Malignant Monetary Madness

The Daily Reckoning PRESENTS: The nomination of Goldman Sachs’ bigwig Hank Paulson for Treasury secretary has the Suspicious Mogambo Mind working overtime. Read his latest conspiracy theory, below…


I am cursing under my breath at all of this monstrous, malignant monetary madness (which is this week’s installment of gratuitous alliteration for no particular reason), when I suddenly realize: “Hey! I haven’t said something nasty about somebody in government, Wall Street, or the banks!”

To correct that grievous error and to get my bodily humors and biles back in sync, I can cover them all by noting that everybody seems to think that Hank Paulson from Goldman Sachs taking over as the new secretary of the U.S. Treasury is such great stuff, but the fascination escapes me. He is just some smiling suit who made his money by successfully hustling up clients and cash for Goldman Sachs to manage and rake off some big fees. Apparently, that is what his duties at the Treasury will be, too.

After all, what in the world can the secretary of the Treasury do? He is just a laborer. Congress proposes to spend, the president signs every spending bill laid in front of him, and then the U.S. Treasury Department issues bonds to finance the spending. That’s how it works. And, somehow, some big shot from Goldman Sachs as secretary of the Treasury can affect any of this by juggling the books? Hahahaha!

In turn, of course, the loathsome U.S. Federal Reserve creates additional credit, so that somebody can borrow the credit (turning it into money), which is used to buy the U.S. Treasury bonds (“going into debt to buy debt!”).

In short, my Suspicious Mogambo Mind (SMM) immediately comes up with a million terrific conspiracy theories about how Paulson was obviously placed there to benefit Goldman Sachs, which (I note with sarcasm) is a major shareholder in the Federal Reserve, and I assume, is now to create new secret accounts everywhere so that his actions (at the behest of Goldman Sachs, the White House and the Federal Reserve) can be hidden from view. This is exactly the kind of desperate, despicable, degenerate thing you see at the end of long booms.

I am sure that it does not surprise Christopher Galakoutis, of CMI Ventures, whose essay “Out of Bullets” was posted on He writes, “Speaking of successions, it was just announced that Henry Paulson of Goldman Sachs will replace John Snow at Treasury. This to me is further proof that everything within reach of our bankers and politicians will be utilized to keep the US’s ‘prosperity’ game going. You just don’t bring in a Wall Street heavyweight when you are about to cripple the economy with tougher Fed action.”

Peter Schiff, of Euro Pacific Capital, does not suggest that Mr. Paulson was nominated for anything underhanded, but perhaps because “In today’s style over substance economy, the job of Treasury Secretary has devolved into a pitch man for the government’s economic disinformation campaign.”

And let’s remember that Lloyd Bentson disgustedly quit the job of Treasury Secretary, and Paul O’Neill was fired for being too curious (and for being too honest about what he found). We ended up with John Snow, who is, apparently, none of these things.

As to why Mr. Paulson, perhaps this is a good time to quote the new interview of Jim Rogers by Jonathan Laing in Barron’s magazine, where Mr. Laing writes, “According to Rogers, new Fed Chairman Ben Bernanke is ‘an amateur with no knowledge of markets’ whose academic work revolved around how nations could avoid depressions by printing more money.” Hahaha! Exactly!

The rub is that you can make money available at low rates, but you can’t make anyone borrow and spend it. I figure that this is where the new Treasury honcho comes into the picture.

And since we are talking about the Jim Rogers interview, he is pretty adamant about the coming boom in commodities. Let’s be sure that we completely comprehend all the ramifications of the phrase “Add to (American consumption) 1.3 billion Chinese and 1.1 Indians – all walled off from the global economy during the last commodities boom – joining the global scrum for natural resources.” This additional 2.4 billion people represents, in case you were wondering, a full third of the world’s population.

Once you take the time to meditate on that mathematical fact, it is then but child’s play to instantly agree with Mr. Rogers’ view, namely that “it’s delusional to deny that competition for commodities will continue to heat up as a result of China’s pell-mell rush from a peasant economy to economic giant.”

As a fun “rainy day” activity, get out your Mogambo Junior Economist Machine (MJEM), enter the two variables “chronic, gigantically rising levels of demand” and “lagging supplies in a finite world,” and then crank the handle a few times. If your shiny, new MJEM is not past the end of the two-hour warranty period (and therefore not just another Broken Piece Of Mogambo Enterprises Crud (BPOMEC)), you will probably notice that demand and supply for commodities will equilibrate at a higher price. And “higher prices” is a prerequisite for “profit” in a “buy low/sell high” kind of way.

But if you are stupid enough to buy a Mogambo Junior Economist Machine from Mogambo Enterprises (our mott “Our business is profits, not quality!”), then you probably did not notice that chronic, gigantically rising demand for commodities and lagging supply in a finite world equilibrate at a higher price. In that case, take just my word for it.

And now, looking out into the misty future, we see that wisely including the word “chronic” in defining a rising level of demand means that this bull market in commodities will last another 10-15 years, just like all the other commodity booms in history seem to have done.

“Well,” you might well note, “if there is a rush to buy commodities, then the increase of demand (constrained by sluggish supply) should be reflected in a rise in the prices of commodities.” Good point, young grasshopper! So, we take a look at look the CRB Group Index futures and we can’t help but be impressed that they are up 26% over last year’s prices. The industrials are up 63%, grains/oils up 12%, energy up 23% and precious metals up 51% from last year, too. Livestock, the sole exception, went nowhere.

Now, let’s look at the commodity price index in the Economist magazine. Sure enough, that’s what you see there, too! The Dollar Index item labeled as the inclusive “All Items,” is up in price by 36% in the last year. With the Sterling Index, All Items are up 31.6%, the All Items Euro Index up 30.2% and the All Items Yen Index up 41.3%! Oil is up 39.2% over this time last year, while gold is up 58.9%.

So, if you think that inflation is low, then you are truly insane.

In keeping with this “Everybody is insane” theme, bonds actually rose in price as clueless “investors” snapped up bonds, locking in yields so low that I laugh in contempt. I find it quite unbelievable that anyone would buy a bond at these prices! Heck, even 30-year bonds are priced so high that they are yielding roughly the same as the Fed Funds rate! And in fact, the yield curve actually inverted today, so that long rates are less than short rates! Hahaha! What morons!

Until next time,

The Mogambo Guru
for The Daily Reckoning
June 12, 2006

Mogambo Sez: The gold and silver market manipulators are handing themselves and their friends a gift, as they know that gold and silver are going to boom any minute now, as they always have when economic conditions got like this. If you want some, and you should, then all you have to do is walk over and pick it up!

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.

“I’ve cut the price twice,” said a dear reader of his house in Florida. “I get plenty of people stopping by, but no one makes an offer. It’s eerie. It’s as if they all suddenly knew that if they wait they’ll be able to do a lot better later on.”

This morning, we read that major new condo projects are being closed down in Washington, DC, as well as Las Vegas and Miami. Nationwide, there are said to be almost four million new and used houses on the market. Reports from all over the country tell of rising inventories, slower sales, and price cutting.

And from other dear readers come more worrying anecdotes:

“When you mentioned Las Vegas real estate woes, I’d like to comment further,” begins a letter from a dear reader. “I am a Phoenix real estate agent and March 2005 there were 5,000 houses on the market, March 2006 there were 35,000 houses on the market. Today there are currently 40,000 houses on the market. Staggering!”

How will it all end, we wonder. With a bang or with a whimper?

Meanwhile, the curious fact remains: consumers are still consuming their fool heads off. Spending and debt are still rising, despite the lag in house sales. And in surveys of consumer attitudes, the lumpen report vague presentiments of trouble coming, but no real fear. It is as if they thought they were expected to appear wary. As if it would be unseemly or lacking in gravitas to expect such fat times to roll on forever. But, queried more closely, that is exactly what they do think.

Susan Walker reports from her own Elliott Wave Forecast:

“A recent national survey of homeowners by the L.A. Times shows ‘widespread faith in the real estate market.’ The worst possible scenario, that prices would ‘stay the same’ over the next three years, was selected by just 5 percent of homeowners. That total was less than the 6 percent who said they expect to see a rise of 31 percent or more. No matter how much talk of a bubble there may be, homeowners continue to demonstrate that they have no clue about the ramifications of one. And this is in an environment in which prices actually are falling! The denial runs so deep, it’s not even denial anymore. It’s some kind of epic disconnect between the reality of a newly falling housing market and an unwritten social contract that says home prices do not fall.”

“We recall that during the late ’90s a study of investor beliefs yielded the unexpected finding that a substantial number of mutual-fund buyers thought their money was insured by the federal government. Those were the unsophisticated lumps, of course. The more sophisticated lumps believed the entire market was protected by the “Greenspan put,” which meant that the Fed chairman would always come to the rescue of a falling market with more liquidity. There was some truth to this, but it didn’t save the billions that had been dumped into tech stocks. Greenspan came through with the liquidity, but it flowed into housing, not dot.coms.

“It is our view that the ‘irrational exuberance’ has transferred from stocks to housing, setting up conditions for a ‘housing deflation,’ writes John Rubino at 321 Gold. “We expect a serious fall-off of home construction, sales and values, starting in 2006, and becoming very pronounced by 2007. A glut of new houses will accumulate in the next 12-24 months, causing a drop in price and construction of new units, and setting up a serious risk of price decline (similar to the ‘tech wreck’ in the stock market).”

But now, the lumps are betting that the new men at the Federal Reserve and U.S. Treasury, along with the president, Congress, all the ships at sea and God himself, will make sure that they never get what they’ve got coming. That is, they’re betting that they’ll never have to put back in the equity they’ve taken out of their houses…that there is no slip to this slope…no downside to go along with the upside…no bear market in housing to follow the bull market.

But there always is. It doesn’t mean that house prices will suddenly fall. There are more ways than one to balance out a housing boom and ruin speculators; some of them homeowners would hardly notice. House prices could stay at present levels for the next 10 years, allowing inflation to cut them in half and slowly grind away at speculators, whose carrying costs would rise while their assets depreciated. Or, prices could collapse in some areas and hold steady in others. Or, they could even continue to rise, but less fast than consumer prices. Anything could happen.

More news from our pundit of currency…


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

“First of all, let me get this straight: the trade deficit did widen in April! Yes…it did, it did, I did see it widen, thus putting the deficit on track to set another new record in 2006. But what did the media and markets focus on?”

For the rest of this story, and for more market insights, see today’s issue of The Daily Pfennig


And more thoughts from London…

*** More from John Rubin

“The housing boom will almost certainly be followed by a long and painful housing bust. We expect that a continued rise in interest rate spreads and decline in housing sales and prices will push the U.S. in recession by late 2006, and this recession will deepen in 2007, as the housing ‘wealth effect’ turns into a ‘poverty effect.’ As defaults accelerate, lenders’ underwriting will tighten significantly, leading to a precipitous drop in new home sales.

“On the heels of the housing downturn will come a downturn in consumer spending, particularly in housing-related retail sectors (home improvement items, furniture and appliances, etc.). This will happen because variable mortgage rates are rising, fuel costs stay high, and the ‘wealth effect’ of the last 10 years quickly turns into a ‘poverty effect,’ forcing the personal savings rate quickly back up to at least the U.S. long term trend of 7.1%. With stocks and housing giving back the ‘asset bubble’ appreciation, the consumer has no choice but to resort to savings (as they have in the past and as they do in all other countries once the ‘asset bubble’ turns into an ‘asset bust’).

“The rising federal deficit, economic recession, lower interest rates, and declines in real estate will all lead to substantial downward pressure on the U.S. dollar. Falling U.S. interest rates will chase out investors, weakening relative demand for the dollar. If the economy experiences an asset deflation recession, the dollar could sink for a period of 3 -5 years, reaching new lows year after year.”

*** U.S. property – especially suburban residential property – seems like a poor bet to us. That’s why we went down to South America last year and invested some money down there. You get three to five times as much for your money in Argentina, we noticed. Maybe 10 times. And Buenos Aires is a great European city.

But what’s this? The Economist reports that sales of Buenos Aires apartments to foreigners – particularly Americans – is exploding. Uh oh. Is it too late?

Lila Rajiva, directly from Buenos Aires, has this report:

“Bill, Americans and Europeans are down here in Buenos Aires buying, no question. Finding an agent who speaks English is not a problem in the popular areas because realtors tell me, matter of factly, most of their clients are foreigners. You can tell that from the wording in the classifieds. They advertise kitchens a l’americaine – which means flush, built in, and yes, with granite counter-tops. The loft-style popular in big cities abroad is popular here as well, especially in older buildings. In San Telmo, which in many ways is the cultural heart of the city, I saw a decent sized stylish loft selling for about 125,000 U.S. dollars. For Argentina, that isn’t cheap by any means, and locals will tell you knowingly that the place is ‘touristic.’ But measured against what you’d pay in New York or London, it’s still a bargain.

“Apartments or homes in the colonial style, especially Spanish or French, go pretty fast if they are located in one of the upscale parts of town like Palermo or Recoleta. This is a city of beautiful old buildings, many of them needing only a little painting and fixing up to be livable, so if you like 19th century architecture, high ceilings, tiled floors, and wrought-iron work – this is the town to be in.

“Of course, if you’re betting on the price rising in the future to New York or San Francisco levels, you might be a bit, let’s say, irrationally exuberant. Locals tell me that real estate can fall here, too…and hard.

“But for now, most people I spoke to thought the boom has a few years more to go. And with the widespread and well-founded suspicion with which many Argentines view their government and their banking system, real estate continues to be the number-one destination for most savings. I think that makes it a fairly safe bet as an investment for foreigners.”

*** The Dow is down 300 points. Japan has lost 12%. Germany’s stocks are off nearly 8%…France not far behind. Emerging markets have suffered even more.

Meanwhile, gold seems to be sinking down toward $600.

How far will the “flight from risk” go? We don’t know, but as we suggested here last week, we suspect the plane is headed in the wrong direction: toward the U.S. dollar. We’re glad we’re not on that plane.

*** And here’s an interesting little item. The 26 top executives at Toyota Motor Company earn an average of $320,000. Good money, but hardly obscene. Toyota is a growing, profitable concern. And Japan is a country with a positive trade balance.

Across the wide Pacific, the U.S. trade deficit went further negative in the month of April, to $63.4 billion. But America’s top dogs aren’t complaining. The heads of America’s 500 biggest companies received an aggregate 54% pay raise last year. As a group, their total compensation amounted to $5.1 billion, versus $3.3 billion in fiscal 2003. G. Richard Wagoner, Jr, heading up Toyota’s rival, General Motors, received total compensation of $8.5 million. That’s what you get when capitalism enters its degenerate phase. The parasites make sure they get their money…even as the company sinks.

The Daily Reckoning