The Happy Mogambo Retirement Fund

As the dollar’s purchasing power falls closer and closer to nothing, the Mogambo realizes that something must be done to save his retirement…which is why he has created the Happy Mogambo Retirement Fund. He appreciates your contribution.

Some people think that there is no advantage in listening to an idiot like the Loudmouth Mogambo Lunatic (LML), and they always want me to go home, or go someplace else, but please, please, please just shut up and go away. Being able to take a hint, I leave, but to show them their folly, I stand on the street outside their doors and shout, "Buy gold, silver and oil stocks, you conceited lowlife drunken bastards, to capitalize on the destructive nature of a fiat currency and a wildly out-of-control fractional-reserve banking system that has now debased itself to holding literally zero reserves against either their liabilities or their assets like we have, I am embarrassed to say, in the United States! Buy gold now, or rue your folly, ya lousy stinking drunks!"

My voice is almost drowned out from them yelling things at me through the bar’s door, like, "Shut your hole, idiot!" and "Go away, jerk!" and "Hey! That Mogambo bastard didn’t pay for his damned drinks again!" But I could have saved us all a lot of trouble by merely referring them to Adam Hamilton of ZealLLC.com, who notes that, "the flagship HUI unhedged gold-stock index was up 1,237% since its bull was born in November 2000. This incredible run was driven by a 262% gain in gold since its own bull launched in April 2001."

More than a one-thousand, two-hundred percent gain in seven years! 1,237%! Fabulous! Compare this against the "average" long-term gain in the stock market of somewhere between 4% and 7% a year! Hahahaha! How long does the stock market have to increase at the high end of 7% to equal a 1,237% gain? Hahahaha! 38 years! How long does it take if the average gain is at the low end at 4%? 65 years! Hahaha!

And let me tell you the Really Bad News (RBN): if you are a person who has their retirement money in common stocks gaining between 4% and 7% a year; you have lost a lot of buying power and not made much money, but the guys who own gold didn’t actually make much profit, either, if any. An ounce of gold pretty much buys what an ounce of gold has always bought.

What actually happened is that the guys who owned gold did not LOSE gobs and gobs of purchasing power; they could still buy the same amount of stuff, or more, with the same amount of gold as they always could! But you can’t! That’s the difference! Hahaha!

In fact, the guys who have had their money in common stocks since 2001 now have to spend more money to buy the same amount of stuff that they once could! Hahahaha! Chumps! With inflation at 13%, like it is now, even if you made 7% on your money in the stock market in the last year, you can only buy 6% less stuff this year! Before paying taxes on the phantom capital gain of the whole 7%! Hahahaha! Nice investing there, America! Hahaha!

Mr. Hamilton is apparently not interested in my sudden interruption about inflation, or how gold protects you against inflation while everybody else gets their guts eaten out by it, and then they go whining to their Congressperson, "We need more money! Give us more money!", which the government will do, which will inflate the money supply when the Fed creates the money so that it can be borrowed by the government and then disbursed, which will make inflation in prices worse and worse, which will make these people again run to their Congressperson, again mewling piteously, "Now we need lots more money! Give us lots more money!", which the government will do, which the Fed will do, and inflation will start roaring out of control and everybody is screaming and there are "bread riots" and The Mogambo is so panicked and scared that he barricaded himself in the Mogambo Fortified Bunker Of Panic (MFBOP) and is expending a fortune in ammunition on warning shots alone.

Mr. Hamilton, to his credit, does not get caught up in the blood fever, but gets to the heart of matter, which is making money on this stuff, which we all need so that we can buy, of course, more gold and ammunition. So it becomes suddenly very important when he goes on to say that this comes to the interesting result that, "the HUI has leveraged gold’s underlying gains by 4.7x!" Wow!

Gold stocks rising almost five times as much as gold itself! "Since the mid-August 2007 lows," he goes on, "at best gold is up 42.6% while the HUI is up 60.3%. This yields HUI leverage to gold of just 1.4x so far in this upleg. This is indeed disturbingly low."

"Hmmm!", the astute Junior Mogambo Ranger (JMR) thinks, "Gold-oriented equities outperformed gold bullion by 4.7 times in the last 7 years, but now they are only outperforming bullion by less than 2 times, while the monetary and price inflationary madness around the globe continues faster and faster and faster? Hmmmm! There is probably a lesson in there somewhere, but I cannot think on an empty stomach, and so I’ll wisely defer thinking about it until after lunch. Or until after my after-lunch nap."

It’s all up in the air, schedule-wise, but I know that I am definitely going to sneak out of here and knock off a little early today because I hate it here, and I hate this stupid job, and I hate this stupid desk, and this stupid computer, and the stupid people all around me who think that they know everything, but do they even dimly comprehend the terrifying enormity of the fact that the Federal Reserve has created so enormously much money, that was created out of so enormously much debt, which is producing so enormously much inflation in consumer prices? No!

And even when I tell them about it over and over, do they rush out and buy gold? No!

They only want to talk about how they found out that the 0.5% deduction in their paychecks for HMRF is actually the Happy Mogambo Retirement Fund (HMRF), which means that I am taking money out of their paychecks for my own use.

So now I have to spend a lot of my Valuable Mogambo Time (VMT) trying to calmly explain to the cheapskate employee trash, who apparently begrudge me a few lousy bucks a week, that this is the exact same thing that is being done to them by inflation. "So," I helpfully suggest, "why don’t you shut the hell up?"

I show them how, on the one hand, that after the HMRF deduction they have less money, so they must buy less stuff. On the other hand, their money is being robbed of its buying power by the Federal Reserve in cahoots with the Congress to allow massive, massive amounts of money and credit to be created, so each dollar must be worth less when measured against a short run static supply of goods and services, and so they must buy, again, less stuff.

So I say to the shop foreman, "So you see how it works, you moron? No matter what, you buy less stuff. Now, get back to work!", which didn’t make much of an impression on them, and the discussion flowed back and forth for awhile, and it was decided that I would refund their money, on the condition that they would not beat me to a pulp and press criminal charges, and that they will all use the money I give back to go out and buy some gold, which they said they would do, but they won’t. They never do.

But it is The Mogambo Way (TMW) to do what I say, and I will be faithfully paying them back every dime I took from them with that HMRF scam of mine, and I am now deducting 0.6% of their stupid paychecks for the Employees Get Their Stupid Repayment (EGTSR) deduction, which works out fine for me, as I take a huge administrative overhead allowance out of it, too! Hahahaha!

Until next week,

The Mogambo Guru
for The Daily Reckoning
February 18, 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.

As we left you on Friday, we were worried that too many people are predicting hard times ahead for the U.S. economy. For its part, the stock market is not saying anything. Stocks are down only slightly – not enough to signal serious economic problems.

Friday saw another small drop in the Dow – minus 28 points for the index.

Bonds too, are maintaining a silence. Some days they are up. Some days they are down. If trouble were really on the way, you’d think the bonds would see it and raise an alarm. Instead, if they do see trouble on the horizon, they’re keeping mum about it.

And what’s going on with retail sales? If consumers really were feeling the squeeze we think they ought to be feeling, they’d start spending less money right away. But the evidence is mixed. Some numbers show a big drop in consumer spending…others show consumers still opening their wallets.

What to make of it? We don’t know, but as usual, ignorance doesn’t prevent us from having a theory…or even two.

One obvious takeaway is that the future isn’t going to be as bad as analysts seem to think. If the economy were really sinking, the optimists say, these indicators would tell us.

A less obvious takeaway is that it will be much worse than expected. Mr. Market is an old trickster. What if he were setting us up to believe the economy would bounce back…when, really, it is headed down forever? As we parted company at the end of last week we suggested that the top might be in, not just for housing and stocks, but for the United States itself. Who wants to believe it? No one. But everything eventually peaks out…and every empire, no matter how great, is eventually scuttled.

It seems perfectly plausible that all-time highs may have come and gone for the US of A. Asians, Russians, Arabs – they are all offering more competition than Americans ever faced before. And in this new contest, Americans have not one, but both arms tied behind their backs. They no longer have enough energy to power their economy; they no longer produce enough food to feed themselves; they spend more than they make; they have higher debts than anyone, higher fixed costs, older equipment, and an older population. And they have an entitlement culture that cannot readily adapt to a more challenging environment. Instead of warning Americans that they need to cut costs, save money, and compete with the rest of the world…voters are being told that they can buy even more stuff, and that, by some magic as yet never explained, they will be protected not only from fierce global competition, but also from the consequences of their own errors.

But if our guess turns out to be correct, maybe never again will U.S. property prices – in real terms – be as high as they were in 2006. Never again, will U.S. stock prices be as high as they were in 2000. And never again will the United States enjoy such a lopsided advantage in wealth and power as it did at the end of the 20th century. Of course, it’s much too early to tell. We won’t know for 20…50… or even 100 years.

But if this were true, why aren’t the markets giving us a heads up?

We have a theory for that too.

What we are watching in the financial markets is a war. But it is a war like the war between Iraq and Iran in the 1980s. Henry Kissinger once remarked that "it is a shame both sides can’t lose." In fact, both sides did lose. Millions of people were killed – at huge expense. Neither side gained a significant advantage. Of course, the same could be said for a lot of wars…maybe most wars. WWI left all the major combatants in worse shape than when the war began – with one exception, the United States of America. The rest were battered almost beyond recognition. Nations were bankrupted, currencies collapsed, empires fell, ruling families – Hapsburgs, Romanoffs, Hohenzollerns – were eliminated, the map of Europe changed…but scarcely anyone was better off.

The present war between inflation and deflation is going the same way. One side gets beaten up. Then, the other side gets walloped. Even when one gets an advantage, it comes at a high price.

Why is the stock market not falling more decisively? Can it not look ahead? Maybe it is looking ahead. And maybe it sees victories by both sides. In other words, maybe it doesn’t see growth and prosperity at all. Maybe it sees a war without a winner…a slump…and consumer price inflation too.

M3 is the fullest measure of the money supply. And prices tend to be set by dividing the available goods and services by the mass of money in circulation. The more money, the higher the prices. Ideally, M3 and GDP (a measure of goods and services) go up at about the same rate and prices are stable. But currently, M3 is increasing about six or seven times faster than GDP. One explanation for the retail sales figures is that they are increasing largely because the prices of necessities are going up. In other words, consumers still have to spend more money – just to get the basics. Wheat prices are up 3 times in the last 12 months. Consumers still want bread…and now they have to pay a lot more for it.

So, maybe the stock market is looking at this situation, too. And maybe it sees stocks as a protection from inflation…maybe it’s guessing that an investment in a profit-making business is a better place for money than a bank account. Maybe it wants to go up because of inflation…and wants to go down because of a coming slump. In the end, it goes nowhere.

And maybe the bond market sees the same picture. Maybe it sees a slowdown…which would be good for bond prices…but rising rates of inflation too, which would be bad. What should it do? It doesn’t know any more than anyone else. So, it bides its time, waiting to see how the war will turn out.

*** Over the weekend, Britain announced that it would nationalize Northern Rock – a major mortgage lender. The Rock got itself into a hard place when it speculated on subprime mortgages; it’s been rolling downhill since last September, while the Chancellor of the Exchequer, Alistair "Sisyphus" Darling, tries to hold it back. Finally, the government has given up on private rescue attempts. Apparently, the private buyers were unreasonable; they wanted to protect themselves and even make money on the deal. London decided instead to drop the Rock on taxpayers’ heads. "It’s the right thing to do," said Mr. Darling.

Meanwhile, from the 50 states, the Democrats’ own darling, Barack Obama, promises voters that he will deal with economic matters in a level-headed, pragmatic way. He apparently had no economic program of his own, so he took Ms. Clinton’s. Too bad he didn’t ask Ron Paul; our old friend probably would have generously provided him with a good one. As it turned out, he had the Clintons accusing him of plagiarism. And what he got wasn’t worth stealing. As near as we can tell, it is effectively the same combination of wishful thinking and delusion as Mr. Darling’s. He intends to raise taxes, reform health care, "protect American jobs," and so forth.

Nobody wants to talk about the real solution to the credit crunch/slowdown. Actually, there are two ‘solutions.’ One is knock ol’ Humpty off the wall…increase rates, tighten up the money supply, have a real recession, and get it over with. No one is going to do that. The other solution is inflation.

The beauty of inflation is that it moves the losses from the people who deserve them onto people who don’t know what’s happening. Banks, speculators, and asset owners, generally, are bailed out. Their losses are socialized – hoisted, via inflation, onto the backs of savers, taxpayers and workers. Wages fall. Prices rise. Standards of living go down. But few people understand why. The people grumble and complain…but what can they do? Vote?

"The first panacea for a mismanaged economy is inflation," wrote Hemingway. "The second is war. Both bring a temporary prosperity. Both bring permanent ruin."

Choose your poison. Obama is an inflation man. McCain seems to favor war, too.

*** Meanwhile, nobody knows anything. As soon as you think you know something, along come new facts to prove you don’t.

One thing we were pretty sure about was that you couldn’t make any money by following trends. As soon as you caught on to the trend, we reasoned, it was probably ready to reverse. You’d always be getting on board the wrong train, going in the wrong direction, at the wrong time.

"You can be a contrarian; or you can be a victim," as our old friend, Rick Rule, puts it.

But what’s this? The Financial Times tells us there’s a new train schedule. A couple of professors at the London Business School decided to test trend following as an investment approach. They imagined that each month, going back to 1900, an investor had simply bought the 20 stocks that had performed the best over the last 12 months – drawing only on the 100 largest stocks on the market. Said investor would have made a compounded annual rate of return of more than 15%, they concluded, compared to a rate of return for the market as a whole of less than 10%.

Well, what if they’d done the opposite, we contrarians want to know. What if they’d taken the 20 worst performers instead of the best? Turns out, they anticipated our question. They found that the worst performers only produced a compound annual rate of return of 4.5%, barely a third of the winning formula.

Go figure.

Until tomorrow,

Bill Bonner
The Daily Reckoning