A Slap in the Face

Debt to Mogambo is like salt to a slug…it makes him froth and bulge until eventually his brain explodes. It just happened…again. We catch up with the MoGu from intensive care…

"The total US credit market debt expanded at a seasonally adjusted $2.733 trillion (in one year) to $34.625 trillion," points out Bill Buckler of The Privateer.

Stupefied by such an impossibly large number, I grab the calculator – in stunned incoherence – and I punch in…let me check that figure again…2.733.

Notice that I am NOT talking about $2.73. No, I am not even talking about $2.73 million. Nor am I even talking about $2.73 billion. No, I am tossing around trillions of dollars here! Trillions!

So, for every dude and dudette in the country that has a non-farm job – all 131 million of us – this increase in debt comes to an astounding $20,865 each. Each! And that’s just the damn increase!

Now, if we take GDP to be $11 trillion, and divide it by the $2.73 trillion 1-year increase in debt, we come up with…my guts twist into a knot as I look at the calculator…0.248. After a few moments spent in some form of suspended animation, it finally impresses onto my tiny little brain that this increase in debt is equal to a quarter of GDP! A fourth of total annual income is borrowed and spent! In one year! One! Year! In one lousy freaking year! My mouth goes dry with panic.

Now I find myself lying in my bed in the hospital, IV lines dripping clear fluids into each arm, and a snotty little doctor is looking at my chart and telling me that my abnormally small brain has, according to the X-rays, exploded again. This must be it – the last time – I will never be able to work in economics again. Then the phone rings. Straining against the straps that tie me to the bed, I do a McGyver trick…with one foot I kick the plastic water pitcher against the wall, which ricochets across the room, hits the phone, and knocks the receiver up onto the pillow and right next to my ear.

Bill Buckler: 302% of the GDP

"Hello?" I answer feebly. Imagine my surprise to find Bill Buckler on the other end of the line. You see, he spoke to my wife at home and she told him how much I would love it if he would call me up and finish talking about the increase in debt. I look at the doctor. I think about what he said. I look at the phone. And then I say to Bill, "Sure! I’d love to hear more about it!" And so, continuing his nice little bedtime story, he tells me, "Since the beginning of 1998, total U.S. borrowings have climbed from about 255% of U.S. GDP to 302%!"

302% of GDP! My puny little brain is suddenly kicked into action, as it suddenly occurs to me that this is a new record.

Notice that this is higher than the 260% of GDP recorded at the height of the bull market in 1929, and we all know how well THAT turned out! This is really scaring the bejesus out of me, and not just because I am a scaredy-cat little coward with a yellow streak down his back.

Suddenly, I feel all woozy again, and I begin to feel my brain pressure increasing; I need to lie down…

But Bill Buckler is not done with us yet. No sooner have I closed my eyes and gotten my snoring machinery back into gear, than he comes charging across the ward, and smacks me with a rolled up newspaper. He orders me to stop making such an obnoxious noise and get up off the floor. Staggering to my feet, he gives me one more slap across the face and reports, "Total U.S. mortgage debt now stands at $9.618 trillion."

Bill Buckler: Everything We Make, We Owe

I stagger and I swoon, but I do not fall. Using the best Rocky impersonation I can muster, I still come out slugging – animated by sheer instinct – despite the double vision and the dribble. My brain swirls with the nagging notion that there is something vaguely familiar about that number. $9.618 trillion. Hmmm. What is it? Then it hits me. This is almost as much as total Personal Income! So I turn around and pick up Bill’s copy of Barron’s from the floor, and I discover that total Personal Income is $9.686 trillion! So, in mortgage debt alone, we owe everything we make!

What to do? What to do? I suggest that we all should run around screaming, "the sky is falling, the sky is falling" while loading up with large-caliber weapons. Then, when fully stocked up, I suggest you head for the hills because we are all doomed, doomed, doomed, as that is what I typically do. But Mr. Buckler has also looked at things, as I have, and has concluded, as I have, that, "there is no ‘solution’ to this dilemma, just as there is no ‘solution’ for a man who finds himself in a barrel on the lip of Niagara Falls."

The same fatal inevitability that exists for the guy in the barrel going over the waterfall also exists for the economy that allows the central bank to create excess money and credit. That is why it is imperative that you don’t get your economy into trouble to start with, and why it is important that you don’t get into a barrel and float downstream to a waterfall. There are some situations where you get to a point where there are no solutions.

But, then again, we area talking about the Federal Reserve, and the Federal Reserve is seemingly always happy to commit any kind of monetary fraud you can name.

And meanwhile, all we can do is stand around shaking our heads in bewilderment and wondering what in the hell went wrong to get us to where we are now, and at the same time expecting these idiot-savant simpletons to fashion a marvelous solution, which involves simply doing more of the same thing that got us here in the first place, only more so. Ugh.

This will soon change. Welcome to hell.

Regards,

The Mogambo Guru
for The Daily Reckoning
July 12, 2004

—Mogambo Sez: In keeping with consistent historical precedent, I will not try to summarize with some witty epigram, because I grow weary of having people e-mail me with their snotty observations, as if I have never come up with anything original in my whole life, like this is some big news to me or something.

So it is my pleasure to quote one of the guys at the Daily Reckoning, I don’t know who exactly. But all of them can write better than me, except when they are busy squabbling good-naturedly amongst themselves about things like who has the better taste in wine, or who’s the better writer, or who is better looking, or who seems to write in these long, continuous, stupid run-on sentences that never seem to get to the point, or who was the darling little rascal that cleverly took the last six donuts and stuffed them all into their mouth at one time so that his cheeks were puffed out like a chipmunk and there were crumbs all down their chin and staining the front of their shirt.

So it is my pleasure to immortalize one of their most profound phrases. "Mother Nature is a hanging judge." And you can take it from me, the Mogambo, that no truer words were ever spoken.

Florida is everything Nova Scotia is not. Nova Scotia was cloudy and cold when we left on Saturday; Florida was hot and sunny. There were few people in Nova Scotia – even in the height of the tourist season; Florida was full of them. In Nova Scotia, people have white skin and wear plaid shirts; in Florida, they are invariably tanned and wear little of anything. In Nova Scotia, the people are modest and the scenery is striking; in Florida the people are extravagant and the scenery is modest. Nova Scotia revealed no trace of a credit bubble; here in Tampa, the skin of the credit bubble seems so taut, it may explode at any minute.

We have never seen so many auto dealers. Or so many new cars. Why do people need so many cars? So they can drive somewhere and spend money. What can they buy? A new car!

Or a new house. Or just about anything else – so long as it is tacky enough to appeal to a mass market. It’s amazing what you can buy just by driving down the main roads. Dozens of stores offer cars and things for cars – mufflers, tires, and so forth. Dozens more offer things for the house – windows, doors, carpeting, kitchens, you name it. There are also a fair number of art galleries offering a wide range of beach scenes that all look alike.

But that is what people come here for: to feel as though they are on vacation, whether or not they are. They let themselves go, in other words. Gone are the neckties, the dresses, the suits, the forbearance, the discipline, the vegetable gardens, the woodpiles, the modesty, the uptight, worried, critical nags of the North.

In their place, a fleshy lassitude reigns.

For more fleshy lassitude, we turn to Eric Fry for the news:

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Eric Fry, back ‘on The Street’ in Downtown New York…

– Last week, your New York editor loaded his kids into the family wagon, donned his Yankees baseball cap and ventured up to Cape Cod – deep in the heart of Red Sox country. After five days of feasting on lobster, soaking up sun and chuckling at the Bostonian accent, your editor returned to the Big Apple to find Mr. Market in very sorry shape. The guy seemed dazed and disoriented, as if someone had smacked him over the head with a lobster mallet.

– Or maybe his knees are buckling because tech companies aren’t producing the earnings growth that so many investors had been anticipating…or maybe Mr. Market is staggering because the oil price jumped back above $40 a barrel (and the gold price jumped above $400 an ounce.)

– Whatever the cause, the Dow slipped 69 points last week to 10,282, while the Nasdaq wilted 3%, falling 60 points to 1,946. The new quarter is only seven trading days old and already the S&P 500 is down 2.5% and the Nasdaq is off a hefty 5%…Something is wrong. Corporate earnings are growing nicely, but share prices are not…in fact, they’re shrinking, and small cap stocks are shrinking the fastest.

– Size matters, and for the last several months, "small" is the size that has mattered most on Wall Street. The Russell 2000 Index of small cap stocks has soared more than 50% since the end of 2002, or more than double the return of the S&P 500 over the same time frame. The index sports a gargantuan P/E ratio of 66. Perhaps this wildly popular index is overdue for a change in fortune.

– "There’s a trade that seems so easy, so comfortably logical in its rationale, that it almost begs the skeptical thinker to ask how it could backfire," Barron’s observed last week. "This is the ‘size trade.’" In other words, sell your pricey small-cap stocks and buy the RELATIVELY undervalued and sedate large cap stocks.

– "The logic behind rotating from small to large stocks comes in a few forms," says Barron’s. "One plays on the ‘nothing lasts forever’ theme, pointing out that small stocks have outperformed big stocks for some five years, a bit longer than the typical win streak."

– According to Morgan Stanley, small-caps have trounced the S&P 500 by an annualized 21 percentage points over the last five years, versus 13 percentage points over 3 and a half years in the prior cycle, which ended in 1994. Maybe a new era of underperformance is about to begin.

– "Slowing economic growth, too, usually portends an end to small-cap overachievement," Barron’s notes. "And one of Wall Street’s rules of thumb is that small companies are more exposed to rising interest rates, due to heavy reliance on bank financing. This pattern is observable from past data, but isn’t as persuasive as perhaps it used to be due to the tech- and financial-heavy industry makeup of the small-cap indexes.

– "The market action very recently has lent encouragement to the advocates of this rotation trade," Barron’s notes. "The Russell 2000, for instance, marginally trailed its large-cap sibling, the Russell 1000, last quarter for the first time in five quarters." The trend continues…The Russell 200 has dropped about 4% since March, or double the drop in the Russell 2000.

– Raising a little cash might not be a bad thing.

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Bill Bonner, back in Florida…

*** Our friend Frank Holmes sends this little note:

– In a study conducted by Morningstar…[our] U.S. Global Investors’ (NASDAQ: GROW) World Precious Minerals Fund (UNWPX) ranked as the top performing fund among 4,145 selected funds in terms of return for the three-year period ending June 30, 2004. The fund’s high correlation to gold, as well as its fund management team’s dedication to actively manage the fund on a daily basis, has led to the fund’s superior relative performance.

*** "Whatever reason Hollywood has for its love affair with the "f" word, it is decidedly not about the money," writes Dan Ferris.

"Since the year 2000, Hollywood has turned out five times as many R-rated films as it has films rated G or PG or PG-13. No less than 2,146 films released since 2000 received R-ratings, compared with 137 films rated G and 252 films rated PG.

"Is it a case of simple supply and demand at work? Apparently not. Of the top 20 moneymaking films of all time, not a single one is rated R, and of the top 50, only five are rated R – with the other 45 rated G or PG.

"It’s all about the art, man. The "f" word is "bad," which, of course is good…only you’re not supposed to be good…you’re supposed to be bad…not that being bad is good, or being good bad…"

*** Money talks in America.

More than that. It commands. It shouts. And it coos and whispers to every Tom, Dick and Harry: you too can be someone important, no matter how tasteless and clueless you are.

European nations have a different kind of history. Over hundreds of years, European societies stratified themselves, like layers of sediment on the bottom of a mud bucket. Each layer had its own style, its own manners and its own contempt for everyone else. Having money in Europe is less important than maintaining an appropriate style. A man is admired not for his money, but for his dress, his comportment, his education, even his way of speaking (especially in England.)

But in America, money does the talking; because it is the only language everyone understands.

In the President’s Lounge (operated by Continental airlines) we saw all sorts. One couple looked as though they had stepped out of a Mafia movie. Black pants. White designer t-shirts, with gold chains. They had a son with them, who also looked the part.

In another corner, a huge couple looked as though they had gotten lost and ended up on the wrong side of the continent. The man wore a Hawaiian shirt. He might have been Hawaiian, except that he looked Irish…with a round pudgy face and a ‘mullet’ hairdo, which we thought went out of style 10 years ago.

And then, there were the wasps too. A foursome. Oh my, oh my. The two men must have been investment bankers on Wall Street. They were dressed identically – khaki pants, loafers without socks, a business shirt without tie, and blue blazers. Both were handsome, with full heads of hair combed back in a fashionable way, but the younger man had such a mane, that it poofed up and tilted to one side, to make it look at as though his head was misshapen. One wore tortoise shell glasses, which made him look vaguely intellectual. The women accompanying them were quite different. One was young and beautiful…dressed in some sort of simple, black outfit. The other wore white, and was beginning to look like the sort of woman a successful man might regret.

In theory, the first class lounges are reserved for people traveling first class…so you might expect that the crust on the group would be the upper sort. But money is remarkably open minded, even promiscuous. It is as likely to rush into the arms of a vulgar slob from Brooklyn as those of a well-mannered swell from Rye. What counts in the getting of wealth – luck and pluck – have little to do with cultural education, good taste, or good manners. So while they help a man get money…they don’t help him much when it comes time to get rid of it.

A man hustles in the auto-parts business and builds up a tidy fortune. But he has no more idea of what to do with it than the guy who sat around watching TV all day. More likely than not, he merely upgrades his lifestyle to an even gaudier caliber. The money doesn’t improve him, he still wants what he wants, no matter how vulgar it is; when he gets rich, he can simply buy more of it. Not surprisingly, once he’s accumulated a little money, he heads to Florida or California – where he can buy all the vulgarity he wants.

The Belleview Biltmore in Tampa was built for another era. The old photos on the wall show a respectable beach hotel…set out on the sand like a piece of driftwood. Today, you drive past a security guard and feel as though you are in a deluxe modern complex. But the hotel rooms themselves have barely changed – except for the ubiquitous air-conditioning and the exposed, retro-fitted sprinkler system.

When the Biltmore was put together, America was a different country. Men in suits and straw hats came down, on the train, bringing with them women in splendid gowns…and good manners along with their traveling trunks. They sat up straight…and paid their bills in money that still had a stiff backing of gold.

Today, breakfast at the old Biltmore is like any modern hotel. The dining room is full of relaxed people in shorts and t-shirts…enjoying a breakfast buffet as if they would never eat again. But on the wall hangs a relic of that earlier era… a painting of a gorgeous woman in full-dress 19th century regalia. We thought we saw a tear in her eye.