Nearly Perfect Data

Investing for the long-term is all well and good, but the Mogambo sees a problem… When inflation continues to eat away at the value of your money, investing for the long-term isn’t really that much different than investing for the short term now.

The S&P 500 is down to where everybody who bought that index any time in the last year has lost money, and if the average price was indeed $1,400, then, "investors" lost about 7%. To be fair, earnings are also lower than at anytime in 2007, too.

Now, subtract the losses due to inflation, which is now running at about 13%, and what do you get? Hahaha! You had a 20% loss, in real (inflation-adjusted) terms! Hahaha! And now you need a 25% gain just to break even! Hahaha! "Invest for the long-term!" Hahaha!

How long will you have to invest before you get your money back? Hahaha! You never will, as inflation in prices is NOT going to abate for the rest of your life, because the federal government must continually spend more and more money for the rest of your life, and so the Federal Reserve will be given free rein to create as much money as they want for the rest of your life, too!

I can see that many of you are turning your radio dials, as you figure that you have heard this "investing for the long-term is a lie" from me so many times that listening to it one more time seems like a punishment. You are wrong! This is not about "investing for the long-term" at all, but about inflation in prices, which is much more important than some nitwit "investor" who is so stupid that he cannot understand that he or she is being fleeced by the financial services industry, even as they notice that they have not made a damned dime, even in nominal terms, and after looking at it from an inflation viewpoint, they are horrified to learn that they are getting screwed out of money that way, too, all thanks to the Federal Reserve that creates the excess money and credit that creates inflation in prices, including inflation in the prices of stocks.

The interesting thing is that Treasury Gross Public Debt is now $9.244 trillion, up from $5.65 trillion in the middle of 2001, when the current government-borrowing binge started going bananas, suddenly rising at a steady $50 billion per month or so.

And for a little perspective, that $3.594 trillion in additional debt means that, at even 5% interest, the government is now paying out $180 billion a year, just in the additional interest payments on just this additional debt, which is more than the entire total of the "economic stimulus" checks that are going to be mailed out! This is insane! And scary as hell!

And speaking of scary things, Adrian Ash at reports one of the most astonishing quotes you will ever hear, in this case from Martin Weale, the director of the National Institute of Economic and Social Research. He was commenting that the economic slowdown in Britain gives the Bank of England, "room for further cautious reductions in interest rates", which means a theoretical spurt in the money supply, which means a theoretical spurt in price inflation.

The astonishing part is when Mr. Weale said, "I don’t see the risk of inflation being a constraint." Yikes!

And doubly yikes when you read that Janet Yellen, one of the brain-dead econometric zombies mistakenly placed in charge of the nation’s money, economy and banks by being president of the San Francisco Fed bank, said that she doesn’t care about you, or your children, or your parents or anybody else, and as far as she is concerned, inflation in prices can eat all of us alive and destroy the money of the United States, the economy of the United States and the people of the United States, and she doesn’t care that the Federal Reserve is mandated to protect the value of the dollar, and if you don’t like it then you can go to hell and take The Mogambo with you.

Well, you probably guessed that she did not actually say that in so many words, but she said the same thing when she said, "We need to remain very focused on the downside risks to the economy." What? Who the hell says so?

And how to do that, anyway? She doesn’t say, but she did supply a metaphor that was as clueless as her economics; she thinks the job of the Fed is to create a "fire wall" of some kind, so that the, "fire doesn’t hurt innocent bystanders". What? Huh? What? Hahaha! This is the kind of people given control of the money, the banks, and the economy! Hahaha! And yikes!

And doubly "yikes" if you contrast this economic gibberish with Mr. Ash quoting Mervyn King, now governor at the Bank of England, as profoundly saying that, "Few empirical regularities in economics are so well documented as the co-movement of money [supply] and inflation."

In fact, Mr. King himself quoted the statistics that, "Over the 30 year horizon 1968-98, the correlation coefficient between the growth rates of both narrow and broad money, on the one hand, and inflation, on the other, was 0.99."

Mr. Ash graciously acknowledges that many of us took a statistics course many years ago, and we didn’t really understand it then, and so this "0.99 correlation coefficient" thing is pretty meaningless to us, and it looks like we are wasting our time here if he is going to converse with the math eggheads in the crowd about things we don’t understand, and since it is almost lunchtime, then I am outta here!

So he politely explains that, "0.99 is as near perfect as you’ll find in any pair of data. An absolute 1.00 only ever exists for the very same thing measured against itself – say, the cost of living mapped onto the cost of living, or gold prices correlated with gold prices, for example."

So we out here in the audience nod our heads to signify that we understand the concept of "virtually guaranteed", but we are soon sorry that we did, as our blood thickens in our veins at the sheer economic horror revealed as he goes on, "But ignoring the flood of money – first created as credit and now stacked up in Treasury bonds across the emerging economies – would mean ignoring the connection between growth in the money supply and inflation in prices", like China registering an 18% plus growth in money, India 22.4% a year growth, Singapore 14%, Britain up by 12.3%, Western Europe 11.5%, Australia16%, Canada 13%, and Saudi Arabia 22%!

He ends with the sorrowful news that, "The U.S. money supply – if the Fed still reported M3 – is now guesstimated to be showing 15% annual expansion."

Then I think back to Mr. King saying that, "Few empirical regularities in economics are so well documented as the co-movement of money and inflation", which turns out to be an almost perfect correlation, and I break out into a sweat as I realize that with money in the USA expanding at 15% a year, we’re freaking doomed!

Until next week,

The Mogambo Guru
for The Daily Reckoning
February 25, 2008

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.

Today’s papers are full of inflation talk. In France, La Liberation says food prices have taken off in Europe – up nearly 50% in the last six months. Part of the reason, no doubt, is the high price of energy. We drove out to the country yesterday. Stopping for fuel, we found the price per liter of diesel was 1.30 euros. Let’s see, there are a few less than 4 liters per gallon…4 times 1.30 = 5.20 euros, which converts to, say, about $7.50 for a gallon of diesel fuel. It adds up fast.

Energy prices work their way into everything – notably food, where the land must be tilled, planted and harvested with fuel-consuming tractors…and then, the tomatoes grown in the south of Spain have to be trucked all the way up to Northern Europe…and refrigerated…and sold in energy using stores, whose customers arrive in their energy-consuming cars to buy them.

But from the oil-producing nations comes news that there, too, inflation is hitting hard. In Saudi Arabia, for example, consumer price inflation was about zero for 10 years…but now is over 6% and rising.

"Oil boom shows a dark side," says the headline in the International Herald Tribune. The dark side is that the oil exporters not only sell oil…they use it too. And while the sheiks and sultans may have the money to keep their harems hot, the average Abdul on the street is feeling left out in the cold.

"Now we have to choose: We either eat or stay warm," says Abdul Rahman Abdul Raheem.

Back in the U.S.A, inflation is just what the doctor ordered. The old quacks that run U.S. monetary policy prescribe inflation as an antidote to deflation. Better to let the fever rise, than let the patient die, they say.

The death that scares them is the kind suffered by the Japanese economy after 1989. It was as if they had subjected the Japanese economy to waterboarding and forgotten to pull it up out of the water. The economy drowned. Even now, 18 years after the Nikkei Dow went under, the poor thing is still coughing up suds.

Which puts us in a helpful mood again. Last week, we promised some buy-side suggestions. Here’s another one: buy Japan. Did we already give you that advice? We can’t remember.

Here’s the story in a nutshell: While credit and speculation ran wild in Britain and America – from the mid ’90s to 2007 – the Japanese struggled to raise themselves up off the floor. Each time they tried, they just fell down again. The Nikkei Dow, once at 39,000, bounced around at the 12,000 – 15,000 level. Each time it looked like things might be looking up, wham…back down on the floor.

The latest bruises came in 2007. After getting roughed up for 17 years, finally, it looked like Japan, Inc. was back in business. And then, along came subprime and the worldwide credit crunch. Japan didn’t have any subprime debt. Its bankers, investors consumers and businessmen had grown cautious and conservative over the years. In America, a downturn is believed to be temporary. Almost everyone believes it will be over by July. Some think it is over already – after only a modest pullback in GDP growth. But in Japan, people think a downturn is permanent. "It will never get better," they say to one another. "It will get worse."

"In Japan, the opposite psychology [from the USA] has been in effect," writes Martin Hutchinson. "Japan was in deep recession for 13 years after its bubble burst in 1990, so traders and analysts had grown used to discounting the government’s positive announcements as mere spin. When the subprime mortgage crisis occurred in August 2007, while U.S. analysts ignored the problem, Japanese analysts decided it must be very bad news for Japan, even though no Japanese banks had more than minor exposure to the market."

In America, investors ignore gloomy circumstance. In Japan, they pay attention to gloomy circumstances that don’t even exist. So when the credit crunch hit world equity markets, it fell upon the Japanese like kamikazes on the U.S. fleet. Japan’s great companies were sunk…with the Nikkei Dow suffering more than twice the losses of its American cousin. The Japanese stock market was the worst performing major market in the world – following the subprime crisis, even though Japan has no subprime mortgage debt.

"The market has discounted bad news that has not happened," Hutchinson continues, "and has ignored the continuing evidence of Japan’s fairly strong growth and negligible inflation. Even a housing problem, that has led analysts to forecast a huge drag on Japan’s economy similar to that in the United States, turned out to have resulted from new tighter housing permit regulations, which caused a dip in new construction that is already ending. There is no subprime mortgage problem – how could there be? The Japanese housing market had a catastrophic downturn in the early 1990s, when Tokyo house prices dropped in some cases by as much as 70%, so there was no possibility of a price spike or lending bubble against that background.

"With the market sharply down, the economy continuing solid (fourth quarter GDP growth was 3.7% double the forecast) and analysts negative, Japan appears a safe haven in an uncomfortable world. Certainly it is likely to lead the world upwards at the end of the current unpleasantness."

"My right flank is in retreat. My left flank is giving way. And the center cannot hold. Conditions perfect," reported French general Foch in WWI. "I will attack!"

Likewise, conditions are perfect for us in Japan. The foreign investors have given up. Domestic investors aren’t interested. And stocks are trading at very low prices, with half the companies listed selling for less than book value.

*** Where to put your money now?

In the dispute between the dollar and gold, says our old friend Lord Rees-Mogg in today’s TIMES of London, "there’s no contest."

As a store of value, says his lordship, gold is unbeatable. "Even now its purchasing power in terms of physical assets is not far distant from 300 years ago, before Isaac Newton’s recoinage of 1717."

America has not protected the value of its dollar, says Lord Rees-Mogg. The last American Fed chief who cared about preserving the purchasing power of the dollar was Paul Volcker. He left his post 20 years ago. Since then, the role has been filled by two inflationists – Alan Greenspan and, now, Ben Bernanke. As a result, people try to protect themselves, by buying gold.

"Gold is a defence against inflation. In November the Americas will elect another inflationary president. That will be good for gold, but bad for the dollar."

*** "It’s so pretty here…I guess that’s why people come…"

Elizabeth was looking out the car window as we drove through rural Poitou, a region Southwest of Paris on the road, more or less, to Bordeaux.

"You know, people talk about something being ‘only a matter of aesthetics,’ as if it really doesn’t matter what things look like. But it matters a lot, because it is part of our culture…of what we want…and what we care about. "

We had just reported on our visit to Chinatown in Paris. The gaudy Chinese New Year’s parade, with its dragons and fireworks, must have delighted the Chinese. To us, it was a mystery…a blank…a curiosity. We lacked a point of reference; it was simply strange and exotic. We didn’t know what to make of it at all.

Chinese music, too, means nothing to us. But this was different.

Driving along in rural France things look like they ‘ought’ to look. There are neat houses of stone, with shutters and woodpiles. There are open fields and hedgerows. You see stately oaks…fat cows…and well-tended gardens. There are no strip malls, almost no shopping plazas, few stop lights, and little traffic. It looks the way we think it should look, in other words…the way we want it to look.

"Remember our friend Isabelle, in Paris," Elizabeth went on. "She took a trip across the U.S. She said she was shocked to see such poor people – you know, she drove through some bad sections of town…and down through rural Mississippi. I explained to her that America is extremely varied. And that a lot of people who look very, very poor in America nevertheless will have a car, a TV and even air-conditioning.

"But she was appalled, and I can see why. In France, even poor people live in a way that seems…as the French say, "correct." Their houses are well maintained. They sit down for real meals. Out here in the country, they stack their wood up nicely and have these impeccably well kept vegetable gardens. They may not have any money at all, but they still live in a way that seems okay to us…we can imagine ourselves living that way. There’s nothing shocking about it.

"But America is so big…and so many people in America have such different ideas about how you should live. Their aesthetic vision is so completely different…say from a prim New England town to a New Orleans slum…that there is no one ‘correct’ way to live. I can perfectly well imagine living in the New England town…it’s part of my culture…it’s part of my family history…and it’s part of the way I think things ought to be. But I couldn’t live happily in a New Orleans slum…or in West Virginia with junk cars in the yard and broken out windowpanes. And when you see people living like that…if you’re not used to it, I guess it is a shock. But it’s not a matter of money…or certainly not just a matter of money. It’s more a matter of aesthetics…which is why they really are important."

Until tomorrow,

Bill Bonner
The Daily Reckoning