Gluttonous Indulgences

Learning how to be ‘flexible,’ with…Mogambo on Monday!

Mars, a planet we Earthlings have never trusted because its inhabitants are always launching some sinister invasion plan, and if you don’t believe me all you have to do is watch old movies on TV some rainy Saturday afternoon and you will learn what I am talking about, is now closer to the Earth than it has been for a long time, and closer than it will be for the next big bunch of years, the exact number of which doesn’t matter because we will all be long dead and buried when it happens again.

But it means that the invisible mind-controlling rays that they are beaming at the Earth are now that much more powerful because they are closer to us, and the single-ply aluminum foil hats that we are all wearing in self-defense are now too thin to provide the requisite level of protection.

One of the guys I figure obviously failed to beef up cranial security is the Prudent Bear’s Marshall Auerback. He has weighed in with an essay entitled "Euroland’s Deficit Hawks Are Wrong" and decided that Euroland needs to scrap its stability pact so that things can get back, somehow, to growth and stability via deficit spending.

Although he quotes the Greek Finance Minister Nikolaos Christodoulakis, who said, "I have never believed, and do not believe that unrestrained handouts, wide deficits and increased debt create conditions for growth or social policy. On the contrary, they lead to stagnation and recession," Mr. Auerback disagrees with that trenchant assessment of stark Reality As We Know It. Instead, Mr. Auerback, who I must assume is suffering mightily from the aforementioned Martian rays, insists that Mr. Christodoulakis, who is obviously a deficit-hawk, is wrong in this instance.

Marshall Auerback: Dangerously Fragile

While maintaining that Mr. C is right in the theoretical big picture, Mr. Auerback nonetheless takes the opposing tack and says that now, right now, things are so dangerously fragile that it is appropriate to disregard the stability pact that requires fiscal deficits to be 3% or less of GDP. According to Mr. Auerback, who is obviously not in his right mind due to these aforementioned Martian rays, "These are not normal times, and solutions need to move beyond prevailing economic orthodoxy," which I assume is defined as "What everybody agreed to do and everybody concerned agreed was the right thing to do." I suppose that this is in line with Alan Greenspan’s vow to use "unconventional methods" to jam growth down the throat of the U.S. economy.

Well, then, why AREN’T these normal times? Because, like a morbidly fat person that has gorged himself for years and years and who now no longer resembles a normal person, economies that have gorged themselves for years and years on one feel-good central bank and government idiocy and malinvestment after another, the economy likewise no longer resembles normality.

And getting beyond that, what, exactly, is the prescription that is beyond this normal orthodoxy that poor Mr. Auerback says is not needed? In the case of the morbidly fat person, I suppose the doctor is supposed to prescribe milkshakes and cookies? And in the case of Euroland, which is what we started talking about before I got sidetracked into a pleasant reverie about milkshakes and cookies, it is more feel-good excesses of credit and money?

I strongly disagree with both the physician and Mr. Auerback for four, count ’em four, reasons. First off, the reason that they are IN the damn mess they are in is because they acted like they DID believe, again quoting Mr. Christodoulakis, that "unrestrained handouts, wide deficits and increased debt create conditions for growth or social policy."

Marshall Auerback: Not the Right Path

The second reason is that breaking the pact to allow "unrestrained handouts, wide deficits and increased debt" is NOT the path one takes to get one’s house in order, as gorging on milkshakes and cookies is NOT the path one takes to get slim and trim, although both are, to be sure, satisfying and delightful to those chugging them down, and as one who has chugged down his fair share of milkshakes and cookies in his life, I happen to be somewhat of an expert in that area, and I am highly disposed to break off this whole train of thought and go have some of each right now.

The third reason is that inflation is rising at the same time as the economy is stagnating, and adding more excess money and credit will make it predictably worse.

And the fourth reason is that this is pure situational ethics; when times are good the argument is that the economy will grow out of the problems, and so the problems are never corrected, and when times are bad the argument is, as Mr. Auerback says, that it is always "the wrong time" to address the problems, since it would add misery to people who were already miserable. So, therefore, there is NEVER a good time to address the problems, and so the problems grow and grow. If you know how to make something good happen when you never address a growing and deadly problem, then you need to register to run for governor of California, because you are obviously brighter than me and everybody else I ever knew.

If there is one thing that you can take to the bank, it is that Euroland, like everybody else, will certainly take any opportunity to continue right down that same feel-good path that got them where they are now. Mr. Auerback even quotes a guy named Professor Paul de Grauwe, who said the same thing, in a Financial Times piece, which reads, "Structural reforms…are very difficult to implement in democratic societies. They imply changes in the distribution of income and in economic security, and are resisted by those who are called upon to be more flexible. The implementation of these reforms will take many years." I like that; asking people to be "flexible," which is a euphemism for "not acting like grubby, greedy little children who will always show their petulant pique by voting for any yahoo that advocates bankrolling all of the wishes of grubby, greedy little children, regardless of the disastrous consequences of doing so."

And I am faaarrrr too old and jaded to believe that "this time is different," or that any politician has learned any lessons, or that any citizen in the whole of Euroland enjoying their bankrupting cradle-to-grave nannyism is going to sit still for even the minutest change in their extensive menu of unearned benefits and unearned lifestyles. Oops, I mean, I don’t think they are going to be "flexible."

Marshall Auerback: Told You So

From a more philosophical perspective, which you will immediately recognize as "I told you so," to even imagine that there even COULD be a single currency and monetary regimen against a dozen separate fiscal and nationalistic policies was, as I stridently proclaimed in my snottiest voice the whole time, ludicrous to start with. And trying to overcome the stupidity of even thinking such a thing was even remotely possible, given the inflexibility of the voting populace, was the reason for the strict pact in the first place.

And now that I, the mighty Mogambo, and all the other nay- sayers have been proven correct, here come the experts, saying that what Euroland needs is do more of the exact wrong thing, namely to run as much deficits as necessary, for as long as necessary.

Mr. Auerback writes that the EU should "pay more attention to structural deficits so that a country’s fiscal deficit would be judged in relation to its economic cycle." And what in the hell CAUSED the economic cycle in the first place, except for central banks and redistributionist governments creating more and more excess credit and money so as to enlarge and expand a increasingly dysfunctional and bankrupting economic paradigm?

So I am being asked to believe, like we here in America are being asked to believe, that the governments acting like jerks can be cured by the governments being given leeway to act like bigger jerks? My God! I thought only we Americans and the Japanese had cornered the market on that kind of idiocy! The mind reels!

Marshall Auerback: Bearing the Burden of Budget Consolidation

Fortunately, the Europeans may be saved from their fate, as they have the fabulous advantage of having the clear-headed Wim Duisenberg in charge of the EU, and although I have not seen any recent photographs of Mr. Duisenberg lately, I am pretty sure that he is wearing an aluminum foil hat and staying strictly out of the line of sight with Mars. How do I know this? Because he said that the Euroland countries have not used the good times to "…consolidate their budgets. Now they bear the burden of it." Exactly right!

See? Didn’t I tell you he was clear-headed?

And like the fat slob in the doctor’s office, whining and complaining about always feeling hungry and out of sorts because a necessary low-calorie diet is the only thing that will save his life, it is a burden they must bear, and hopefully learn from.

Not that they will. And not that we will, either. Until it is too late. And probably not even then, since neither they nor we have shown any inclination in that regard, because if either of us had, we would not be in the mess we are all in now.

Now, all of this petulance may be caused by the results of my own gluttonous indulgences, as I went to a party over the weekend where there was this gigantic taco bar, see, and of course I made a big embarrassment of myself in front of my wife who was doing her wifely duties by reminding me, by slapping me on the back of my head, that stuffing tacos into my mouth with both hands was one thing, but making horrible slobbering and grunting noises while doing it was quite another, and so I was finally reduced to constantly fending her and all the other guests off with one hand and stuffing innumerable delicious tacos into my mouth with the other. And now I am reminded, days later, that mature men cannot act like starving, ravenous beasts, and that the penalty of ridiculous, massive overindulgence is lethargy and indigestion, replete with moaning and groaning.

But I feel a little better, now that I know I was just being, ummm, inflexible.

Warm regards,

The Mogambo Guru,
for The Daily Reckoning

August 25, 2003

P.S. Mogambo Sez: Insiders are selling. NYSE Members are selling. Specialists are selling short. So who in the hell is doing all this buying? And why?

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.

The Dow finished a long, slow August week in the black last week, but barely. Gold lost 40 cents for the week…but the Nasdaq raced ahead nearly 4%.

Banks stocks dipped about 2% because, as Barron’s helpfully explains, "investors are continuing to question whether all banks have successfully weathered the ferocious rise in market interest rates and the tumult in the mortgage-backed securities market…"

Self-evidently, not all banks have successfully weathered the ferocious interest rate storm of the last two months. "Mid-sized lender Capitol Commerce Mortgage abruptly shut down," the Associated Press reports. "Friday’s closure came just a few weeks after Sacramento-based Capitol Commerce celebrated one of the busiest months in its 17-year history; the lender funded $3.7 billion in mortgages during July, according to several account executives interviewed Friday."

The current interest rate on a 30-year mortgage is about 6.6%, well above the low of 5.31% on June 11, according to HSH Associates. "A small or mid-sized lender unprepared for a sudden swing in rates can get into trouble if it is holding a large basket of unfunded loans locked in at the low rates available a few weeks ago," the AP story explains.

We would guess that a large or giant-sized lender like, say, Fannie Mae, is probably not immune from getting into trouble.

Patient Daily Reckoning readers are aware, we are sure, that your editor in New York has been droning on and on for weeks and weeks about the possible hidden hazards that may be lurking within the balance sheets of Fannie Mae and Freddie Mac, the two gargantuan mortgage lenders.

Though we have not followed Fannie and Freddie as closely as Eric, still…we note that their saga continues: Friday evening, Freddie Mac’s chief executive, Greg Parseghian, announced he would step down from his post. The disturbing part of this announcement is that it followed news report earlier in the day that a federal regulator investigating Freddie Mac wanted Parseghian removed…Hmmm…The plot thickens!

Eric, what else is going on?


Eric Fry in New York…

– Hooray for Bayer! Last week, the German drug company received FDA approval to begin marketing its "Levitra" drug in the United States. As a result of the new approval, Levitra becomes the first major erectile dysfunction drug to compete against Pfizer’s Viagra…and Bayer becomes the only pharmaceutical company to offer a comprehensive "intimacy-dysfunction solution" – Levitra for the husband and Bayer aspirin for the wife.

– Meanwhile, the virile stock market requires no pharmaceutical assistance whatsoever, as it rises effortlessly every day. Last week, the Nasdaq strutted its stuff by rising nearly 4% to 1,765.

– Apparently, the monetary stimulus provided by the Federal Reserve is more than sufficient to arouse buying activity in the stock market. The Fed’s easy-money policies, along with the widespread expectation of a robust economic recovery, seem to be the main stimuli lifting the major equity averages these days. Certainly, nothing as unsexy as "value investing" is causing share prices to rise.

– We wish we could embrace the latest stock market rally with the child-like faith of a Wall Street strategist. But, alas, we are too jaded. We have learned to distrust a stock market selling for 35 times earnings like a dentistry patient distrusts the phrase, "This won’t hurt a bit." Furthermore, we are somewhat troubled by the so-called "market internals."

– It’s a little unnerving, for example, that the Dow and S&P 500 both lagged so far behind the Nasdaq last week. The Dow added a mere 27 points to 9,348. And the S&P 500 also struggled to put points on the board, as financial stocks weighed down the popular benchmark index.

– We would like to believe that a new bull market in stocks is underway, but we keep colliding into opposing evidence. The towering economic delusions erected by the stock market bubble of the 1990s have crumbled and the nation is still trying to clear its way out of the rubble.

– Consider GM…again. During boom times, the company did not set aside sufficient reserves for the inevitable, upcoming bust. Therefore, as we have noted innumerable times in this column, the giant automaker labors under a crippling debt load and pension plan liability.

– "Few Chevrolet drivers would guess that the single biggest cost of making their car was medical care for retired workers," the Financial Times reports. "But General Motors…spends more on healthcare for pensioners than it does on steel. On each one of the 5.5m vehicles churned out by GM’s north American factories, healthcare for pensioners cost more than $1,300, well above the steel cost."

– As a result, General Motors, which is the world’s largest buyer of steel, has become one of the world’s biggest healthcare providers.

– At the end of last year, GM’s total post-retirement benefits liability – consisting almost exclusively of healthcare obligations – totaled a staggering $51 billion. Even worse, GM’s already considerable liability will likely increase by an additional $4.5 billion this year. How much money is $4.5 billion? Almost double GM’s anticipated profits this year.

– But despite the troubles at GM and the looming difficulties in the U.S. financial sector, the virile stock market seems to rise every day. Even so, the market may be vulnerable to the embarrassment of premature expectation.


Addison Wiggin, back in Paris…

*** We traveled to Verdun this weekend…site of a ten- month battle in 1916 that sent over 700,000 German and French farmers, artisans, shopkeepers and merchants to their deaths. Many of their skulls and bones are on display at the ‘ossarie’ atop Douaumant hill.

Raymond Poincaré, then president of France, proclaimed that the very name of the town had come to symbolize the valor, honor and national pride in the hearts of all Frenchmen. We were reminded of William Tecumseh Sherman’s warning following the American Civil war: "It is only those who have neither fired a shot nor heard the shrieks and groans of the wounded who cry aloud for blood, more vengeance, more desolation."

Verdun has been sacked and plundered 11 times since the birth of Christ. More tomorrow…

*** The latest CPI numbers, which came out last week, were ‘only’ up 0.2 for the month…or, if you multiply that number by the twelve months in a year, are growing at a 2.4% annual rate.

"This is NOT good news," writes the Mogambo Guru. "This is NOT neutral news, but it is likewise NOT end-of-the-world and we-are-all-going-to-die news, so THAT is good news, but it IS, nonetheless, bad news. But you wouldn’t know it from the jackasses that like to run their mouths and thus demonstrate their lack of intellectual capacity, who all say how this proves that inflation is, in their egregious estimation, neutral and tame and benign and all the rest of those Pollyanna terms that make me so angry that I spit up blood whenever I hear them say them."

And yet, Alan Greenspan is promising to make you suffer MORE inflation!

"The government wants the stock market to recover," writes James Cook of Investment Rarities, commenting on Greenspan’s ‘War on Deflation’. "[Fed governors] don’t care about value. They are doing everything in their power to drive stock prices higher. That includes a positive economic spin from the Fed and questionable economic statistics."

*** Here at the Daily Reckoning, we have on occasion remarked upon a certain peculiar feature of the post-bubble landscape: an interconnection between everything and everybody and the economy. While the world used to revolve around politics – as in the days before Verdun – all retirement funds, government tax revenues, foreign governments, foreign citizens, and every financial entity in the country and the world have placed their bets on a reflated stock market.

"That it will end badly is guaranteed," suggests Mogambo, "as there is no precedent in history where government attempting to boost economies and stock markets did NOT end badly, even though every attempt to do so always STARTED out great. And it always starts out great because all of that money suddenly appearing in the economy cannot fail to generate activity. If all that goosing of the economic embers did not also allow the growth of the cancer of big government, then perhaps the bursting of the bubbles created would just be a matter of some tough luck for the greedy people who got involved."

"The road to big government," concludes Mr. Cook, "is the road to social disintegration. In the end, the safety net erected by the state will fail to do its job. Government programs, with their high cost and runaway expenses, will contribute to the bankruptcy of the nation…Markets will crash and the dollar will undergo a disastrous drop. Interest rates will soar and the debt will never be repaid."

*** You’ll find more Mogambo below…

The Daily Reckoning