Fed in the Land of Excess

The Daily Reckoning PRESENTS: The Fed doesn’t know how to do anything small – and the Mogambo never lets them do it without giving them a piece of his mind. See why this week, he wants to drag them down to The Mogambo Secret Kangaroo Court Of Vengeance (TMSKCOV). Read on…

FED IN THE LAND OF EXCESS

So Greenspan thinks foreigners will provide us with a “cushion”? Don’t make me laugh! Hell, they seem to be suddenly making less money, too, as the Commerce Department said the trade deficit narrowed to $58.4 billion in February, from $58.9 billion in the prior month!

But Paul H. figures that this comes to about $2.086 billion per day, and that’s only because February only has 28 days in it. “Had February been a ‘normal month,'” he says, “the trade deficit would have been between $62.57 billion and $64.66 billion. ”

Okay, so they are still making more money, and now I look like an idiot. Happy now?

Trying to divert attention from my embarrassment, Paul continues, “Now, if the $58.4 billion represented a narrowing of 0.7% from January (which was a 31-day month), then using the normalized figure for 31 days indicates that the trade deficit actually widened for February by about 3%!! Holy cow, Batman! We are freakin’ doomed (to coin a phrase).” Yep!

And speaking of federal budget deficits, Rep. Ron Paul, who would be the next President of the United States if we weren’t a nation of moronic Big Government-loving wankers, writes, “The greatest threat facing America today is the disastrous fiscal policies of our own government, marked by shameless deficit spending and Federal Reserve currency devaluation. It is this one-two punch – Congress spending more than it can tax or borrow, and the Fed printing money to make up the difference – that threatens to impoverish us by further destroying the value of our dollars.”

I leap to my feet and shout, “Bravo! Bravo, Mr. Paul!” with an angry undertone to my voice that clearly indicates that I am astonished that the rest of Congress, our “leaders”, is so completely clueless about this stuff. “Bravo!” I bellow! “Bravo!”

This brings up an excerpt from Lee Iacocca’s new book, Where Have All the Leaders Gone? that I was sent via a forwarded email, where he purportedly writes, “Had enough? Am I the only guy in this country who’s fed up with what’s happening? Where the hell is our outrage? We should be screaming bloody murder. We’ve got a gang of clueless bozos steering our ship of state right over a cliff, we’ve got corporate gangsters stealing us blind, and we can’t even clean up after a hurricane. I’ll give you a sound bite: Throw the bums out! I’ll go a step further. You can’t call yourself a patriot if you’re not outraged.”

And I, the Wildly Irrepressible Mogambo (WIM), will bravely go even further than that! I will say that: 1.) Every sentence of that excellent paragraph of Mr. Iacocca’s should have concluded with at least one exclamation point to indicate the dramatic emphasis that it clearly deserves, and 2.) If you are not tracking the guilty bums down and dragging them in chains to The Mogambo Secret Kangaroo Court Of Vengeance (TMSKCOV) for a quickie trial, guilty verdict and sentencing, THEN you are not a real patriot!

MarketWatch.com, completely ignoring my clear call to begin The Mogambo’s Terrible Revenge Of The Sheep (TMTROTS), instead risked inflaming me even more when they reported that the Treasury Department revealed, “The U.S. federal government spent more money in March than in any other month ever.” Ever!

In actual numbers, “The federal budget deficit widened to $96.3 billion in March, compared with $85.3 billion last March.”

In total, “Excluding the Social Security and other trust funds, the deficit totaled $108.2 billion in March and $347.8 billion for the fiscal year so far.” That’s about $700 billion!

I assume that inflation helped make government receipts rise, “about 1% year over year in March to $166.5 billion, while outlays rose about 5% to a record $262.7 billion”, as, “Defense spending totaled $67.8 billion in March and $268.3 billion so far for the year,” which is up 7%.

Continuing, “Spending on Medicare and Medicaid totaled $83.4 billion in March and $418.4 billion for the year,” up a huge 15.6%. “Spending on the Medicare drug benefit” is up a staggering 144%. “Social Security tallied $55.5 billion in March spending and $306.8 billion for the year”, up about a whopping 6%. “Spending on interest on the public debt totaled $21.3 billion in March and $202.1 billion for the year”, up a terrifying 4%!

And all of this excessive spending, made possible by the excessive creation of money and credit by the Federal Reserve, means that prices will go up excessively. And sure enough, from Bloomberg.com we read that the Labor Department released the nightmarish news that that U.S. consumer prices, as measured by the Consumer Price Index, rose 0.6% (including food and energy prices) in March, which is even higher than February’s 0.4% increase.

And “Producer prices rose 3.2 percent from March 2006, compared with a 2.5 percent gain in the 12 months ended in February. Prices excluding food and energy rose 1.7 percent from a year earlier, compared with a 1.8 percent gain in the 12 months ended in February.” Yikes!

It’s a good thing that they are excluding energy costs in reporting inflation, as “Energy prices jumped 3.6 percent last month after increasing 3.5 percent the prior month. The price of gasoline rose 8.7 percent, the most since November, and natural gas costs increased 3.3 percent”! Yikes and yikes again!

And let’s not forget food! Luscious, delicious food that is sometimes fried, often crunchy and/or chocolate covered, and then eaten a hell of a lot more often than I should (but a lot less than I want) which results in a big deficit in the Total Mogambo Food-Oriented Hedonism Quotient (TMFOHQ), for which I angrily blame a cruel, uncaring world, and thus proceed to make everyone’s life a living hell with my righteous revenge.

Now, unfortunately, things are getting worse, as the new report, “showed food prices rose 1.4 percent in March, after the previous month’s 1.9 percent increase that was the most since October 2003.”

Well, judging by the lack of frightened wailing and screams of outrage, apparently I am the only guy in town who can multiply the 0.6% rise in the CPI times twelve months to get a terrifying annual inflation rate of 7.2%, or who can add March’s 0.6% inflation in prices to February’s 0.4% inflation in prices to get an average of 0.5% inflation in prices, and then multiplying THAT by twelve months to get an annual price inflation of 6.0%, which is still horrifying enough to make you whimper and cringe in terror if you have any tiny little bit of a hint of comprehension of the enormity of what this means!

Or maybe everyone else is so gullible, non-thinking, childishly trusting, ignorant, stupid and easily-led that they are falling for the Fed’s trick of making you pay attention only to “core consumer price inflation”, which EXCLUDES food and energy prices, but is still hedonically adjusted to make it look better than it is. When you do that, “core consumer prices” are, magically, up only 0.1%! Hahaha! What a scam!

Until next week,

The Mogambo Guru
for The Daily Reckoning
April 23, 2007

**** Mogambo sez: For those that say to me, “Hey! Loudmouth Fathead Mogambo (LFM)! Hey! Yeah, I’m talking to you, creep! How much gold and/or silver should I have?” I can now offer both the customary rude hand gesture and this interesting metric from Rhody. He writes that his brother had the opinion that 10,000 ounces of silver would ensure “financial security” through old age.

Unfortunately, the brother “did not explain how he obtained this figure.” So the clever Rhody did some research and found that “in 1900, one ounce of silver was a professional class daily wage. If one retires, one can expect a life expectancy of 30 years, which is about 10,000 days. At one ounce per day, this is how much silver one should have.”

And I seem to remember something about the historical averages of the value of silver through the ages, when measured against a day’s wage for a professional class worker, being around here someplace.

All of this immediately says two things to me. First, I need 9,999 more ounces of silver! And second, silver should be selling for (since the average working-class wage is now almost $15 an hour) at least $120 an ounce. It’s actually selling at $14 an ounce.

So is silver a compelling buy at these prices? You do the math!

And when you do, and you factor in various estimates of inflation that are coming down the line, don’t be surprised if the answer screams, “Buy as much as you can possibly buy, chump!”

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.

Money…money…money…

We know it’s a rich man’s world, but how rich is the rich man these days?

What’s happened in the world of money since we’ve been away from it?

Well, on one hand, the Dow has gone up, up, and up; we just hope someone is holding on to the string, or this balloon might get away…or pop! Right now, we’re not sure. When we checked on Friday, the Dow had risen almost to 13,000.

The metals are soaring too, with many base metals hitting new records and gold back up to nearly $700.

On the other hand, a fund manager who’d come to South America to look for bargains (and whom, by an odd coincidence, we know from London) had this to say:

“Bargains? Ha! There aren’t any. There’s so much money in funds that the managers just have to take what they can get. But the investors don’t seem to care. They’re pouring cash in faster than the managers can put it to work. And, of course, they all only want to invest in the funds AFTER the funds have made a lot of money. The whole thing is absurd.

“I travel all over the globe. When I was raising money in about 2003, there were plenty of good investments around. But then, I had a hard time getting investors to put in any money. Now, the investments I had targeted are up 100%, 200% and more…and investors are still giving us more money than we can handle. The only problem is we can’t find investments that are bargains anymore.”

Hedge funds took in more than $60 billion in new money in the first quarter. The International Herald Tribune reports that that’s not only making hedge fund managers rich, with all the legal work involved in the hedge business, it’s making the lawyers rich too.

What a delightful, degenerate economy! AP reports that three million manufacturing jobs have been lost in the United States since George W. Bush came into the White House. But who cares about making anything anymore? Who cares about actually creating the things that really make people wealthier? The money is not in making things…but in shuffling paper around.

Everyone is getting rich – providing financial services to everyone else, like people on an island making their livings by taking in each other’s laundry. Let’s see, we’ll lend you money to buy a house. Then, you refinance the house with our friendly rivals down the street…and then you place the money with a private equity firm…that uses it to take a company private…paying off the shareholders…who take their loot and put it into a hedge fund that buys the shares of the same company when it comes back onto the public market! Whew!

What does it take to keep this grand money machine spinning?

More credit (or cash)…and an incredible amount of naïveté…not to say, dumbness. Not to mention more than a few twisted tales.

Money supplies all over the world are increasing – 10% per annum in the United States, 10% in Europe, 14% in Asia. The hedge funds, mutual funds, private equity funds, investment banks – the green stuff is everywhere…and everywhere it is chasing more green stuff. The world has gone green.

“It’s incredible,” said our friend from London. “Everywhere I go I run into other investment managers, all looking for something – anything – that is still at a reasonable price. I was just in Zimbabwe, for example. Now, there at least you’d expect to get assets for nothing. The inflation rate is something like 100% per month, and nobody has anything.

“I went into one of the finest restaurants in Harare. I mean, this was a restaurant that used to be the best in all of Africa. But they gave me an old menu, listing an assortment of cakes and desserts – and when I asked for one, they said, ‘I’m sorry, but we don’t have that any more.’ So I asked for something else, and they said, ‘I’m sorry but we don’ t have that any more, either.’ So, I tried a third one and got the same reply. Finally, I asked, ‘What DO you have?’ And they said, ‘White bread…’

“And this was in the best hotel in the city. A fine hotel. But the city’s sewage treatment plant had collapsed and the raw sewage was running into the same river where they took in the city’s water supplies. So, even in the best hotel in the city, the water was a little brown and smelly…and you were afraid to even take a bath.

“And then I’m sitting at the table in the restaurant, and whom do I see at the other tables? Other fund managers…also scouting around for bargains. There is just so much money floating around the world, no one knows what to do with it.”

Against this huge increase in the supply of cash and credit is a relatively modest increase in actual wealth, if any at all. Of course, we don’t know how much, because our measuring stick has such a wiggle to it. We live in an era of ‘managed’ currencies. We measure our wealth…and our profits…in managed currencies. And we have faith that the managers know what they are doing.

When that faith goes…so goes the value of our currencies…and so goes much of our wealth.

Practically unnoticed in the worldwide euphoria of rising prices was the falling dollar. In the two weeks we were in South America, the dollar lost about 2% of its value against the euro. Against gold, it lost 3%. Measured against gold or the euro, Americans – even if they had all their money in the Dow – got poorer while we were away.

Someday, all that liquidity is going to turn a little smelly…like the Harare sewage.

More news:

————–

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

“Last week’s fantastic GDP of +11% in China has really stirred the pot on the relations. I guess the question in all of this is how does a strained relationship between the U.S. and China affect the markets?”

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

————-

And more views:

*** Buenos Aires is the most European city in the world, say the locals.

“The Mexicans descended from the Aztecs,” they say.

“The Peruvians descended from the Incas.”

“But the Argentines descended from boats.”

The Indians found on the Pampas were either killed or died of natural causes. Then, there were some African slaves shipped over in the early days to work on the haciendas who mysteriously disappeared in the 19th century. There is little trace of them around anymore. Buenos Aires is almost 100% European.

Many cities in Europe, by contrast, have seen waves of immigrants from Africa and Asia. Walk down any street in London. You will find yourself among Indians, Pakistanis, Arabs, Chinese, Japanese, sub-Saharan Africans and people from all over the rest of the world. Or, take the subway in Paris. Often, coming back from London, we get on the subway at the Gare du Nord and find that we are the only white person in the car.

Still, the Argentines are not the same Europeans you find in Amsterdam or Edinburgh. Many of them came from the south of Italy…or the south of Spain…or Sicily…or even Syria. They tend to be dark-haired, with olive skin. Of course, there were many immigrants from England and Germany too – so many Argentines have blond hair and blue eyes. And many speak English better than we do.

“Oh yes,” said an elegant Anglo-Argentine woman with whom we dined the other night, speaking in very precise, but rather antique English. “My family has been in the Argentine for more than four generations. We have always spoken English at home. But when I went to London a few years ago, I turned on the television and couldn’t understand a word of what they were saying.

“Still, we have always thought of ourselves as British. When Britain went to war in World War I and World War II, many people from here went over to fight for Britain. In World War II, for example, my husband volunteered for the British Air Force. We have always been loyal to Britain.

“But then, after the war was over, Malvinas Islands came along and a crew from the BBC came to interview me and find out what the Anglo-Argentines thought about the war. I told them that the Argentine had been good to me and to my family. It was not exactly what they wanted to hear. We are English, but we are Argentine too. And this is our country.”

*** You have to keep your eye on the cab drivers. We have been cheated twice. The first time, the driver said his meter was broken. He charged us three times the normal fare. The second time, we gave the driver a 100-peso bill. He did the ol’ switcheroo and held up a 5-peso bill. We were almost positive we had given him 100 pesos…but not sure enough to want to get into a fight about it.

*** A note from a dear reader:

“I’m writing with a question regarding a book I’m currently trying to get through. You’ve probably heard of the author, Jeffrey Sachs. The book is ‘The End of Poverty: Economic Possibilities for Our Time.’ You guys would probably call Sachs a ‘world improver’, but I’m finding myself drawn to most of his arguments and approaches.

“He seems to have had a pretty significant influence, everywhere from Poland to Bolivia to Kenya. I’m trying to read a range of books to self-educate myself on matters of global economics, yours included, but I’m not sufficiently trained in these matters to sort through much of it. If this guy is leading me astray, I’d like to be shaken out of my stupor.

“For example, your explanations and support of a gold standard resonate with me, but it seems Sachs has a different take. Here’s a quote from his book:

“‘The economic instability that followed World War I led to the Great Depression of the 1930s and then to World War II. The linkages are subtle and debated in detail, but undeniable in basic fact. The overhang of bad debts, shrunken trade within Europe, and over stretched budgets of the European powers meant that inflation, stabilization, and austerity were the order of the day throughout the 1920s. The European countries duly climbed one by one back to the gold standard, viewed at the time as the guarantor of long-term financial stability. Alas, the return to the gold standard did little more than exacerbate the conditions that had prevailed in the 1920s. Most important, the gold standard and its “rules of the game” for monetary management made it difficult, if not impossible, for the major economies to escape from a slide into deep depression in the early 1930s. The Great Depression, in turn, triggered a calamitous spread of trade protectionism and the rise of Nazism in Germany and military rule in Japan.'”

We reply:

Yes, Mr. Sachs is a world-improver. And like all world-improvers, he is a threat to prosperity and to peace.

But since we are not familiar enough with Mr. Sachs’ oeuvre to offer ridicule, we turn to his interpretation of the gold standard. Yes, the facts are as generally accepted. But, the interpretation is defective. It is a little like saying of a former call girl…that she had a hard time earning a living after she gave up doing tricks. Yes, when economies stop inflating, debt becomes harder to deal with. The illusion of prosperity is replaced by the reality of debt deflation.

“Dere’s dem dat’s good…an’ dere’s dem dat’s smart,” said Uncle Remus. The gold standard is only a monetary form of goodness. It cheats no one. Nor does it give anyone a break…or anyone a special favor. But Jeffrey Sachs, on the other hand, is smart. He thinks ‘the rules’ of the gold standard just get in the way. He can do better, he believes – by imposing his own, very smart policies.

Those same very smart policies, if we recall led to disaster in Russia after the fall of the Soviet Union. After that, he gave some very smart advice as well to Poland, Russia and even Colombia. The only one of that trio that succeeded was Poland – which didn’t follow his smart policies.

Could the Great Depression have been alleviated by better policies? Probably. But you can always count on the world-improvers to make a mess of things…and then come up with policies that will feel better first and then end up making everything worse.

Eventually, things will get so bad they will blow up and then people will have to hunt up the old rules again. Most people only decide to stick with being good, only after they find out what being too smart does to them.

———————