Dressing Up Inflation

Mogambo on Monday! In today’s episode, our favorite Guru unveils this season’s Spring Spin on the ugly "I" word. But spin or no spin, how long can the feds conceal their object’s true nature?

I know that you remember how the Mogambo heaped scorn on the whole idea of the Fed creating more money and credit to produce a reflation. I know what you are thinking. You are saying to yourself, "The Mogambo never said anything about reflation, because all he ever talks about is how alien beings from another dimension are tampering with his mail." Well, that is true.

So let me correct that oversight, and say that inflation is always bad, and that reflation is merely putting a New Age prefix on inflation – but one which results in an added piquancy of a delightful hint of benefit to it, like a refreshing hint of Spring or something, as it makes the price of assets rise.

But reflation is just inflation dressed in a frilly hat. So why would any government that had an IQ above that of a slug do such a thing as try to reflate/inflate the economy? Ah, my darling quizzical one! My heart soars to hear you speak with the Wisdom of the Ages! But you are not the first one to ask that question of the Mogambo. In fact, the only question MORE popular among the Seekers of Enlightenment that sit at the feet of the Mogambo is "What is that stink?"

But the Mogambo is now saved from any future threats of exertion such as thinking or answering questions, as now all I need to is to smile knowingly, languidly raise my finger, and point to the "Cycle Pros" on Geocities.com, where Mr. Stephen J. Williams has provided the answer. "Inflation is a stealth tax and has a very efficient built-in collection scheme…everyone holding dollars is affected and everyone’s purchasing power is diminished, therefore the collection of this ‘tax’ is 100% efficient. And to make it even better, there is no paperwork to fill out, no check to send in, no harassing telephone calls from the tax collector, and the government can continue to print all of the dollars it wants so it can continue a free spending policy." And, of course, higher prices means, ceteris paribus, more sales tax collected at the state level, with which to fund THAT particular cancer.

Reflation: "You Are a Worthless Collection of Lunatics"

But the worst thing is, despite ludicrous protestations to the contrary, this little stealth tax has already thrown itself into its dirty work. With a vengeance.

Newsflash to the media of the USA! Dateline: Deep inside the Mogambo Defensive Bunker. "Flash! A heavily armed, raving lunatic posing as a Concerned Scientist with graphs and charts and all that scientific stuff has issued this important bulletin! He reports that, once again, Alan Greenspan has proved that you are a worthless collection of childishly trusting lunatics, and are raving mental incompetents to boot, as he looks you right in the eye and tells you that the price inflation that you are seeing with your own eyes, at least before Greenspan started looking into your eyes and trying to hypnotize you, is not happening in front of your own eyes! And you believe him!"

If you read down farther into the article, you will see where I say, "I mean, import prices increased 0.9% last month, yet Greenspan has, according to the Wall Street Journal, ‘discounted that risk’ of inflation! Petroleum prices are up 6.1%, and Greenspan has probably also ‘discounted that risk’ of inflation, too! Export prices rose at the ‘fastest rate in nine years,’ surging at 0.9%. Greenspan, of course, has doubtlessly ‘discounted that risk’ of inflation, too."

And in looking at the back pages of the Economist magazine at the Dollar Index of their Commodity Price Index, we note with alarm that, in the last year, All Items are up 32.8%, Food is up 27.3%, All Industrials are up 40.9%, Non-food Agriculturals are up 22.6%, Metals are up a blistering 58.5%, oil is up 22.6%, and gold 29.3%! How in the hell everything can be up between 22% and 58%, and Greenspan and the other Fed pea-brains can claim that inflation is "low," is beyond me.

Reflation: Services and Commodity Costs

Well, the facts are not lost on everybody, as on Monday the Wall Street Journal had a front-page article entitled "Price Increases in Asia Fan Inflation Fears in U.S." After using a lot of ink relating the eyebrow-arching rise in the prices of everything that you can name, and even things that I cannot even pronounce, they quote a lot of Fed officials who are all in agreement that the Mogambo is an idiot, and if you think that inflation is rising just because prices are rising, then you, too, are an idiot.

They go on to announce that labor is about 65% of production costs in goods and services, which makes a kind of weird sense, since services HAVE no commodity costs inherent in them, which I can verify because I went to the barber last week and I did not see a single bushel of soybeans in the whole place.

On a more personal level, I report that the government is, as you are no doubt aware, out to get me, and sure enough, last week my washing machine finally quit. It was so old that the lousy timer to fix it was $61 freaking dollars. But my wife was getting tired of the rusted exterior, the dripping water, getting a shock when you touched it, the sparks flying, that smell of burning insulation, the weird permanent stains on the clothes when they came out of the thing, the banging and clanging and blah blah blah, so we bought a new one. It cost $320, tax, tag and title. But, and this is the part that kills me, the delivery charge would have been $70!

My mind reels! People can mine, ship and smelt ore, collect, ship and refine other materials, produce metal and plastic parts, assemble it into a heavy machine, pack it up, ship it across country, keep it in inventory, sell it to me, pay sales taxes of 7%, and all for $320. But to go that last three miles would cost almost another quarter of that!

So the fact that labor is a BIG part of production of goods may indeed be true. But the Fed boneheads think that because they can break those costs out of the price means, I guess, that it no longer has anything to do with inflation! Weird!

But to get back to the big picture, so, do ya wanna know how much money it will take to keep this little reflation gig going for a year? Me, too. If you asked me how much money it would take to fund a general reflation for year, I would avert my eyes and give my usual classical, textbook Mogambo answer, which is to shrug my shoulders, and mumble "I dunno," and then turn it back on you and give you a vicious third-degree on "Why you want to know? And why are you asking ME that question anyway? You trying to make trouble? Is that what you want? You want a piece of me? Huh? Is that what you want? You want a piece of me, punk?"

Reflation: Can Anyone Spare $3 Trillion?

But fortunately it didn’t come to that, as James Cook of Investment Rarities, in his article "Boom or Bust," has helpfully done the math for us, and he figures that about three trillion bucks ought to do it. Now all we gotta do is ramp up three trillion smackeroos and have somebody borrow it all, and put that mountain of money into stocks, and bonds, and houses.

See how simple this economics stuff is? This stuff is easy! I mean, how much do we overpay this Alan Greenspan character and all those other Fed guys anyway? A retarded chicken pecking at a computer console, mindlessly pressing a button emblazoned with the words "Increase credit" could do every bit as well. And if a mental-defective chicken WAS appointed as Fed Chairman, whenever this new chairman gave a speech, the people in audience might even get an egg, which is, I am sure you agree, a lot better than what the audiences who listen to Greenspan speak get, which is to have their heads filled with lies and optimistic mumbo-jumbo, which has no nutritional value at all. So what do you want? An egg that you can make into a delicious omelet, or vacuous mumbo-jumbo? The choice is yours.

All it takes, and you might want to pay particular attention here because this is the crux of the matter, is to convince a bunch of guys to borrow the money and, for reasons that befuddle me, invest it in those overpriced assets. Then the prices of the assets will go up some more. Or, as we say in the economics biz, reflates.

And with the right incentives, notably tax-related, there is no reason to suspect that it cannot initially work. Will Congress step up to the plate and do something heroic and stupid, a kind of desperation-induced "clutching at straws" legislative nonsense? Who knows? Congress knows. And since you know Congress, you know the answer, too.

But believe me when I tell you, and pay attention to the look of deadly seriousness on my face and stop staring in dumbfounded disbelief at the size of the inflamed pimple on my nose, that you are going to repay every dime of that borrowed-and-spent money, in the form of higher taxes and higher prices. Every freaking penny. For such are the Iron Laws Of Economics.


The Mogambo Guru
for The Daily Reckoning
April 19, 2004

— Mogambo Sez: It just keeps getting weirder and weirder, and I am struck by the fact that there has never been a published theory of economics that postulates that the basis of economic prosperity is monetary and fiscal stupidity.

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 Great America-Killing Inflation Machine

Dead men tell no lies. But living men are full of them.

The big lie of the early 21st century has been that people can live beyond their means – forever. People would not admit that they wanted ‘something for nothing,’ but hardly anyone expected anything less.

And when the correction of 2000-2002 threatened to undermine the lie, new lies were brought out to shore it up.

Alan Greenspan told people not to worry about a correction. Too much debt? Don’t bother yourself about it…we’ll give you more E-Z credit!

Not enough money in your pocket? Heck, we’ll cut taxes, said George W. Bush. And we’ll increase spending, too!

But lies have a way of catching you up. George W. Bush has to finance his spending somehow. And since Americans save little money, he has to look to Asian lenders to cover his deficits. This puts him in an uncomfortable position. America may be the world’s only superpower…but never before has a U.S. administration been so beholden to foreigners. If the Japanese and Chinese want Bush out of office…all they have to do is sell their U.S. bonds. Interest rates would soar and the phony ‘recovery’ would be over.

"A Nation Chained to Rates," says a Washington Post headline. And foreigners have the key.

In ancient times, a leader would have been torn apart by a mob of citizens for having put them in such a vulnerable position. We don’t know exactly what he did wrong, but according to Mrs. Oliphant’s history, one of the early Doges of Venice, Pietro Candiano, so aggravated his people in 976 that they killed him and his infant son and burnt down half the city.

Those were the good old days. Politicians thought twice before lying. Today, they lie twice…and never think at all.

Even without Asian selling, long-term interest rates are inching up. Alan "Bubbles" Greenspan is squirming a bit, too. While telling the public that there was nothing to worry about, he pushed short rates down to emergency levels and left them there for almost a year. People borrowed, spent, and went deeper into the hole.

And now that they’re more vulnerable to rising rates than ever before…guess what? Rates are rising.

Greenspan chained himself and the nation, like galley slaves, to an unnatural 1% short-term rate. Now, all risk going down with the ship.

Inflation seems to be flooding in. Economists are calling on Greenspan to pump up rates.

"It’s time to End Super Low Interest Rates," says Floyd Norris in the New York Times.

But what can poor Mr. Greenspan do? He’s lured consumers deeper into debt with unnaturally low interest rates. Now inflation has shown itself. He’ll have to raise rates now, say economists, maybe even before the elections.

But what would happen if rates rose? Where would the ‘something’ in ‘something for nothing’ come from if E-Z credit were not so E-Z anymore? What would the lumpen do if they actually had to pay their debts – at higher rates of interest? Would they thank Misters Greenspan and Bush for giving them more credit when they really didn’t need it? Or will they want to lynch them both?

We don’t know. But we think it will be fun to find out.

In the meantime, here’s Eric with more news:


Eric Fry in lower Manhattan…

– "This market sucks," one hedge fund manager griped last Friday to your New York editor, "The volatility is exhausting."

– "Yeah, it’s rough right now," your editor replied, trying to sound empathetic.

– We all have our crosses to bear, of course, and sometimes professional money managers have to work to make money…

– But isn’t the stock market supposed to be volatile? Isn’t that the nature of this beast? Of course, volatility, like cholesterol, comes in two varieties: the "good" kind and the "bad" kind. No one ever complains about the sort of volatility that produces rising share prices – that’s good volatility. But when share prices gyrate for months to produce no gain, or when they simply fall, that’s bad volatility…

– For most of 2004, the stock market has dished up a heaping portion of volatility, without any compensatory reward. After three and a half months of thrashing around, the Dow and Nasdaq are both nearly unchanged for the year-to-date. Making conditions even more harrowing for most investors is the fact that "garbage stocks" are excelling.

– "The ‘flight to garbage’ theme carries over from 2003 into 2004," one of the nation’s most successful hedge fund manager’s observed last week. "Guardian Life’s ‘Feds Index,’ which purports to track companies under investigation by the federal government, was up 60% in 2003, more than twice the gain of the S&P 500. The ‘best’ companies ranked by Merrill Lynch were up 26%; the worst, ranked ‘sick and dying,’ were up 81%. In the first quarter of 2004, the worst continued to outperform, gaining 6% compared to the 3% gain for the best companies. These aberrations concern us."

– Meanwhile, some of the stock market’s "internal fundamentals" are deteriorating. "Foreboding indicators include the faltering number of new 52-week highs versus new lows, the buckling of financial stocks and the unconvincing nature of the latest low-volume rebound from the late-March lows," writes Barron’s Michael Santoli. "John Roque at Natexis Bleichroeder points out that on Wednesday the number of new highs on the NYSE was 28, the lowest total since March 24, 2003, while new lows were 202, the most since March 12, 2003."

– Last week, the Nasdaq stumbled 2.8% to 1,995 – victimized by disappointing earnings reports from various technology stalwarts like Intel. The Dow managed to add 9 points to 10,451, but the blue-chip index labored all week under the heavy burden of rising interest rates. U.S. Treasury notes fell for a fourth straight week, their longest losing streak since March 2002, as the 10-year yield jumped from 4.19% to 4.34% over the five-day span.

– Rising rates also knocked the legs out from under the gold market, while providing a crutch to the U.S. dollar. The gold price plummeted nearly $20 to $400.55 an ounce. In the currency market, however, the dollar gained about 1% against both the euro and the yen.

– Rising interest rates almost always produce widespread fear and loathing on Wall Street. Since April 2nd, the day the Labor Department stunned investors with a surprisingly strong employment report, the 10-year Treasury yield has jumped from 3.88% to 4.34%. Notably, the S&P 500 has gained no ground since then, while the Philadelphia Bank Index (BKX) has dropped 4% and the Bloomberg Homebuilding Index has fallen 9%.

– While interest-rate-sensitive stocks tumble on Wall Street, demand for new mortgages is tumbling as well. The Mortgage Bankers’ Association’s index of applications dropped 22.1% last week, the fourth straight decline, while the index of applications to refinance mortgages plunged 30.7%. Both declines were the biggest in nearly nine months.

– Even so, homebuilders just keep on pounding nails…Starts of new U.S. houses rose a whopping 6.4% in March. Rising home supply in the face of waning mortgage demand is not usually a good combination…We should not be surprised if home prices begin to experience a bit of bad volatility.


Bill Bonner, back in Venice…

*** Housing starts are up. But "a housing market collapse draws nearer," warns the Financial Times.

*** The price of gold is still holding above $400 – the level we said it may never see again.

We stand by our guess: that the fraudulent trends of the last 18 months have largely played themselves out. Stocks and consumer spending are topping out. Gold has found its bottom.

*** Our apartment sits on the Giudecca waterfront overlooking the skyline of Venice. From the front balcony, it is as though we were looking at a Canaletto painting in 3-D.

*** "Venice has long borne in the imagination of the world a distinctive position, something of the character of a great enchantress, a magician of the seas," says Mrs. Oliphant in "The Makers of Venice."

"Her growth between the water and the sky; her great palaces, solid and splendid, built, so to speak, on nothing; the wonderful glory of light and reflection about her; the glimmer of incessant brightness and movement; the absence of all those harsh, artificial sounds which vex the air in other towns, but which in her are replaced by harmonies of human voices, and by the liquid tinkle of the waves – all these unusual characteristics combine to make her a wonder and a prodigy…

"In the light of summer mornings, in the glow of winter sunsets, Venice stands out upon the blue background, the sea that brims upwards to her very doors, the sky that sweeps in widening circles all around radiant with an answering tone of light. She is all wonder, enchantment, the brightness and glory of a dream. Her own children cannot enough paint her, praise her, celebrate her splendors: and to outdo if possible that patriotic enthusiasm has been the effort of a many a stranger from afar."

*** Yesterday, we went to mass at San Giorgio’s. We had our choice of at least 4 magnificent churches along the water’s edge. There are no cars in Venice. You can drink as much as you want at dinner…and have no fear of being stopped by a traffic cop. But everything is along the water’s edge in Venice; if you are not careful, you will fall in.

None of us speak Italian, but most Italian words and the structure of the language itself have parallels in either French or Spanish…so we could understand a bit of what was going on. Especially, since the basic storyline of Christianity is the same everywhere.

While sitting in a nearby café after the service, a group came in from a different church. The men wore black, with open collars, sunglasses and black hair cut short but greased so that it stood up in spikes. Each also wore a gold earring.

"Hey, they look just like Italians," one of the boys remarked.

"Yeah, they look like mafia hit men or bodyguards," said another.

Their appearance was comforting and puzzling at the same time. Here in Italy, it would have been disturbing to find the city populated with Norwegians or South Sea Islanders. But these Italians looked like the Italians you find in Queens or Hollywood. It was hard to imagine them as the heirs to Botticelli, Caravaggio, Palladio, Raphael and Michelangelo. It was as if the entire race had degraded since the time of Dante, Petrarch and Bellini.