Comlimentary Cash in a Fantasy Casino

Zimbabwe is an economic hellhole. Inflation is running at 1,000s of percent per year… the economy is collapsing…and the stock market is actually going up faster than any in the world. But Zimbabwe is still worth looking at, because it reminds us of what wealth really is, and that – given the right circumstances – anyone can turn a dream into a nightmare.

“Living the American Nightmare,” says a headline at The article tells the now-familiar story. People bought houses using no-money-down adjustable rate mortgages. Now, their monthly installments are going up and they can’t pay them.

Foreclosures are said to be running at the highest levels in 30 years. California homeowners are in a “tailspin,” says TIME magazine. In San Bernardino, for example, foreclosures rose 987% in the second quarter of this year.

And here’s a sign of the times on the other coast. In Baltimore, we used to see small signs along the highways saying, “Refinance Your Home.” Now the signs say, “Avoid Foreclosure.”

Is the subprime problem over…is it “contained”? If so, nobody told the stock market. Hovnanian, the nation’s largest homebuilder, is down 82%…and still going down.

But let us return to what we can learn from Zimbabwe…

Real wealth is neither having more money, nor having higher priced stocks. Real wealth is accumulated capital – buildings, tools, factories…and the skills to know how to use them. Wealth can be money too – but only if the money represents real, useful capital. In Zimbabwe, they’ve got their Zim dollars up the wazoo. But the real capital in the country is fast disappearing – stolen, destroyed, neglected, redistributed, consumed or exported. Under these conditions, increases in stock prices are empty; the stock market in Harare has become a kind of fantasy casino, where people can pretend to get rich by betting against each other.

When the U.S. stock market hit a peak in January of 2000, it looked to us as though we had seen the top. Stocks do not tend to hit another peak once they have just come off a major one. And even if they do, it’s not a peak you want to climb. It’s too treacherous. You make money by buying low and selling high. Start your climbing in the valley, in other words; it’s safer down there…and the only way to go is up. As you go up, it becomes more dangerous. You have farther to fall. Eventually, you will want to get off the trail all together.

“Why bother with any of it?” wonders Capital & Crisis’ Chris Mayer. “You can be sure if Wall Street is talking about a stock, it’s in your best interest to ignore it. My simple mantra is: You never make money buying the easy stocks that Wall Street buys.

“You see, brokers and advisers tend to recommend stocks when they are 100% sure they are going up. It’s called momentum. They look for stocks that have been going up for a while, and hope they continue to go up. I would bet that 99% of advisers are incapable of thinking independently.

“By investing in so-called ‘momentum’ stocks, you’re missing out on significant gains. These ‘popular’ stocks have already seen their prices surge, and the rest of Wall Street is happy with the remaining measly returns.”

Since 2000, the feds did all they could to prevent a real correction. They gave consumers and speculators trillions of dollars’ worth of new money. The trouble with this money was the same trouble with the money coming out of the Central Bank of Zimbabwe – it didn’t represent real capital. It was just paper money. It had no real value.

You can’t get something from nothing, we said. But who cares what we say? The gush of liquidity soon had boats floating all over the planet – stocks, houses, planes, paintings – the great gaudy vessels were soon bumping into each other. Everyone was getting richer – or so they thought. And who could argue with them? People had more money…they could buy more things…what was the problem?

The problem was that the boom was phony…at least, mostly…and mostly in the West. It was an ersatz “Crack Up Boom” created by monetary inflation and speculation. It was easy come, easy go wealth…not the real thing.

“That’s why I look for stocks that sweat – that are rich in tangible, physical assets that support the stock price, and sweat cash.”

And now here we are – beginning to see it more clearly. Last week, the U.S. stock market suffered its worst week in five years. At the end of it, guess what? The S&P was actually BELOW its high set in January 2000. Adjust that for inflation and stock market investors – on average – have lost 20% to 30% of their money over the last seven and a half years.

Today, Wall Street will be a little jittery. Maybe prices will go up. Maybe they will go down. It hardly matters. Stocks must get back down in the valley again…until then, we’re not interested.

Bill Bonner
The Daily Reckoning
Ouzilly, France
Monday, July 30, 2007

More news…


Addison Wiggin, fresh off the plane from Vancouver:

“Global Sovereign wealth funds – like Chinese one, who recently purchased the largest external stake in Blackstone – now have over $2.5 trillion in purchasing power. Or so say the latest estimates from Morgan Stanley.

“For a bit of perspective, let’s do a back-of-the-envelope calculation. Let’s say, you’ve been alive since the first day or our Christian calendar…0 A.D. On that first day of that first year – and every day until today – you placed a million dollars in a zero interest, inflation proof account. Today, in 2007, you’d have… hmmmn… let’s see… 2007 x 365 = X… times 1,000,000…. that would be…

$732 billion…. not even be close to $1 trillion.

“But that’s just the beginning. Morgan Stanley estimates the sovereign wealth funds will increase to $12 trillion by 2015. Not only is that an unbelievable rate of growth, but a staggering indicator as to how huge a role these funds could play in the global market place in the very near future.”

For more market insights, see today’s issue of The 5 Min. Forecast


And more thoughts…

*** Greg Guenthner, on how lasers can be your ticket to big gains:

“Lasers are everywhere today. They play our DVDs… read prices off the products we buy… even correct our eyesight. Yet these beams of concentrated light still capture our imagination, fueling dreams of high-tech and futuristic devices.

“I have my eye on a tiny laser manufacturer that has its hands in several lucrative market streams,” continued Gunner.

“The company specializes in making lasers smaller and more energy-efficient – exactly what you need to stick them on military vehicles. And so far, the military must like what it sees, because 65% of this company’s revenue is from government contracts. In fact, it recently delivered a batch of high-powered lasers to a company that’s developing ‘directed-energy’ weapons.

“In other words, laser guns… like the kind you see in science fiction.

“The defense applications alone make this laser company exciting to explore. But it’s also making headway in other hot markets, too.”

But before you get too excited, he warns us, keep in mind that this company isn’t perfect.

For one thing, it’s a relatively new technology company. And like most startups, there’s little more here than potential. The company is burning through cash and has yet to turn a profit. In fact, even after boosting its revenue nearly 200%, it still posted an $18 million loss. The company was holding about $2.8 million in cash and is nearly $8 million in debt.

“The question you have to ask as an investor is does the opportunity here outweigh the risks?”

It’s a question you have to consider for yourself – and one we can’t answer for you. Gunner thinks there’s some potential money to be made here, which is why he recommended the stock to his Bulletin Board Elite members.

It’s clear that interest in lasers is nowhere near its peak…so grab a ride while you can. But do it now – until midnight tonight.

*** “Risk is being re-priced,” said U.S. Treasury Secretary Henry Paulson. But don’t worry; he went on to add that there was “no threat to the overall economy.”

How much do you have to pay someone to say such soothing lies? Paulson knows far better than most people that there is plenty of risk to the overall economy. He and everyone else in a position of financial authority must be worried about it – perhaps desperately worried.

But that won’t keep them from lying to Americans…after all, ignorance is bliss – and bliss doesn’t deter you from buying your new SUV, overpriced painting or Coach bag. Nope, they have to keep filling everyone’s heads with nonsense to prop up our faltering economy – and they have no problem bankrupting you while they are at it. Find out who’s not telling you the truth here.

First, there is the direct problem that the crisis in the subprime market may be infecting other parts of the credit market. “Subprime crisis shows signs of spreading,” says a headline in the Financial Times. What? Is the FT just imagining things? We don’t think so.

“Bonds hit by credit dip,” is a follow-up headline in the FT. And one of the largest hedge funds – Sowood Capital – reports a 10% loss for the year in its $3 billion fund.

It would not be at all surprising if subprime credit problems soon became PRIME credit problems. It would be surprising if they didn’t. Whether you are referring to financing mergers and acquisitions…lending money to emerging markets…or mortgaging doublewide trailers – the phenomenon is essentially the same. Lenders made money by originating loans…not by following them to their completion. Financiers got rich by making deals…not making sure that the deals actually increased shareholder value. And hedge fund managers earn their money by speculating…not by guaranteeing that their bets pay off.

As more and more liquidity became available…more and more bets were placed. And like everything else in life – almost everything – as quantity increases, quality decreases. Soon, the mortgage industry was lending money to people who clearly could never pay it back. Hedge funds were underperforming the market indices – and still charging 2 and 20 for it! And the big private equity deals seemed to make less and less sense.

As long as the credit bubble was expanding, everything looked good. The marginal borrower could always find an even more reckless lender to give him money. It was a system in which people made their money by providing credit to other people who weren’t really credit-worthy. What can it do but implode?

This is similar in some respects to what is happening in Zimbabwe. There too, people have more and more money available. Still, the system is falling apart.

Another thing that must be worrying financial officials is the yen. It is going up. When the yen goes up, it puts speculators in a tight spot. They’ve bet hundreds of billions that they yen wouldn’t move. They borrowed yen to fund speculations. If the yen goes up, many of those gambles will blow up. Between the rising cost of credit…and the rising yen…how many speculators are already in trouble? We don’t know…but we will find out.


*** We are getting into our rhythm for summer. This week, the family gathers from all parts of the globe. Jules from Boston, via Paris. Maria and Henry from London. Sophia from West Virginia. Elizabeth comes back from New York. Even our 85-year-old mother, from Virginia, has already joined us…Edward is already here, too.

Too bad the weather is so bad. We had to make a fire in the fireplace again this morning. Global warming doesn’t seem to be working here. Maybe we should tell them to hold off for a few days. But who knows how long it will be before France has good weather again? July has been rainy and cold. Maybe August will be better.

Besides, it’s not like the old days. When the children were young, we could count on having them around – no matter what the weather was like. Now they’ve got jobs, careers, girlfriends, boyfriends…we feel lucky to get them at all. And soon, they’ll be flying off again.

“Oh Daddy,” said Maria on the phone yesterday. “I can only stay for a few days, because I have a try-out for a part in a London play. It seems perfect for me, so I can’t miss the audition. And then, if I get the part, I’ll have to rush right back from Sicily to start rehearsals.”

“Sicily? I thought you were staying here.”

“Well, I’d love to…but I told Gabriella that I’d come to visit for a few days. I want to take advantage of this time before I actually start work, you know…and these Ryan Air flights are so cheap.”


“Dad…I’m not going to be able to get down there until Thursday,” says Jules.

“Why not?”

“Well…my girlfriend is here in town…and I don’t want to leave while she’s here.”

“Oh…I see…”

And now this…

“Honey…I may not be back as soon as I thought.” says Elizabeth. “I’m still trying to tie up the loose ends of this place.”

We left our farm in the United States 10 years ago. We still haven’t figured out what to do with the furniture and property we left behind.

“I gave away a lot of things…and we’re selling some other things. But it would take me weeks to go through all these papers. So, I just put them back in the boxes and sealed them up. They’ll be all right in the barn. We can deal with them later.

“I’ll be there as soon as I can.”

We turned to Edward, 13, who has been helping his grandmother make plum tarts. Edward does the work. His grandmother gives directions.

“I’m glad you’re not going anywhere,” we said.

“Dad…I would if I could. It’s boring around here.”

*** In the month of August we switch to our vacation schedule…which is to say, we begin work at 7am…and we stop at 1pm. That gives us enough time to keep up with vital matters – including these Daily Reckonings. And it still allows us time to visit with the family…finish painting the gypsy wagon…fix the windows…repair the stone wall…and so forth.

More to come…


The Daily Reckoning PRESENTS: Right now, price of just about everything is going up – especially prices of food and oil. This week, the Mogambo guru explains why this increase in prices, when coupled with increasingly crushing debt, can have serious consequences with regard to your weekly diet – unless you’re on Atkins. Read on…


Peter Schiff of Euro Pacific Capital writes, “In current theory, the excess cash piling up around the world is like manna from heaven. Don’t believe the hype. Liquidity is merely a euphemism for inflation. Asset prices, including stocks, are simply rising to reflect the diminished value of the currencies in which they are traded. Wealth is not being created, merely re-priced.”

Well, I don’t know where Mr. Schiff lives, but around here, it’s not wealth that is being re-priced, but poverty. As the inflation in the prices of everything continues to outstrip “income after taxes and deductions”, standards of living are being eroded because people can’t buy as much stuff as they used to; their relatively static stream of discretionary income has lost buying power against rapidly rising prices.

For example, from the Financial Times we read that inflation is finally affecting food, and that Hovis bread said it was “preparing to raise bread prices for the second time in six months. The pending increase – which the company attributed to rising wheat costs – is merely the latest in a series of price increases food and drink companies have been trying to pass on to consumers this year. The series has seen costs of making bread, beer, yoghurt and chocolate as well as dozens of others packaged food products become increasingly expensive.”

I know what you are thinking. You are thinking, “Who cares about bread? I don’t need no stinkin’ bread! I can eat pizza!”, which is wrong, whereas you would have been correct if you had instead thought “I don’t need no stinkin’ bread! I can eat the bodies of dead animals that I find alongside the highway!”

And indeed you could, as the current market price of road kill is still a very economical zero, which may explain why it is not included in the Lehman Brothers’ ingredients cost index, which “covers cocoa, coffee, oats, tea, soyabeans and milk, among other commodities and which is based on spot rates.” This index, in case you were wondering, “rose 14.9% in the first half of the year”, which “follows a 16.5% increase in the second half of 2006.” Yikes! Prices of foodstuffs are up over 30% in twelve months? Yow!

And what is the biggest gainer? “The biggest increase has occurred in powdered milk prices. These have nearly doubled compared with the same period a year ago. Barley prices have also shot up 53%, while corn prices are up 68%.”

So it is no wonder that people are complaining about prices! And you may be interested to learn the surprising fact that these afflicted people are, paradoxically, not the least bit interested in, or appreciative of, being educated that their inflation problems are all self-inflicted, as they are the same drooling morons that elected the Congressional morons that have spent us into the Hell Of Crushing Debt (HOCD) and allowed the Federal Reserve to create wildly excessive amounts of money and credit to make that grotesque orgy of spending possible!

To prove it to yourself, the next time somebody says that prices are going up and that they are having a hard time making ends meet, carefully observe their reaction when you politely and respectfully go up to them and, by way of education for their benefit, say, “Shut your damned stupid mouth, you ugly little troll! Your problems are all self-inflicted, as you are the same drooling ‘I Love Big Government Creating Perpetual Entitlements’ moron that elected the Congressional morons that have spent us into the Hell Of Crushing Debt (HOCD) and who conveniently looked the other way while the damnable Federal Reserve created the money and credit to make that stupid, bankrupting spending possible! It’s your own fault, you ignorant little commie creep! You committed economic suicide, and in doing so have economically murdered the rest of us, you filthy piece of stupid, greedy, Leftist crap!”

And it is going to get worse as more people get more desperate, and things get more weird, like John Stepek at mysteriously using the exact same words as were used in a copyrighted report from a Mogambo Economic Truth And News Service (METANS) broadcast, which bravely reported, “The Mogambo Economic Forecast Institute (MEFI) reckons that the world will face a dollar supply overload within the next five years that could send prices soaring, and coupled with an oil demand overload against an oil supply deficit, the price of oil will soar, and the prices of all other things will soar right along with it, and especially all things imported, and doubly-especially the aforementioned imported oil, in case you weren’t paying attention the first time I said it.”

The report ended with, “And with oil being a prime ingredient of making and/or moving damned near everything these days, if you don’t think that paying a couple of hundred bucks for a lousy barrel of oil is going to have a hugely inflationary effect on all prices, then congratulations, as you have passed the test! You are officially stupid enough to send $50,000 in cash to me, addressed to ‘Occupant’, in return for which I will pray that your children do not end up being as stupid as you are. And remember; cash only!”

Until next week,

The Mogambo Guru
for The Daily Reckoning
July 30, 2007

Mogambo sez: I suggest that you take the time to buy some gold bullion, silver bullion and some oil stocks, and when I get back you can tell me all about how much money you made, and all the silly, selfish crap you want to buy with the gains, which always seems to put people in a really, really good mood!

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.

The Daily Reckoning