Forces of Nature

Has Greenspan been building upon a firm foundation? We’ll soon find out…the big bad wolf is at the door, threatening to blow the economy down in a whirlwind of inflation…

I just saw another of those dreadful shows about why the pyramids look like they do, and how the universality of this building plan all around the world is evidence of communication between the cultures, countries, and continents…which is a nice piece of alliteration and I didn’t even plan it! It just came out! I don’t know how I do it, or even why, mostly because the big shot mental health professionals assigned to my case keep assuring me that "You don’t want to know. Trust us. We’re professionals."

The fact is, if you want to build higher and not have your building collapse, then there is no other shape that is possible.

Our ancestors must have tried squares, because their houses were square. And obviously it failed, as it must. So what to do? Round? No, too many problems, the most important being that the round rocks tended to run away downhill, since back in the old days, they did not have a United States Congress to solemnly pass laws against that insidious and terrorist-influenced Force of Nature that is Gravity. If they had taken the precaution of electing preening morons to their government, like we have, they could have made it illegal for the Forces of Nature to operate within fifty feet of a tall structure, or within a thousand feet of a school just to show you that we are always "Saving the Children."

Pyramid construction: Gravity

So, round is out. How about triangular? Nope. The second layer of triangular stones would have had all the weight concentrated at a point, breaking the stones. Ergo, that is why all tall structures are pyramids, on a square base, made with rectangular stones.

With pyramids, it all comes down to one thing – gravity. The same goes for economics. You can try and make an economic structure out of many things, arranged in many ways, but there is one thing – inflation – that will always bring it down. And that is why I am so fixated on inflation.

On the Bloomberg news site, we read, "The Personal Consumption Expenditures price Index, a measure of inflation watched by Greenspan and other policy makers and tied to spending, rose at a 3.2 percent annual pace, the fastest in three years. Excluding energy and food, the core index rose 2 percent at an annual rate, the biggest rise since the third quarter of 2000."

But these figures are not adjusted for inflation. So what was that deflator? "The GDP price deflator used to adjust the figures rose at a 2.5 percent annual rate compared with a 1.5 percent rate in the fourth quarter." So adjusting for the change in prices makes the picture a lot less rosy.

And remember that prices are chained, and that the inflation measure carries around with it all those low inflation costs from months and months ago. "Once upon a time, bread was cheap, because they had just invented bread. So we are keeping those low costs in the inflation gauge, even though they have no meaning whatsoever to you bozos in the checkout line at the supermarket today."

Furthermore, these inflation figures do not include those two pesky components called food and energy. What is the inflation rate of THESE two components? Nobody likes to talk about them, but oil hit $39 a barrel this morning, and I don’t pay any attention to food prices any more, as all I can afford to eat is cat food, which is, in case you were wondering, going up, too.

The Christian Science Monitor contains an article titled "Inflation Hits the Family Dinner Table," by Ron Scherer, who writes: "In the category most families would relate to – food and gasoline – prices rose at a 5.3 percent annual rate." But even this may be too low – I’ve heard a 7% figure bandied about, which is also probably too low, seeing how gasoline alone is increasing by about 1% a week, and every time I turn on the TV to get the news, some cute little thing is looking into the camera and saying: "Gasoline prices are hitting new record prices at the pump" with her mouth, while her beautiful eyes are saying: "I want you, I lust for you, I am burning up with passion for you, Mogambo!"

Pyramid Construction: This Inflation Thing

And it just keeps getting worse. No, it’s not my incapacitating paranoia or repulsive personality, but this inflation thing. Bloomberg further reports, "Benefit costs – which include severance, health insurance, vacation pay and referral bonuses – rose 6.9 percent over the past 12 months, compared with a rise of 6.1 percent in the prior year. U.S. costs for labor jumped 1.1 percent in the first quarter, as benefits costs rose the most in more than two decades." Two decades!

In a similar vein, "The employment cost index, a gauge of labor expenses for businesses and government, climbed 0.8 percent in the fourth quarter, the Labor Department said in Washington. Benefit costs rose 2.4 percent from January through March – the greatest rise since the third quarter of 1982 – and wages and salaries rose 0.6 percent, the government said."

And we can thank Greg Ip ("Thanks, Greg!"), a columnist for the Wall Street Journal, for helping us identify the culprits in this horror. He posted an interesting article in last Friday’s edition, entitled "Fed May Have Acted on False Alarm," wherein we read that the Reserve Bank of Atlanta concludes that "most of the drop in inflation between 2001 and 2003 was due to unusual behavior of residential rents and used car prices indirectly caused by low interest rates."

So, once again, the Fed acted like a gang of clueless chumps…and like ignorant children randomly playing with their little computers and their precious little models, they incorrectly and stupidly overemphasized how the Fed’s idiocy – desperately pounding down interest rates to negative real rates – affected things. Mr. Ip concludes, "If the study is correct, underlying inflation may not be as low as it appears." Well, I have no idea if the study is correct or not, but if it comes from anyone connected with the Federal Reserve, then I am pretty sure it is chock-a-block full of stupidity, lies, and outright fraud. But I don’t need no stinking Fed study to tell me that inflation is higher than they say it is, as I already have whole armies of snotty checkout clerks who remind me of that every time they hit the "total" button on their cash registers.

Pyramid Construction: Power-Hungry Bozos

The Ip article goes on to say that "The study, which made no inferences about monetary policy, doesn’t represent mainstream Fed thinking. Chairman Alan Greenspan and most of his fellow policy makers consider productivity growth and the degree of unused slack in the economy more important to the course of inflation than the behavior of individual prices." Huh?

Please permit me to interpret this for you. In plain English, the majority of the power-hungry bozos at the Fed are in total agreement that prices going up do not, in fact, mean that prices are going up. They have also decided that the blazing sun being directly overhead does not mean it is daytime, and by their calculations the correct time is three minutes past midnight. They further conclude that since there is some slack in the economy – the result of idiotic, massive overbuilding during the boom years – prices should not have gone up. And even though they did, of course, go up, this just means that prices are rude, and Miss Manners thinks that you should just ignore rudeness. So they ignore higher prices, bringing us back, once again, to their official announcement that prices are not going up, even though prices are going up.

Of course, the dimwitted "mainstream Fed thinking" indicates that they do not consider gigantic, mind-blowing creations of money and credit to be important to the course of inflation, especially as it pertains to prices, which is somehow, weirdly, perversely, not important to them at all. If there was ever a reason to gather the townspeople together and follow the Mogambo on a march to Washington DC, as an unruly mob singing witty and catchy tunes about how the brave proletariat worker will arise in glorious revolution to throw off the shackles of the hated ruling class and take our Flaming Torches Of Freedom to the Federal Reserve and to drive those idiots out into the street and give them a good thrashing, it is their bizarre insistence that price inflation has nothing to do with prices rising.

Ergo, rising prices are not rising prices. It is beyond insane to even say such a thing. Beyond Orwellian!


The Mogambo Guru
for The Daily Reckoning
May 10, 2004

— Mogambo Sez: The recent downdraft in gold is a buying opportunity, and I hope you took advantage of it. The investment paradigm of the next, oh, zillion years or so, will be to buy gold and commodities on dips. Thus spake the Mogambo.

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.

Ursus interruptus. Ursus recommensus.

The financial press is full of the usual gibberish. What company is beating expectations…which mutual fund is outperforming its sector…how Alan Greenspan is managing the economy…

No one seems to have noticed that Phase II of the Great Bear Market seems to have gotten underway…

Friday’s drop in the Dow was the least of it. The stock market was in broad, general retreat, with more than 10 stocks going down for every one on the rise.

Now, the Dow sinks back towards 10,000…and no one seems to notice. The two leading companies of Greenspan’s credit bubble – Fannie Mae, which lent the money…and Wal-Mart, which helped consumers spend it – are headed down. And according to Richard Russell, the ‘Hindenburg Omen’ is still operative…Wall Street is in ‘potential crash mode.’

Of course, this will not be the first time you’ve heard us say so. We’ve been a little early before…and may be again.

Still some things are worth expecting all the time, even if they never happen. If you are in bed with your mistress, for example, it is probably a good idea to expect your wife to come through the door at any moment. Likewise, when you’re holding a bevy of very expensive stocks…you might as well believe that every day is the last day of the bull market.

You will recall that the first ‘break’ in the bull market happened just 4 years ago. But after a quarter century of rising prices, people were not ready to give up the dream of getting something for nothing. They had swallowed Wall Street’s sales pitch: they believed they were ‘investors,’ not gamblers. And they thought that getting something for nothing was not only exactly what they wanted, but what they deserved. Buy a well-diversified group of stocks, they told each other, hold for the long term…and somehow – for some reason they could not explain – they would get rich.

Of course, it is bunk. Nonsense. Folderol. Flim flam. A scam. The old false shuffle.

Stocks do not go up over the long run; they go nowhere. Up. Down. Sideways. Nowhere.

There is no reason a dollar’s worth of earnings should be worth more in the future than it was in the past. Nor will the average company be more valuable. Instead, it will go out of business. Over time, everything degrades, decays and fades away. Sooner or later, all businesses become defunct…and every stock becomes worthless.

Real investors buy companies, not stocks. As Buffett puts it, they buy good companies at a "fair" price. The little guys – the lumpeninvestoriat – shop for ‘bargains’ and only buy when there are none. That is, they only come into the market at the worst possible time…after the bull market is well advanced. And then, they don’t look for good companies…they look for stocks they think will go up.

The lumps buy stocks timidly at first. They feel proud to be in the game with Soros, Buffett, and other pros. Then, as more and more of their fellows come in, their confidence mounts. Soon, they are buying stocks brazenly, wantonly…with neither a clue nor a prayer. Real investors, meanwhile, are selling.

Eventually, the lumps will be knocked out or squeezed out of their positions; then, they will forswear stocks for another quarter century! But after 25 years of rising stock prices, who believes it?

So, when the break came in 2000, stock buyers weren’t ready to give up. The bear market remained a work in progress…a hesitation…ursus interruptus…

‘Investors’ abandoned the Nasdaq, but not the stock market. They merely moved to ‘safer’ sectors. And then, after a suitable interval of mourning for their beloved tech stocks, they were ready for another fling. For thousands of investors, Google comes along at just the right time, just when they were looking for a little excitement.

The AOL/Time Warner coupling marked the first break…Google’s public offering could very well spice up the second.

Between the first break and the second was the most aggressive E-Z credit campaign the world has ever seen, the biggest turnaround in federal finances, and the largest run-up in debt. We only mention it to round out the picture. You have heard us discuss these things so often that you must be getting tired of it.

Still, the trillions in borrowing and spending looked like ‘growth’ to economists; they couldn’t tell the difference. The newspapers were able to print cheery headlines. Companies were able to report higher profits. And the ‘recovery’ seemed like a done deal.

Even the employment numbers, stubbornly negative, finally seemed to be improving. Except, if you bothered to look at them, you noticed that people were actually working fewer hours and earning less money. Wal-Mart’s sales figures showed spending weakening by the end of the month; the obvious inference: people were running out of money. And all over the Anglo-Saxon world, people were going bankrupt at the fastest rates in history; they were being crushed under the weight of Greenspan’s debt!

How can companies make money when their customers are going bust? How can they defend their profit margins when the Chinese are making things at half the price? How can stocks go up when everyone who ever wanted them already has more than he needs? How long will the lumps continue to believe in ‘stocks for the long haul?’

These answers to these…and so many other exciting questions…will surely be revealed as Phase II of the Great Bear Market gets underway.

*** Our Baltimore office is strangely silent this morning. No matter, dear reader, for you know the story already…markets everywhere fizzled last week.

"The Dow slumped 108 points to 10,117 [on Friday]," writes our New York editor, Eric Fry, in the DR Weekend Edition, "dragging the index down to a 3.2% loss for the year. The Nasdaq slipped just two points to 1917, but nurses a 4.2% loss for the year to date."

Elsewhere, the Nikkei lost 4.8%…or 10.75% in its last 7 days of trading; it now lies low at 10,884. Hong Kong’s Hang Seng index fell 3.6 percent on Friday to end at a seven-month low. European bourses, too, all finished in the red.

*** Mortgage rates rose for the 7th week in a row.

*** Gold dropped more than $8 last week. Well, so much for our ‘floor’ at $400…and in the mid-’80s.

*** "What’s wrong with gold?" We had posed the question to Kurt Richebächer when he was in town. We don’t know whether we’re headed towards an inflationary collapse…or a deflationary slump. Either way, it should be good for gold, we figure.

"Well," said the old man, "I don’t really follow gold. I don’t understand it. But if the U.S. is edging towards an LTCM-style liquidity crisis…everything will go down."

[Editor’s note: Back on the DR website, John Myers takes a different view…namely, that gold can go nowhere but up. Why? "Two reasons," writes John, "or really two certainties…first of all, Washington refuses to accept a crushing deflation. Second, vast numbers of people are generating new wealth – wealth that they will no doubt spend but also save…some of it in the form of gold bullion…"

*** France is yellow.

We drove through the Loire Valley yesterday, in search of a château for sale. Everywhere we looked, there were vast fields of yellow mustard seed in full bloom. It was as if the whole country had put on a bright yellow dress for spring.

Men are insecure, nervous animals. That must be what accounts for all the misspellings on the internet. "A&d 2 innch@s to your P3nicz" screams a typical spam message. We get dozens of these messages every day. How do they know we need this service? How do we know we don’t?

The mysteries of this life are many. Men always seem to worry that what they’ve got isn’t big enough. That is why we were château hunting on Sunday. Some men want bigger cars. Some want bigger p3niczes. But it is châteaux that bother us. Our own little pile is so modest, so small, so humble. We feel a little like an Iraqi prisoner – naked, and we fear the guards are laughing at us.

And so we set off with a friend. And there, near Chinon, we spotted what we were looking for – an abandoned château. From a distance, it looked like it could have been a movie set. The place was huge…dominating the top of a hill, with turrets and gargoyles and a moat and a dungeon. There was also a high stonewall to keep out invaders.

"I checked with the neighbors," said our friend. "It’s still for sale."

"Dad," Henry prepared a suggestion. "Why would you want to buy it?"

"Well, I don’t know…it might be a good deal…maybe a good investment…"

"No, I mean why would you want to BUY it? There’s no one here. Let’s just take it like they did in the old days. Let’s capture it."


Within seconds Edward, 10, Henry, 13 and our friend’s beautiful wife, Cecelia, an argentine opera singer, age unimportant, had scaled the wall. They had found handholds in the eroded stone and managed to climb up the 3 or 4 meters to the top. From the top, they walked along until they had found a place on the other side where they could get down.

Your editor was not to be left behind. Finding the wall undefended, he managed to climb up…and then fall into a soft patch of nettles and briars on the other side. Then, the small invading force, led by its youngest member, approached the château itself. The closer they drew towards it, the bigger it seemed.

"This is not a fixer-upper," your editor remarked, "this is a lifetime project for a madman…it would cost millions to renovate this place."

"That’s why I brought you here," said our friend.

"Dad, I think we’re going to need siege equipment," said Henry. "Maybe some catapults and ladders…or at least some bolt cutters to cut the chain on the gate."

"Maybe we should just call the real estate agent…"

"What makes this so interesting," said our friend, "is that it is so cheap. It’s a white elephant. Nobody knows what to do with it. They’re just trying to get rid of it."

Driving back towards Paris, the sun went down into the fields of mustard seed in one of the most spectacular sunsets we have ever seen. Red, scarlet, orange, yellow…it was as if a nuclear reactor was melting down outside Tours.

We reflected on the château as we drove along:

"Even if it were free, it would still be too expensive," said your author’s mother in the back seat.


Bill Bonner

The Daily Reckoning