Mumbling and Grumbling

It must be Monday! Today the Mogambo meets John Snow…well, er…John Snow’s security team to be accurate…

To show you how far removed from reality John Snow is – for those of you who don’t keep up with local politics, this guy is the Treasury Secretary of the United States – BusinessWeek magazine sat down with him and listened to him flap his lips for half an hour.

It is from the interview that we learn that that we should "Give people more control over their own lives, empower them to take greater responsibility for their own retirements, health care and economic security." Hahahaha! Where the hell has this guy been? Take responsibility? We’re suddenly going to act responsibly for our own actions? Now? Hahahaha! The very essence of government today is that it works day and night to make up for everybody’s mistakes, so that nobody ever has to take responsibility for anything!

But it doesn’t stop there! He goes on to say "People are intelligent in the United States; they can make intelligent trade-offs." Hahahaha! The Mogambo springs to his feet, and whipping out a Magic Marker, quickly draws some graphs on the wall.

Treasury Secretary John Snow: Ignorant Americans

As the security guards drag me away – they obviously don’t like Magic Marker on the walls – you can hear the Mogambo yelling out, "When one charts the apparent IQ of Americans through the decades, which is shown by this upper line that is sloping down and to the right, simple extrapolation dictates – dictates! – that we are provably, beyond any shadow of a doubt, much more ignorant than at any other time in American history! I mean, just look at us!"

Well, obviously, I was not there for the rest of the interview, entangled as I was with the security personnel. Instead, I was trying to gently calm them down by screaming right into their faces that they can’t arrest me because I am the Mogambo, and they are infuriating me by acting like they never heard of me, and you should have heard the disrespect they showed for my License To Kill status! Jerks.

Anyway, so it is to the actual magazine article that we turn, and we read that Mr. Snow figures that we need to fiddle with tax policy to encourage savings. So far, so good! The reason is, and I love this, that he says that it "plays into long-term growth rates, because if you invest more for the future, you have higher real wages, higher per capita income, higher prosperity."

This is where we part company on this savings thing, because I am here to tell you that while we DO want investment from savings, we do NOT want higher real wages OR higher per capita income. We want prices and wages to remain perfectly stable! Zero inflation. If we do that, then the "Miracle of Productivity" kicks in! Prices go down, while income stays up, and part of the extra money saved per week (the marginal propensity to save) lowers rates, and the remainder (the marginal propensity to spend) provides the extra demand to soak up the additional production! So textbook! So classic! So deliciously perfect!

Treasury Secretary John Snow: More Income Inequality

And that is the reason why I was dragging my feet as the security people were dragging me down the hall – screaming as loud as I could – that John Snow is an idiot, because even a moron as intellectually impoverished as me can immediately realize that the only real end result from higher wages and higher per capita income, what he envisions as our future, is that it necessarily breeds more income inequality, which is characterized by the wealthy and a middle class that raises its prices to cover its increased costs (and thus merely offsetting the inflation in prices) and that leaves a large, and growing, class of people who do NOT have a higher income but have to pay the damned higher prices. These are your standard categories of your old, infirm, handicapped, homeless, mentally ill, young, abandoned, weird, anti-social, homicidal, lunatic, the unemployed and the unemployable, and various assorted others, like the Mogambo, who embody a little of all of these people, if modern psychiatric diagnostic techniques are as good as they claim.

If you don’t have any money, then a $1 loaf of bread is more attainable than a $5 loaf of bread. And if you are homeless, then a studio apartment at $50 a month, utilities included, is a lot more attainable than an apartment costing $1,500 per month, plus utilities and security services to keep the poor people away.

And when you gather all these poor, miserable people into one place, you will immediately notice that there are a lot of them. And I mean a lot! Out of a population of 290 million currently living in America, 150 million do not work at all! Of the 140 million who DO work, fully 22 million of them are direct employees of a government! And the rest of the country is merely engaged in selling goods and services to the government and to each other.

So how many people are going to benefit by higher wages and higher per capital income? Let’s find out! I walk up to the microphone and announce, "May I have your attention, please? Stand up if you think you are going to benefit from a policy aimed at producing higher wages and higher per capital income. Be honest." After a lot of shuffling of feet and mumbling and grumbling, I look out over the audience. With a sneer in my voice, I say, "I see the usual suspects standing: Lawyers, politicians, power brokers and, of course, the damn bankers. Perfect. Absolutely freaking perfect."

And all the rest of the people, that vast, engulfing sea of people who are not playing in the game, for one reason or another, are going to suffer because of somebody else getting higher wages and higher per capita income, which makes prices go up. And increasing the suffering of more than half the population of the United States is not in Mogambo’s Definition Of Economic Success (MDOES).

Treasury Secretary John Snow: No escaping Dollars and Cents

In a similar vein, the Associated Press reported that the Census Bureau figures that "The number of Americans living in poverty increased by 1.3 million last year, while the ranks of the uninsured swelled by 1.4 million." Well, rising immigration could explain that, I suppose.

In the same light, "Approximately 35.8 million people lived below the poverty line in 2003, or about 12.5% of the population. That was up from 34.5 million, or 12.1% in 2002." Well, that could be a statistical error, an all in all, one could make the argument that things are, roughly, about the same, and if adjusting by immigration, then things are actually better!

But there is no escaping dollars and cents, and in that regard, they report that "The median household income, when adjusted for inflation, remained basically flat last year at $43,318."

And I am here to tell you that the government massaging of actual statistics only partially compensates for the real level of price inflation, and if you fully adjusted incomes for the effects of inflation, then the median household income went DOWN, and has been going down for years!



The Mogambo Guru
for The Daily Reckoning
September 13, 2004

The latest trade deficit came in on Friday, as feared, above $50 billion.

We just got off a plane…with no time to write.

Here’s a message from our old friend, Martin Spring… traveling in China:

"Here in Shanghai, on my first visit to mainland China, the past and the future are ‘in your face.’ The 120,000 items on display at the Shanghai Museum that celebrate the grandeur of thousands of years of Chinese history – porcelain, paintings, sculpture, bronze ware, coinage, jade, furniture – are housed in a spectacular modern building that cost $700 million. I traveled there from my luxury hotel, where the rack rates start at $320 a night, on a subway system for just 2 yuan (about an American quarter).

"China is well on its way to becoming a superpower, yet the rest of the world has hardly begun to consider the implications. Political and cultural as well as economic.

"Investment bank Goldman Sachs has forecast that in less than 40 years China will overtake the United States to become the world’s most powerful economy. Yet, with a per capita income only one-sixth the American level, it should have most of its growth still to come.

"Last year, for the first time, global markets really felt the impact of China’s surging economic expansion, which accounted for all the growth in world demand for copper, 99% of the growth in nickel and 95% of the growth in steel. It was the major factor driving up oil prices, as China overtook Japan to become the world’s second biggest importer of crude.

"Yet ‘the dragon’ has only just started to develop its hunger for imported resources…and manufactured goods.

"Within 10 years, ‘its appetite for base metals, food and probably also luxury goods will strain the world’s ability to produce them,’ Financial Times bureau chief James Kynge told the conference I’ve been attending in Shanghai. ‘Its people will be traveling abroad, buying property abroad and educating their children abroad, in numbers that will shock the world.’

"’China’s competition for resources will cause great problems’ with other countries. For example, some analysts forecast that over the next five years China will become a major importer of grain, perhaps even the world’s biggest importer.

"China has emerged from its period of Maoist failure (thanks to the wipeout of the ‘Cultural Revolution,’ a whole generation had no advanced education) to become a highly successful mixed economy with an increasingly free-market character. ‘The best capitalists live in Communist China,’ says the well-known investment commentator Jim Rogers.

"Globalization and domestic reform are releasing the enormous potential of one-fifth of mankind united by a single culture, language and state. They are perhaps the hardest-working people on earth, very thrifty (saving on average more than 40% of their incomes), intelligent, aggressively materialistic and with a high level of natural commercial skills.

"China still has a long way to go, with an economy only one-third the size of Japan’s despite more than 10 times the population. But I cannot conceive of anything that can stop this juggernaut racing ahead, other than internal political dislocation as one-party rule breaks down, as in time it must.

"The coming emergence of China as a superpower is a prospect that raises some interesting questions:

"To what extent will Chinese challenge the dominance of English as the principal world language? Chinese is particularly unsuited to international commerce, as it does not translate well, being written in thousands of ideographs, instead of a couple of dozen letters, as well as being imprecise and full of subtleties. Yet economic power always brings with it cultural power.

"How will other major nations in the region (Japan, Russia and India), as well as those beyond it, but in a shrinking world (America, Europe) adapt to China’s increasing ability to get its own way? There are some obvious potentials for conflict – China’s wish to reabsorb Taiwan, extend its control over the hydrocarbon areas of surrounding seas, and ultimately re-establish control over its ‘lost lands’ in Siberia.

"How will the governments of other nations handle the social and business implications of a mass shift of global manufacturing to China, acquisition of natural resources and other assets by globalizing Chinese megacorporations, and an avalanche of Chinese visitors? (Kynge says there are already more outbound Chinese tourists than there are Japanese, and an ‘exceedingly conservative’ estimate is that their number will treble to 100 million a year by 2020).

"How can you invest in China’s growth? Marc Faber gave some sensible suggestions that I reported in my last issue. What I’ve learned here so far confirms that the most sensible way is through indirect investment, through companies such as Australian miners and Japanese equipment and components suppliers."

Here’s Eric Fry, with news from the Street…


Eric Fry, from the Land of the Rising Stock Market…

– The Dow Jones Industrial Average patched together enough winning days last week to eke out a 52-point gain, closing out Friday’s session at 10,313. This, despite the fact that two Dow stalwarts, Coca-Cola and Alcoa, dropped more than 5% each on disappointing earnings forecasts.

– But while blue chip America swooned, the racier pockets of the stock market soared, lifting the Nasdaq to a 2.7% gain on the week at 1,844. Semiconductor stocks took a break from their losing ways to jump 7% and lead the tech sector higher.

– Over the last several months, the formerly sexy semiconductor sector had become a kind of financial Paris Hilton – more embarrassing than alluring. The SOX index of semi stocks had plunged more than 30% between January and Sept. 3 – the very day your New York editor observed in this column that hating semiconductor stocks had become a bit too fashionable on Wall Street.

– "Now that Intel and most other semiconductor stocks have tumbled substantially from their recent highs, Wall Street analysts are rushing to downgrade stocks throughout the semiconductor sector," he noted. "UBS, First Albany, WR Hambrecht, Janney Montgomery Scott and Piper Jaffray all issued downbeat comments about one or more semiconductor stocks. Might the Wall Street guidance system be sending the wrong signals once again? Will semiconductor stocks soon begin to outperform the rest of the stock market?"

– Sure enough, the ink had scarcely dried on Wall Street’s latest batch of downgrades before semiconductor stocks started to rally. We aren’t saying Wall Street’s learned and esteemed analysts have got it all wrong, but they sure picked an inopportune moment to flip-flop from unbridled bullishness to cautious bearishness.

– We’d tend to agree that the semiconductor sector is struggling. But even bad stocks rally sometimes, and often really bad stocks rally the most. The semis may advance for a few more days, but we wouldn’t be too surprised to see them returning to their losing ways before too long. Likewise, we suspect the broad market’s mini-rally from its mid-August lows has only a little juice left in it.

– "The rebound off the Aug. 13 low, which preceded a peak in alarmism about oil prices, has now carried the S&P 500 to a 6% gain in four weeks," notes Barron’s Michael Santoli. "For an index that has occupied the range of roughly 1060-1160 since mid-December, that qualifies as a significant move.

– "A comparison with the two prior rallies off interim low points (set in March and May) offers some perspective on where the current bounce ranks. The rally from the March low lasted two weeks and amounted to a 5.8% move. The next bounce took six weeks and covered 6.5%. That places the current move right around the average magnitude of the prior two and right at the average duration. And notably, each of these rallies has topped out at a lower point than the prior one. But of course," Santoli concludes, "the moment the market starts to appear predictable, it rediscovers its tendency to confound."

– And the market is especially prone to confounding investors when optimism is high and complacency pervasive. Investors have become remarkably complacent of late. The VIX index of option volatility dropped to a two-month low last Friday, and to within a whisker of a multiyear low. This near record-low reading of option volatility indicates that the lumpeninvestoriat has become as complacent as it is gullible.

– Typically, low levels of fear precede steep market sell-offs.

– Options pro Jay Shartsis agrees that the current rally is closer to its end than its beginning. "One gauge flashing danger here," Jay warns, "is newsletter writer Joe Granville’s ‘Climax Indicator.’ This on-balance volume measure of the Dow components has just generated its fifth upside nonconfirmation. Joe notes that every major top in market history has been preceded by a cluster of such nonconfirmations. The current number of five was only exceeded by the seven seen in September 1929 and January 2000. Were we to record a string of high call-buying days, which is yet to happen, then the ‘CLX’ warning would take on greater immediacy."

– Shartsis also points out that put/call ratios are sliding, which is usually a bad sign for stocks.

– "At the May bottom four months ago," Shartsis notes, "the 21-day dollar-weighted equity put/call ratio hit about 94 cents in puts traded for every $1 in calls, which was the most pessimism recorded since the March-April period of 2003, the big bottom. This year we also got a rally off the May lows, but not a substantial one. The Dow, for example, gained about 500 points in June. At that time, the 21-day dollar-weighted put/call ratio dropped down to near 62 cents traded in puts for every $1 in calls, and then the Dow dropped about 600 points. At the August bottom last month, this ratio got up to near 98 cents in puts traded for every $1 in calls, and the Dow has subsequently gained nearly 400 points.

– "The dollar-weighted put/call ratio is now down to about 80 cents in puts for every $1 in calls," Shartsis continues. "So maybe we get another 100 Dow points up before a selloff, based on this indicator. But I think it’s worth noting that the rally off the May bottom this year didn’t get too far or run too long with similar starting figures from the dollar-weighted put/call ratio as were seen last month."

– Call buyers beware…


Bill Bonner, back in Paris…

*** A woman reader – and one in her 20s!

"What a shock to a curmudgeonly old dude like yourself, immersed in the financial pages and unending doomsaying prophecies, to receive a response from a woman in her 20s." "It is easy, I think, to doomsay forever, for all good things, from empires to love affairs, do eventually come to an end, so all your predictions of gloom and sorrow are guaranteed to be correct…at some unknown, distant point in the future. "How easy it would have been, then, for someone in 1950 to cry, ‘It’s over! It’s all over! Don’t you see? We can’t possibly continue to grow economically anymore! We’re all living in a fantasy world with grim economic realities ahead!’ "This madman could have continued his rants daily for the last 54 years, and still he wouldn’t have been proven correct. Despite occasional recessions and forays into the financial doldrums, the American (and world) economy has proven remarkably robust. "And yet someday in the future – tomorrow? 2008? 2070? perhaps later? – these madman predictions will prove true. Then the madman can pound his chest and say, ‘I told you so!’ "What I am trying to say, with all due respect, sir, is: You’re full of s***. You deliberately write in this sky-is-falling tone, not unlike George W. Bush with his ad infinitum warnings of impending terror (or ‘terra,’ as he likes to say), in order to convince readers to purchase the financial advice of you and your cronies. "’Buy my latest report which will show you how to get wealthy in 3.8 seconds!’ "The nettlesomely verbose, pabulum-spouting, foaming-at-the-mouth Mogambo Moron explains why he is God and then brags about his latest correct forecast, conveniently ignoring the other 2,741 woefully inaccurate prognostications he has made! ‘Send $400 a year for his weekly madman rant newsletter!’ "’Send me, Bill Bonner, $500 to show you how to write annoying, cliche-laden copy like this! It could make you wealthy!’ "Nice try, Mr. Bonner. Some of us aren’t stupid enough to make you and your friends a hefty profit."

*** A 63-year-old reader…

"Many of my friends and acquaintances are either ‘retired’ or not able to find the kind of work they would like. It is not a lack of ability – it comes from the fact that many of them choose not to work because it has become overly burdensome. After the taxes are paid, the pay isn’t all that great, even given ‘benefits’ like ‘health insurance’ (really, prepaid medical care). It is fascinating to observe how people are dropping out of the system, finding ways to curtail their expenses so they don’t have to submit to all the politically correct yahoos. The rules and regulations just make everyday work unbelievably difficult. "People think it is a shame that older folks end up as greeters at Wal-Mart. Why not? It’s a job that doesn’t require filling out forms if you want to do something. You don’t have to ask permission from the company to purchase stock, even in Wal-Mart. The person who does it even halfway reasonably gets a fair amount of respect. So the pay isn’t so great – but after taxes, it isn’t that much less than what a teacher makes, and there is a lot less grief."

The Daily Reckoning