Inflation: The Real Hamburglar

The Daily Reckoning PRESENTS: What in the world do McDonald’s hamburgers have to do with economy? More than you would think. Professor Mogambo explains…

INFLATION: THE REAL HAMBURGLAR

Paying a dollar for a single McDonald’s hamburger seems like a lot to me, since I can remember when you could get a McDonald’s hamburger for 15 cents in 1966.

So, class, put down your books and take out a clean sheet of paper for today’s Mogambo Pop Quiz (MPQ). The question is, “If in 1966 I had started to save for my retirement, how much money would I need to save, per day, to buy one hamburger, per day, in the future, knowing that the hamburger is currently selling for 15 cents, but would cost a dollar in 40 years?”

Since everyone in the class is moaning and whining and scratching their heads, I kindly provide the hint, “Firstly, we note that inflation in the price of the burger has been 670% over 40 years. That’s comes out to 4.9% inflation, per year, compounded.”

Uncharacteristically forsaking my usual unhelpful, vengeful and insulting pedantry, I announce that I will magnanimously, “Assume that inflation and expenses equals net capital gains.”

I foolishly thought that would be enough to enable them to solve the problem, but with my Mogambo Super Hearing (MSH) I can hear them whispering into their little cell-phones to each other, “What in the hell is this Mogambo idiot talking about?”

I make a mental note that since the government is tapping all of our phones now, I can simply have FBI give me a list of exactly who was talking to who in my class, and maybe get a transcript of their little conversations, so that I can take my calculated revenge with their final grades.

Having done that, I put a big, false smile on my face so that they would not suspect anything, and I go on to helpfully hint, “If you had saved up your retirement in cash, you actually lost ‘money’, as your money lost its buying power at the rate of 4.9% per year.” Again I paused; expecting to see their young, fresh little faces light up at the sudden comprehension. But nothing! If anything, their faces were even MORE blank, and they were even MORE stupid than they were a minute ago. And then they wonder why I hate them so much!

Abruptly losing my patience, I leap atop a desk and scream out, “If you had invested the money into assets on a buy-and-hold basis, year after year, it looks like you made money, doesn’t it?” Frightened, they all nervously nod their heads up and down. Enraged, I go on, shouting, “But after you pay capital gains taxes, income taxes, miscellaneous other taxes, fees, expenses and commissions, and maybe some state income taxes, and after all THAT you then deduct from that pitifully diminished ‘gain’ the vast diminution of your wealth caused by persistent, grinding inflation, you ain’t really earned squat! Hahaha! Squat! In fact, you lost wealth, you little twits! Hahaha! You are worse off than when you started! Welcome to ugly economic reality, you stupid, halfwitted morons!”

Still they sat there, perplexed and apparently paralyzed with fear for some reason. Tiring of this game, I give them the answer, “Mathematically, with real (inflation-adjusted) net gains of zero, to get a hamburger in the future, you have to save a hamburger today.”

A murmur runs through the class! I have finally connected with these little boneheads! Excitedly, I quickly go on to say “Extrapolating, if you want to have a retirement lasting 20 years, after working for 40 years, and to do so with a retirement income equal to the buying power of 100% of your current income, then, adjusting for inflation and taxes, you have to save 50% of your income per year, every year that you work, for the whole 40 years! Hahahaha! Fifty percent!”

At that, they all jumped up, screaming, and ran from the class in horror, so I never got the chance to tell them that it gets worse if you are only 20 years away from retirement, because then you have to save (hahaha!) 100% of your income today!

The point of all of this? According to my Daily Lesson Plan, I was teaching that it is very, very ugly (VVU) out here in the real world of Stark Mogambo Reality (SMR).

And all of this misery is because of inflation in the monetary aggregates by the Federal Reserve, which has to show up as inflation in prices as all this new money floods through the economy. And it, sadly, does. And thus it erodes the value of you, your money, and your pitiful little retirement account that is so pathetically inadequate that I laugh in scorn (LIS).

And in that regard, what did not get (in my opinion) adequate media coverage was the release of the Leading, Coincident and Lagging Indicators. The only trusted news outlet really raising a fuss was the Mogambo True Patriot Monetary News Service, located at 1776 on your radio dial, and available everywhere, except where the government is jamming the broadcast signal in an attempt to silence The Mogambo, preventing His Mogambo-ness from spreading the news that you can, “Kiss your fat, stupid butts goodbye, American morons, because you ignored the Constitution and let your money be nothing but paper and electronic accounting balances, and as a result the government and the banks went nuts with creating and spending too much money, and now you are all freaking doomed by the inflation in prices and the hell of an economy composed of government spending! Hahaha!”

Anyway, for those of you who were prevented by government censors from hearing that important, important broadcast, what happened was that the Leading Indicator (which, as advertised, indicates future profits) went down 0.3. Bad enough. The Coincident Indicator (again as promised, the indicator of current economic activity) went up by the smallest increment possible, 0.1. Worse enough, if I may be permitted to coin a phrase.

The really horrifying news was that the Lagging Indicator (which is the indicator of inflation) zoomed (relatively) by 0.4! Worst enough!

If you look up that curious combination of things in the “Risk/Reward Matrix” section of your Mogambo Handy-Dandy Desk Reference (MHDDR), you will notice that it is far, far, far into the Doom Zone, which is sort of like the Twilight Zone, in that things are pretty weird and twisted, except that in the Twilight Zone everybody is usually still alive at the end of the episode, whereas in the Doom Zone everybody dies a horrible death by being eaten alive by inflation, with lots and lots of screaming in pain and fear, and the episodes always end with silence and something burping, instead of the cool, dulcet tones of Rod Serling saying, “Thus little Bobby learned the true meaning of Christmas, in the Twilight Zone.”

But it was inflation we were talking about, because that is all I ever talk about, and that brings up the news about how the drought has severely reduced this year’s crops of things that we eat, such as wheat fields, soybean bushes, corn stalks and pizza shrubs. For example, from Bloomberg we learn, “The continental U.S. endured the hottest summer since the Dust Bowl of the 1930s, and the second-warmest since recordkeeping began more than a century ago.”

And this almost certainly has something to do with the El Nino region of the Pacific Ocean that is, again this year, very big and very warm and commensurately more influential of the weather. For example, from FreeMarketNews.com comes the item “John Ing, of Maison Placements Canada, in a post on gold-eagle.com takes the inflationary side, noting that the anchovies have once again gone missing off the Peruvian coast.”

What do anchovies have to do with anything? Well, before I can explain how this reduced supply of anchovy protein and rising global demand for protein spills over into the supply/demand dynamics of alternative sources of protein, they rudely interrupt me by saying, “The last time this happened soybeans rose to record highs, carrying precious metals prices along with them.”

Until next we meet,

The Mogambo Guru
for The Daily Reckoning
October 2, 2006

Mogambo sez: Whether or not the current economic and financial weirdnesses are caused by the government trying to keep things up-tempo until the elections, they are surely trying. Remember that ever since Clinton, the mantra is “It’s the economy, stupid!”

Their bigger problem is that the big Presidential election is only two years away, so they have to keep this bloated, stinking monstrosity of a world economy afloat for a long, long time yet. Your best-case scenario is that they succeed enough to keep the prices of gold and silver extraordinarily low the whole time, so that you can have two more glorious, fabulous years of accumulating gold and silver at astonishing, historic bargains, multiplying your eventual gain when it all blows apart!

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.

Chastity is not a particularly useful virtue if you are a prostitute…nor charity if you are an IRS agent. There is a time and place for virtue, as well as all other things.

The Daily Reckoning is a millennial project…in the sense that it began at the dewy dawn of the 21st century – in July 1999.

But though it began fairly recently, it had behind it nearly 30 years of watching the financial markets, the economy, and human nature. Of course, whether we drew the right conclusions from all those years of observation is open to question…if not derision.

We pause briefly merely to look back at those last seven or eight years.

One thing we were very right about was the Tech Bubble of the late ’90s. We said it would pop. And so it came to pass that in the first year of the great 3rd millennium AD, the NASDAQ crashed and has not recovered.

Predicting the end of the Tech Bubble was child’s play. So many bells were ringing; we practically went deaf…and went dumb shouting over them. Valuations were absurd. Companies with no earnings were suddenly worth millions. It was a ‘new era,’ we were told. And if we dissented, we were dismissed: “You just don’t get it, do you?” one annoyed dear reader wrote to us.

We were also very right about gold. It was trading for less than $300 when we began pushing it. Nor did we ever hide the fact that we had favored gold for the previous 20 years. But there is nothing like a two-decade bear market in your favorite metal to give a man a sense of humility.

Long-suffering readers know that humility is our only real virtue…and even as to that, we are insincere. Humility resulted from our being profoundly wrong for an embarrassingly long time. Year after year, our stock of gold lost value…but our stock of humility grew.

Soon our humility was floating with tech stock valuations…until it, too, had reached a bubble stage. We were so humble in the year 2000…we were shamelessly arrogant about it. Of course, humility gives us an edge…and an advantage; well, okay…it damned well makes us superior! So here you are, dear reader…a full and complete confession.

After having been wrong about gold for 20 years, we figured it was time we were right for a while. Gold cooperated beautifully. We expect it to cooperate for another five or ten years – at least. But not everything has gone so well. We were convinced that the whole economy was going to Hell in a handcart…we could never quite understand why it hadn’t gotten there yet.

Humility and modesty were useful to us in the face of the tech bubble…they helped us to be suspicious of the ‘new era’ claims of the period. But they were as useless as an umbrella in the desert in the years that followed. We held it up while the sun shone. The housing bubble, the dollar rebound, and the apparently robust economy of the 2002-2006 period – all of them required a willing suspension of disbelief…the kind of wanton disregard for virtue of any form that you get in a drunken stupor or a bubble market.

Housing was the way to get rich…but we were loath to mention it. The dollar was the currency to be in; but we were afraid to hold it. The economy spun like a top; but we kept expecting it to spin out of control.

We would have been better off – looking at it in purely financial terms – if we’d tossed off our humble virtues like a bikini top at St. Tropez. We should have flipped some condos in Miami (just so long as we didn’t forget to sell!). We should have bought the Dow at the bottom in 2002. We should have squeezed a little profit from the dollar too – selling off our euro positions in January of ’05 when the euro was quoted at $1.35

And here we are…the leaves are piling up in the park…the days are getting shorter…another days of another year are dwindling down to a precious few. What virtues will pay off in the months ahead?

We have a hunch. And here, since we are in a confessional mood, we have to admit that it is a hunch we have had for a long time without result…waiting for a real financial collapse that seems to have missed its plane. Nevertheless we have a hunch that the time for recklessness is over. We have a hunch that thrift will pay off in the years ahead. And timidity. Even fear.

Gold sold for $604 on Friday. At that price, it is only $4 over our target price. We have a hunch that dear readers will not resent or regret that $4…if they were to buy now. Nor will they regret selling the Dow…offloading speculative condos…or lightening up on the dollar.

More news from our currency counselor:

————–

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

“That means simply that sometime this year; China will have in their piggy banks, 1 trillion U.S. dollars. Do you think Schumer and Graham will like hearing about that?”

For the rest of this story, and for more insights into the currency markets, see The Daily Pfennig

————–

And more thoughts:

*** We’re back in Paris…but in a new office. As we write we are sitting at a sidewalk café having a cup of tea and ‘une tartine’ – bread and butter.

A motorcyclist, characteristically dressed all in black leather, just stopped right in front of us. Dismounting, the helmet came off and a swish of bright, blond hair came out. She shook her head like a Clairol model…and then began to take her pants off. Well, actually, she was stripping off her riding pants, underneath of which were a pair of blue jeans…but our pulse picked up for a moment.

…And now she’s packed her pants into a backpack and headed off down the street.

Every neighborhood has its charm.

This morning, we thought we saw Audrey Hepburn re-incarnate. This time it was a motor scooter that brought her before us. The scooter stopped in the middle of the Rue Royale. A sprightly young woman got off the back, she took off her helmet…and gave a kiss to the man in front of her. Then, she set off across the street.

This is a professional neighborhood. In the morning, men are almost all dressed in suits. Women wear elegant work outfits. They all bustle around until about 9:30 AM; by then, they have taken up their jobs and the tourists and shoppers take over.

It is nice, but this ‘quartier’-near the Madeleine – is much more businesslike…and more chic…than our old digs on the Rue de la Verrerie. We miss the geriatric whores…the flamboyant poofters…and the mentally deranged street people – we loved them all. Near the old office, for example, an old man lived in a cardboard box. He had been there for years…and sported a long gray beard. We used to ask him for financial advice occasionally…but he gave us only cryptic replies. Is the economy improving, we had asked? ‘Strawberry raincakes,’ he replied.

And the prostitutes…what a delight it was to sit in the Paradis Café and drink a glass of cheap rouge with them. One always wore a black, laquered rain coat and carried a white lapdog with her. We never saw her with a paying customer…and we couldn’t imagine who would pay for her services…but it was a pleasure to be in her company. For there was a woman who understood the financial industry. “If they don’t pay…well, f*** ’em,” we overheard her say to the bartender one day. It was a phrase so rich in paradox…yet so sure and to the point…we could tell immediately that she might have had a nice career on Wall Street if fortune had taken her in that direction.

But she probably began business long before women were admitted to financial careers. In fact, she was so old, she probably started out before women could even vote in France.

We’re not joking; women only got the vote in France in 1945. Since then, the country has been going downhill, as any Frenchman will tell you.

Of course, it’s not women’s fault. The system degrades naturally and ineluctably. Feminine intervention is not needed.

“As soon as women take over a profession,” said our neighbor yesterday, “the profession is discredited. The first women to enter a formerly male profession are seen as pioneers…they are highly regarded. But when women dominate the profession, the profession itself is downgraded. It is taken less seriously. People earn less.

“That’s what happened to school teachers…and now it’s happening to medicine.”

Our neighbor is a doctor. And a woman.

“Women are not able to invest the kind of time and energy into a profession that men can, because women have other interests and concerns…family, usually. So people take them less seriously in the business world. And when they take over a profession, the profession becomes less serious. I guess that’s just normal.”

We don’t know. But we’re ready to believe anything…or nothing at all.

“And now it’s even happening to the military. More and more women are being permitted to do more and more different jobs in the military. So the whole image of the military service is softening. I don’t know whether that is a good thing or not.

“But the one area that is still very much dominated by aggressive, ambitious men is finance. Men in finance work 80 hours and week…and they earn millions. And as far as I know, very few women can compete.”

*** Here’s an interesting headline: “Labor shortage leaves fruit rotting.” So there you are, dear reader, a new career path. Isn’t this economy amazing? It can produce an almost unlimited number of low-paying jobs.