in the Complacency showcase. "Mainstream economists offer their own piece of advice," Heinzl counters. "Ignore the gloom and doom books altogether. Their predictions are usually out to lunch." Ouch.

"The crash has been coming for about 20 years now," Heinzl quotes George Vasic, chief economist at UBS Securities Canada. We presume Mr. Vasic meant to be sarcastic, along the lines of that ol’ chestnut: So-and-so predicted 30 out of the last 2 recessions. But if so, we’re left with a simple question: Did Mr. Vasic – or Mr. Heinzl for that matter – pull a twin set of Rumplestilskins and completely miss the year 2000…2001…and 2002? There wasn’t a market in the world that wasn’t in free fall. If that’s not a crash, then we’d be tickled to see their idea of a boom.

"With governments and stock markets cranking out an endless supply of data," says Mr. Heinzl, "anybody with an Internet connection can construct, ‘an ongoing story about numbers that are going to explode or implode.’" On the other hand, one supposes, if you happen to be the chief economist of a large Canadian trading firm, you could crank out an ongoing story of economic recovery, not to mention strong reasons for buying your firm’s financial assets. Or better yet, just get your staff and a host of breathless journalists to do it for you.

"The whole genre of crash, depression, impending financial Armegeddon," Tim O’Neill, chief economist at the Bank of Montreal chimes in, "is based on gross extrapolations from some minor – in relation to the outcome that they foresee – current trend." Hmmnnn…13 rate cuts, a three-year bear market and over two and a half million jobs lost since the ‘recovery’ began. Yep…minor current trends. We sure must be out to lunch.

It almost goes without saying, with this kind of commentary passing for insightful, we must be nearing the top of the rally.

"Addressing the comparison of the United States and Japan," writes Heinzl, "[O’Neill] says the U.S. banking system is far more stable than Japan’s and the U.S. central bank moved more quickly than its Japanese counterpart to shore up the weakening economy."

That’s funny…during the 1990s – the ten years known in Japan as the ‘Lost Decade’ – the Nikkei rallied 5 times more the 25% on its way from 39,000 to where it sits today at roughly 10,000. Each time the BOJ was praised for actively dropping rates (eventually to zero) and the government commended for issuing large checks to build cement highways out into the middle of nowhere. Each time the Nikkei rallies petered out. Each time they sold off to new lows.

What’s more, Japanese banks may have been weaker (an arguable point given the vested interests of their directors), but their consumers were net savers! In the U.S., during the height of the boom, the savings rate went negative. With record levels of consumer debt…consumer spending comprising 70% of GDP…the U.S. dollar headed into the toilet and a government willing to flush once it has arrived…and stocks still selling at bull-market-high valuations…what trends are these guys looking at that make them so chipper?

Mr. Heinzl takes the high road. He is apparently rather concerned that the "outlook for the gloom-and-doom industry" is so bright. Our greatest concern: it isn’t.

Our short plane ride to New Orleans and back revealed nary a copy of Financial Reckoning Day on the shelves. Nor anything remotely like it. Your average debt-strapped American burger-masher doesn’t have a clue as to what may lay ahead.

He lacks the imagination required to envision it.

Addison Wiggin The Daily Reckoning