Economic Spaghetti

The Daily Reckoning PRESENTS: Like most economic systems, everything is seemingly fine until, without warning, some errant combination of unseen forces shake your happy little world to the core. And of course, the Mogambo has a theory based on this. Read on…

ECONOMIC SPAGHETTI

I am proud to announce my fabulous new Mogambo Theory, which I call the Mogambo Theory Of Economic Spaghetti (MTOES). The best way to explain it is to imagine that you are sitting at the table, having dinner with your in-laws, in your new clothes, and you are eating spaghetti. Being the careful little person that you are, you put on a bib to protect your clothes, and you position your napkin in your lap just perfectly so, and you try to eat very carefully and slowly, instead of wallowing in your food and gobbling it down with your bare hands like you do at home, making those disgusting, pig-like slobbering sounds and listening to your family yelling, “Ewww, Dad! Gross!” In short, you have taken every possible, prissy precaution to protect yourself.

Like most economic systems, the situation is usually in hand, bite after bite, and everything is fine, even when her dad asks about my “intentions” and “future plans” concerning his daughter, since we seem to survive by borrowing money from him, and I almost choke to death on a meatball as I angrily think to myself, “You want the truth, old man? You can’t handle the truth!”

Then “it” happens! Without warning, some errant combination of unseen forces, some remarkable coincidence of unpredictable vectors, occurs, and a tiny, little, eensy-weensy drop of red sauce is suddenly, and mysteriously, propelled up, up, up in a perfect parabolic trajectory, vastly exceeding the statistical averages of “droplet splatter dispersion”, and, arcing up and out, lands (blip!) on the sleeve of my, I mean your, shirt – one, single, tiny red dot of marinara sauce in an ocean of crisp whiteness and starch.

This, then, is the fabled chaotic and destructive “fat tail” of probability distributions, and it is the random, improbable, wildly-chaotic event that causes the messing of a shirt, the failure of Long Term Capital Management, and all of the other systems based on probability that exclude the guaranteed statistical certainty of a catastrophic event of some kind, especially ones with so infinitely many variables.

The only other 100% sure-fire thing in economics is the probability that an economic system based on the over-creation of fiat currency and/or insane levels of fractional-reserve banking credit, will implode; just as they have imploded every time in history that they have ever been tried by a government that is so brain dead, or so ignorant, or so insane, or so corrupt as to try it, given the absolute, provable certainty that trying it is guaranteed to fail and cause, as it always seemed at the time, unimaginable suffering, ruination and misery.

From Bloomberg.com we learn that the Commerce Department reported,”disposable income, or the money left over after taxes, rose 0.5 percent for a second month. The gain left disposable income up 5.9 percent from the same month last year. Adjusted for inflation, last month’s 0.8 percent jump in disposable income was the biggest in a year.”

I guess it all depends on how you define “income”, because the people I know who have only earned income to live on are telling me that they don’t see any increases in their wages, which sounds ominous, until you realize that the only people I know are the ones I met in a holding cell or one stupid court-ordered therapy group or another, and so these people are, like me, anti-social scumbag pieces of human trash with paranoid tendencies and multiple personalities (three, if you count Invisible Dave), so it’s not surprising that we are not getting raises, and, indeed, the surprising thing is that we have jobs at all!

But if you include as income the income from governments increasing spending, and governments paying more interest dollars because they have been issuing more debt, and if you include the increase in incomes by CEO’s making insanely huge salaries, involving hundreds of millions, if not more than a billion, in salary and benefits and options and outright gifts…then okay, incomes are going up.

But the Commerce Department is not interested in my choice of friends, probably because every secret-police government agency already has all that information on file. They just go on to say that there was a 0.1% rise in spending, and that incomes were up 0.5 percent.

That all sounds nice, but alarmingly, “the report’s price gauge tied to spending patterns and excluding food and energy costs, the Fed’s preferred measure, was up 2.4 percent from September 2005, down from a 2.5 percent year-over-year increase a month earlier.”

John Williams, of shadowstats.com says “The ‘improvement’ all was tied to year-ago CPI comparisons that were distorted by the effects of Hurricane Katrina. Those effects and distortions will reverse in the months ahead.”

If you have still not moved into gold, perhaps you will reevaluate your position when erudite reader David W. says that you can extract some very good advice from the movie “A Beautiful Mind.” He writes, “The fact is that the spontaneous re-monetization of the precious metals is a Nash equilibrium. What this means in English is that an ideal financial strategy for everyone on Earth is to buy as much gold and silver as they can, as soon as possible.”

Or if you don’t want to steadily, and boringly, increase your wealth, but just want to know how to trade gold with technical analysis, then the Aden sisters at AdenForecast.com have just what you need, although they do not have, I am sorry to report, what I need, which is free calendars with pictures of pretty ladies in skimpy bathing suits smiling at me with that wicked “come hither” look in their eyes.

I was kind of surprised, too, since they were ladies themselves, and so it seemed kind of a natural for them to innately understand what creepy degenerates like me are looking for in a quality investment advisory service.

But they don’t even talk about the calendar thing or how they called the cops on me because they were “creeped out” by my innocent inquiry, but instead get right to the lesson when they say that “gold’s 65-week moving average is the most important indicator to follow. It’s been excellent in identifying gold’s major trends.”

As proof, they report that “gold has been above this moving average since 2001 and it’s kept us on the right side of the major rise since then. As long as gold stays above this average at $549, it’ll continue signaling to stay with gold.”

Jealous that these ladies are getting all the attention in spite of that whole calendar fiasco, I suddenly jump in to interrupt them so that I can glory in a little attention for a while. I pipe up, “And if you are using the technique of dollar-cost-averaging, whereby you invest the same dollar amount each month, then you are consistently buying more when it is cheap and buying less when it is more dear, as long as the trend continues.”

I look over and I can see them standing there dumbfounded, their mouths hanging open in astonishment at my rude and completely unexpected interruption. Interpreting that to mean “Fascinating, Mr. Mogambo! Please tell us more!” I happily go on to my conclusion. “And that, my Darling Mogambo Cherubs (DMC), is how successful investing is done over the long haul, whether in gold or anything else!”

Until next we meet,

The Mogambo Guru
for The Daily Reckoning
November 6, 2006

Mogambo sez: Scared? Tired? Tired and being scared? If so, then buy more gold and silver bullion. If not, then you will be, so buy some gold and silver. Either way, I think you get the message.

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.

Oh ye fickle gods of the markets – give us a clearer sign!

The Dow dropped again on Friday, for the sixth day in a row – and is now below 12,000. But each drop has been a little hesitant, as if the market wasn’t sure it wanted to go in this direction at all.

Gold, on the other hand, has been stepping out as it if it were in a hurry. The price rose another $1.65 on Friday and now stands at a two month high.

As long-time Daily Reckoning sufferers know, we are not exactly bullish on gold. We buy gold, but we have no real opinion about what the price will be or when it will be there. We like to own gold, in other words, not speculate on it.

Gold is nature’s antidote to human financial chicanery. The more distorted and stretched the world’s money system becomes, the more important it is to own gold to protect yourself.

The FunnyMoneyReport.com keeps us abreast of the latest distortions:

“For starters, our country has become a nation of debt where anybody can get a line of credit. Once reserved for the select few, many Americans are now relying on credit to purchase the essentials of everyday life. Americans no longer save what they earn. Second, the U.S. government for all intensive purposes is bankrupt with a debt in the trillions. Third, the Federal Reserve throughout its existence has continuously devalued our currency by expanding the money supply. They continue to do so, but since they stopped reporting the M3 money supply numbers we no longer know exactly how much they are destroying the currency. Fourth, foreigners are looking for ways to withdraw from U.S. currency holdings into something more stable. Fifth, the housing boom Alan Greenspan created is in the midst of crashing. Anyone with adjustable rate mortgages or home equity loans are getting slammed. Sixth, real wages are going down and the price of tangible assets is going up. Seventh, the Government Accountability Office is warning of a future economic disaster. Eighth, U.S. Treasury Secretary Hank Paulson is now organizing more frequent meetings of the President’s Working Group in Financial Markets otherwise known as the Plunge Protection Team every six weeks. The question is why would Paulson be organizing additional meetings of this group if the economy is in good shape?”

Gold is pulled out of the ground only grudgingly and reluctantly. Each year, the total amount of it above terra firma increases by only about 1.7 percent. But paper or electronic wealth (of nominal dollar-based assets) is lighter than air. It puffs, floats, soars, zooms, orbits…and pretty soon, it has lost all connection to the on-the-ground reality of the real economy.

But gold never gets too far from it.

Recently, we’ve been watching an HBO series on the history of the Roman Empire. In last night’s episode, we saw how close the fight between Caesar and Pompey for control of Rome really was. There was cunning and bravery on both sides. But only one side had the gold. When Pompey fled Rome, he made sure that the treasury went with him. But the treasure was waylaid…lost…and then recovered by Caesar. So, in the end, while Pompey may have had more troops, he had no way to pay them. We’ll have to wait until tonight to find out what happens, but we have a feeling that it’s the yellow stuff that will decide what happens.

Every government, before and since, has succumbed to the ‘Golden Rule’ – he who has the gold makes the rules. When things are going well, a government can get by on paper money, I.O.U.s and credit. But when the going gets tough, suppliers, soldiers, and creditors lose faith in paper and promises; they want real money. And gold is real money.

Gold is up in price now simply because there are too many paper and electronic promises floating around. The Financial Times, for example, reports ‘panic selling’ in the derivatives market. It seems that what’s hopping out of everyone’s hands is credit default swaps. Well, credit default swaps are what institutional investors buy when they fear the going might get tough. But now, instead of buying them, they’re selling them…and selling them down to record low prices.

Apparently, a lot of people don’t think a lot of credit will go bad for a lot of time.

But of course, that is just what most people tend to think…right before the gods let out a belly laugh…and things go bad in a big way.

More news:

————–

Justice Litle, reporting from Reno, Nevada…

“…Just as the morning sun begins to make its presence known — when it’s still dark, but daybreak is tickling the back of your neck — the coyotes of Paradise Valley are apt to let loose…”

For the rest of this story, and for more market insights, see today’s issue of Whiskey and Gunpowder

————–

And more views:

*** Now, here’s a real negative for gold. Bloomberg reports that 27 out of 35 analysts are now bullish on the metal. They expect a weaker U.S. economy will drag down the dollar – and boost gold in the process. Rarely do prices rise when experts expect them to. But maybe this time, it will be different…and maybe gold will rise much more than the experts expect.

*** Expectations for housing, meanwhile, continue to be rosy…if not downright peachy. Everyone admits housing is coming down…but they insist it will come down in a ‘soft landing.’ Soon, we expect to see them begin redefining what soft is.

*** Halloween is over, but the undead are still among us, writes Susan Walker of Elliot Wave Forecast:

“They will be those folks who overextended themselves to buy a handsome Gothic mansion in a friendly subdivision. And they will have one thing on their minds – needing more cash to make their monthly mortgage payments, particularly after their adjustable-rate mortgages are re-set. One estimate suggests that 2007 will be the Year of the Vampire, as $1 trillion-worth of ARMs (or 12% of all U.S. mortgage debt) will be readjusted upward, increasing monthly payments and adding to homeowners’ burdens. The mortgage companies will want more blood from their mortgagees, yet these homeowners have already been bled white: where will they find the cash to make the payments?

“As prices of both new and existing homes fall in many parts of the nation, more ordinary people will become unwilling foot soldiers in the vampire empire, because they won’t be able to refinance their homes. Or, to use the vampire vernacular: They won’t be able to get any more blood from their houses, which will be cold relics of themselves. Homes that once pulsed with life will now be peopled with deathly white homeowners trying to find more cash-blood.”

*** Meanwhile out readers have their gripes, with our politics and our economics:

“This U. S. Navy veteran from WWII is disgusted with the anti-American crap spewed by Daily Reckoning. Having spent a year doing research in London, I know how the non-science British ‘intellectuals’ constantly carp against America, and show their ignorance of America too. ‘Show White Flag’ on a photo of Marines at Iwo Jima is typical left-wing snide vicious stupidity.

“We fought in the Pacific against Imperial Japan (who had made a shameful surprise attack on Pearl Harbor) not for Exxon, etc. but to crush Japanese fascism. At least the Australians and New Zealanders remember the desperate battles near the Solomon Islands in the Coral Sea, and appreciate that we saved them from the ‘tender hands’ of Japanese invaders!!! Churchill appreciated our help. President Truman made the RIGHT DECISION to use two atomic bombs, saving millions of Japanese lives and several hundred thousand American lives (including mine probably) if an invasion had been necessary!!

“Much of your financial stuff is old and elementary. Calling America ‘the empire’ is typical despicable leftist trash. If you think so, send back the Marshall Plan money with interest!”

*** And another:

“Yeah, and Wal-Mart hurts poor people, too. Here are two examples:

“A young woman whose father is a friend of ours (both poor) took her car to Wal-Mart for repairs. The brain dead mechanic let the car roll off the rack and it broke her axle and damaged the body. Wal-Mart refused to pay for the damages and they couldn’t find an attorney to fight Wal-Mart on a contingency fee basis.

“Another friend of ours is a big game guide in Idaho. He took his 4WD vehicle to Wal-Mart for an oil change before taking his hunters on their hunting expedition. The oil plug came out when they were 20 miles from the nearest human and the engine seized. The same thing happened. He couldn’t afford an attorney and couldn’t find one willing to sue Wal-Mart on a contingent fee basis.

“No wonder Wal-Mart can sell things so cheaply. They have no liability insurance and deny all liability.

“The end doesn’t justify the means (in spite of what Bill Clinton said to the contrary).”

*** And yet another anti-Wal-Mart comment:

“Before praising the dubious ‘virtues’ of Wal-Mart…

” …consider that it is ALSO responsible for creating a LOT of unemployment (especially in the smaller towns). In the small town where I grew up, when Wal-Mart moved in, temporarily DRASTICALLY undercutting the prices of our town’s local merchants, and driving them out of business, the town square quickly turned into a skeleton of its former thriving self. So, of course, the former employees of these merchants were forced to accept employment at Wal-Mart (at reduced salaries).

“Then, once Wal-Mart controlled the pricing of goods sold in this small town, they gradually began raising them. So, after about two years from the time Wal-Mart had arrived, the townspeople had gained very little in the way of savings, and had paid a huge price in their lowered standard of living!

“But this is how Wal-Mart built itself, not by competing with stores in the larger cities, but by targeting the merchants in small towns, and unfairly under-pricing them until they had been driven out of business, then absorbing their employees, and underpaying them while gradually raising prices (to pay for Wal-Mart to be able to ‘take-over’ their next small town victims).

“And don’t even get me started on the ‘quality’ of the merchandise sold by Wal-Mart, to the townspeople (once they had no alterative but to either purchase at this super store, or to drive a long distance to shop elsewhere)!”