Howling Wolf

More monstrous piles of money, more mental anxieties, more derogatory remarks about high ranking Fed officials…yes, it must be, it’s Mogambo on Monday…

"The Chinese government is doing what they can to create a dynamic manufacturing machine," suggests John Mauldin. This amazing machine, which sounds like something from an Isaac Asimov novel, creates unlimited new employment, and by extension, unlimited internal demand. China, reckons Mauldin, is being structured in a way that is sure to create a true future economic powerhouse.

And to that I say, "I sure HOPE so, because if they manage to screw up this great opportunity, then it would be de facto evidence that they are really, really stupid, and if there is one thing that I am desperately afraid of, it’s that the Chinese, who make up nearly a third of the population of the world, will end up acting as stupid as us!"

In fact, it is exactly what the American government SHOULD be doing too, but they don’t. Instead, our idiotic government spends all their time and money growing the bureaucracy like a cancer, and installing every idiotic socialist, communist, and fascist entitlement program that they can think of. And now look at us!

Soaring Inflation: "Staggering" Isn’t the Word

"In the 12 months to March 2004," quotes Mauldin, "global reserves grew by a staggering $791 billion (equivalent to around 7.5% U.S. GDP), a 30.3% year over year increase."

Notice the way he uses the word "staggering" to characterize the size of the pile of money that is $791 billion. This shows how literate this guy is. As for me, I would have been perplexed for days, fruitlessly searching for the word that means ‘to act like you have just had your brains scrambled by a knockout punch delivered by a professional heavyweight boxer who is in a really bad mood.’

I will understand if you cannot comprehend how much money that is. Your puny earthling brains were not designed to comprehend the enormity of such money excesses. But just between you and me – and don’t let this get around – there are only a few, exotic species in this whole sector of the galaxy that are stupid enough to create this much money and credit in one year, and they mostly live in Washington. Now the music gets all spooky, and, off in the distance, you can hear a wolf howling. The camera zooms-in for the close-up: "Something was reported last week that hasn’t been seen since December 2001. Global liquidity fell."

Now, normally, I would launch into some long-winded and pointless diatribe about how bad this is and then suggest we all go out for something to eat. But as I am feeling particularly lazy today, I will turn the microphone over to Martin Hutchison, reading from his column "The Bear’s Lair: Life After Greenspan."

I sit back, open a fresh beer, and listen attentively as Mr. Hutchinson begins: "Contrary to much calming media and analyst speculation, the rise in inflation is the beginning of a long-term trend, caused primarily by excessive money creation over almost a decade." Needless to say, he is referring to the inevitable inflation that monetary insanity causes.

Hutchinson does not stop there – although I wish he would, as my heart is now pounding like a kettledrum, boom boom boom – but instead explains how far Greenspan is behind the curve: "If inflation is running at 4.9 percent per annum, or even at the 3.7 percent per annum of June’s superficially anodyne figure, then a Federal Funds rate of 1.25 percent is not the beginnings of restriction, it is still wildly inflationary, being minus 2.5 percent or more in real terms. Now that inflation has stirred, now in the 3.4 to 4 percent range, the neutral Federal Funds rate is not 4 percent, but at least 6 percent."

Soaring Inflation: Worse than the 1970s

The Aden sisters agree. These two have also been around this economic biz long enough to see the writing on the wall. They write: "Inflation is headed higher," although they qualify their assessment with the soothing caveat, "It may not become as extreme as it did in the 1970s."

Well, they have their opinion and I have mine, which is that inflation will be worse, much, much worse, than it was in the 1970s, if only because the outrageous level of money creation and the sheer size and cost of the government makes the 1970s look like a stroll on the beach.

The sisters provide this little snapshot on how prices have been acting lately: "Last month, import prices soared at an annual rate of 19.2%. Consumer prices had their biggest jump in 14 years this year with the latest rise at 7.2% annualized. This included a 55% surge in energy prices and a near 11% gain in food prices (both annualized). Excluding these, the popular core rate was obviously less. But since we all eat and drive, the core rate is actually meaningless."

"Producer prices reinforced the other inflation figures. They too have soared faster than at any time in the last 14 years, over the past year, with the latest figures up at an annual rate of nearly 10%. Energy and food prices surged over 19% and 18% annualized, respectively. So who says there’s no inflation? There is, and it’s soaring."

Soaring Inflation: Merely Overpriced

And not one of the morons at the Fed had the foresight to realize that monstrously excessive monetary laxity would result in price inflation. Now, belatedly, they are starting to gradually, painfully gradually, increase interest rates. They need to try and stem this rising price inflation, although their efforts are ludicrously insufficient. How does one define ludicrously insufficient? How about: "Raising interest rates from a third of the rate of inflation to slightly less than half the rate?"

But it is this next nugget that ought to curdle the blood of equity investors. "The May inflow of foreign funds into the U.S. economy was also announced Friday; at $54.8 billion, down from $81.2 billion in April, it dropped for the fourth successive month."

And since foreigners are the only ones with money these days, attested to by the $540 billion trade deficit, it’s pretty scary when they chop their U.S. investments month after month.

There is a disaster afoot if stocks deflate from "insanely overpriced" to merely "overpriced," and the Fed knows it. There’s just no room to cut rates any lower and besides, they need to be fighting inflation. It just goes to show, the forces of nature can be delayed for a while, but they can’t be reversed. What’s coming is coming, whether the Fed likes it or not.

Bad things are going to happen. Ugh.


The Mogambo Guru
for The Daily Reckoning
July 26, 2004

—Mogambo Sez: Things are getting so weird here lately that I am more scared and dyspeptic than usual. You can bet that every trick in the book is being used, and will be used, to keep this whole thing from collapsing until after the election in November. If they can do it, then this may be your last chance to buy gold and silver at these prices. And if you do not want to buy any gold and silver, then send me the money and let ME buy some more!

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.

The Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning, and other fine publications.

The money supply is falling…along with the Dow…and the price of gold. Bonds and the dollar are rising.

What to make of it?

The U.S. economy is still working its way into a Japan- style slump, is our guess. If we’re right, stocks will fall for the next 10 years. Real estate should start dropping too…just as it did in Japan, about 4 years after the first stock market break. More news below…

"How are we different from your French friends," asked an American friend of Jules last night at dinner.

Jules was sure there was a difference…but he couldn’t say what it was.

"I don’t know…Americans are bigger. They don’t dress as well. They drive bigger cars…but they’re just as dumb as the French."

The teenager’s assessment acorn fell not far from his Dad’s.

More strange notes from strangers to a strange land…below…after the news from Eric:


Eric Fry, from the corner of Wall and Broad…

– "I may not know what I’m doing, but at least I know why I am doing it," said a frustrated hedge fund manager recently. He was referring to the fact that his funds under management are down for the year, even though he is pursuing a seemingly intelligent investment strategy. "Nothing works for more than eight minutes…This is the most difficult investment environment I have ever encountered."

– The guy is not alone. Every money manager who speaks regularly with your New York editor complains that the stock market has become a very treacherous and unforgiving habitat for investment capital.

– The most intelligent investment strategy these days seems to be buying and holding cash, especially the sort of cash that bears the likenesses of dead American presidents. For the month of July, the U.S. dollar has outperformed almost every other conventional investment.

– Regular Daily Reckoning readers may recall the essay of June 29th in which Dan Ferris, editor of Extreme Value, observed, "The most unwanted asset today, the one thing nobody seems to want to own, the one asset people can’t seem to get rid of fast enough, is…cash."

– "Every investor who really knows what he’s doing is holding a large cash position right now," Ferris wrote. "I’m referring to some of the greatest investment minds of our time. Warren Buffett, Staley Cates and Mason Hawkins, Jim Gipson, Tweedy Browne, the Sequoia Fund and Alan van den Berg."

– So far so good; since the day Ferris offered his two cents, the dollar has outperformed both euros and gold, while far outpacing the swooning stock market. A buyer of dollars on June 29th is about 10% better off than a buyer of Nasdaq stocks.

– "Staley Cates and Mason Hawkins are the co-managers of the Longleaf Partners Fund, [whose] cash position is now at about 25% of assets," Ferris continued. "I asked Staley Cates about this." The exchange went as follows:

– Ferris: What on earth do you do when there’s nothing to buy? Do you just sit and wait? All the value investors are holding lots of cash.

– Cates: Yes, we just sit and wait. That’s often very hard to do, and we’re not too pumped about earning pretax money market yields. But we’ve made the alternative mistake (i.e. forcing something) enough to not do it again.

– Playing defense has proven to be a good offense for Longleaf. The cash-rich fund is about breakeven for the year, despite the stock market’s losing ways. Last week, the S&P 500 logged its sixth straight losing week, as the Dow sank 177 points to 9,962 and the Nasdaq dropped 34 points to hit a new low for the year at 1,849.

– "The sliding market may seem less alarming to fundamentally driven investors because of the strong gains in headline earnings and the appearance of otherwise benign economic numbers," writes Barron’s Michael Santoli. "Comments from this cohort about market performance make heavy use of the word ‘despite.’"

– "They see stocks weakening ‘despite’ strong earnings, historically low interest rates and manageable inflation. Markets soured last week ‘despite’ Fed Chairman Greenspan’s upbeat view on economic growth and inflation. They point out, conversely, that stocks have held near the flat line ‘despite’ high oil prices and ever-present political, military and terror concerns."

– "The subtext here," says Santoli, "is that share prices, by rights, ought to be a good deal higher if only the market were focused on what these folks deem to be the happy realities hiding in plain sight."

– Maybe so…or maybe stocks ought to be a good deal lower…if not for the embedded buying reflex that the lumpeninvestoriat developed over the course of a 20-year bull market – a reflex that becomes unlearned only after a lengthy and painful bear market.

– In 1981, on the eve of a two-decade bull market in stocks, cash represented more than three quarters of all mutual fund assets, according to the Investment Company Institute of America. Today, this reviled asset-of-last- resort represents only about one quarter of all mutual fund assets.

– Hmmm…maybe the bull market in cash is just beginning.


Bill Bonner, still in Manhattan…

*** We had dinner with Eric on Friday night at a popular eatery in Lower Manhattan, the Blue Water Grill. We sat outside and were amazed by the activity of the place. The weather was neither too hot nor too cold, which is odd for New York. But this has been an odd summer in the East; it has been bearable.

We are still surprised by how many foreigners there are – at least in America’s big cities. Waiters, taxi drivers, clerks – often, we can’t understand them. Our waiter on Friday was homegrown, but he must have been practicing with the overseas crowd. He ran through the plats du jour as if he were reading an indictment. We couldn’t tell the verbs from the vegetables. And when he was finished, we had no better idea what was on offer than we had from the menus in our hands.

Still, the food was good and the company was congenial. We all agreed that the country was going to Hell, but none was sure which Hell it was going to. Higher inflation…deflation…war…we don’t know what to expect, but we’re sure it’s on its way.

*** In the New York papers, we noticed many ads for new cars. Not one of them told us how much vehicles actually cost. We could pay $249 per month…or $469 per month – at 0% financing for the next 5 years. One ad even promised to give us $6,000 cash back. But if the price of the cars was reported, it must have been in the very small print.

Nobody saves, because nobody needs to save, we guessed. Everything is cash flow, built on the lowest rates in 2 generations…and fullest employment in history. More than ever before, all adults in the household have jobs.

If you can make the payment, you can buy. What will happen when rates rise…or someone loses a job…we wait to find out…

"As Cash Fades, America Becomes a Plastic Nation," says a headline in the Wall Street Journal. Vending machines, the subway, and charities now take credit cards, says the article. Even the cops will take plastic.

"McDonald’s joins pay-with-plastic trend," adds USA Today. Apparently, taking credit cards lifts the average order size. *** Your Man at Fort Duquesne, Byron King, writes…

"Note the French reference…Fort Duquesne. In case you are homesick. I’ve been reading more of our old French friend from the 1830s, Alexis de Tocqueville.

"It is interesting to me to re-read AdToc. He constantly commented on the presence and influence of religion in American life in the 1830s. "He describes a world that seems so…almost alien today. Yes, "alien" is the right world. Life in America in the 1830s was nothing even close to what we have today, courtesy of Woodrow Wilson and Frank Roosevelt and Lyndon Johnson and Richard Millhouse. Ours is a world (yes, literally, a world) held together by a collective belief in the virtue and strength of the U.S. dollar, which is a Federal Reserve Note backed entirely by the full faith and credit of the government of the United States of America.

"Hmmm…for some strange reason, that does not make me feel better.

"Studying de Tocqueville brings back memories to me of reading other French philosophers of a more recent vintage, like Rene Dubos ("So Human an Animal") and Teilhard de Chardin ("Phenomenon of Man" and many other articles). Their collective thesis was, to sum it up in far too few words, that material items are not the be-all and end-all of human existence. Spiritualism is part of a well-ordered human society.

"Remove belief in God from our existence, diminish the role of the Deity in earthly life, run Him out of town on a rail so to speak, and what have you got? The experiment to prove the thesis is, in my humble opinion, the world we see around us. A world almost foreseen by Alexis de Tocqueville, certainly in this paragraph…

"’If men were ever to content themselves with material objects, it is probable that they would lose by degrees the art of producing them; and they would enjoy them in the end, like the brutes, without discernment and without improvement.’"