Intractable Problems

Much to the Mogambo’s surprise, more and more people are beginning to realize that something must be done about the U.S.’s economic difficulties, namely the twin deficits…but he also knows that the solutions will be quite costly…

The CBOE Volatility Index (the famous VIX) had a sharp spike two weeks ago, producing the biggest volatility since August of last year. The yield curve also flattened, and the breadth (advancers shares minus decliners on the NYSE) continued to plummet. Somebody is, so it seems, losing confidence.

These things could be just a coincidence, but a lot of people have suddenly decided that something ugly is in the wind. One of them is Alan Abelson, in his Up and Down Wall Street column in Barron’s, is also noticing the outbreak of the heebie-jeebies, and notes a "peculiar disquiet" among both some economists and everybody else. A "peculiar disquiet" is such wonderful phrase that it probably reflects the kind of genteel crowd he hangs with, all educated and refined, but who can’t be bothered with the likes of me and my hoodlum friends, like it would kill them to give us a couple of bucks, or offer to give us a ride in their fancy cars, or maybe spring for a pizza, or even a lousy can of deodorant, which is something that I obviously need very desperately.

Perhaps this is because The Mogambo and his little crowd of "disquieted people" went waaaayyyyy past "disquiet" at ninety miles an hour about three state lines ago, and am now out there on the hysterical fringe with a "Repent! The end is near!" sign around my neck, standing at various four-way stops, yelling to the cars how Alan Greenspan has murdered our money and (as a lesson in how things have far-reaching effects), has also murdered the United States, and, extending that important lesson, their cozy little debt-addled little lifestyles are soon to be toast, too.

The Twin Deficits: Our Problems Are Intractable

After ignoring The Mogambo holding out his little tin cup, he follows this up with a review of a speech that Paul Volcker, the last great Federal Reserve chairman we had, gave, wherein he opines our problems as "intractable," and that we have to do something about (hold onto your hats) the budget deficits and the trade deficits! Hahahaha! Like that’s going to happen! Hahahaha! We are not going to consume until out little tummies burst? And Congress is not going to create more entitlements and increase spending and create more programs and spend spend spend? Hahahaha!

Mr. Volcker could have stopped after he told us that our problems were intractable, as they are. There is nothing that can be done, because if there WAS something that could be done, someone would have done it, and nobody in all of recorded history has ever come close. Of course, this does not mean that the Fed and the Congress will not TRY to do something, like all the rest of the brain-dead bozos in history have tried when their asinine spending excesses got to this point. And what will they try? It will be, as if you had to be told, more of the same thing that got us into this mess! Hahahaha! More money and credit and deficit spending! Hahahaha! What idiots! And we elected them! Hahahaha! So WE’RE the idiots! Hahahaha!

And the mention of idiocy reminds me that it is time to take one of my anti-idiocy pills that don’t seem to be working, and that, for reasons that highly-trained psychiatrists don’t even want to address, reminds me of a comment by John St. George while he was interviewing me last Friday for the Free Market Network News show. He commented that people around the world do not seem to have as much respect for our money, and I had to laugh (and if you listen to it you will hear me go "Hahaha!" and my wife yelling "Shut up that stupid laughing! I’m watching TV!"). Foreigners are going to respect the money of people who are so blindingly stupid as to get into the humongous mess we are in? Especially when our own vaunted Constitution literally precludes acting this way? Hahahaha!

Hell, I’m from this damn country, and I don’t have any respect for our money, either! And then to think that (and if you could see me now you would notice that my eyes have this blank look of stupefaction at the very thought), that MORE creation of money and credit and debt and MORE deficit spending is the freaking CURE for the resultant miseries? Hahahaha! Look! I’m laughing again! Perhaps they think that the productivity miracle of replacing laboriously slow mechanical printing presses to create money with a button that electronically increases credit balances in the banks, so that they can loan it out and create more debt, is our salvation and that makes our money so wonderful. Again the laugh of The Mogambo echoes: "Hahahaha!"

The Twin Deficits: "Something BIG Coming Up in the Markets"

But we had started out talking about how there were suddenly a lot of guys who were saying that something significant has changed. Another one is Doug Noland who wrote in his Credit Bubble Bulletin at, "In short, Risk markets are under increasing stress, the goliath leveraged speculating community is not making money – at best – and the derivative players must now be studying their risk exposure and questioning their risk assumptions and models. The Speculative Bubble in Risk has been pierced."

If you want another example, then here is Richard Russell, he of the Dow Theory Letter, who says "There’s something BIG coming up in the markets and in the U.S. economy during the months ahead. If you look at the market action, if you listen to ‘the language of the market,’ you can almost taste it."

Even Paul Krugman, a Leftist Loser with whom I seldom agree, is also growing alarmed. He writes, "What few seem to have noticed, however, is that a mild form of stagflation -rising inflation in an economy still well short of full employment – has already arrived. I shouldn’t overstate the case: we’re not back to the economic misery of the 1970’s. But the fact that we’re already experiencing mild stagflation means that there will be no good options if something else goes wrong." If something goes wrong? Hahahaha! See? I told you he was a loser! What in the hell could possibly go right? Name another stagflation episode, anywhere in the world and anytime in history, where things "went right."

He even alludes to the fact that our economic mess is, as he again quotes Paul Volcker, who seems to get a lot of mileage out of his every utterance, that our problems are "intractable." Mr. Krugman says, making a joke of it, "How do we get out of this bind? As the old joke goes, I wouldn’t start from here." And so, for once, I DO agree with Mr. Krugman, which just goes to show you how weird things are getting to be! Since there is no escape from our economic problems, the time to "get out of this bind" was a long, long time ago, before it started.


The Mogambo Guru
for The Daily Reckoning

April 25, 2005

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.

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

As you know, we’re waiting for something to happen. That is, we’re waiting for the day when what can’t go on for much longer finally stops going on.

Most people seem to believe things that couldn’t possibly be true. They think houses go up faster than the rate of inflation – all the time. They think they can spend more money than they earn – indefinitely. They think America can take more from the rest of the world than it gives – for as long as it wants.

And because they believe these things, they do things that an older, more experienced person would find reckless and irresponsible. During the great Tech Bubble, Wall Street investors bought stocks trading at 200 times earnings…or stocks that had no earnings at all! They knew they were doing something extraordinary; but they thought they were doing something very smart. "It’s a new era," they said…and thought if they didn’t get on board that train now, they were going to be left behind.

Now, it’s the housing market that draws in young, inexperienced players.

Peter Schiff comments:

"One ‘expert’ consulted [by the New York Times] commented that in the past, real estate investors expected annual rental returns of 8% to 10%, and that such a ‘historical perspective’ is actually a negative in today’s market, as it results in experienced investors passing on properties that investors with ‘fresh prospective’ routinely buy. ‘They’re not being foolish; they’re looking at it differently than people who have been in the market for a long time.’ In other words, this time it’s different, a new era. I’ve seen this movie before, and I know how it ends. Remember all the novice stock market day-traders ridiculing Warren Buffet for his failure to grasp the new reality."

People buy property now as they bought tech stocks five years ago – without any regard for earnings. It’s all a greater fool game – betting that someone will come along who is an even bigger numbskull than you are. The game continues for a very long time…so long that people come to see it as eternal. And the more confidence they have in it…the more reasons they invent why it should go on. Most experts cite "demographic factors" – meaning, that there are supposed to be many more people who need a roof over their heads. According to the theory, there are so many new immigrants and baby boomer children that the homebuilders can’t keep up with them. Prices will rise. Why the homebuilders can’t build enough houses to keep up with the demand is a matter of debate.

How the new buyers will be able to pay higher prices – when incomes are falling – is not clear. Nor has anyone bothered to explain why prices didn’t rise when the baby boomers themselves grew up. And there is always the outside chance that these new households may rent. Rental yields are falling; relatively, rents are cheap.

Markets make opinions. When prices rise, people find all the reasons in the world why they should continue. You’ll recall, one of the major reasons given for why stock prices had to continue rising in 1999 was "demographic factors." There were supposed to be so many people putting so much money into stocks – for their retirements. The logic was supposedly irrefutable: The Baby Boomers must save money. They had no choice but to put it into stocks. Stocks had to go up.

Then, too, the reasoning was perfect – as long as stocks went up. But then something happened; they went down. For the last five years, the Baby Boomers have felt little desire to buy stocks.

But the "demographic factors" argument is still perfectly serviceable for the housing market. It will work fine – until something happens and houses go down in price.

More news, from our currency counselor:


Chuck Butler, reporting from the EverBank trading desk in St. Louis…

"Asian currencies have to keep their currencies weak to remain in competition with China…should the renminbi be allowed to rise vs. the dollar, the other Asian currencies will follow suit…"


Bill Bonner, back in Ouzilly:

*** A note from Kevin Kerr, our favorite commodity trader:

"Oil-guzzling Americans consume almost 21 million barrels of oil a day, a quarter of the world total of 84 million barrels a day, according to the International Energy Agency. Coming up the ranks, fast and furious, is China, which is now second, at 6.4 million barrels a day – and its demand could double by 2020, according to various reports. Frighteningly, China will import most of its future oil supply; its domestic output is only about 3.5 million barrels a day.

"Global demand is rising exponentially; global supply is dwindling."

[Ed. Note: Demand for oil may soon be overshadowed by another problem…over the next 25 years, more than three times the money invested in either crude oil or natural gas will pour into the one absolutely essential energy resource every major economy on Earth must scramble to secure…electricity.

*** It’s another holiday in France – children get two week’s off from school for spring break. The roads leaving Paris were clogged on Friday and Saturday. Parents tend to take some of their six weeks’ of vacation at the same time. On Saturday morning, it seemed that everyone was headed south. We were among them, of course…on our way out to the country.

We got almost all the way home – with the family in the car…and Elizabeth’s horse in a trailer behind us – when our Nissan Patrol blew a gasket on a tiny country road. Cars are so much more reliable than they used to be. It has been so long since we had car trouble, we almost forgot what to do.

"Why don’t we hitch up the horse and let her pull us home?" Henry suggested.

Instead, we hitched a ride to our house…and called a neighbor…while the rest of the family enjoyed picnic beside the road.

Nissan and Renault have somehow gotten together. They had a man on the scene within 15 minutes.

"I think your motor is shot," said the mechanic.

"But it’s almost new," we replied.

"I don’t know…stuff happens," he said, philosophically.

*** Stuff happens, dear reader, stuff happens. We read in the paper that the price of the war against Iraq has risen to $300 billion. We remember citing an estimate that the war would cost $1 trillion. The number was so large we couldn’t believe it. The Vietnam War only cost $500 billion in today’s money. But war is expensive…and if the war in Iraq continues at this rate…the expense could rise to more than $1 trillion.

Still, who counts money or corpses when you’re building democracy?

Readers will remember that we were skeptical and cynical of the war in Iraq. Not that we had any idea of how it would turn out. We just thought it was the wrong thing to do. Turning Iraqis into democrats didn’t seem like a good enough reason to kill people – even if the war were a success. When you do the wrong thing – whether in foreign policy or investing – stuff happens. Of course, stuff happens anyway…but at least it’s not your fault.

In Vietnam, Ho Chi Minh knew he couldn’t beat the United States in a pitched battle. So, he adopted the tactics of guerilla warfare…that allowed him to control his losses. The North Vietnamese and the Vietcong fought the war on their own terms – allowing the United States to wear itself out by keeping a huge, modern army in the field. All along, the Joint Chiefs of Staff reported on the great progress they were making. They seemed convinced that it was just a matter of time before resistance collapsed. All they needed, they said, was more firepower…more money…more troops.

Once engaged, an army wants to win. This instinct is so strong, few people are able to look beyond it to see if winning is possible…or whether it makes any difference. Instead, they come up with "reasons" why the war is a good idea…and why they are sure to win if they just stick with it. In WWI, the troops could have gone home in 1915 – after the Battle of the Marne, there was no longer any real hope of either side winning a decisive victory at anything that might come close to "reasonable" cost. But no one could call a halt to the war. As bad as they were at fighting the war, (many of the attacks were suicidal) they were even worse at stopping the fight. "More firepower…more money…more troops," said the generals, and the war went on for three more years. By the end, all the major combatants – except the United States – were worn out by it. Neither Europe, nor America, was ever the same.

In the Vietnam War, Secretary of Defense Robert MacNamara realized that the war was hopeless in 1967. At that time, the United States had 485,000 troops in South Vietnam…and had flown 170,000 bombing sorties against the North. None of it seemed to have much effect – either in driving Ho Chi Minh to a settlement…or preventing the Vietcong from operating in the South.

Still, more firepower…more money…more troops…were brought to bear. Between the time that the Secretary of Defense wanted out and the time the war was actually terminated (badly), 43,000 more Americans were killed. "We were terribly, terribly wrong," said MacNamara, with tears in his eyes, 30 years later.