Fighting Off Cynics With Golden Gloves

The Daily Reckoning PRESENTS: Given the rather direct tone of our dear Mogambo’s weekly musings, it is no surprise that he gets a certain level of equally, er…direct responses. This week, he rebuts one of these emails with the derisive wit that he is known for – and you won’t believe who it’s addressed to. Read on…


Lately, I get a lot of emails like “Dear Mogambo Butt-Face Moron (MBFM), I am distraught because I listened to you and bought silver and gold like you said to do, and they ain’t done squat since then. By this time, I had planned to be so freaking rich from buying gold and silver, and then watching it run to astronomical heights, that I could leave my stupid husband forever and be far, far away from here, sitting on a warm beach somewhere, sipping a cold Pina Colada brought to me by a handsome cabana boy named Raoul and having him rub soothing oils and scented emollients all over my tingling body until I am writhing and moaning with pleasure.”

I thought to myself, “Hey! This was starting to get good!” and was hoping to pick up some pointers from this lucky Raoul character! So, imagine my disappointment when the writer goes on, “So, since gold and silver did not produce the spectacular returns I had so eagerly anticipated, I am stuck here, I am very angry about it, and my husband is pretty disgruntled, too, since I am now even MORE of a shrill, hateful harpy whose only pleasure in life is trying to make him miserable enough to commit suicide just to get the hell away from me. And don’t get me started about Raoul, you Disgusting Mogambo Puke Bag (DMPB)!”

Now, as soon as she called me a DMPB, I instantly recognized the writer as my own wife! Ahhh! Pieces of the puzzle fall into place at last!

Too clever to let her know that I am on to her and her little game, I casually reply “Dear Cheating Little Scumbag Whore (CLSW), The New York Times writes that ‘Representative Ron Paul of Texas, a libertarian-minded Republican who often warns that excessive government threatens the economy, has put his pessimism into his portfolio. If the dollar collapses, Mr. Paul will be ready: his favorite investments are real estate, silver and gold.'”

Then I closed my reply with “And Raoul says that you are a big, fat cow.” Hahaha!

And although the spiteful content of the email was all too distressingly familiar, the concern is a widely-held one; why isn’t gold going to the moon in light of all of this inflationary insanity all around the world so that we can get the hell out of here, away from our whining, suffocating families and maybe find one lousy moment of happiness before we die?

Well, one explanation for the sorry performance of gold comes from a report that “Over the past two months the Banco de España has sold off 80 tonnes of gold, flooding the world market with enough bullion to dampen the usual spring rally.”

Plus, some other European banks sold some gold, too, and the gold ETF had to sell some gold because some speculators bailed out.

In case you were wondering, this is all part of a desperation move by Spain to get some money, as their “foreign reserves have plummeted to wafer-thin levels, leaving the country exposed to a possible banking crisis if the property market swings from boom to bust.”

The Telegraph goes on “The Banco de España refused to comment on the sales, leaving it unclear why reserves have fallen so low, or where the money has gone”, although “It appears the bank has been draining the reserves to help finance the current account deficit, which has ballooned to 9.5pc of GDP, reaching ?8.6bn in January alone.”

This same current-account problem is affecting the dollar, being as it is “the idiotic currency of an idiotic economy being run into the ground by an idiotic Congress letting an idiotic banking system act despicably”.

And the problems of the dollar will not be going away anytime soon, either, although it has been up a little here lately. As to that, Chuck Butler in his Daily Pfenning newsletter writes that the recent bounce in the dollar “is simply a technical correction” in “the weak dollar trend that began in February of 2002.”

In case you were wondering how he knew that the downward trend of the dollar started in 2002, he says “The dollar entered the weak trend when its Current Account Deficit reached the historically telling number of 4.5% of GDP”, as “fiat currencies always experienced a currency crisis any time their deficit to GDP percentage reached 4.5%”

The Current Account deficit is now well over 6% of GDP, in case you were wondering if things are getting any better. They obviously aren’t.

And technical corrections aside, the reason that the dollar is headed down is that (as the Current Account proves), “An asset begins a weak or strong trend because of a fundamental reason, and the trend will not end until that fundamental reason is corrected.”

And what is that reason? A big part of it is that individual Spaniards have acted just as stupidly as Americans, and “Spain’s private sector has amassed $600bn (£300bn) in foreign debts. Corporate borrowing is 100pc of GDP. The overall stock of mortgages has increased sixfold in a decade. Household debt has reached 120pc of disposable income, largely on floating rates.”

Oddly enough, this news hit my desk at the same time as a page from the CIA’s World Fact Book, which lists Spain as having the second-worst current account deficit in the world, at $98.6 billion. Parenthetically, the United States has the world’s worst deficit at a gigantic $862.3 billion.

In case you were wondering, “Who are the top five in trade and financial surpluses?” the answer is China ($179.1 billion), Japan ($174.4 billion), Germany ($134.8 billion), Russia ($105 billion) and Saudi Arabia ($103.8 billion).

Until next week,

The Mogambo Guru
for The Daily Reckoning
May 28, 2007

Mogambo sez: If the dollar goes down in purchasing power, but prices of gold, silver, oil do not change, then for the holders of foreign currencies, every import will be (thanks to arbitrageurs and the global marketplace) cheaper. Thus, the only way (if nothing else changes) that gold, silver and oil can go down in price is if these foreigners decide to lower their demand for these things in response to lower prices! Hahaha!

What will almost surely happen is that foreign demand for gold, silver and oil will increase as they take advantage of the temporary bargains, making their prices in devalued dollars go up.

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.

Today is a holiday in much of the world. For Americans, it is Memorial Day. And much of Europe, though less religious than America, nonetheless takes Pentecost as a holiday.

Here at The Daily Reckoning, by contrast, we take no holidays…hardly any rest…nary a break. Every day there is something to be reckoned with – and always something to remember. Still, even we are in a holiday mood today…sitting in the 7:45 train from Montmorillon to Poitiers. Trouble is, the train has hit a log on the track…it looks as though a telephone pole came down in last night’s storm. Now, there are wires wrapped around the wheels. Too bad there’s no Internet signal. We’ll have to think.

People – in groups – live according to myths that they invent for themselves. Modern historians refer to these myths as national ‘narratives.’ And today is the day set aside for Americans to remember their patriotic ‘narrative.’ Founded by pilgrims, settled by pioneers, and defended with the blood of patriots, America has become what it is thanks to the sacrifices made by our ancestors – those who fought the heathen tribes to make the New World safe for people from the Old World…those who fought each other in the Civil War to decide who got to boss around whom…those who fought the Huns (twice) to make the Old World safe for democracy…and those who fought and died in all the other wars whose names, dates, and causes we can’t recall and scarcely ever talk about anymore.

“All these people sacrificed so that America could be free and independent” is the standard line. But after the British ran through the briars and fled through the brambles down in New Orleans in 1814, never was our freedom or independence really in doubt, except perhaps in the War Between the States, and then it was the side fighting for independence that lost.

The French national narrative is a good deal longer. The Gallic tribes arrived in the area thousands of years ago. They booted the Celts into the corner in Brittany…and then, by the grace of God, thanks to Caesar’s defeat of Vercingetorix at Alesia, were civilized by the Romans. Of course, more Germanic tribes kept beating across the Rhine whenever the Romans turned their backs…and soon Vikings settled in Normandy and the valley of the Gironde…but civilization, once it had taken root in Gaul, spread and flourished even among these new barbarians. Eventually, they were all turned into frogs.

Still, the smell of Rome stuck in the Gauls’ nostrils long after Rome itself was put to the torch. Driving out the English…keeping out the krauts…gradually, unrelentingly, these amalgamated Frenchmen put together their nation. It now fills the “Hexagon,” bounded by the Pyrenees, the Alps, the Rhine, the Atlantic, the Channel, and the Mediterranean – one of the most fertile, temperate, and beautiful regions in the world.

But let us return to the 50 states. If American soldiers did not really fight and die to preserve our freedom and independence, why did they fight and die? What is it that we are remembering today?

Ah…good question. We wish we had as good an answer. Instead, all we can say is that that is what people seem to do. They fight and die from time to time. And people put up monuments to them…and remember them in their national narratives. Sic transit gloria mundi.

As a group of people grows and prospers, its idea of itself changes. The original Americans seem to have been content to simply win their own independence from Britain – with French help. It was out of the question for a green little nation to challenge the great powers of Europe. That would have to wait more than a century…until the newcomer got big enough to throw its weight around. Then, it got a new idea of what it was supposed to be. No longer content to be merely a refuge for the world’s poor, wretched and ambitious…the masses yearning to be rich and free…it now proclaimed itself a world power, ready and able to reshape the planet in its own image. America would impose its will not merely from sea to shining sea, but overseas too…extending the benefits of D.C. government to the banks of the Tigris.

And so, today, we set aside a moment to remember the legion of poor souls who became fodder for these battles…including those who now sacrifice their lives in Mesopotamia on behalf of a government that should have known better.

Meanwhile, the transformation of capital markets proceeds apace. Last week, the press reported that Oaktree Capital Management LLC, an alternative investment firm that had $40 billion in assets under management, had sold around 14% of itself for more than $800 million. There were fewer than 50 buyers. Oaktree is only one more firm cashing in on the surge in private equity. There was Fortress Investment Group’s public offering before it, with Blackstone’s yet to come.

Oaktree’s shares will trade on a new private market developed by Goldman Sachs, “GS Tradable Unregistered Equity OTC Market.” GSTrUE, as it’s fashionably known, has not been publicized by the secretive Goldman, but reports suggest that it is on track to become an alternative exchange for hedge funds and other big players. It seems that you only need $100 million in spare change for investment and a hankering to elude SEC oversight…

We think we smell the exciting aroma of a new trend here.



Adrian Ash, reporting from London:

“Tied to the Dollar, the Chinese Yuan fails to reflect China’s surging economy – or so goes the theory. Either way, China’s super-low interest rates remain well below inflation.”

For the rest of this story, see the DR site


And more news…

*** It’s amazing we get anything done in France in the month of May.

“The whole month is wasted,” notes my friend, Michel. “We might as well not bother to show up for work. Because even if we work, the people we need to work with are out on holiday.”

Every week, there is a holiday – the first is international Labor Day…the eighth marks the end of WWII in Europe. Then there are two religious holidays – Ascension Day and Pentecost. If the holiday falls on a Thursday or a Tuesday, people tend to ‘faire le pont’ – take off another day, so they get a four-day weekend. Last week, I learned that the same practice exists in Spain – “hacer un puente.”

I hope this expression doesn’t catch on in English.

*** “Everyone thinks Detroit is dead,” says Porter Stansberry. “But that’s only because the U.S. auto industry is bankrupt. It won’t be forever. And the endgame – a massive restructuring of Ford, GM, and Chrysler – is much closer than most people realize. Within five to 10 years, Americans will be making the best cars in the world again – at the best prices.

Investors who end up owning the Big Three’s assets (but not their liabilities) will make a fortune. And so will property investors in Detroit. It will be a city reborn.

*** We’re not so sure. Where’s Ctesiphon? Where is Mohenjo Daro? What happened to Timbuktu? Cities die. Sometimes they are never reborn. Industries disappear – forever, not just for 10 years.

But we have a suggestion. It is a big city…largely deserted. Well, what does China need? Cities…they’re building new ones at breakneck speed. And what does it have? Money. Lots of it. A Great Wall of Cash.

Can you put 2 and 2 together, dear reader? Sell Detroit to the Chinese. Give them a million green cards. Then Detroit will really boom.

And there’s a lot of precedent for this sort of thing. China, once a fading power, granted concessions to the rising European empires – Hong Kong to the British…Macao to the Portuguese. The Portuguese – when they were a rising power – also got a city on the coast of India…not to mention colonies in the New World and elsewhere.


The Daily Reckoning