The World's Greatest Central Banker

There is one man who has single-handedly led our economy down the road to ruin…which is why the Mogambo Guru has more than a hint of sarcasm in his voice when he calls this man…

An editorial in the October 5th issue of the WSJ, by Cesar Conda, had this priceless quote from a paper by Alan Blinder and Ricardo Reis, both "Princeton economists," commenting on Alan Greenspan.

They said, "We think that he has a legitimate claim to being the greatest central banker who ever lived." Hahahaha! But what else could they say about the guy, when they were all there at Jackson Hole to pay homage to the damned man. But it was a little overboard for me, so I will attack them without mercy, as that is the kind of arrogant bastard I am.

Wayne Angell: This Is Genius?

To prove that the media is biased against me, what you did not read was an editorial by The Mogambo on the same Alan Greenspan, where I quote myself saying, "Alan Greenspan is the worst central banker that ever lived, as will be seen shortly!" This Greenspan is the guy that caused trillions of dollar’s worth of assets to go up in smoke in the stock market collapse in 2000. He did it by first providing the excess money and credit, which was used to bid the assets up to unsustainable high prices, which then collapsed in a fit of common sense, and thus produced the losses.

And then, to compound his calumny, he tried to bail himself and the economy out of the mess he caused by pounding interest rates to absurdly low levels, and thus screwed the living hell out of senior citizens out of hundreds of billions more for years and years. And not just seniors, but others whose incomes depended on that miserly interest income, mostly from certificates of deposit and U.S. Treasury bills. So, millions and millions of people who needed, and depended upon, that piddley little bit of interest income, suffered as they saw their incomes slashed by two-thirds…and more! Does any of this sound like what you would expect from the "greatest central banker who ever lived"?

And insurers need to invest the premiums from the policies they write, but since they cannot make any money on bonds, thanks to Alan Greenspan driving interest rates down and down to save his own nasty butt, the insurers have to make up the difference by charging higher insurance premiums to the policy holders! So, we pay more, even as we get less! This is supposed to be genius from the "greatest central banker who ever lived"?

We also saw the huge, monstrous, freaking enormous expansion in growth and reach of all the levels of government, all financed, in the final analysis, by the Federal Reserve creating all that money and credit, which created tax revenues of all kinds, which was spent on creating huge permanent government programs. Does that sound like what you would expect from the "greatest central banker who ever lived"?

Wayne Angell: A Few Unkind Things About Wayne Angell

And speaking of dimwits, let me also say a few unkind things about Wayne Angell, former Fed functionary of some sort, and now, having been kicked out for what I assume is (to be as snarlingly and ruthlessly unkind as possible) incompetence and stupidity. This is the little, ummm, person, who, not more than a couple of months ago, looked right into the camera on CNBC, and with an irritating little smirk assured us that not only is there no inflation, but that there is not going to be any inflation. The idea that anybody who thinks differently is, and I quote verbatim from memory because the exact words were burned into my brain from the moment he uttered them, "out to lunch." And then I watched helplessly as he sat back in his chair and laughed to himself, because he knew that The Mogambo was out here, watching, and hearing, and now is probably exploding in outrage at such a bald-faced lie…spitting at the television screen, which was a lucky guess on his part.

He even brought up the fact that inflation is "impossible" without wage growth. Which makes sense, sort of, as people need money to keep bidding up the prices of things. And I bring this up because some other jerk "chief economist" at some doofus capital management firm or another was on CNBC the other day (are you seeing a pattern here?), who said the same thing, namely that inflation is "impossible" without wage growth.

Well, that may have been true in the old days, when America had all the money and wages and all the foreigners were on their knees kissing our American butts in thanks for not crushing them like the little bugs they were. But no longer! And the ugly fact is that there is plenty of wage growth…just not here in America. But there is plenty, plenty, plenty big money being made in other places. Wages in China and India, to name but two, are rising, and by a lot, too!

So, if you insist that rising wages are necessary for inflation, then brother, that’s all right with me, because we already got ’em! And since we got ’em, then inflation is not far behind!

And one thing to do about that is, as I never seem to tire of saying, buy gold. And to show you that there is somebody listening to The Mogambo when he declares that anybody with half a brain should prove it by buying gold, the Economist magazine reports, "New figures from the World Gold Council show that demand for physical gold is growing strongly, up by 21% in tonnage terms during the first half of 2005 compared with the same period a year earlier. Supply, meanwhile, increased less quickly, by just 18%, thanks partly to slowing central-bank sales." Wow! Demand is up 21%? So, demand is higher than supply? This latter fact should ring a little bell ("ding ding ding!"), which is Nature’s way of reminding you that the adjustment to the disequilibrium in demand versus supply is always made, in the beginning at least, through the price going up. That the price will continue to go up until enough demand has been destroyed by the higher prices and new supply is brought on-line to take advantage of the higher prices, which in turn, pushes prices back down.

And if you go all the way back to day one of your home-study course in The Mogambo’s Famous Lazy Man’s Way To Get Rich In Investing, you will remember that you must always try to "buy low" as the necessary precursor to "selling high."

Putting this all together, I think that this means you should be buying gold with both hands. And if you are stupid enough to take the advice of The Mogambo, then perhaps you are stupid enough to send the gold to The Mogambo for "safekeeping," after you buy it!

Regards,

The Mogambo Guru
for The Daily Reckoning

October 17, 2005

Mogambo Sez: Sell everything and buy gold and silver and oil, and some guns to keep people from taking your gold and silver and oil away from you.

The rest of the world is full of dummies. And all of our ancestors were dolts.

Or America’s present generation of financial messiahs is composed of fools and quacks.

That is the naked choice that confronts us this morning.

What brings us to this disagreeable menu was a remark by U.S. Treasury Secretary John W. Snow, reported in the New York Times: "Touring a village in the Sichuan province, [Snow] urged China to take a lesson from the United States on how to spend more, borrow more, and save less. He argued that China’s consumers and entrepreneurs are badly in need of financial sophistication offered by American banks and investment banks."

For the last week, ever since our dinner with a pair of sharp fund managers, an idea has been nagging at us. "A country doesn’t need to make anything," said the investment pros, "It can provide services – such as the financial services offered by The City in London or Wall Street in New York. Those services are very profitable because the Chinese can’t compete with them. Their financial industry is not sophisticated enough."

What the dynamic duo were saying appears to be true. The smokestacks in Britain and America have stopped smoking. But both nations appear to prosper. And the most prosperous industry in both nations is finance. Who earns big salaries? Who owns big estates…big cars…and big yachts? What do mamas want their babies to grow up to be? Hedge fund managers! Or ask a father what he wishes for his son. Should the boy take a job on the assembly line…go to college at night…and work his way into management? Or should he go directly to Wall Street? You might as well ask him if he’d rather be stuck in an elevator with one sober old lady, or two young ones who’ve had too much to drink!

What is the financial ‘sophistication’ to which we all owe so much? And how come none of our ancestors, nor any other nation outside of the Anglo-Saxon world, has been able to figure it out?

The Chinese, for example, have been around for a very long time. They were eating spaghetti and firing off rockets when our own Anglo-Saxon forebears were still slithering in the mud of the Dark Ages. It is not as if the Chinese were born yesterday; it is as if they hadn’t been born yet at all. They seem so naïve…so innocent…so benighted. Why the poor people still think you have to save money to get ahead! Can you think of anything so backward, dear reader? It is hard to imagine, isn’t it? We mean that in this great Internet age – with all the world’s secrets available to anyone who can spell google.com – how could the Chinese remain so frightfully un-sophisticated? How could they not know of mortgage equity extraction (MEW), of negative amortization mortgages (Neg Am), maximizing shareholder value (MSV), or flipping condos (FC)? We wonder if they are aware of other breakthroughs; do they know about penicillin, reality TV, rap music? Do they walk on two legs, or four? Maybe they don’t even know how to use a knife and fork.

Here in London, The City is a huge source of money. As we report often, restaurants and nightclubs are full. Yesterday, walking along the Southwark riverbank, we could not even get a table for lunch. We had to retreat inland.

Here, financial sophistication has paid great dividends. As on the other side of the Atlantic, many people found that they could make more money speculating on houses than they could by working. In 2003, mortgage equity extraction (MEW) reached nearly 10% of post-tax income. And it was all so easy…so simple. Why didn’t the Chinese, or 19th century Englishmen, for that matter, realize that they could live so well, merely by borrowing against their houses? We don’t know, but our friend James Ferguson thinks he sees a downside to sophistication.

"Britain’s homeowners are heading for bankruptcy," is his headline in MoneyWeek magazine. "What we could easily be seeing is the desperation phase (before bankruptcy stage)…" House prices are no longer going up in England. What is going up? Mortgage rates. So, people should have cut back on their MEW. That they are borrowing more, not less, is a sign of either dementia or desperation, he thinks.

"In the past, the value of their houses has kept rising and so, accordingly, has their available borrowing pot, meaning that they could always go back for more. But now, flat house prices mean those happy days are over. If they don’t rein in their spending, then the next stop is bankruptcy court."

Maybe the unsophisticated rubes, hicks, Chinese, and dead people aren’t so dumb after all. Of course, The City and Wall Street have made money; the credit mongers have enjoyed the biggest expansion of credit in history. What we wait to find out is what happens when the credit bubble bursts. More below.

First, more news from our currency counselor…

————–

Chuck Butler, reporting from the EverBank trading desk in St. Louis:

"We’ll see the Empire State manufacturing index in a bit, and this is a real wild index. But it most likely will fall in line with the rest of the weak data lately here in the United States, and that will give the euro another good bid."

————–

Bill Bonner, back in London with more views…

*** The Chinese are dopes; we don’t deny it. While Americans have leveraged their economy to buy things they can’t afford, the Chinese have built factories to build things for people who can’t pay for them. Profit margins in many Chinese industries have practically disappeared. Companies know that the way to survive in China is to get big. The Chinese government is always worried about unemployment. People without jobs are a source of trouble. So, if you can grow large enough to employ enough people, the government will make sure you don’t go under. You will be deemed "too big to fail."

This imperative sets the Chinese to work in a preposterous way: building factories, hiring people, making things…with little regard to how they will make money from it. The effect in the West is salutary: prices on consumer items fall. But a drop in sales is going to hurt in China…

That’s why they’re not laughing at U.S. Treasury Secretary Snow in China, they know he’s a quack, but they also know he’s right. Many of China’s factories will go bust when U.S. buying eases off. They’ll have to replace foreign demand (largely from the United States ) with domestic demand. The Chinese themselves will have to loosen up and spend money, get credit cards, and Neg Am mortgages. Then, they can all go bankrupt, not just their manufacturers.

*** We’re buying cheap land in South America. But in today’s paper we discover that we could get land even cheaper in North America. Ellsworth, Kansas, is giving away land to anyone who will agree to live there. Ah…there’s the rub.

We recall, many years ago, we took up a similar offer from the city of Baltimore. The mayor was trying to "revitalize" the downtown area. He gave us two decrepit buildings for $1 each. The buildings were located on East Baltimore Street, near Little Italy. So, when we wanted a good meal, we’d walk a couple of blocks down to one of the many Italian restaurants in the area and hang out with mobsters.

One evening a group of us were walking along when a police car pulled up alongside us. Mistaking us for lost tourists, the officer said:

"What’s the matter with you people? Can’t you see that this is not a safe area? Get out of here."

Baltimore has the highest murder rate in the nation. One of its mayors tried to slow the violence by proclaiming a ‘No Killing Day.’ We imagined the conversations on the corner of Charles Street and North Avenue, between two civic-minded citizens:

"I see you intend to kill me. Don’t you realize that this is ‘No Killing Day’?"

"Oh, you’re right. I’ll have to wait until tomorrow."

Another initiative was aimed at getting handguns out of the hands of people who might need them. The city announced a gun ‘buy back’ program. Like every government program, the results were perverse. The low-lifes turned in their used and worthless guns, and took the money to buy better ones.

But people adjust quickly to their surroundings, and soon begin to think that the extraordinary is routine. We got used to stepping over dead bodies and dodging bullets.

Eventually, the downtown area did turn up. The housing projects were destroyed. House prices rose. But our timing was bad. The buildings we bought in the early ’80s were sold in the mid-’90s. After the cost of renovation, they sold for less than we had invested. Even at $1, the property was overpriced.

*** "I’m going to give you a real Jeremiah this morning," said the minister at St. Michael’s Cornhill, in yesterday’s sermon. Jeremiah, he reminded us, was a bit like The Daily Reckoning – providing unwelcome warnings. For his trouble, Jeremiah was branded a traitor, but he was right. The Jews were soon overrun and taken into captivity in Babylon.

Jeremiah pointed out that the Israelites faced two threats: One from the outside, the other from inside. The greater threat, he said, was internal. Turning away from their God and His laws, they practically asked to be enslaved.

And now all of Western Christendom faces similar threats, the Anglican cleric continued. There are external threats we read about in the paper and see on television. But the bigger threat is internal. We are obsessed by material things, by sex, by celebrities, by wealth, and by the thought that we can do whatever we want and get away with it. But it is not true.

We have heard similar sermons, but never in an Anglican church.

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.