Putrid Economics at a Terrible Price

The Daily Reckoning PRESENTS: Need to lose weight? Try the new line of Mogambo Yummy Diet Food (MYDF). You won’t lose any weight, but you can feel confident that your purchase will prove, beyond a doubt, that you are just as stupid as the Fed’s stance on inflation, and that you have helped the Mogambo get rich beyond his wildest dreams. Read on…


Junior Mogambo Ranger (JMR) Roxane P. sent “Remarks before the Equipment Leasing and Finance Association Financial Institutions Conference” made by Richard W. Fisher, who is the President and CEO of the Federal Reserve Bank of Dallas. “Bad fiscal policy,” he said, “creates pressure for bad monetary policy. When fiscal policy gets out of whack, monetary authorities face pressure to monetize the debt, a cardinal sin in my mind.” Exactly!

Deep inside my chest I can feel a laugh rising up at the irony of this Fisher guy. As directly responsible as he is for the massive creation of excess money and credit to fund massive government deficits that are bedeviling us now, he is also saying that what he did is a “cardinal sin.” Hahaha! Burn in hell for your sins, Fisher! Hahaha!

Oops! That might not be a laugh that is rising in my chest; it might be my stomach rebelling against that old taco that I found in a drawer in my desk. Normally, I would not eat an old taco that I just, you know, found – particularly one that smelled as bad as that! I’ve fallen for that trick far too many times – but I ate it thinking I was fortunate to have found it, since I had forgotten to bring my lunch.

But conditioned to use Fed-approved hedonic adjustments (as invented wholesale by the infamous Boskin Commission and made even more infamous by the Greenspan Fed actually adopting the stupid things), it was but child’s play to come up with an equation to “prove” that the disutility of having a putrid, pungent taste was easily outweighed by the overwhelming utility of great price (free!); and thus, on balance, everything was just peachy! The old taco is thus proved to be an economic good!

And speaking of my gastrointestinal problems (“blurrrp!”), they don’t get any better from reading a Bloomberg.com report that “Federal Reserve Governor Frederic Mishkin said the central bank’s current stance on interest rates is likely to slow price gains outside of food and fuel, though reducing inflation ‘may take time.'” Hahaha!

He is actually admitting that food and fuel are showing big price gains. Why then, should continuing with “the central bank’s current stance on interest rates” (which is, as far as I can tell, to loan money to anybody, for anything, at interest rates that are less than the rate of inflation, which produces inflation) be likely to “slow” the rate at which prices are rising? Hahaha!

Why doesn’t he stop prices from rising at all, which is what he and his damned Federal Reserve are supposed to do, for crying out loud? That’s their damned job! To hell with them all!

Well, as usual, I am too hasty in my blanket condemnation of the Federal Reserve in general (and of Mr. Mishkin in particular) and now I credit this amazing quote from Mr. Mishkin with inspiring me to create the new line of soon-to-be-famous dietary products – Mogambo Yummy Diet Food (MYDF)!

My business model is simplicity itself: I merely go to local fast-food restaurants and pick up lots and lots of leftover greasy burgers, pizzas, and whole buckets of fried chicken. I then freeze-dry the stuff, and sell the over-priced garbage to anybody stupid enough to fall for such an obvious scam.

Unfortunately, each individual delicious MYDF entree (e.g. three Double-Bacon Cheeseburgers or two Pizza Supremes) has more than 9,000 calories in it. So it takes the utter, contemptible shamelessness of an Alberto Gonzalez or a Mogambo to pawn this crap off as “diet food”, which I have always been embarrassed to do.

But now things are wonderfully different! Now I can proudly show my face in polite company by pointing to Mr. Mishkin’s groundbreaking analysis!

As Mr. Mishkin says, “Achieving further reductions in inflation may take time”, likewise I say, “Achieving further reductions in weight may take time.”

And where he was too embarrassed to continue, I proudly went on, “And just like the Federal Reserve says that they will reduce price inflation caused by the excessive creation of money and credit by simply creating more money and credit, the more delicious Mogambo Yummy Diet Food products you consume, the more weight you will lose!”

How’s that saying go? “Scratch a liar and find a thief”? Yep! That’s it exactly! I’m lying to you, and stealing your health and your money! The Federal Reserve is lying to us and stealing the purchasing power of our money!

And a perfect example of this can be found in the terrific essay “What Record High?” by Peter Schiff of Euro Pacific Capital. He writes, “As the Dow burst through the 13,000 milestone, few understood the hollowness of the achievement. Measured against the rising dollar-denominated prices of just about everything else on the planet, the Dow has actually lost value over the past seven years.”

And how does he know this? He merely says, “Measured against the truest benchmark, the price of gold, the record high for the Dow was set back in January of 2000 when its price equaled approximately 43 ounces of gold. Today it is only worth about 19 ounces.”

I clear my throat to indicate that we were talking about how inflation is robbing us of purchasing power – not the stock market or gold. Startled at my rude interruption, he nevertheless shows me what a chump I am by immediately going on to say, “To better appreciate just how much of stock gains can be attributed to inflation, consider that the record high for the Dow in 1929 of approximately 380 also equated to 19 ounces of gold. So despite all of the hoopla and a thirty-fold increase in stock prices, the Dow has actually gained no real value during the past eighty years.” Wow! Go gold!

Until next week,

The Mogambo Guru
for The Daily Reckoning
May 7, 2007

**** Mogambo sez: This recent pullback in the prices of gold, silver and oil is one of those rare times in history where opportunity is not actually knock, knock, knocking on your front door, but is actually sitting on your chest, pinning you down, slapping the hell out of your face while screaming, “Buy, you idiot! Buy! What in the hell is the matter with you that you don’t buy?”

And as painful as that is, it is not nearly as painful as not buying, and then watching the prices go up and up and up, while you end up spending hours and hours kicking yourself about “how much money you lost” by not buying when you knew you should have.

Been there. Done that. Don’t do it again.

Editor’s Note: Don’t forget – you can hear the Mogambo (along with all of your favorite DR editor’s) speak at this year’s Agora Financial Investment Symposium in Vancouver, British Columbia. This year’s theme is “Rim of Fire: Crisis & Opportunity in the New Asian Era” – and it’s your first look at investment opportunities, global market concerns, and the best investment bets across the globe.

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.

Horns began honking about 8 PM last night.

“Sarkozy must have won the elections,” Elizabeth deduced.

Americans, meanwhile, are nowhere near elections, yet there too the politicians are hogging time on the big screen. People can’t seem to take their eyes off of it – except to tune in to the Dow, of course, which hit yet another high on Friday.

What is going on? What is so much nice money doing in a place like this?

Here at the Daily Reckoning headquarters, we continue to give out dire warnings. And yes, our Crash Alert flag still flutters.

Not since the late ’20s have we seen such a long stretch of highs, without a major correction. Does this tell us that we are in a New Era…when stocks can only go up? Nobody is quite talking about a ‘New Era’, but probably only because they don’t want to put a hex on it. Most people think we’ve reached some new omega point in the world’s economic development. That’s what the stock market is telling us, they believe.

Here, we set up the argument for a New Era…just so we will have the delicious pleasure of knocking it down later:

1) New technology – especially the Internet – is increasing output and efficiency.

2) Globalization permits a huge new expansion of the world economy.

3) Billions of people who were formerly shut out of the modern economy – by communism, by distance, or by culture – are now taking part.

4) The triumph of capitalism helps to focus governments on intelligent wealth-producing policies.

All those things are superficially correct…but they are hardly unique. The same things could have been said at the top of almost any major bull market in history. In ’29, for example, who could have doubted that the world was on a roll? Automobiles, trucks, railroads, telephones, electrical appliances…the resurgence of the German economy…the spectacular advances of the Japanese…modern planning and administration…not to mention the vast expansion of the capital markets!

We don’t have to tell you that that ‘New Era’ ended badly. But what about the peak in the mid-’60s? There, the ‘New Era’ arguments were less compelling…but they still abounded. People had become fascinated by computers and drugs. Remember the man in the gray flannel suit, with the narrow tie? American go-go corporate management was said to be conquering the world. General Motors (NYSE:GM) was still thought to be unstoppable. It was just a matter of time before the entire planet would be owned by U.S. corporations – except all the parts run by communists, of course.

Stocks hit a peak in ’66…and then a double peak in ’68. And from there, they went down – catastrophically down when adjusted for inflation – for the next 14 years.

And then, as recently as eight years ago, came another New Era. So loony were the hopes for the dotcoms and telecoms that the experience left some investors permanently skeptical of all ‘New Era’ claims.

But what was really behind all three of these New Era booms?

Money! Moola! Credit! Cash! Each New Era coincides with a massive expansion of liquidity. The cash and credit drive up prices. Investors look around and wonder why. And then they begin to invent post hoc explanations. One explanation is as good as another…until the credit expansion ends. By then, nobody cares; they are too busy running for cover.

What is remarkable about the present expansion is that it is so big…and so durable. First, stock markets went up in the ’90s…then housing in the 2000-2007 period…and now, as near as we can tell, stocks are enjoying another big gust of wind at their backs. Mergers, acquisitions, buyouts…hedge funds, pensions funds, private equity funds, private investors…deals…deals…deals on wheels! We’ve never seen anything like it.

But behind it all is the same phenomenon – an enormous expansion of money and credit. Liquidity is like a bead of mercury; it’s hard to put your finger on it. Still, when the Bank of England tried to measure the growth in global liquidity, recently, it found that liquidity had doubled in the last four years. Now, everyone’s a player…and all the players are leveraged far more than they were a few years ago.

“There’s capital everywhere,” says Henry Kravis of Kohlberg, Kravis, Roberts.

“There’s too much liquidity in the system,” says a rival at 3i Group (LON:III).

“The world isn’t pricing risk appropriately. Investors are simply not being paid for the risks they’re taking,” adds Steve Rattner of the Quadrangle Group.

Money is competing with money. Assets are bid up to prices that are no longer attractive. In order to get a decent return, fund managers have to venture into rougher neighborhoods. Many will be lucky to make it out alive.

More news:


Addison Wiggin, with a bit of news from our peak oil expert, Byron King…

“Reporting from the Offshore Technology Conference in Houston, Byron tells us that countries with nationalized oil programs like Canada, Norway and Brazil have made technological and financial leaps that bring them toe-to-toe with the world’s Big Oil giants.”

For more on this story, check out this issue of The 5 Min. Forecast


And more views:

*** The price of gold continues to climb towards $700. And the dollar, at a 10-year low, seems to be giving up ground against other currencies.

Is gold too high or too low? How about the dollar?

In the stock market, it is fairly easy to say whether prices are high or low. You just look at the expected return. Dividend yields are less than 2%. Which means, you are paying $50 for every $1 of annual dividend income – not very good; you can get more than twice as much by putting your cash into a money market fund.

Or, if you look at it in terms of earnings, you find the typical Dow company priced at about 18 times earnings. You pay $18 for $1 of company earnings, in other words – still not very good. At low points, you can get a dollar’s worth of earnings for only $5 to $10, which is another way of saying that the $1 of earnings you buy now for $18, is a risky proposition. Because, if the stock market were to go back down – as historically, it always has – you would lose as much as $13 by the time it reached bottom. And then, if the patterns of the past repeat themselves, you could wait another 20 to 30 years before prices returned to these levels.

So, stocks are simply expensive…and not, on the average, worth the risk.

But what about gold and the dollar? A few years ago, a barrel of oil was worth $15…and an ounce of gold $300. A single ounce of gold would buy 20 barrels of oil. Now, you can only buy about 12 barrels of oil with an ounce of gold.

Is oil too expensive…or gold too cheap? Or were they merely mis-priced seven years ago?

We don’t know, but when people are fearful they buy gold for safety. When they are confident they buy investments for profit. Now, by all the evidence, they are flush with cash and confidence. When that bullish sentiment swings the other way, gold should go up.

And now, for the first time, you can take advantage of the rising price of oil and the falling dollar with EverBank’s brand-new World Energy CD. This FDIC-insured deposit account allows you to automatically hedge any U.S. dollars you put in, simply by spreading them evenly between four politically stable, energy-centric currencies whose purchasing power against the greenback is soaring right now.

EverBank has opted to give DR readers first dibs on their World EnergySM Index CD, before they open it up to the rest of the market. If you’re interested in finding out more, the only way to get info is to either email them at worldmarkets@everbank.com or call 800-926-4922. Just be sure to mention you read about it here in the Daily Reckoning when you write or call.

*** We live in a very conservative part of town. There would have been no celebration last night had Ségolène Royal won.

“My friend Pierre said his father was going to leave France if Ségolène won,” Edward reported.

We do not have a television; but the couple across the street has such a big screen that if we wanted to watch TV, all we would have to do is look out the window.

“Yes, Sarkozy must have won,” Henry reported. “He’s on the TV…and there are scenes of people celebrating and waving Sarkozy banners.”

Elizabeth has been following the elections closely. Each time we voiced our opinion, that it was unwise and unhealthy to interest oneself in politics, we found our self in an argument:

“Look, we live in a world governed by politics and politicians,” Elizabeth replied. “If you put your head in the sand, it doesn’t make them go away. They’re still there. And you’re better off knowing what they’re up to…and, yes, you’re better off participating in the political process. Because others will, even if you don’t. And you’ll end up with a government you don’t like. Besides, it’s interesting.”

This morning, Elizabeth was so busy catching up on the election coverage that our eggs were overcooked.

“There, you see. There you have the whole story in an eggshell,” we explained. “You are so caught up by things you can’t possibly control or even influence that you have forgotten the eggs. ‘Love afar is spite at home,’ as Emerson put it. We aren’t French. We can’t vote here. Nothing you can say or do has any effect on French politics.

“Besides, we vote in the only honest way – with our feet and our money. When we don’t like it here, we’ll go somewhere else…and spend our money somewhere else. We don’t have to try to tell the frogs how they should run their country. Instead, we should be concentrating on running ourselves…which means watching to make sure the soft-boiled eggs don’t get too hard. Always and everywhere when you become overly interested in politics, the quality of life declines. And we have had an example of it this morning.”

“Then, watch your own eggs,” came the reply.