Reserved Seats for Big Credit Spenders

When I come to my senses, I find that I am in some dingy little bar on the other side of town, stinking drunk; and the bartender has grabbed me by the front of my shirt to haul me unceremoniously halfway across the bar, and is rudely in my face, telling me through gritted teeth that if I want to stay there, I am going to have to "Shut the hell up about the Federal Reserve creating so much money and credit in the banks, as there is nobody in this whole freaking bar who gives a rat’s ass about Total Fed Credit one way or the other."

I look to my left and see a drunken woman named Shirley (I think to myself, "How do you know her name is Shirley?") winking at me and saying, "Give ’em hell, Tiger! Now, let’s all have another drinkie-poo! Hic!"

I look around, and I can see that the bartender was right, as there doesn’t seem to be anybody here who can even say "Total Fed Credit" without slurring the words and probably getting some of their foul breath on me, stinking of cigarettes and (sniff, sniff) onions and garlic with a hint of pepperoni.

But whether they care or not, the fact is that last week the Federal Reserve boosted Total Fed Credit, namely the amount of fresh credit that appears on the books of the banks, by another staggering $245.4 billion! In One Freaking Week (OFW)!

And this whopping increase in TFC is just the beginning of the credit-becomes-money-through-debt cycle, where this original $245.4 billion is multiplied, theoretically, by infinity, as there has not been an increase in Required Reserves in the bank since 1994, and it always hovers around $43 billion, which is still exactly what Required Reserves is today, too! Hahaha!

You can see how this constant, piddly $43 billion in reserves is chump change when compared to how Non-Borrowed Reserves in the banks has surprisingly zoomed to a NEGATIVE $363.1 billion! Hahaha! Hell, Free Reserves, which used to always run about $1.5 billion or so, is now a NEGATIVE $407 billion! Hahahaha! We are so freaking doomed!

And, just as you would expect, the Monetary Base has exploded to $984.717 billion from $911.454 billion last week, and which is up from $827.367 billion just 12 months before! Money is being expanded at unbelievable, unbelievable, Freaking Unbelievable Rates (FUR)!

And most of it is being used by the government, as the Treasury Gross National Debt is now $10.326 trillion, up from $10.245 trillion the week before, and up by a staggering $1.271 trillion from the $9.055 trillion in national debt only 12 months ago! Yikes! We’re freaking doomed!

All of this mountain of money and credit will have disastrous consequences, which I was going to turn into a long, eerie wail, like a hungry banshee keening from beyond the dead as a "performance art" thing that I have been working on in my spare time, but instead we have John Embry of Sprott Asset Management jolting me back to reality, which is the fact that I can’t change anything, and so I am only in this to make a lot of money betting on the stupidity and failure of the Federal Reserve and the Congress abusing their stupid fiat currency and stupid central bank to finance some bizarre regime of perpetual deficit-spending.

To this end he succeeded admirably, and he captured my full attention with his essay’s title "Rescue Will Send Gold To Surreal Price Level", mostly because I am so familiar with things surreal, like my wife coming home early and yelling, "Why in the hell aren’t you at work, and who’s been eating all the Girl Scout Thin Mint cookies like the big, fat pig that he is?" which makes it sound like there are two people involved when there is only one! Weird! See what I mean about my experiencing "surreal" first hand?

I noticed that Mr. Embry was appreciably staggered, although it turns out he was not affected by my surreal experience, but about how "The recent events that have occurred on the U.S. financial scene can only be described as mind-boggling."

Such as, perhaps, noting the extreme differentials between the prices of sold and silver futures versus the prices of gold and silver bullion, and in the case of silver, sometimes there’s a difference of up to 100%! People are reportedly paying up to $20 – and more! – for an ounce of silver when the futures price for silver is less than $10!

Anyway, whatever the reason, Jim Willie of the Hat Trick Letter concludes that we should "Expect defaults in the COMEX with gold & silver, whose prices for paper vastly diverge from physical, to the anger of foreigners watching" because those foreigners "hold massive precious metals assets" which I figure shows just how much smarter they are than we Americans, thus giving me something else to worry about.

He figures that these defaults will constitute a "breath-taking discontinuity event", to which I say, "Whee!" as the result will be a Big, Big, BIG Profit (BBBP) for those who own gold and silver, and this will all happen thanks to the arbitrageurs, who are pouncing all over this huge price disparity by buying in the cheap futures market and simultaneously selling in the expensive bullion market to pocket the difference, and who will make a lot of money, too.

And one of them is Jason Hommel of, who announced that he, too, is starting a new arbitrage business to take advantage of that surprising disparity by buying silver on the Comex at the manipulated low, low price, then taking delivery, having it minted into individual ounces and small bars, and then auctioned off at prices that more approximate supply and demand, making a profit, and everybody is theoretically happy! Perfect! Effortlessly capitalizing on the governments’ regulatory corruption and the rules of Comex that apparently allow it! Hahaha! Go silver!

And it will continue until the price disparity disappears to the point where arbitrageurs can no longer make a profit at it, either because the price of bullion went down or the price of a futures contract in silver went up.

I know which way I am betting, and soon, I am wistfully wasting the day away, marveling at the lovely, lovely profits I will make and all the wonderful, wonderful things I will buy, and all the lovely, wonderful things I will do with all that lovely, lovely, wonderful, wonderful money when silver zooms in price as it must. Sigh.

And then, lost in a reverie of such sweetness, secret sins and delicious depravities, nothing seems all that important anymore. Like finishing this stupid column. Sigh.

Until next time,

The Mogambo Guru
for The Daily Reckoning
October 27, 2008

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.

Another flag on The Daily Reckoning mast!

The First World War: 1914-1918. The First World Depression: 2009-??

"This is going to be even worse that I thought," said our old friend, Doug Casey.

He was referring to what will most likely become the world’s first global depression.

"What happened while we were away?" was the question we had asked.

We just got back from our trip out to the ranch. What do we find? More of the same:

The Dow fell another 312 points on Friday. The index now stands at 8379. This morning, stocks are falling again in Asia.

In Japan, the Nikkei index finished down 6.4% – its worst closing level since October 1982. Shares in Hong Kong didn’t fare any better; with the Hang Seng index falling 12.7%.

And at the open this morning, the Dow is down over 150 points, as confidence in the U.S. government to help quell this global depression is further shaken.

‘Dow 5,000’ is our prediction. Not that we have any inside information. But when we look at a long-term chart of the Dow, we notice that it goes up and down. It tends to go way down after it has been way up – in long, 15-20 year waves. The top of this wave washed over us in January 2000. Since then, the index has been higher…but not when you adjust it for inflation.

It probably would have corrected to the 5,000-range already. But the feds intervened. And now we’ve really got trouble. Because in trying to head off a recession/bear market, the authorities provoked a housing bubble, a financial bubble, and a worldwide credit bubble. Homeowners over-bought. Banks over-lent. Consumers over-stretched. Almost everyone seemed to over-do it. So, what might have been a typical bear market has been transformed into a monster of deleveraging.

The planet’s financial press is beginning to see things our way. "In the first place, the U.S. federal reserve applied a very expansive monetary policy." This is a quote from La Prensa in Buenos Aires. The article goes on to explain that a combination of fiscal and monetary stimulus in the early 2000s produced a huge party in the financial sector, with most of the liquor coming from residential mortgages. Banks all over the world got in the bubbly spirit. Too bad. Now, they’re all reporting in sick and calling the doctor.

The paper does not point it out; so we will: The world’s worst headaches will be felt by America’s baby boomers.

"I don’t know what they’re going to do," said another friend over the weekend. "I know I’m in good shape. I’ve saved a lot of cash. I began reading The Daily Reckoning about two years ago…and actually started following your advice. I sold almost all my stocks. I’m in cash in and gold. I don’t even have a mortgage.

"So I don’t have too to worry about. But I’m worried anyway. I don’t know…maybe it’s just catchy. I’m cutting back as much as I can. For example, I was going to buy a new car. I went in the showroom and picked one out and everything. But I think I’m going to cancel the order. Well, the salesman’s not going to get his commission. And I’m going to start doing my own yard work. It’s silly in a way. Because I don’t have to. But it makes me nervous to spend the money. Which means, there’s some minimum-wage guy who’s wages are about to become even more minimal. And I figure that if I’m thinking that way, there must be millions of other baby boomers in worse shape than I am and they’re probably cutting back as fast as they can. Businesses have got to be cutting back too. And when employers look for fat to cut, they’re bound to find the baby boomers. And then what do these people do? They don’t have savings. And they’re not likely to get another job…not in a major downturn. It could be pretty grim all around."

The latest report says unemployment in Rhode Island has topped 9% – the highest rate in the nation.

"But this has barely begun," continued Doug. "The real cuts only began a few weeks ago. They don’t show up in the figures yet. All this takes time. First, it was only the bankers who were panicking. Then, it was investors. Now, it’s businessmen. And soon, it will be consumers. This kind of crisis runs downhill."

Investors had plenty of reason to panic. This month alone, stocks worldwide lost $10 trillion. The world stock index is down 48% so far for the year.

Businessmen have reason to panic too. They’ll have a hard time raising money in this market. So, they have to cut new projects and old employees.

The next stage will come when consumers go on a rampage of thrift. Credit cards will go in the trash. Malls will be silent. Sales clerks will fall asleep on the job – and then be fired. Higher unemployment. More foreclosures. More bankruptcies.

And when Americans don’t shop, it will be products Made in China that they aren’t shopping for. That’s why the depression will be worldwide – the first ever.

"China, India, Brazil and Russia (the BRICs), the biggest emerging economies, export most of their products either to each other…or to the developed economies [mainly, the USA]," continues La Prensa.

Yes, dear reader…our "Crash Alert" flag is still up-even though the stock market, the housing market, the financial market, and the commodities market have already crashed. But now, there’s another flag up on our mast, a black flag. On it is a white duck laying on its back with its feet up in the air.

It is our way of warning you: "Global Depression Alert" it says at the bottom.

*** Asked about the commodities market, our old friend Rick Rule had this comment:

"There’s going to be a very interesting tug-of-war. On the lower side will be, I think, rapidly declining developed-nations demand. Meaning recession in the United States and Western Europe. And on the other side is going to be, I think, steadier emerging-market demand than many people think. Simply because the developing countries’ balance sheets are better than we are accustomed to.

"I think the very sharp moves down in commodity prices are over. I think that those sharp moves down were not a reflection of fabrication in consumer markets. But rather, [they were] a function of financial players that were involved in the new carry trade involving low U.S. dollar interest rates where people were going long commodity, short the U.S. dollar; a trade that worked for a year and unwound very, very, very aggressively. So I think the sharp down move that we’ve been through is in some part over. I think it’s likely to be replaced in the base metals by a grinding move lower. It probably will not be particularly deep but maybe four to six months longer in duration."

(Look for more comments from Rick in our upcoming report on the crisis and how to survive it…coming soon…promise!)

*** "It’s better not to watch," said a friend over dinner.

We’ve been out of touch with the financial world for a couple days. Up at the ranch in Argentina, we have neither phone, nor TV, nor Internet.

"You’re better off not paying any attention to it anyway," continued our companion. "All markets go to extremes. And then, when they get to their extreme position, everyone tells you that ‘this market won’t go down.’ And they always have a lot of reasons why they won’t go down. As soon as you hear people explaining why this market is different, it’s time to get out.

"But the trouble is, even if you know it’s a lot of nonsense…and even if you know prices WILL go down… all those people with all their stupid ‘reasons’ have an effect on you. You may think it is crazy…but you begin to think that there are so many crazy people out there…maybe it will go on forever. And so you don’t get out when you should. You say to yourself: ‘well, only a fool would buy at these prices…but there are a lot of fools around… I’m going to sell…but not quite yet.’

"That’s why it’s better to cut yourself off. Just look at the facts yourself. And if you think it is crazy, it probably is crazy. And you should get out, now. What was it that J.P. Morgan said? ‘I’ve made a fortune by selling too soon.’

Dear readers are warned:

First, we don’t know any better than anyone else how this bear market will play itself out.

Second, it is quite likely that there will be a biggish rally that will convince people that the whole thing will blow over. We hope there is a biggish rally; we intend to use it to sell out of stocks completely (a confession: we’re better at giving advice than taking it – even our own advice.)

And third, Warren Buffett is no fool; if he says you should buy stocks, you should at least listen.

Listen politely…but get out of the stock market anyway.

Colleague Dan Amoss has found a way to make ridiculous gains in this market…he’s 11 of 14 on his closed plays for an average of 94% per trade – including the losing three trades. And this is all without putting a single dime into stocks. Sounds like the way to go in the current market climate. Check out his full report here – but act fast. After tomorrow, Tuesday, October 28 at 11 AM, his service will double in price…

*** We come to Argentina partly to check on our cabbages…and partly to get a look at the future. Bankruptcy. Default. Hyper-inflation. As our dear reader commented earlier in the week, the average Argentine cab driver knows more about financial crises than the heads of the U.S. Federal Reserve and Treasury Department combined.

What have we learned? More tomorrow…

Until then,

Bill Bonner
The Daily Reckoning