The Best Kind of Wealth

Is the great worldwide bubble still expanding?

We checked our usual sources this morning.

And yes…after a few days of uncertainty last week when the Dow fell 400 points…the leak was quickly repaired and the bubble continued to expand. On Friday, just before the end of the session, the Dow pumped up 157.66 points or 1.19% to 13,424.39. Gold fell to $650. The dollar rose.

It is now the 6th month of the 25th year of this historic expansion…and all is well.

Meanwhile, we got word, via Bloomberg, that there are still plenty of people eager to get into the party before someone calls the cops. Sales of CDOs (collateralized debt obligations) hit a record in the first quarter of this year – at $251 billion for the three months they’re running at more than $1 trillion per annum.

Bloomberg reports, “sales of CDOs pooling asset-backed securities increased 21 percent from the previous quarter. The derivatives are typically backed mainly by subprime mortgage bonds, or securities created from loans to homeowners with poor or limited credit histories.”

And yesterday, an old friend brought up another old friend,

“You remember Catherine?” he asked. “You know, she collects photographs. I mean, photographs from well-known people. Well, guess what? The market for photographs has gone crazy. Actually, all the collectibles have gone crazy. There’s just so much money around, it’s stirring everything up. She had a few photos that she’d paid $4,000 for, a few years ago. They’re going on the auction block at Christie’s this week. Guess what the guide price is? A half a million. It’s really unbelievable.”

See how easy it is to get rich, dear reader? Just buy something. Then, you wait a respectable interval, and then you sell it to someone. It’s so easy an idiot could to it. In fact, many of the people who are doing it are idiots. They’re dumb enough to believe that asset prices always go up. And they’re getting rich because they don’t know any better. Oh, to be an idiot.

But what kind of wealth is that you get without working or saving? ‘The best kind,’ say most people. But to us, it seems more like a case of false pretenses. It’s like a man who marries a rich widow…and then discovers that she’s as penniless as he is. Maybe it will work out; but, maybe it won’t.

Here at The Daily Reckoning headquarters, we confess that we’re too rich to steal…too dumb to lie…and too humble to profit from a credit bubble. To get rich in today’s wacky markets, you have to believe wacky things. We don’t mind believing wacky things, but the problem is the wacky things you need to believe today, scratch uncomfortably against our sense of humility.

Today, you have to believe not only that over-priced financial assets are going up, but that you alone know which ones will go up most. And you also have to believe that you know better than Mr. Market. Because, when you buy at the market price, you’re wagering that Mr. Market has made a mistake and missed something. And then, you have to believe that when he gets around to noticing what he’s missed, the asset you just bought will have gone up in price.

The staggering arrogance of it is too much for us. We don’t buy things because we think Mr. Market has bungled. We only buy things we think are of real value. But right now, where can you find a real value? In the stock market? In the property market?

Chris Mayer says the real value lies in unnoticed stocks of companies that sweat assets and cash… and are stuffed with hidden wealth.

How about Paraguay? Maybe. That’s where the Bush clan has bought a ranch. We think perhaps they were looking ahead to the time when they’d have to flee an angry American mob. They’ve probably made a deal with the Paraguayan government, letting them skulk down there after people get wise to what they are up to here. Or, maybe they were just looking at values. According to International Living’s reports [at] – there is no place where you can get more for your money than in Paraguay.

Who wants to live in Paraguay, you ask? We don’t know, but we’ll check it out. You see, we just learned that we’re being exiled from France, so we too will soon need a place to hide out. (More below.) We’ll give you a report when we get down there.

But let us return to the world’s first Worldwide Bubble. We notice one other thing – in addition to gold – that did not bounce up on Friday. That was the 10-year U.S. Treasury note. It’s going down. Which means, the price of credit is going up – despite the glorious gush of cash and credit from central banks, CDO investors and others. Now, if the cost of debt goes up enough, of course, the credit bubble will blow up.

According to classical economic theory, an expanding credit bubble takes more and more credit to expand and keep output increasing. That is what we have seen for the last few years – higher debt/GDP. Economists now warn that the housing slump may have a longer-lasting effect on GDP growth than previously thought and (according to the most recent reading), actual GDP growth has fallen below the rate of population growth. As a credit bubble goes on, it becomes less effective at producing wealth…and more effective at producing what was most lacking in the first place – humility.

That means that if this book keeps at this rate, Americans will eventually be sneaking across the Rio Grande, to look for work.

Maybe the Mexicans will build that wall before us.

Bill Bonner
Paris, France
Monday, June 11, 2007

More news:


Addison Wiggin, reporting from Baltimore…

“On the eve of the subprime bust in 2005, 52% of subprime mortgages were originated by companies and organizations with zero federal supervision. And rightly so, perhaps. A free market in credit should operate without federal supervision. It could also do without the pretense that the Fed could and/or should do anything about lax lending standards…or the shell game set up by Congress with Fannie Mae, Sallie Mae and Freddie Mac.”

For the rest of this story, see today’s supersized issue of The 5 Min. Forecast


And more views…

*** Now, here’s what William Bendix, in The Life of Riley, used to call a ‘revolting development.’

“You have to get out of France and stay out,” pronounced our tax lawyer, gravely over the weekend.

Naturally, we protested.

“But I just came for the weekend, to visit the family.”

“Doesn’t matter. If you keep coming back into the country, the French tax authorities are going to say you are a resident.”

“But I thought there was a tax treaty with the United States, anyway, so I don’t actually have to pay more money.”

“Yes, there is a tax treaty, but it’s more complicated than that. The treaty only applies, in this case, to your income from working. You have a slightly different situation.”

“How so?”

“You have a company here and when you reorganized it, you shifted assets from one company to another, and from your personal name into the company name.”

“But it was just a paper transaction. No money changed hands; I didn’t make a dime!”

“Doesn’t matter; the French are going to impute a value to it, and if you’re a French resident, you’re going to pay a huge tax on a capital gain you never got. Plus, you’re going to have to pay the ‘wealth tax’ too.”

“Can’t I offset it by the money I lost on that conference center project?”

“No. Because the place is not yet open for business.”

“But it’s not open for business because of the authorities. We can’t get the permits we need.”

“Doesn’t matter; you can’t take a business loss on a place until it’s approved as a ‘business.’ You’re stuck. We’ve done some calculations. Unless you leave France immediately, between US taxes, English taxes, and French taxes you’re going to pay more than 100% of your income in taxes this year.”

“Okay. Call me a cab.”

“Okay. You’re a cab.”

“No. I meant, call a cab to take me to the train station.”

*** Our friend Ron Paul is putting up a good fight. Will, our oldest son, argues that we should get behind him now.

“While his chances of winning are low… I think it might be worth it, just for him to make a good showing… And his Internet buzz is impressive, check out my recent posts about his campaign:

“He gets more Internet traffic than any other candidate… and amusingly wins almost every online poll about the GOP debates at CNN:

*** Does Ron Paul have a chance, we asked a savvy American friend from Washington?

“No…of course not. If he starts becoming a threat to the establishment candidates, the media will tear him apart. Ron is a guy who thinks about things. He cares about the country and where it’s going. And he really believes in the constitution. You can’t get elected in America with those kinds of ideas. When they ask him a question, he gives an honest answer. That’s no way to get elected. The press won’t stand for it. And the voters, once they realize that Ron is sincere, will turn against him, too.

“Well, could he get close enough to the Republican nomination that he prods the party into taking a more traditional, conservative position?” we asked.

“Maybe. Not likely…but maybe. The Republican Party has gone downhill badly since the days of Ronald Reagan. At least the Gipper had a vision of America. You know what John Locke wrote, ‘In the beginning, all the world was America’? He meant that America was meant to be free and open. Reagan, at least in the beginning, did believe that – ‘a city on a hill…a bright shining beacon of liberty.’

“But now, the Republicans seem to be trying to outdo one another in stupidity. They want to keep foreigners out – especially if they’re poor. They want national ID cards…and Gestapo checkpoints…and a wall to keep people out. The way things are going, it won’t be long before that wall is used to keep people in.”

“I’ve been in Washington for more than 40 years, so I’m a little cynical. I sure hope Ron Paul can make a strong enough showing to bring the Republicans back to their senses, and I’m going to give him money, because he’s an old friend and I want him to succeed. But I don’t know if I would count on it.”

*** We got in touch with our ‘Hedge Against Prosperity’ fund manager on Friday. To remind you, a couple of days ago we were noticing what a fantastic financial asset boom the world is enjoying. The whoosh of money and credit is sending everything aloft. Trash companies…trash art…trash assets…trash bonds…every bit of throwaway junk is flying high.

“Darned,” we said to ourselves. “We should have invested in trash.”

Then, it suddenly occurred to us – we did invest in trash. We put a little pittance into a bunch of tech companies put together by an old friend. We suspected we would never see the money again…and forgot about it. But, hey, you never know…

“So, how’s the portfolio doing?” we asked. “In this kind of wind, even your turkeys must be flying, right?”

“These are very promising new technology companies, yes.”

“Well, what’s happened to them? Am I rich? Can I retire?”

“Not quite. I mean, these are long-term, development companies, with new technologies that take a long time to bring to the market. But they’re making progress. And we’ve got some very impressive people behind them, working with us to make sure they succeed. We’ve even got one of the original people behind Google, for example. So it looks very good.”

“So how much is my original investment worth now?”

“Well, it hasn’t gone up much, if that’s what you’re asking. Actually, it’s worth about what you put in. There hasn’t been much capital growth. These things take time, you know.”

*** And a reader offers us another view of Detroit:

“Your story about Detroit has nothing in common with reality. It is obvious that you did not let any facts get in the way of your story. You say that a ‘friend reports.’ Come on, Bill; everybody knows that you don’t have any friends. We do not have gangs; we have never had a gang problem. Everything is not for sale. I have never seen drug stuff on our streets; I could go on about your incorrect information, but instead I would like to invite you to Detroit. I would like to show our downtown, with its new buildings, its 42 new restaurants and bars that have opened in the last 2 years. I would like to take you to a Tigers game, they are sold out most of the time, but I can get you some tickets. I would like to show you the restoration of our older buildings that are being turned in to lofts. I realize that your story would not have been as much fun to write if you had this information, but please come and visit us, I will show you the good stuff we have and you can show me the stuff you say we have. I will give you directions to Detroit, go to the chilly shores of Lake Michigan and then go east about 250 to 300 miles, follow the signs to Downtown, look for construction equipment, people and new buildings. “

Is this ‘Dear Reader’ pulling our leg? Or, is Detroit really booming?


The Daily Reckoning PRESENTS: The recent minimum wage increase is the most shameful achievement of any Congress in the last forty years. So sayeth The Mogambo in his three fold argument for why this “achievement” is yet one more nail in the U.S. dollar’s coffin. Read on…


I have suddenly found a quote that I was looking for. It is an AP news item that reported that Senator Edward Kennedy, D-Mass. – who is at once one of the biggest jerks ever elected to Congress and the perennial shame of Massachusetts for having elected such a commie rat – called the recent increase in the minimum wage one of “the proudest achievements of this new Congress.”

The actual truth is that raising the minimum wage is the most shameful “achievement” of any Congress in the last forty years. The reason that I make this highly-inflammatory and rudely derogatory statement is threefold:

1) Congress’s own continual, irresponsible expansion of government, by deficit-spending the excess money and credit (monetary inflation) created by the Federal Reserve, is what produced the inflation in prices that “necessitated” the increase in the minimum wage,

2) it is the culmination of 94 years of gathering the most profound, incontrovertible actual proof that the Federal Reserve cannot be trusted to maintain the value of the fiat dollar because the dollar’s buying power has gone down, and down, and down the whole freaking time since the Fed was established in 1913, and the dollar now has a lousy 3% of its original purchasing power left, and yet not one damned Congress has done one damned thing to require the Fed to do anything different in the whole 94 years, and

3) because I enjoy being contemptuous and sarcastically rude to people who are being trusted to know better and act better, but don’t.

I can see you out there, yawning in boredom, as this is shaping up to be another Pointless Mogambo Rant (PMR). But you would be wrong! There IS a point! Buy gold, because the end is almost nigh, as evidenced by the anxiety produced by Dennis Cauchon’s column in USA Today titled, “Rules ‘Hiding’ Trillions in Debt”. The subhead was “Liability $516,348 per U.S. household.”

The short story is that it is the same old story about how if the federal government was required to use accrual accounting like corporations and most businesses are, then the whole economic jig would be up as the horrific dollars-and-cents truth was revealed, and there would be rioting in the streets if the newspapers, the schools and the population as a whole were not so damned stupid that they do not even dimly grasp the profound, bankrupting, horrifying inflationary significance of this.

Well, the new twist is that USA Today has updated the figures, and shows that the federal government would have recorded a $1.3 trillion loss in 2006, “far more than the official $248 billion deficit.”

It was explained that “The loss reflects a continued deterioration in the finances of Social Security and government retirement programs for civil servants and military personnel.”

Surprisingly, we learn that “The loss – equal to $11,434 per household – is more than Americans paid in income taxes in 2006.” Yow! What kind of crazy government IS this, anyway?

Well, they are resorting to obfuscation, “so promises for Social Security and Medicare don’t show up when the government reports its financial condition. Unfunded promises made for Medicare, Social Security and federal retirement programs account for 85% of taxpayer liabilities. State and local government retirement plans account for much of the rest.”

At that I immediately thought to myself, “What? How in the hell did state and local government retirement programs get included in the federal government’s accounting? What in the hell is going on here?”

Naturally, I raised my hand and said, “Hey! Hey, you! It’s almost lunchtime! Could you hurry it up a little? Like, get to the fabled ‘bottom line’ so we can get the hell out of here? And my five-day ‘cooling off’ period is over, so I want to go by the gun shop to pick up my new pistol. So if I have to come back here, I’ll be packing heat again, but that means I will have to wear a coat to keep it concealed, see, and it’s too damned hot to wear a damned coat! So let’s get a move on!”

Well, there must have been something charming about me that they instinctively liked, because they immediately went on to graciously grant my exact wishes and said, “Bottom line: Taxpayers are now on the hook for a record $59.1 trillion in liabilities, a 2.3% increase from 2006. That amount is equal to $516,348 for every U.S. household. By comparison, U.S. households owe an average of $112,043 for mortgages, car loans, credit cards and all other debt combined.”

And who is so corrupt and despicable as to be against revealing an on-rushing destruction and doom that is afforded by accrual accounting? You’re going to love this! “The White House and the Congressional Budget Office oppose the change, arguing that the programs are not true liabilities because government can cancel or cut them.” Hahaha! I told you that you would love it!

Well, I loved it, anyway, and I was so delighted with the ramifications that the next day I snuck into the employee’s retirement fund and borrowed all the money, leaving my IOU. If the ungrateful employees ever demand that I make good on the IOU, I can now say that they are “not true liabilities” because I can “cancel or cut them”, and therefore I don’t owe them anything! I love this government accounting thing!

Antal Fekete of the Gold Standard University writes that gold is being secreted away, and that “The present episode of gold vanishing into private hoards is no less ominous than the previous one that was followed by the collapse of the Roman Empire, and the lights going out in the civilized world.”

Hmmm! Very interesting! He goes on, “The last time in history when huge quantities of gold were going into hiding occurred during the twilight of the Roman Empire. It was an ominous portent of bad tidings”, as “People were withdrawing gold coins from circulation. They declined to spend them hoping that saner and safer times would come.”

Unfortunately, saner and safer times never came in their lifetimes, showing how bad a bust can be after such a long boom, and, “these ancient hoards were forgotten and remained buried in the ground throughout the Dark Ages. Present day archeologists still keep finding them fifteen hundred years later.”

The timeless lesson is that, “The fortunes of empires tend to be predicated by the fortunes of their currencies.” Do you see the decline in the dollar? What do you think will happen? Me, too!

Until next week,

The Mogambo Guru
for The Daily Reckoning

Mogambo sez: Gather your friends to sing with you in a jolly little round, “Gold and silver and oil for me”. The tune isn’t important. In the immortal words of Obi Wan Kenobe, “Listen to the words, Luke Skywalker! Listen to the words!”

Editor’s Note: This year, the Mighty Mogambo is actually going to bravely exit his Big Mogambo Bunker (BMB) in order to speak at the Agora Financial Investment Symposium in Vancouver, British Columbia. Don’t miss this opportunity to hear his rants live, on why “We are all Freaking Doomed!”

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 Daily Reckoning