The Half and Half in your Economic Coffee

If the economy were a cup of coffee, the mortgage market would be the half and half. Unfortunately, the mortgage market is passed its expiration date. Good thing the Mogambo drinks his coffee black, eh?

Peter Schiff of Euro Pacific Capital writes, "The grim reality is that trillions of dollars were borrowed and spent that will never be repaid. No government program can alter that fact. Someone is going to have to pay the piper for all those granite counter tops and plasma TVs. The price tag is staggering and for all the bailouts and stimulus packages, all the government can do is exacerbate the losses and shift the burden through inflation. Nor can the government resurrect bubble home prices and the fantasy of real estate riches that went along with them. One way or another, rational home prices will be restored and the myths of our asset-based, consumption-dependent economy will be finally discredited."

If that wasn’t enough, as a long-time homeowner, I can tell you that buying the house is just the beginning of house-induced-bankruptcy, as staggering property taxes and homeowner insurance are major recurring items, but which doesn’t even begin to address the fact that you need to paint the damned thing every ten years or so – costing many thousands of dollars – and replace the roof about every 15 years – costing many more thousands of dollars – and replace every damned thing in it (air conditioner/heater, dishwasher, water heater, televisions, video players, furniture, carpets, etc) in the thing every 7 years or so, costing umpteen MORE thousands of dollars, not to mention all the front doors you knock down and have to replace when your family locks you out as part of some doofus "tough love" thing, like I’m going to put up with that crap even if I was sober!

So, it seems little wonder that so many people are allowing themselves to go into foreclosure. Nobody told them about that part!

And given that banks, when selling foreclosed houses, actually net about half the price of the mortgage, that means to me that houses are, by extension, overpriced by half, and as such will surely not be rising in price for a long, long time to come.

The is not interested in how I am trying to unload my own eyesore of a house at a seeming top in the market, or how I am holding the dishwasher together with duct tape until then, but says that that National Australia Bank has made a "decision to write off 90 per cent of its US conduit loans", which apparently comes out to a tidy $830 million dollars! Wow! Talk about biting a bullet!

They go on, "A US recession is now locked in, but more alarmingly, 55 per cent loan losses point to the possibility of a depression."

Possibility? Hahaha! The essay "Dead Cat Bounce" by Edgar J. Steele at hits the nail on the head when he says, "Not only is something wrong with the dollar, the banking system and the economy, there almost literally is nothing right with any of them. Truth is, that whistling noise you hear is the air streaming past your ears as we all plummet into the deepest economic abyss ever seen by mankind."

So why haven’t things collapsed? The answer is simplicity itself: Desperate actions by desperate people in Congress and the Federal Reserve, who are using every slimy trick they can think of, as I gather from Michael S. Rozeff, a retired professor of finance and writing at, who asks, "What do our officials most fear? They fear the public’s loss of confidence. Events are driving their improvised attempts to stem a general loss of confidence in the dollar, in them, the financial and monetary system, and the government as a whole".

The motivation, I assume, is because the November elections are just around the corner, where all the House of Representatives and a third of the Senate are up for re-election! Hahaha! Now you know how things work!

And they may be onto something there, as the latest Gallup poll has Congress receiving its lowest approval rating ever. Only 14%! And when 6 out of 7 people think you are doing a bad job, you become desperate people doing desperate things, too.

Some will be desperate enough to buy gold and silver. They will almost certainly prosper, if history repeats itself as it always has.

Others will be desperate enough to invest in other things. They will almost certainly not prosper, if history repeats itself as it always has.

So it comes down to a bet on a 100% long-term probability, which makes me go "Whee!"

Until next time,

The Mogambo Guru
for The Daily Reckoning
August 4, 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.

Writing to you from the Land of the Dead…

We step back in order to have a look at the Big Picture.

Hmmm…still, not very clear. So, we step back again…and again. Soon, we are so far away that we can’t see a thing!

Still, looking through the binoculars, this is what we think we see.

First, the U.S. economy is in decline. The latest figures show it growing more slowly than the population – which means, the average citizen is getting poorer.

Of course, dear readers know the figures are not very helpful anyway. In a consumer economy, GDP growth rates tend to measure the rate at which people consume wealth rather than the rate at which they create it.

But let us put that quibble aside, at least for this morning.

The weekend news brought more evidence that the U.S. economy has peaked out. Recent graduates are having a hard time finding work, says the Washington Post. Joblessness is supposed to rise to 6% next year, adds the Financial Times.

Even ‘the rich are beginning to feel the pain,’ opines a piece from the Associated Press.

And millions of Americans are facing "retirement poverty," continued the salmon-colored paper. Why? They haven’t saved enough…and their houses – on which they had counted to finance their golden years – suddenly seem to be made of base metal.

Fannie Mae faces a "glut of unsold homes," reports the Chicago Tribune. (What the paper means is that it faces a glut of houses, not homes. A home is what people make of a house. But if it is unsold, it is a house, not a home. And many of the houses built in America in the last 10 years will probably never be homes. They are too expensive. Too far out. And too many.)

"Ghost towns across America," is how the Wall Street Journal describes them.

Another small bank failed in Florida, while in Detroit, the auto industry is a wreck. Vehicle sales are down 13.2%, for obvious reasons…and the automakers are running low on cash, says the New York Times.

Between 1950 and 2000, the USA transformed itself from a country that made things to a country that financed things. Mothers stopped wanting their babies to grow up and become captains of industry; instead, they wanted them to go to Wall Street. That’s where the money was – in finance, not in manufacture. Gradually, the engineers and machinists who used to run the automakers were replaced by financiers. And gradually, the business model changed, from making money by selling cars to making money by financing cars. And if you’re going to finance cars, why not finance some houses too?

But now the finance industry seems to have peaked out. And what’s left of the automakers? We don’t know…but we’re going to find out soon – as they get hauled to the junkyards, stripped, dismantled and sold for scrap.

"Only luck can save America’s troubled economy," concludes the FT.

From a distance, we can see the United States – and England – sinking. But it looked for a long time as though the rise of other economies – China, India, Russia, Brazil…just to name a few – might be enough to balance it out. This was the theory of ‘decoupling,’ the idea that the U.S. could sneeze all it wanted; the rest of the world would still remain in rude good health.

Here at The Daily Reckoning, we were always skeptical of the ‘decoupling’ concept. Coupling has been going on for a long time; it didn’t seem likely to us that it should suddenly go out of style.

On the other hand, never before in the history of the world has so much economic growth been going on. And most of it is going on outside the United States…and Europe.

"It’s amazing…I just can’t believe it," said a young man we met over the weekend. "I work in aluminum. I’m a buyer for a big French company that makes products out of aluminum. So, I travel regularly to China…to Beijing and Shanghai, mostly. I go at least every six months. And when I go I stay in the same hotels. And I get there and I look out the window, and every time there is another big skyscraper right next door. ‘Where did that come from?’ I wonder. Because they hadn’t even begun to work on it when I was there the last time. But those people work day and night. And the city of Shanghai is growing by about 30,000 new people every week…something like that. It’s unbelievable…

"And then when I get back to France…it is like going into a museum…where nothing ever changes. In some ways, it is a comfort, because life here is nice…predictable…and comfortable. But it is like the land of the dead."

And now, the big news: manufacturing contracted in China for the first time since ’05. Decoupling? Maybe…but China is slowing down too. And if America, Britain, Europe and Asia are all slowing down, what does it mean for oil and commodities? It means they must go down!

Yes, that is the third big thing we see…as we look through our binoculars. After hitting a high of $147, oil is slipping and sliding. It ended last week at $125 – a loss of 15% from its high.

The industrial commodities are all falling – copper, aluminum, steel. Gold at $917 an ounce also seems to have lost its way. And many people think we’ve seen the last of the bull market in the whole commodity/oil/gold complex. It may be another 20 years, some believe, before we have another big run-up in the commodity sector. So far, no major magazine has announced the "Death of Commodities," but surely some are thinking about.

But we’re even more skeptical about the ‘death of commodities’ than we are of ‘decoupling.’ Because, commodities cycles tend to be much longer than other cycles…and prices do not react only to the economic cycles; they also react to the monetary cycles. Copper, oil, lead, wheat – all represent more or less finite resources. And all require real resources – time, money, equipment, investment, and know-how – to bring forth. You can’t blame the people who produce them for wanting more than worthless pieces of paper in exchange for them. Typically, the more pieces of paper there are in circulation – pretending to be ‘money’ – the more pieces of paper producers want in exchange for their oil, gold, silver, lead, etc. And typically, they look ahead to try to figure out what those pieces of paper will be worth in the future before they agree to trade valuable resources for them.

Yes, dear reader, that is what we see through our binoculars too. A world in motion. Nothing stands still. Instead, no matter where we look – at houses, oil, stocks, you name it – it bobs on a frothy sea of ‘money.’ And while we have to look to see if the United States and China are declining…or if the financial boom has topped out…or the commodity cycle has peaked…we also have to keep our eye on tides of money too. About which…more to come this week…

*** "Wave goodbye to the invisible hand," says a Washington Post article by Steven Pearlstein. The poor man thinks it is the ‘invisible hand’ of the market that has messed things up, rather than the fat paws of the market manipulators in Washington.

"Trade…[has]…failed to deliver the economic and social outcomes that Americans consider acceptable," he writes.

He has a point – trade has failed to give the yahoos what they wanted, something for nothing. They thought they could use their houses like an infinite line of credit. Didn’t turn out that way.

But nobody really appreciates laissez-faire capitalism, least of all the capitalists. They all want to control the future, not let it happen. And everybody wants to gain some edge…some little favor or advantage – a monopoly, a subsidy, a fat contract with the government, a handout, free food, free medicine, crop supports, student loans, a guaranteed pension, a bailout, a tax credit…some kind of greasy giveaway; the last thing they want is a free market, where the chips fall where they may.

And now that the illusions of the Reagan Era are being destroyed, out come the regulators, controllers and meddlers with illusions of their own. Now, they claim they can make a better world – better than people could make on their own. They’ll make sure that capitalism is put in chains…defanged, de-clawed…trained and harnessed. They’ll turn the jungle of capitalism into the zoo of a rational, state-managed mixed economy.

The Wall Street Journal reports that New York has gone into court with a complaint about Citigroup. "Hey, we didn’t know you could lose money on those freak investments you sold us," say the New Yorkers.

They are all searching the email records for the ‘smoking gun,’ a single email by someone with a brain pointing out the obvious – that those complicated collateralized securities might really be the investments of "mass capital destruction" that Warren Buffett said they were.

And hallelujah, they’ve got one: "We should not be rating it," said an email from an operative from Standard & Poor’s, stating what many others must have thought but few dared to say.

As you recall from last week, the sovereign state of Connecticut has attacked the rating agencies, charging that they knew or should have known what they were doing. Now, with that email, it looks like the yankees have a case.

Until tomorrow,

Bill Bonner
The Daily Reckoning