The Road to Commodity-ville

The Daily Reckoning PRESENTS: The Mogambo has decided to educate the masses using his special brand attention getting tactics. On today’s agenda…the stock market is only profitable for some…and for those who buy gold and silver. Read on…

The Road to Commodity-ville

My duty is thus clear: As part of my assigned Mogambo Educational Duties (MED) to educate the people of this planet, naturally I am up bright and early each morning, standing at the stop sign at the crossroads. Before people even come to a stop in their shiny cars on their way to their big-shot jobs, I am screaming at them, “The stock market is – at best – a breakeven proposition over the long term, you stupid moron! It’s a loser for the vast majority of people! And that means YOU, mister fancy-schmancy guy in his fancy-schmancy car on his way to his fancy-schmancy job with his fancy-schmancy retirement package, and who will see them all destroyed! Destroyed!”

By now, most people have learned that if they give me money I will stop “instructing” them. For most people it’s a bargain, because my voice is loud and irritating, especially that early in the morning. And since I only have the one message that I repeat over and over and over – once you’ve heard it, it seems like once is more than enough.

So, then, imagine my surprise when one of my regular “customers” comes roaring up, squeals to a stop, gets out of his car, strides over to me, grabs me by the neck and shouts in my face about how he already freaking KNOWS about the freaking STOCK market being a freaking LOSER, and helpfully advises “So just shut the hell up about it, you Creepy Little Loudmouth Mogambo Twerp (CLLMT)!”

So naturally, I coolly and malevolently say, “You know that once you let me go, I am going to hunt you down and make you pay for this in blood, don’t you lowly Earth creature?” His face beamed with joy as he said, “You won’t once you found out how you can prove that you are right!”

My eyes literally glowed at the happy prospect of being able to finally prove, one glorious time before I die, that I was right about something, and I say, hiding my rising excitement, “Oh, yeah? Prove it, smart guy!”

Getting my attention by tightening his iron grip around my throat, he tells me that Sprott Asset Management said, “Having started the decade at 11,000, for the Dow to only have attained a level of 12,000 after almost seven years is nothing to write home about. It equates to a paltry 1.2% annualized return ex-dividends. Furthermore, the S&P 500 and the NASDAQ are still nowhere near the levels they were at the start of the decade. The NASDAQ, in fact, is still less than half of what it once was.”

And as bad as that is, it gets worse when he adds, “If one were to also incorporate the weakness of the U.S. dollar over the past several years, then the performance of U.S. equity markets looks even worse.” Exactly! Just like I said!

And in this same “the majority must lose” vein, I have been getting heat from people who want me to relax my strident antipathy to the proposed hike in the minimum wage, which will make business costs go up, which will make prices go up, which is what the low-wage worker is complaining about to start with!

So let me be as forthright as I can be when I say that I pity them, and the essential message of the Mogambo Guru newsletter in the first place is to object loud and long against the creation of excess money and credit, which will prevent inflation, which will prevent this suffering from inflation from even happening.

But, and hopefully conveying all the venom and contempt that I can muster, I have no compassion for the damned poor or the middle class, who have consistently used their massive electoral power to consistently elect socialists, communists, fascists and morons to every elected office in the land, and it is these lying, brain-diseased politicians who have spent us into the economic grave, as has happened every other time in the last 3,000 years when a government, any government, tried such monetary crap. So it is not like this is anything new.

And so, given the stark lessons of the sheer tonnage of the last 3,000 years of history, it is obvious that government is constantly growing, and especially by constant deficit-spending to accomplish it, is suicidal stupidity writ large, and we also learn that allowing unfettered growth in money, credit and debt is suicidal stupidity writ large. Thus, the behavior of Americans is inexcusable, as it bespeaks a nation of ignoramuses and lunatics, and the historical fate of such persons, and their brain-dead countries, is always bleak. Very, very bleak.

And it has to be the poor who first suffer the coming avalanche of pain, as they have no cushion against it. But as more and more people become poorer and poorer, as prices continue to rise faster than wages, then soon this cohort will collectively have the sheer physical clout to violently overthrow the government and arrest the treacherous politicians (a la the French Revolution) and Federal Reserve numbskulls who have gotten us into such a wretched, miserable state, which is how Mother Nature instills in future politicians and citizens the reluctance to commit the staggering, unbelievable economic idiocies that we Americans have been blithely committing for half a freaking century.

And now, obviously working myself into a fit of outrage, and since my arrogance knows no bounds, I deliberately quote Bill Bonner of completely out of context, and, twisting his words around to my own advantage, I have him agreeing with me, and that “in America, there is still a fool on every corner, a clown in every public office, and every village has not one, but several, idiots.”

And now the wailing of the poor for higher incomes is merely the sound of the first people reaping the dismal economic rewards of what we, as a nation of irresponsible simpletons and knaves, have sown.

It seems to me that I would shy away from the stocks of property insurers, as I predict that as the value of houses keeps going down and down (while the mortgages do not, but instead continue going up and up) and insurers keep increasing their premiums and deductibles but insuring less and less (by excluding from coverage those things that may actually happen to you), many homeowners are going to think to themselves “Hmmm! How can I escape the horror of letting this house drag me into debt hell?”

I figure that in a “Eureka!” moment (probably about the same time as the insurance bill arrives with that new, much-higher premium and much-smaller coverage), arson will seem to be a “painless and toasty way to wipe my debts away” (which is catchy and rhymes, so you know it must be true), thus allowing you to get the hell away from here, starting a new life somewhere else, clean and sober, free from debt and the burden of a suffocating, clinging family always complaining and whining for food and medicine, even though I have repeatedly and patiently explained that I am on the verge – the very verge – of a big, big breakthrough in correcting my backswing, and so to give up even one round of golf per week for the sake of their constant, whining “needs” is not optimal.

From the newsletter we get the dispiriting news that “about 2.5% of all of the nation’s homes were sitting vacant in the third quarter, according to the Census Bureau.”

So how bad is it? Well, they don’t answer directly, but they do say that “it’s also the highest since the Census started keeping track in 1956.” The worst in 50 years!

This at the same time as one of Congress’s most Leftist whack-o embarrassments, Maxine Waters, is vowing that she will use her new powers to have the government build “affordable housing”! Hahaha! A glut of vacant housing, and she wants to build more! Hahaha!

Jim Rogers, writing at, says that “the dollar has been a pale remnant of itself – down against the euro almost 40 percent from the beginning of 2002 until the start of 2004 and at a three-year low against the Japanese yen.”

Like most people, I find this whole foreign exchange thing to be very confusing, and so Mr. Rogers sees my eyes glazing over as I try to understand how to use this apparently very useful, albeit mystifying, information to make a profit on something. Amazingly, I think he supplied the answer when he went on to say, “Since commodities are traded in dollars, a weak dollar will make prices appear higher.”

Perhaps a brief flicker of comprehension flashed across my face at that, but it was soon obvious that I was still stumbling in the dark for the answer. Attempting to be helpful, he added “Crude oil rose 64 percent in dollars over that two-year period, but only 16 percent in euros.”

Surprising everyone, I shout out, “I never expected to see the day when a 16% increase in the price of oil was the good news! Hahaha! Did you, Jim?”

With a stern look in my direction that says “It’s ‘MISTER Rogers’ to you, you Little Mogambo Punk (LMP)!” He ignores my little joke in vain attempt at familiarity, and instead goes on to say that it all comes down to, as it always does, the supply/demand dynamic, as he tells us, “For now, however, here’s the story: dwindling supplies and increasing demand. And,” he adds ominously, “the dollar has nothing to do with either.”

My brain flickered to life at that ominous thing, as it meant that prices of commodities would rise anyway, thanks to the increased demand, which is price inflation, which is the thing I fear the most. But a falling U.S. dollar will make them rise MORE!

So who gets hurt the most? Only the people who use dollars to buy the commodities! And who will make the most? The people who invest dollars in commodities!

You want to know where the next boom is, my Cuddly Mogambo Darlings (CMD)? It’s right here in Commodity-ville!

Until next week,

The Mogambo Guru
for The Daily Reckoning
December 4, 2006

Mogambo sez: Gold, silver and oil are your only friends, and that is why they have treated you so good for so long, and will continue for a long time more. Keep accumulating more of these friends.

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.

Among the many curious facts about today’s markets is this:

The dollar has gone down sharply, but bonds have remained strong. [For complete understanding of the trends weakening the dollar, read Addison Wiggin’s book:

Demise of the Dollar

People who lend in dollars get repaid in dollars. An obvious consequence of a falling dollar is that lenders have to expect to get less back than they originally invested. In the last few weeks, the dollar has lost about 5% against the euro. Yet, the 91-day T-bill lending rate is only about 4.90%. Go figure. Lenders expected only 4.9% on their money – for a full year. And in a few weeks, they’ve lost more than that, in international terms. What’s more, they still have to pay taxes on the nominal gains…and still have to suffer the effects of domestic dollar inflation.

What are they thinking? Are they thinking at all?

Currency fluctuations come and go, of course. But so do currencies themselves. Yet bond investors seem to be betting that the dollar is eternal; and they find themselves trapped between two paradoxical trends. On the one hand, the U.S. economy is deteriorating.

The inevitable effects of weakness in the housing sector are working their way through the entire economy…like termites through soft wood. Sales are going down; prices are falling; inventories are rising. Fewer people are being hired to pound nails, or grind down granite for kitchen countertops. Fewer people are taking up careers in real estate. And the feds are nosing around a sub-prime mortgage industry; if they want to be ready with some show trials when the business blows up.

Manufacturing is going down too, unexpectedly. Gasoline prices are going up. And Wal-Mart tells us that consumers are not reaching into their pockets with the same sans souci as they once did.

This economic weakness could be expected to lead to lower bond yields – which would mean higher bond prices. Bernanke and Paulson are talking about fighting inflation – suggesting that that the Fed might raise rates. Our guess is that they are just talking, in order to try to hold up the dollar. The real danger for the U.S. economy is not that it is likely to ‘overheat’ and need higher rates to fight inflation. The real danger is that it is likely to cool off…and ice over. The Fed is not likely to risk raising rates with so many people trying to sell so many houses. It is more likely that they will cut them – which would cause bonds to go up.

On the other hand, the foreign currency markets are telling us that the dollar is vulnerable. It could be re-rated at a level considerably lower than it is today. Currently, it takes $1.32 to buy a euro. It could easily take $1.50. Likewise, the price of gold is $650. It could just as well be $750. Either way, a bond investor has to start asking himself questions: ‘what if I’m right about the economy, but the dollar still loses another 10% on the foreign currency markets?’

And now imagine that you are in charge of your country’s foreign currency reserves…in China, Russia, or Japan. Yes, you can put your money in 30-year U.S. government bonds, guaranteed by the world’s only superpower and denominated in the world’s reserve currency. No one will fault you; it seems like the prudent thing to do. After all, Americans are your best customers. Buying U.S. government bonds is, effectively, lending to your customers. That way, they’ll have the money to continue buying your stuff.

But wait…what if the dollar does go to $1.50 per euro? Imagine that you have $500,000,000,000 in your vault. That would be a loss of about $75 billion. Wouldn’t it make sense to hedge it a little? Reduce your dollar holdings $400,000,000,000 – at least?

As the dollar falls, it makes more and more sense for investors to hedge against it – especially foreign central banks. And when they turn their backs on the dollar, it puts the whole ‘new imperial cycle’ in jeopardy.

Here at The Daily Reckoning, we have been as perplexed as bond investors. We saw the weakness in the U.S. economy…we guessed that it would be good for bonds…and yet, we have been reluctant to buy bonds, because it seemed to us that yields were too low to justify the risks – the stability of the U.S. dollar being the major one.

What to do? Our advice it to hedge against the dollar – by buying gold or foreign currencies – and to avoid U.S. dollar-based stocks and bonds until they offer good value again.

More news:


Chuck Butler, reporting from the EverBank world currency trading desk in St. Louis…

“I had to laugh at a comment by a Fed Head on Friday, as he commented on the ISM report. He had the nerve to say that ‘one month doesn’t make a trend.’ Now…I’m always the one to say that one swallow doesn’t make a summer…but come on!”

For the rest of this story, and for more market insights see today’s issue of The Daily Pfennig


And more thoughts…

*** Everyone gains from globalization…at least in theory.

Some gain more than others. And there is the rub. Most people are not really interested in getting richer – not in theory. Being richer means nothing to them. It is too abstract. It is like eating. Once you have enough calories…you can’t really improve your quality of life by eating more. All you can do is improve your diet slightly…maybe by being more selective about what you eat.

But just because a food is more expensive doesn’t make it more satisfying to your stomach. That is, you’re not likely to appreciate foie gras any more than you do Kellogg’s corn flakes – except that the foie gras might appeal to your vanity. It makes you feel better about yourself; because it proves you are capable of appreciating fine food…and you are able to afford it.

Likewise, if you have $100,000 in the bank…or $1,000,000…what difference does it really make? In either case are you unlikely to go hungry or homeless. It only matters because it affects your IDEA of yourself…your amour proper…and your station in life. In other words, it plays on your vanity and your aesthetic sense of yourself and your surroundings.

These considerations are not absolute. They are relative. Your vanity is flattered not by getting richer…but merely by getting richer than the people around you. Nor do you get much pleasure in living in a better house; instead, the pleasure comes from living in a better house than your friends, family and neighbors.

So even though everyone – again, at least in theory – is better off if the world’s people were able to trade freely with one another, that doesn’t mean that everyone is going to like the results. People don’t like to see others getting richer faster they are – even if they are all prospering. They’ll quickly jump to the conclusion that others are getting rich – AT THEIR EXPENSE.

The next thing you know, some blowhard in Congress will be urging tariffs, fair trade, and sanctions.

We know that Asia is a big winner from globalization. Factories are being built in every Middlesex, village and town. Real wages in China and India are doubling every ten years – or less. Consumption of meat-based proteins is increasing quickly. Apartment buildings and office are springing up overnight. Output is soaring. Coffers of central banks…and private accounts…bulge with foreign earnings.

Last week, we read that Europe is a winner from globalization, too. Europe sells luxury products to Asia and the rest of the world. Perfumes, handbags, chocolates, watches, fashions, jewelry – rich Asians can’t get enough of the stuff. Europeans also manufacture much of the world’s state-of-the-art tools and machinery. Swiss and German toolmakers are renown throughout the globe. And they make planes, and trains, and automobiles, and subway systems, and pharmaceuticals. Altogether, Europe enjoys a trade surplus with the rest of the world, and a heavy surplus with Asia.

That leaves America. U.S. corporations are extremely active on the world stage…but more and more of what they sell is produced in Asia. From a trade standpoint, the United States is the biggest loser in the world. Its deficit surpasses any other nation…and surpasses even what economists thought possible. Of course, the trade deficit is not the whole story. U.S. companies are still very profitable…and many of them are figuring out how to get along in the world marketplace. They employ Asians to cut costs…and sell to Europeans to boost profits. And their owners – capitalists in the United States and abroad – are happy to reap the profits.

But what about the average lumpen in the U.S. of A? Globalization may make him marginally richer (he is able to buy more stuff at Wal-Mart with less money). Still, his wages haven’t really gone up in 30 years…and yes, he got a little carried away in the last great upswing in the credit cycle. Now, he owes more money than ever to more people than ever – including quite a few foreigners.

His leaders told him the new globalized economy would make him rich. Wasn’t he an American, after all – a citizen in the world’s most dynamic, most free and most competitive economy? How come he is having such a hard time making ends meet? He is likely to wonder.

*** Our dear mother is getting ready to leave us again. At 85, she is frail…and fears falling ill far from her friends and family. We urged her to stay for Christmas.

“Do you really have any friends who are still alive?” we asked yesterday.

“Well, not many,” was the reply. “But I feel safer in the United States. That’s where my doctor is…and I want to see all the grandchildren for Christmas.”

On Sunday, we all went out to lunch, after church. We went to a restaurant in Auteuil, on the west side of Paris – partly to give mother a good send-off…and partly because we don’t have a kitchen that works.

It was raining…but the lights from headlights, streetlights, and restaurants reflecting on the wet pavement made the city seem more festive than usual. Maria, walking down the street, pretended to be Gene Kelly, using her umbrella and doing an improvised version of “Singing in the Rain.”

“Things are so much different. I never thought I’d live like this,” mother began. “It was a different world that I grew up in. When I was Maria’s age [Maria will be 21 next month], we were at war. And we weren’t sure we were going to win. And I had never been away from home. But then, with the war, everyone wanted to play a part in it.

“Very different. I mean, we’re at war today, I guess…but it doesn’t seem like it. You wouldn’t think of going out to a fancy restaurant back then. P
tly because no one had any money, and partly because we had rationing…there wasn’t any fancy food. We all realized that we had to tighten our belts and make sacrifices to win the war. Today, I don’t think anyone makes any sacrifices…at least, I don’t see any.”

“But then I enlisted in the WACs – the women’s army corps. They sent me to San Antonio, Texas. That’s where I met so many of the friends I have now…well, those that are still alive. Not many, I’m afraid. They were all so different from me. And they were all so nice. Even those girls that seemed a little tough and worldly; they were actually very nice.

“That’s where I met your father…on New Year’s Eve. We got married the next April. He hadn’t even met my parents. But it was in the middle of the war…and you didn’t know what could happen. He had just come back from the Pacific…and we thought he’d be sent to invade Japan.

“Yes, it was nothing like it is now.”

Edward, 13, ordered foie gras as his starter dish. “I like foie gras,” he explained.

“Isn’t it a little extravagant, letting him eat foie gras?” asked father.

“It’s about the same price as everything else,” Elizabeth replied. “Besides we’re having a little something special because your mother is leaving.”

“Honestly, I never ate foie gras until I was over 60,” mother continued. “I wonder what will happen to this next generation. When you eat foie gras in a marvelous restaurant in Paris, what do you do next? It must be all downhill from here.”

The Daily Reckoning