Lessons in Market Lore

There are many things in this world that astound The Mighty Mogambo…one that gets him really scratching his head is why people continue to buy the ever-rising U.S. debt? Isn’t that something an intelligent person would avoid? The Mogambo explores…

The NYSE breadth line (advancers minus decliners) has definitely turned down, after all these months of it rising relentlessly. And if you want to know HOW many months, I am looking at the chart in Barron’s right now, and it goes back to April of last year. And here is today’s Mogambo lesson in market lore (MLIML); when there are more shares being bought than are being sold, as indicated by the breadth line, then the prices of shares usually follows that trend.

Well, to be fair, I only came to that conclusion after analyzing the data with The Highly Scientific Mogambo Method Of Data Analysis (HSTMOMDA), which is to randomly stumble upon a graph of some kind, and then one of the three remaining neurons in my brain sort of half-heartedly fire and sizzle in some vague, primordial inkling that maybe this is somehow important, and then the other two neurons take a look a this sudden activity and figure that something must be significant and they will, too, try and comprehend it all. Putting all of this together, I will take precious Mogambo time (PMT) out of my busy, busy day spent writing letters to my Congresspersons ("Dear Senator or Representative, Watch the money, butthead! Signed, Affectionately, The Mogambo"), to say that I can only surmise that the stock market is in for losses for quite a while if sellers keep outnumbering advancers. Maybe. But only if the government cannot find another way to keep this stupidity going.

That, of course, brings us to the amount of debt that the Treasury has been issuing of late. You can tell by the way alarm bells are ringing, sirens are blaring, buzzers are buzzing and the way that I am running around covered with body armor that this is getting weird and scary, and the weirder and scarier it gets, the weirder and scarier I get. In real numbers (and remember that these come from the Treasury itself), they have issued $84 billion freaking dollar’s worth of new national debt in 28 freaking days! Not even a whole month! 28 lousy days! If it were February, well, then, yes, it would be a whole month! But this is March, which has 31 days in it, making it three days short of one freaking month! $84 billion in less than a month! I am now going to put this paper bag over my face and breathe slowly in and out, and perhaps I will stop hyperventilating about this now, and if I don’t, then at least the paper bag will muffle my screams a little bit.

Rising US Government Debt: Who’s Going To Buy? And Why?

So who is going to buy all of this enormous (and always rising) debt? Not me, mostly because I don’t have any money, and even if I DID have some money I would not buy U.S. government debt at these prices! And since I am a really stupid guy, and maybe (according to family and friends) the most stupid guy in the whole world, if this avoidance of U.S. debt is obvious to me, imagine the clarity with which somebody with normal intelligence (or above) can see it, too!

To that end, a reader in Houston suggested that I visit the site of the Depository Trust & Clearing Corporation (DTCC). They say that they provide "clearance, settlement and information services for equities, corporate and municipal bonds, government and mortgage-backed securities and over-the-counter credit derivatives."

And they are a pretty big outfit, as they crow about how their depository "also provides custody and asset servicing for more than two million securities issues from the United States and 100 other countries and territories."

We then read that the next section is entitled "A Shared Vision," which, having been around, means that I intuitively understand that when somebody says that they have a "vision," especially a "shared vision," what they really mean is that they will tell me what my socialist dreams are, and then they take my money to make it come true for themselves and/or their friends. Sure enough, we then read, "Established in 1999 to bring together and integrate the operations of The Depository Trust Company (DTC) and National Securities Clearing Corporation (NSCC), DTCC’s purpose is to help grow the world economy by furthering the development of low-cost, efficient capital."

Rising US Government Debt: This Place Has Customers?

So somehow, probably because they are such nice guys or something, they talk other guys with money (their customers) into loaning it out cheap? And thus they allow their customers to get crappy investment results, compared to guys who did NOT loan their money out on the cheap? And they have customers? Wow!

To tell the truth, this could be a highly unfair attack against a wonderful bunch of people, I don’t know. I don’t care. I figure, "Live and let live." But then I think that I may have to re-think my position, as I get the news they are getting bigger, as we then read that they are announcing, "The integration of the newest DTCC subsidiaries, Government Securities Clearing Corporation (GSCC), MBS Clearing Corporation (MBSCC) and the Emerging Markets Clearing Corporation (EMCC), which took effect officially on January 1, 2002, is part of a larger effort by the industry to bring greater synergies and efficiencies to post-trade processing, with the vision of creating a truly global central counterparty solution for many types of securities." As I figure it from what I just read, bristling as it is with words like "synergies" and "efficiencies" and more "vision," they are going to make a market in these securities, buying and selling from their own book, and make gigantic oodles of money on it. On the one hand, "Ah, the wonders of capitalism!" On the other hand, "Yikes!"

This is scary enough, as I am naturally paranoid and suspicious whenever any large, powerful and mysterious private mega-corporation gets larger, or more powerful or more mysterious. No, The Mogambo is too serene on this beautiful spring day to be wasting his breath making insulting-yet-stupid comments about the rise of the mutant monsters created by the union of government and the financial services industry.

I allow myself to be entranced as their dulcet tones sound pleasantly productivity-enhancing and wonderful when they say, as they talk about their own glorious tomorrows, "It is a future in which technology will be driving – with greater force – new ways of doing business, where the time it takes to settle trades will be reduced to minimize risk and where" and here is where I stop the tape. In fact, I leap to my feet and shout out "Stop the tape!" Before continuing, I caution you to buckle your seat belt, because I was totally unprepared for what lay ahead, and look what happened to me! Do I look normal to you? I’m hideous! Don’t look at me! I mean, here we are, taking a nice little drive in the car with the top down on a beautiful spring day, talking about enhancing productivity and low-cost capital and having a terrific time, and then, well, I won’t spoil it for you, but pay attention because it is the crux of the whole thing, "trading volumes will continue to escalate almost exponentially." My life flashed before my eyes!

And if you are at all familiar with graphs that go up exponentially, which is merely pictorially showing you that something has been rising exponentially, you, too, will be alarmed and you, too, will start screaming, "The Mogambo was right! We’re freaking doomed!" and then we are both clutching at our chests and gasping for air. And then it gets worse when you realize that one day, and soon, the amount of money that will be needed to be created to keep this huge Ponzi scheme going and trading hands will be hundreds of times bigger than today, then thousands of times bigger than today, and then millions of times bigger, and then billions of times, and then trillions of times bigger, and then quadrillions of times bigger, and then, hopefully, it will be Friday and we can take the weekend off to live it up like there is no tomorrow, because it looks like Monday will be that day referred to in that timeless expression.

And now you want me to tell you, again, the benefits of owning gold and silver? Or are you savvy enough to have figured that out for yourself?


The Mogambo Guru
for The Daily Reckoning

April 04, 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.

We are down on the bottom side of the earth, hanging on to trees and furniture in order to try to keep from falling off.

But the place looks fairly prosperous – a bit like the Dallas-Fort Worth area. We turn to the local press to find out what is going on.

"Africa must free itself of European legacies," begins an editorial. Uh-oh…the place is crawling with world improvers. "In South Africa, less than 1% of black matriculates pass math for university entrance in natural and applied sciences, as opposed to 25% whites. This does not indicate that blacks are less intelligent than whites, but that they are forced to write exams in a language that is foreign to them.

"Mathematics has its own unique language best understood in the mother tongue. Imagine how the above ratio of 1:25 would change if, say, Xhosa learners wrote exams in their mother tongue (after being educated by qualified Xhosa-speaking teachers) and whites had to write in Xhosa!

Africa has to liberate itself from the European languages, continues the writer, in English, because "no treatise of note has ever been written in anything but the mother tongue…"

In South Africa, everyone is talking about the "transformation" of the country into what Thabo Mbeki, the nation’s president, calls a "non-racial, non-sexist" society. He proposes to do so in the usual slimy ways – with various carrots and sticks, that is – larceny, bribery and threats.

The South Africans are victims of democracy. As long as the white minority dominated the country, it looked much like any other European colonial society. But since political power has shifted to the black majority, most whites are wondering how long it will be before they mess it up. We have no particular opinion on the subject; we just got here yesterday. As near as we can tell, the place is doing well.

But the papers look to the north – to Zimbabwe – to see what direction democracy could take it. There, Robert Mugabe, has become an embarrassment to post-colonial Africa. He won that last election in a landslide. South African election monitors pronounced it a win, fair and square; they said it reflected "the will of the majority." We don’t doubt it. The majority of people in any society are usually decent, honest and intelligent people. But put the power of the ballot box in their hands and they turn into jackasses.

Just to show you that deceit and humbug are as much in evidence in Africa as in America, Mugabe was just awarded an honorary doctorate from Zimbabwe’s Open University. The country is very fertile and extremely productive. It used to be the "breadbasket" of Southern Africa, as its economy exported tons and tons of food to the rest of the continent. But Mugabe decided to steal the land of white farmers and redistribute it to his cronies and political allies. The white farmers left and the new landowners who took their places had little interest in farming. In a few years, half a million African farm workers were destitute. Inflation rose to an annual rate of 800%…four out of five workers are unemployed. And millions of people now face starvation. So, what discipline do you suppose Mugabe’s honorary degree is in? Agriculture, of course.

More news, from our currency counselor…


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

"Big Al decided that he would tell the world that the Fed Heads are now worried about inflation…WOW! All this time, we’ve been told there are no inflation pressures, that productivity was the end all and so on, and so forth. But now…they’re worried?"


Bill Bonner, back in Johannesburg…

*** Oil hit its highest level ever last week. And now Goldman Sachs is predicting a "super-spike" in the price – to over $100 a barrel – and gasoline prices of $4 a gallon. It is coming, dear reader. But not necessarily as Goldman imagines.

We turn to our commodities expert, Kevin Kerr for his opinion:

"We expect the supply numbers for crude to once again be very solid and clearly bearish. This type of market activity reminds us of musical chairs: when the music stops, the bullish investors at these levels may find themselves without a chair, when the big investment banks decide to cash out for profits.

"It seems certain that this market will correct, and gasoline is likely to continue to climb, but it is a question of when. Bottom line is that this market is being supported by fund-buying and general hype…and neither of those things can force the crude higher for an extended period of time. We feel the market is trading $7-$10 over current actual value. One thing that remains clear: this is a very volatile market that can turn on a dime."

*** So, too, is a super-spike in the price of gold almost a certainty. As the world supply of "funny" money increases…the value of real money must increase too. All over the globe, the supply of money and credit is increasing at two, three…four…times increases in GDP. For now, the extra liquidity is going into asset prices. Property prices are still going up in most places. In America, for example, increases in house prices added $6 trillion to homeowners’ net worth over the last four years. Americans were so delighted with getting something for nothing that they decided to enjoy it. The personal savings rate dropped to 0.6% in February. Why bother to save something so you can have something later on…when you’ll get something anyway? Lunch is always free, isn’t it?

But it will be a cold day in Hell when the laws of nature are repealed. Self-deceit can go on for a long time, but not forever. Eventually, the U.S. dollar will begin to look more like the Zimbabwean paper currency than real money. When it does, gold will spike. If we only knew when!

*** Another Canadian reader incensed by our "Backstabbed" report…

"1. I read your newsletter below with a sense of disgust.  Ingratitude?  What Bullshit!

"2. Perhaps U.S.A. and George ‘Shrub’ should have thought about the oil and gas issues before your country put the blocks to, and destroyed, the Canadian softwood industry, thereby allowing Weyerhaeuser to come in and buy assets at less than 5 – 10 cents on the dollar.  If you do any research at all, you will know that this act was not a one-time shot but a clearly thought-through and protracted policy on the part of your government over many years, with many delaying tactics / refusals at GATT and other international courts.

"3. Perhaps the same above people should have thought about it before your country decimated the Canadian beef industry by closing the border to imports of beef over one/two cows with mad-cow disease.  Diseases that were mostly caused when Canadian producers bought pre-prepared feed with animal parts and steroids in them from the major suppliers – large multi-national agri-business corporations who just happen to be American.

"4. Perhaps these same people should have thought about their real friends – and listened to their counsel – BEFORE they unilaterally prosecuted a clearly illegal war against an innocent people in Iraq.  But George "Shrub" and his ilk of crony friends and advisors [many of whom carry two passports] did not think they needed any advice from anyone – pure unadulterated arrogance!  They simply lied – even before the United Nations – like common thieves.

"5. Canadian oil reserves belong to Canada.  Our government will sell to whom it pleases.  If U.S.A. wants that oil, then it should come to the table and buy it like anyone else, not come sneaking in and try to steal it for nothing.  Those days are over.

"6. Like your newsletter says:  "Rude Awakening" for George "Shrub" and his cronies.  He pushes people around like the barnyard bully – and then he cries when people do not respond to him and his Gang of Idiots with friendship.  That is why this reply is written on "April Fools" Day.

"7. Cancel my subscription immediately.  I do not wish to read your drivel any longer.

Baltimore-based editor, Addison Wiggin responds…

"I couldn’t agree with you more. "Backstabbed" is just the kind of bone-headed thinking that pervades not only our government, but our populace these days. We’re recommending our readers forget the politics and invest wisely – just as the Canadians are doing.

"I apologize if that did not come out in the piece."

The Daily Reckoning