Silver Saves Investors Big and Small

Ah, supply and demand…it makes the world of economics go ’round. This week, the Mighty Mogambo opines about one commodity that can save your portfolio – and how it’s relatively inexpensive. Now if there were only enough supply to meet Demanding Mogambo Demand (DMD)…

In case you want a handy way to keep tabs on how bad things get, Anthony Cherniawski of the Practical Investor reports that recently "reintroduced the concept of the ‘Misery Index’", which is an interesting metric produced by combining the rate of inflation plus the rate of unemployment, which "was last heard of in the 1980’s" when both of the rates were soaring and people were miserable.

He notes that using "official" numbers of 3.9 % inflation with 5% unemployment produces "a current Misery Index of only 8.9", which he says is "not far from the Misery Index’s low of 6.1 seen in 1998."

Naturally, because I rudely say that anybody even partially believing the government’s "official" rate of inflation or "official" rate of unemployment has got to be a raving lunatic or be otherwise intellectually impaired enough to, for example, read crap like the Mogambo Guru newsletter, I start rising to my feet to give Mr. Cherniawski the benefit of a little, you know, Mogambo Educational Update (MEU) about the veracity of government-derived statistics.

But before I could start out with my famous MEU preamble ("Do you have any freaking idea how stupid you are to believe anything a government tells you? Huh? Do ya, punk?"), he says that he is waaAAaay ahead of me on that score, and says, "using the estimates on CPI and unemployment from economists skeptical of the government numbers, the Misery Index is actually in the teens. Some worry it could even approach the post-World War II record of 20.6", which was last seen in 1980.

So, the Misery Index record is 20.6? Hmmm! So I take a look and see that prices in general are running at an inflation rate of about 12%, and inflation in consumer prices for food and energy are higher than 20%!

And everything is going to see higher and higher prices, since the money supply can be shown to be growing at up to the unbelievable annual rate of 28%, thanks to a loathsome, corrupt Federal Reserve and an equally despicable Congress (except Ron Paul).

And real unemployment, stripped of its corrupt government "massaging" of the data and the laughable tricks of assigning different people to different categories of "unemployed" and even defining away whole swaths of people who are, literally, unemployed, is about 10%, too!

Adding 12% inflation with 10% unemployment gives us a Misery Index of 22, a new world- record! No wonder people are so angry!

And no wonder, too, that people are scrambling to get into gold and silver, and indeed the Wall Street Journal reports that people are accumulating all the silver eagles that the Mint can make. The WSJ reports, "The coins, each containing about an ounce of silver, have become so popular among investors seeking alternatives to stocks and real estate that the U.S. Mint can’t make them fast enough. In March the mint stopped taking orders for the bullion coins. Late last month it began limiting how many coins its 13 authorized buyers worldwide are allowed to purchase."

So how many ounces of silver are people wanting to buy? Well, it must be a lot, because a dealer name Oliari has "customers demanding twice as many as they did last year", and he would "like to buy 500,000 a week. But the mint will sell him only around 100,000."

Actually, the doubling of people buying silver, as demonstrated by Mr. Oliari’s clients, is about average, as "This year, the mint has sold 6.8 million" silver eagles, "representing more than twice last year’s pace", although Much, Much More Interesting (MMMI) is the datum point that "In March, sales of silver eagles surged more than ninefold from the previous month, to 1.85 million." Ninefold! In one month! Wow!

You know that if we idiot Americans are buying silver, then surely foreigners are scooping them up, too. And sure enough, "The Royal Canadian Mint saw its sales of silver Canadian maple-leaf bullion coins rise 40% last year, to 3.5 million, according to a spokesman."

All in all, as I gather from the facts, I agree with the Wall Street Journal; silver is "growing in popularity, and some investors are betting that its value will surge as inventory shrinks."

Well, I never thought of it that way, but, yes, if inventory is shrinking because demand is increasing, but supply is (as I seem to recall) actually decreasing (which is how inventory shrinks), then I, The Mogambo, am one of those "investors" who is "betting that its value will surge as inventory shrinks"! But only because that is the way that the supply-versus-demand dynamic works, has always worked, and will always work, with silver as it is with everything else! Whee! This economics stuff is easy!

And to show you that it is not just us little guys buying silver, coming out from our cramped cubbyholes under the overpass to collect empty aluminum cans to sell to the scrap yard to get some money to buy silver, and then scuttling back under the bridge, but "Big investors are loading up on silver eagles," too, which they immediately follow with, "which are the only American silver coins allowed in individual retirement plans".

I think that this is an odd juxtaposition of items, as I never heard it even mentioned that "big investors" were doing their "big investing" inside of retirement plans, but it sounds like an interesting idea if you never want to take money out of the individual retirement plan to spend it on, for example, a wonderful holiday weekend away from the wife and kids, maybe playing some golf, eating stuff like tasty chunks of meat fried in lard and scratching my butt whenever I want without somebody saying, "Stop eating that damned fried meat!" and "Stop scratching your damned nasty butt!" and "Stop scratching your damned nasty butt with fried meat!"

Well, the Journal was apparently not that interested in either my diet or my butt, scratched or un-scratched, but says, "For small investors, (silver eagles) are an accessible way to get into the metal boom", which implies that we "small investors" don’t have enough money to buy gold, but even dumb, brain-damaged slobs like us "small investors" can somehow manage to scrape together $20 and then wander, slug-like and drooling, I suppose, over to some coin shop to buy an ounce of silver or something, even though we are too stupid to understand why we are doing it.

And why is everybody, big and small investors alike, suddenly buying all of this silver? Could it be because silver, like gold, has always (for the last 4,000 years in a row, anyway) gone up in price when the value of the money went down? Hahaha! You bet it is! I mean, how stupid do you have to be, not to want to buy silver when, for the last 4,000 years in a row, silver has held its value as currencies depreciated?

And the value of the money going down is felt by the impoverished people as a rise in prices, which brings us to the salient point that a new University of Michigan survey came out with the horrifying news that consumers expect inflation in prices to run at 5.2% over the next year, which is reportedly the highest 1-year expected inflation rate since 1982 or something!

It will be very interesting to see what Ben Bernanke, chairman of the Federal Reserve, does now, because he has always maintained (as laughably unbelievable as it sounds) that it is not actual inflation that is important to Fed policy, but inflation EXPECTATIONS! Hahaha! What a moron! And now we have both!

Until next time,

The Mogambo Guru
for The Daily Reckoning
June 16, 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.

What happened last week? Anything interesting?

We spent the weekend painting windows and doors, fixing the roof. Less is more, we realized…in houses as in dessert. As a place to live, our house in France is a disaster. As an investment it is a catastrophe…

But we’ll have to wait until tomorrow to tell you about that…

Back to the latest financial news… The Saudis announced that they would consider increasing the amount of oil they pump. They said they could increase production by 200,000 barrels per day.

Watch out, dear reader…markets still work. The cure for high prices is high prices. High prices encourage producers to increase output…and consumers to reduce consumption. Sooner or later, the medicine does the trick – and prices fall. Oil closed Friday still near an all-time high, at $134 a barrel. While there may be more upside, the danger is on the downside.

Analysts are still wondering why the price of oil is so high. "Supply and demand," say the oil bulls. "Speculation," say the oil bears. "Oil company profiteering," say the politicians.

The good…the bad…and the ugly – you can get any opinion you want.

And in Byron King’s opinion, the Saudi’s aren’t quite telling the truth:

"In 2004, Saudi officials claimed they boosted production to 9.5 million barrels per day and maintained that level for five months," says our intrepid correspondent.

"It’s almost sure they were lying. The International Energy Agency is the group that keeps an eye on these things for the developed, oil-importing countries. The IEA could find no sign the Saudis were selling more oil.

"As far as anyone can tell, they pump only around 5 million barrels a day, and that’s all they’ve pumped for years."

And that’s just the tip of the iceberg.

You’ll get the full story in a free special investment report called Crude Awakening: How to Survive the Total Global Energy Crunch. It’s just one of four free special reports with Byron’s 10 best recommendations.

But there are only two real reasons the price of oil has gone up. The first is that more people are using the stuff. And the new users are not the same as the old users. The old users – in the U.S.A. and Europe – are much more sensitive to price pressure than the new users. Incomes in America have been more or less stagnant for 30 years. When the price of gasoline goes up, people have to take money out of other household budgets in order to make it up – or, drive less. Currently, they’re doing both.

But the new users live in places such as India, Russia, China, and Brazil. They can afford to use more energy, even with rising prices, because their own incomes are doubling every 7 to 10 years.

And it’s not just energy prices they are pushing up. Emerging markets consumed 36% of the world’s copper in 1998. Now, they take up 59%. And zinc, too; emerging markets use 63% of the world’s output compared to 43% ten years ago. You can go down the list of commodities; the story is the same. The developed world has enough refrigerators and automobiles already. People just replace what they have. But in emerging markets…the scope for selling more appliances, houses, automobiles and the rest of the paraphernalia of modern life is wide open. In these countries, as soon as people get some money, they go out and buy a washing machine. And good for them. But it means that the market for the basic ingredients of the machine age is no longer controlled by Western consumers. And it means – for the first time ever – that even if Western economies go on the fritz, prices paid by Western households may still go up.

This is bad news for the average American household; it has so much debt it can’t afford an increase in energy prices. And it’s bad news for the industry that loaded the average American household up with debt. Since 2006, U.S. house prices are down 16%. That, of course, has thrown a lot of mortgaged-backed credits onto the trash heap. Banks and other financial institutions have already written off $350 billion of mortgage-backed loans. Another $300 billion or so in write-offs seems likely. But the whole U.S. banking system only has about $1.3 trillion in equity; so these amounts represent a considerable share of the banks’ total capital…and a big blow to the whole industry.

Naturally, banks and brokers have been rushing to bring in more money. And they’re scheduled to announce big dividend cuts this week, to preserve their cash. You’ll recall, dear reader, that when the finance sector went down last fall, many investors thought they saw an opportunity to get in on flagship firms such as MBIA and Citigroup at bargain levels.

Alas, it didn’t work out. As we keep saying, when a bubble explodes…there is no way to get air back in. You can pump, but the air goes into a new sector.

Which brings us to the second reason commodity prices have gone up: because the dollar and other paper currencies have gone down. Just look at the price of oil in terms of gold: Ten years ago, an ounce of gold bought as many as 26 barrels of oil. Today, it takes 13 times as many dollars to buy a barrel of oil as it did in 1998, but only about twice as much gold. Now, an ounce of gold buys 7 barrels of oil. By this measure, oil is either too expensive or gold is too cheap. Whether you measure it in dollars or in gold, oil is high. It’s gone up 1300% in dollars, and 350% in terms of gold. But at least if you had traded your dollars for gold at $260 an ounce ten years ago, gasoline wouldn’t seem so expensive.

So let’s get back to the investors who decided that the bottom was in for the financial industry.

"Investors who backed U.S. financial companies’ drive to raise much-needed capital are sitting on nearly $10 billion in paper losses," says today’s Financial Times. Since last October, the finance business has raised some $64 billion of additional capital. That investment has dropped in value by $9.7 billion, reports the FT, giving investors a 15% loss.

Ambac, for example, raised $1.2 billion; investors who put in that money have lost 70% of their money since March. A similar amount invested in MBIA resulted in a 60% loss. Citigroup investments, meanwhile, are down 2$%.

*** Hey, here’s a chance to get into hedge funds, even if you don’t have a fortune. Goldman is launching a hedge fund for the masses, designed to track the results of absolute return hedge fund strategies. It’s called the GS-Art Fund. What exactly do you get if you invest? Beats us, dear reader. It’s a mixture of one part quantitative strategies, one part sophisticated swaps, futures and structured products, and one part hocus pocus. Good luck.

*** What difference would it make?

Between John McCain and Barack Obama? On matters of finance – not much.

The candidates are evenly matched, in our opinion – by equal weights of humbug. McCain says he cut $3.7 trillion in taxes over the next 10 years. Obama says he’ll cut $2.7 trillion. That’s 10% out of government revenue for McCain; 7% for Obama. Neither man talks about cutting spending.

Each man adds his nuances. McCain is generally more favorable to the rich than the Democrat. They have different ideas about how to fix the health care system. But the most remarkable thing is that neither candidate has shown any interest in the fact that the government is going broke.

Psst… Want to see a bubble chart? Look at the rate of growth in federal debt and financial obligations. It is now going straight up at a rate of $1.58 billion per day. The ‘financial gap,’ meanwhile has reached $57 trillion. In other words, if you took all Bill Gates’ and Warren Buffett’s money, combined, it would only keep up with the growth in federal debt for about 54 days. As for covering the financing gap, it would only fill 0.0014% of it.

All bubbles burst. The only questions are when and how. We don’t know the answer to either question; all we have is an intuition…that when the bubble in U.S. public finances finally blows up…so will the global dollar-based money system.

*** And so we come back to a popular theme: democracy is not what it is made out to be. The conceit of democrats is that popular democracy adapts…that the voters will always ‘throw the rascals’ out and correct whatever mess they’ve made. But what really happens is that a new group of rascals takes their place. Instead of adapting, the system becomes rigid. Over time, people build up advantages, privileges, positions that they don’t want to give up. These sinecures and subsidies gradually become so expensive that the whole society creaks like an 80-year-old. Then, the whole group shuffles toward catastrophe.

More tomorrow…

Bill Bonner
The Daily Reckoning

The Daily Reckoning