Bond Buying and Pill Popping

The Daily Reckoning PRESENTS: The Feds have been firing up the trusty printing press quite a bit lately – and then bought up $1.423 billion dollars in government bonds last week, after first creating the money to do so. Lucky for them, The Mogambo is tied to a chair in the kitchen…


After gobbling a handful of assorted tranquilizers washed down with coffee, my wife tied me to a chair before looking in the Wall Street Journal to see the report of new total reserve bank credit on page C-12. Cinching the last of the knots, she picked up the paper and reported, “It says here that it’s up $2,460.”

I breathed a sigh of some relief. Two and a half billion bucks ain’t too bad for one week. Even a little on the low side, maybe! Suddenly she throws the newspaper at me and started to walk out, and I said, “Hey! How about looking up U.S. government securities: bought outright?” I heard only scorn in her voice as she said, “Look it up yourself, jerk!”

So I asked, “Well, how about untying me so that I can read it myself?” but she was gone, although I could hear her muttering to herself as she walked down the hall.

After awhile I get tired of alternately begging for help and screaming death threats at her, so I decide to try and find out on my own. I finally manage to loosen one corner of the strip of duct tape that she put over my eyes, and I used my Amazing Mogambo Super Vision (AMSV) to read, “U.S. Gov’t Securities: Bought Outright” next to the number “$1,423,” which means the evil Federal Reserve bought up $1.423 billion dollars in government bonds last week, after first creating the money to do so.

What a racket! This is the ultimate in fiscal fraud and they all should all go to prison for it. And if the American government was not filled with (being as nice as I can manage) stupid, ignorant, untrustworthy, lying, corrupt, cheating jerks, that’s where they would go.

But if I dare to show up at the Federal Reserve to make a citizen’s arrest, dressed for the occasion in my best Rambo outfit, complete with headband and .30 caliber, belt-fed, air-cooled machine gun under my Brawny, Manly Mogambo Arm (BMMA), the cops come roaring up with sirens blaring, not to help me round up the economic terrorists that have taken over the Federal Reserve, but to arrest me! Like I’M the one guilty of something!

But those vainglorious days seem now over, and I am stuck here, ignominiously tied to a chair, peeking out from under a blindfold. Then, I notice that required reserves in the banks dropped back to the insignificant $42.459 billion.

What fraud! What audacity! What an embarrassment that the self-important nitwits at the nation’s universities see nothing wrong with not only an out-of-control fractional-reserve banking system, but one where there are literally No Freaking Reserves At All (NFRAA)! Money is literally created out of thin air, with no backing from deposits whatsoever! This level of risk and multiplication of the money supply is insane! This is beyond insane! And yet, there it is!

I also noticed that custody foreign holdings of government debt rose $11.4 billion in the last week, too, and so, I amused myself with laughing at foreigners while I struggled at the ropes.

Chuck Butler of EverBank notes that the G-8 finance ministers are meeting again and he reports that Brad Setser of Roubini Global Economics said that the ministers are promising not only more action, but “vigorous” action, regarding the global economic imbalances. Yow!

“Vigorous” action ought to produce a lot of fireworks, including a rise in the dollar price of a barrel of oil. And if you have not been out shopping for oil-related stock lately, then I strongly suggest that you chug down the rest of that morning “eye-opener” can of beer and buy some. Pronto.

And this suggestion that you load up on oil is because the dollar is going to go down in purchasing power, which is the whole point of the G-8 promising “vigorous” action.

You will, theoretically, seemingly make a lot of money on this oil trade, but that is just an example of “money illusion”; you think that you made money because you bought low and sold high, but remember; it is still only a barrel of oil! And now, the “money” you think you “made” only offsets the loss in buying power that your money has suffered. And to make it worse, you are actually a loser, since you have to pay taxes on your nominal “gain!”

And to make it worse yet, you have to pay higher prices for gasoline when you gas up the car to go pick up the profits and mail the check to the IRS! Hahahaha! Welcome to the world of inflation! And it will get worse, as evidenced by Barclays Capital estimating that global inflation is increasing at the “fastest pace in a decade.”

If you are panicking about the swoon in gold lately, then I pity you, because I know that you have not achieved True Mogambo Enlightenment (TME), and thus I further I know that you will be, to your dismay, repeating my course again next year. And while I may be seeing your happy little face again next term, we will obviously not be seeing Jim Otis, aka The Optimist, who demonstrates flawless TME when he addresses the “near certainty that inflation and world tensions will continue to get worse, so an opportunity to buy silver and gold at temporarily reduced prices is truly wonderful and positive news.”

And the reason that he has the apt moniker “The Optimist” is that he hedges his bet about inflation with the phrase “near certainty” about price inflation, hoping for, I suppose, a chance that a miracle of some kind will occur.

Tired of being referred to in the press as “local obnoxious halfwit,” I seize this opportunity to re-invent myself to become (insert trumpet fanfare “taa-daa!”) “The Pessimist,” because I am 100% sure that we are going to get price inflation. Lots of it. I am so sure, so very sure, so very, very sure that price inflation is coming because it has always, always, always followed monetary inflation.

As proof of monetary inflation, David Tice of the Prudent Bear Funds, in his semi-annual report, notes, “Across the world, domestic credit systems are firing on all cylinders. Double-digit credit growth now blankets the economies and asset markets of the U.S., the Eurozone, the United Kingdom, Scandinavia, China, Russia, India, Australia, throughout non-Japan Asia, and elsewhere. To be sure, global monetary conditions have never been so loose.”

When you have, like we do right freaking now, lots and lots and lots of growth in the global monetary base, especially after whole decades of it, you eventually run out of bubbles in the stock market, bubbles in the bond market, bubbles in the size, scope, and cost of government, and bubbles in the housing market. That’s when you finally get around to bubbles in commodities. Gold is a commodity, and it is a store of wealth.

And if you believe that there are such things as “lessons of history,” then as price inflation heats up, as the value of the dollar goes down and down, gold will go up and up, just like it has all the other times in history when somebody’s stupid government caused too much money to be created. And especially those times when the “too much money” created was not just by literally printing up cash with paper and ink, but creating the money from debt! Hahaha! But now, this one time in history, you think gold is going to go down as a result? Hahahaha!

Until next week,

The Mogambo Guru
for The Daily Reckoning
June 18, 2006

Mogambo sez: To all of those whose selling made the price of gold and silver fall, I send a Hearty Mogambo Thank You (HMTY)! Now, those people whose educations are more extensive and can thus see the folly in selling can buy those metals at bargain prices! HMTY!

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.

“Anyone can get old,” said Queen Elizabeth II, quoting Groucho Marx on the occasion of her 80th birthday, “all you have to do is live long enough.”

We would have put it differently: the secret to getting old is not to die.

And it brings to mind a thought: many of the best things in life are achieved simply by not doing anything. The Queen has ruled with charm, wit, and integrity largely by refusing to get involved in the arguments and follies that have brought so many of her family and her ministers to ruin. She has outdone them all by remaining aloof, doing her duty, and conducting herself with such a dignified restraint you’d hardly know she was part of the government.

“Lethargy just shy of laziness,” says Warren Buffett, describing his investment style. He is willing to wait…and wait…and wait…until he finds something he likes. This is not baseball, he says. You don’t have to swing at every good pitch. Instead, you can wait for the perfect pitch.

What’s the secret to saving? Simple, just don’t spend. What’s the secret to losing weight? Simple, just don’t eat.

The queen waits. Once, she went unannounced into a clothing shop to have a look around. A fellow shopper turned to her and remarked, “You look just like the Queen.”

“How convenient,” Her Majesty replied.

Investors rarely show that kind of calm. They can’t seem to wait. It is as if their money were contaminated with leprosy; they are so eager to get it out of their pockets and into someone else’s. And they’re not entirely wrong. Money these days – in the form of dollars – has a lethal disease, like leprosy. Day by day, parts fall off, and little by little, it dies away.

Ah, there’s the rub. You hold your money in short-term Treasuries. You make no mistake. You do nothing, and still the dollar can sink 20%, 30%, or more. You thought you were 100% insured against loss, but you hadn’t counted on the money itself wasting away. That is the trouble with the dollar; it is a faith-based currency. It floats on a sea of faith. When faith goes down, so does your wealth.

But what can you do about it? If you put your money into gold you still have a problem. As we’ve seen in recently, the price of gold can drop, too – by more than 20% in only three weeks.

Doing nothing is not easy. The ancient Chinese knew this when they spoke of wu wei, or the path of non-action. It was not really inaction that they were describing, but a kind of flow…spontaneous with no striving, no hard edges:

“The Tao abides in non-action, Yet nothing is left undone,” wrote Lao Tzu.

And in much the same way, the secret to investment success is not simply doing nothing at all, because you’re always doing something with your money, even when you’re trying your hardest not to.

But the secret is you don’t have to do much, because unless you’re doing a lot of investment research, unless you’re very lucky, or unless you have inside information, you’re not likely to be able to find the one stock that goes up while the others go down. Nor are you likely to buy commodities when they are at a three-month low and sell them when they are at a three-month high. There are a few traders who can do that. Maybe. But for most people getting in and out of an investment with good timing is a matter of luck. And few people are lucky enough to do it very often.

That’s why most people are probably better off believing “you can’t time the markets.” It’s like believing that you can’t get away with cheating on your wife; it’s not necessarily true, but you’re probably better off thinking it is.

Over to our currency counselor…


Chuck Butler, reporting from the EverBank world-currency-trading desk in St. Louis:

“The first quarter current account deficit came in at $202 billion, instead of the forecast $222 billion. Well, unless something happened in the second quarter that I don’t know about, the current account deficit is still going to top $800 billion.”

For the rest of this story, and for more market insights, see today’s issue of The Daily Pfennig


Back to Scotland for more thoughts…

*** What are we doing now? Glad you asked. Nothing much. We’re just buying gold; we think the price will come back above $700. We just hope we live long enough to see it.

For those too antsy to invest like a Taoist, Richard Russell notes a little known market timing indicator developed in the 1970s by a brilliant trader called Alphier, who identified market bottoms by symptoms of “prolonged liquidation.”

“Each week count how many days the S&P closed up and how many days it closed down,” writes Russell. “If there is a day that the index is exactly unchanged, give that day the sign of the previous day. Forget about holidays or any day in which the market is closed. Each week go back over the past 14 weeks and count how many total days are up and how many are down. If, in the past 14 weeks there are at least 17 more down days than up days, you have a major bottom and a buy signal.

“That ‘formula’ worked amazingly well in calling all the major market bottoms since 1932.”

And what about today?

Russell points out that on Friday, June 16, 2006, gold had declined eight days in a row and closed down on 10 of 12 days, that is, it was lower on 83.3% of the previous 12 days.

This, he notes, is “very impressive and it implies a downside panic – even capitulation.

“What I’m trying to measure is the degree of fear that has been generated in the gold picture, just as I tried to measure the degree of bullishness generated as gold was topping out on May 11. We’ll see how this study works, although, as I said, I would have preferred a longer period of days.”

*** We have been touring Scotland for the last couple of days. The immediate reason for the trip is this: we were looking at boarding schools for Edward.

We knew nothing about boarding since none of our six children has gone to one. And we know less about Scotland itself.

Our trip began in Inverness, on the northern coast, a small town of brown stone buildings that lines the River Ness just before it opens up into the Moray Firth. It seems a dreary city. Whether it is dreary all year round as well or only on our account, we can’t say. The weather has been overcast since we arrived on Friday. Gray sky. Gray-brown city. No good restaurants. No fashionable shops. No theaters worthy of the name. Of course, we were only there for a few hours. Maybe we missed them. Or maybe they just weren’t there.

We drove along the coast to Findhorn…and then Elgin.

All we knew about Findhorn was that it was the site of hippie debauchery in the 1960s. Elizabeth reported that a neighbor from New York City had abandoned her husband in order to live in a hippie commune in Findhorn. Curious, we left the main road to have a look around. It is an old fishing village with a mobile-home park next to it.

“Hmmm…hard to believe she left New York for this, ” we said to Elizabeth.

“Well, I didn’t know Anne very well,” replied Elizabeth. “But what I heard was that she came to visit the place and liked it so much she never went back. That was the ’60s, and they had what was called an ‘open’ marriage. They were both supposed to find fulfillment in their own way. She apparently found something here…God knows what, but their marriage didn’t last long after.”

“Maybe she’s still here, ” we noted.

Why she would be there was a mystery to us. The old village was quaint, but quaint only goes so far. It was like a fishing village on the coast of Maine or Nova Scotia…with its own charm, but not much else. To the south of the village was a trailer park that advertised itself as a ‘community.” Here and there we saw relics that looked like they dated from the Age of Aquarius. But it seemed an unlikely end to the Brave New World that the hippies had imagined in the ’60s. We looked around, but saw no other possibilities. And we had neither the time nor the interest to follow up. If that was where poor Anne ended up, well, too bad for her.

We are making our way through Scotland one scone at a time. We stop for scones and tea for breakfast. Then again for afternoon tea. By the time dinnertime comes, we are thoroughly fed up with tea and scones.

And with rain. It is raining again this morning, as it did yesterday morning and the morning before.

“It’s a shame you’ve had such bad weather,” said the woman who greeted us when we arrived at Gordonstoun. “It’s been bright and sunny for the past few weeks and only turned gray a few days ago. People down in London imagine that it is cold and windswept up here. Well, of course it is, up in the mountains. But here we are warmed by the Gulf Stream and it’s very pleasant most of the time.”

Gordonstoun is a private school founded by the man who also founded the Outward Bound program. Students are taught not just math and science, but also how to get along with others, how to sail a boat, and how to climb a mountain. They even have their own fire department. When something catches fire in the town next door, they jump into their gear and go to put out the flames.

A student from Spain showed us around. One-third of the students are foreign. One- third are Scottish. Another third are English. English is the common language.

“What do you think of this place?” we asked our guide. “It’s a bit remote. Don’t you miss your family?”

“Well, of course I did at first. Just like all the students. But after a while, I really liked it. I was only supposed to come for a year, but I’ve been here three years. It’s great,” replied our new friend.

It sounded like the sort of place that might suit Edward.

We ate with the students and found the food better than any institutional grub we had ever had…lots of choice…free. As much as you could eat. In fact, we were happy to go back for seconds.

We noticed, as well, that the 300 odd students in the cafeteria were all well-behaved, friendly, and neatly dressed in their uniforms. How could you not like the place?

And then toward the end, there was a telling incident. One young man dropped his tray of food. Instead of laughing at him and telling him what an idiot he was, which is what would have happened in our family, the other students rushed up to help him clean up.

“We think there is more to getting along in life than academics,” said the headmaster gently.

He turned to Edward. “Do you think you’d like to come here?” he asked.

“No,” came the reply. Without hesitation.

“Don’t you think you’d be happy here? Don’t you think you’d make friends?” the headmaster inquired.

“I don’t know…I just know I don’t want to go to boarding school, ” Edward said.

Maybe we should have asked at Findhorn if they had an opening for a twelve-year-old.

The Daily Reckoning