Under Gold's Spell
The Daily Reckoning PRESENTS: For those of you shuffling in to work today, head still ringing from the New Year’s festivities, thinking that the Mogambo would take it easy on you today and talk about his resolutions for 2006, think again…
UNDER GOLD’S SPELL
Rick Ackerman of Rick’s Picks recently wrote, “Bernanke considers himself to be an expert on the Great Depression and the 1929 Crash, and he evidently has Wall Street convinced that under his watch the Fed will not repeat the monetary mistakes that supposedly triggered the deflationary collapse of the 1930s. I would argue that merely by harboring the belief that the Fed will be able to manage a global debt bubble amounting to hundreds of trillions of dollars, Bernanke has disqualified himself for the job.” Hahaha! My feelings exactly! Good one!
But hundreds of trillions? I interrupt to say, “An impressive number, Mr. Ackerman!” Hearing me, I can see a vein pop out on Mr. Ackerman’s neck. But instead of having a couple of his goons throw me out like he threatened to do if I opened my big fat yap one more time when he was speaking, he explains, “The total value of the world’s goods and services economy amounts to no more than $40 trillion. However, the financial economy has a notional value more than six times that size, resting as it does on leveraged financial instruments with a face value estimated by the BIS at $250 trillion.” I have also read of a $350 trillion estimate, for the record, but if you believe the memory of The Mogambo (MOTM), you are a fool.
But, getting back to the subject, the total notional size of existing financial instruments is six times the size of all the actual buying and selling of goods and service in the whole freaking world? Yow yow yow! But even THAT is insignificant, as he argues, “Again, the focus is wrongly on the relatively puny goods-and-services economy. But it is the $250 trillion financial economy that we should be concerned about, since it rests entirely on collateral that has been artificially inflated via credit stimulus.”
All I can do is stare off into space, my mouth hanging open in stunned stupefaction at the enormity of it all. $250 trillion! Trance-like, in my mind’s eye I see gold. Glittering, shining gold, all yellow and golden, saying, “I will save you, Mogambo! And even better, you will be rich for having accumulated gold and silver at these bargain prices, and you can easily finance the long-awaited Mogambo Reign of Terror against all your enemies, both real AND imagined, which is, by this time, probably damned near everybody alive or dead.”
Seeing that I am going off on another tangent of rhapsodizing about delicious revenge, Martin Weiss of Money Report tries to calm me down, saying, “2008 will see gold at over $1,000 an ounce.” Well, I admit that his clever ploy worked. As a guy who has both 1) a wife with a gold crown on her tooth and 2) a pair of pliers in the garage, I LOVE hearing about how gold is going to $1,000 and ounce! I sit down, enthralled.
Jason Hommel of SilverStockReport.com sees how easy it is to get me to shut the hell up, and says that he predicts $40,000 an ounce! I scoot over towards Mr. Hommel and away from that piker Weiss and his lousy $1,000. With me fawning at his feet, I am entranced when he says, “And yet, this prediction of $40,000/oz. gold is conservative. It is important to note that these are not really true growth rates. They are actually decay rates. They show the dollar decaying. Gold’s value cannot grow to infinity, but a dollar’s value can decay away to nothing. So, I’m not saying that gold will have infinite value. I’m saying dollars will become worthless.”
Well, I didn’t once date a math major in college for nothing, and I am telling you that dividing gold by the zero worth of the dollar is, indeed, infinity on the old dollars-per-ounce scale. Or damned close to it!
And for this week’s installment of “Don’t forget about silver!” he says, “Silver will rise to about $8000/oz. You should start investing as early as possible, and you should not really care whether silver is $7/oz., or $9/oz. or even $25/oz.”
So who is buying all this gold? It ain’t me, since I have no money and have no prospects of getting any because I am lazy and hate working, and I have a wife who won’t take a second job and gets real testy when I bring it up all the time. Well, it turns out that lots of people are not like me, and they are buying with enthusiasm, as Martin Weiss says, “The buyers are more aggressive right now because they know that the world is on an inflationary path. They also know that most central banks will do everything in their power to keep their economies tilted toward inflation. The alternative – deflation – is a nightmare to all governments.”
But deflation might be terrific for you! How does a nice waterfront home in Florida for $12,000 suit you? How about a ten-cent cheeseburger? It suits you fine, I’ll bet! But we are not talking about Florida real estate or luscious cheeseburgers, but about gold. He goes on to say, “Historically, when you hear about central banks selling gold, also keep the following in mind: In the late 1970s, the U.S. Treasury sold tons of gold. Traders and savvy investors bought every ounce at every auction, and more. So despite the Treasury sales, gold prices went up, up, and away!”
And keep in mind, too, that in the 30’s, during the Great Depression, Homestake Mining supposedly went up 500% while everything else went, like my life, my dreams and ambitions have gone today, into the crapper.
Weiss also reports that a milestone was set recently, so that the “Chinese are now consuming more natural resources than any other civilization in history.” The upshot of this news is “That’s putting huge upside pressure on prices, which, in turn, is raising general inflation levels around the world.” And on top of that we have central banks creating more money and credit, which ALSO puts upward pressure on prices! And what is the one thing, the one sure bet, the only thing that will protect you against the debasing of your currency/rising prices? Gold!
Perhaps he is sick of hearing me whine about inflation this and inflation that, but Rick Ackerman says that I should “Think of deflation in precisely the way it will come knocking on your door: i.e., as an increase in the real burden of debt. Which is to say, having to pay real rates of 9 or 10 percent to service a mortgage on a home worth less than you paid for it. Or having the rate on your $15,000 of credit card debt boosted from 4% to 12% overnight.”
But we are both on the same page when he asks the timeless question, “Can anyone still believe Keynesian quackery works, or that the key to reviving prosperity is to get consumers to spend yet more borrowed money?”
Well, Congress does, and the Federal Reserve does, and from SafeHaven.com we learn that there may be more than meets the eye to this decision by the Federal Reserve to no longer report M3, the most inclusive estimate of the money supply. They write, “The date when M-3 will start being hidden also happens to be the exact month that Iran will declare economic war against the U.S. Dollar by trading its oil in Petro-Euros on its new bourse.” Hmmmm! But before I can take the time to think about this, he says “But there is more. The Federal Reserve currently has three vacancies within the 19 top Regional Bank and Board of Governor spots. Why? Part of ongoing wholesale resignations. Over the past few years no less than six Federal Reserve Regional Bank Presidents have resigned. This is highly unusual. Two positions for the Board of Governors (there are 7) have been open for quite a while. Plus, six of the 12 Regional Head spots have turned over during the past few years.”
Notice that he is such a classy guy that not once did he use the phrase “rats deserting a sinking ship.” But The Mogambo is not nearly so constrained by civility and breeding, and I say that they, and the whole rest of the Federal Reserve System, are a bunch of filthy, stinking, lying, stupid rats that have made a diseased, pus-filled canker sore of the economy of the United States
What is even more interesting is when they write, “The recent rise in gold catalogued 74 points over about a month, a 16 percent rally from precisely the day the Fed announced it would hide M-3 from taxpayers and citizens of this great nation. That is no coincidence. gold sees hyperinflation, monetization of debt, and intervention into free markets. Gold is telling us it expects Ben Bernanke to be an inflationist.”
All of this over M3? So how big is the M3 money supply? For this we turn to Doug Noland, who says, “Broad money supply (M3) surged $27.3 billion (week of December 12) to a record $10.148 Trillion. Over the past 30 weeks, M3 has inflated $523 billion, or 9.4% annualized. Year-to-date, M3 has expanded at a 7.3% rate, with M3-less Money Funds expanding at an 8.2% pace.”
And we can rely on Doug Noland not only for pertinent data, but to give his unbiased opinion about Ben Bernanke, too, as when he says “We have a full-fledged monetary quack about to take the helm at the Federal Reserve.”
Until next week,
The Mogambo Guru
for The Daily Reckoning
Baltimore, Maryland
January 2, 2006
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, and a vocational 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. If you’re inclined to read more, you’ll find the whole Mogambo here:
“If deflation is such a good thing,” our friend Mike ‘Mish’ Shedlock wrote in the Daily Reckoning last week, “why do central banks fear it?” His comments were picked up the Mises.org site this morning.
Bill is traveling back to London this morning. So here we steal a moment to make a small prediction for 2006: the big “d” – deflation – is going to be coming out of the mouths of the financial commentators a lot this year. Why?
“One answer is because deflation is debt’s worst enemy,” writes Mish. And we’ve got a heck of a lot of debt on our books to worry about.
Frankly, we didn’t realize how pessimistic we were on the economy until we had our weekly chat with radio host Charles Goyette this morning on Air America. But the reasons stare us in the face this morning like a cold cup of coffee after a heavy night of champagne and holiday noisemakers.
The 2-year Treasury pays more than the 10-year note as of last Tuesday, which means the “yield curve” is inverted. And investors view short term U.S. debt with more suspicion than “long-term” debt. It could also mean we’ve already veered around the bend toward a nasty recession. Uncle Sam, who’s been binging on credit for some time now, is barreling for a head-on collision with the Mack truck known as debt deflation.
“If asset prices and wages fall,” Mish reminds us, “people can not possibly ever pay back what they owe. Banks and credit card companies don’t seem to like that state of affairs. Is that a problem with deflation? No, that is a problem created by a reckless lending, easy credit, and endless cheerleading on CNBC every time consumer spending rises and people sink heavier into debt.
“…inflation benefits those that receive money first: the government and banks. The former is via automatic tax increases not indexed to inflation (especially property taxes), the latter simply because banks are first in line to receive money from the FED at rates no one else sees.
“By the time lending standards drop so that the masses have access to credit, the boom is well underway. By the time credit is granted to anyone that can fog a mirror, the boom is nearly over. Those buying assets late in the game will eventually be crushed by those selling assets that got in early.”
“The time to be bullish was back in October,” Jeffrey Saut, an investment strategist with Raymond James, told Reuters this morning. That’s when the market was in the throes of a 26-week swoon. Since then there haven’t been a lot of ways to make easy money.
Another major deflation indicator will be the domestic car and truck sales for December, due out on Wednesday. This data should be quite interesting, since all the car manufacturers that have been advertising have dropped their prices $5,000 – $10,000.
Santa, for his part, failed to show up on Wall Street this year. All three of the major indexes lost ground in the final week of 2005. The Dow lost a percent for the year. And the big winner, the S&P 500, grew by a meager 3 percent. “If Santa Claus should fail to call,” writes the Stock Trader’s Almanac “bears may come to Wall & Broad.” History suggests that if stocks fail to rally late in the old year, or within the first few days of the new, they will fall in the coming year.
And…more news, from our team at The Rude Awakening…
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Eric Fry, reporting from Lower Manhattan:
“Is it a good thing that America inhales $2 billion of foreign capital every day, or a bad thing? Most traditional economists – the kinds of folks who pay off their mortgages, drink powdered milk to save money, and wear both a belt and suspenders – worry that our massive borrowings from abroad will imperil our economy.”
For the rest of this story, and for more market insights, see today’s issue of The Rude Awakening:
Cerebral Striptease – The Final Chapter
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*** One short note from Bill:
“You are doing great work. Because of you there hundreds of people who are eating properly. Because of you, people have jobs. Because of you, we have a future here in Tola.”
The speaker was laying on more sugar than even Jessica. But Padre Walter seemed genuinely grateful to have us. He came on Christmas Day to bless our house (for the second time)…and to say a mass. In a moment, the living room was transformed into a church. A table was turned into an altar…with chairs lined up in front as though pews.
Padre Walter is a short man with close-cropped graying hair. He is responsible for about 15,000 souls in the Tola area, and makes the rounds of 18 different churches, on foot, every two weeks. But he seems to enjoy his work.
“We are pleased to be able to come together here today to bless this home and this family. I saw on your wall you have a picture of the sacred family. Mary, Joseph, and the baby Jesus. This is the day we commemorate the birth of that sacred child. And it is also a day for remembering…and for praying…that all our families are like that special family of Christ. It is our duty as Christians to try.
“And we give thanks to the Lord for bringing this good Catholic family to us here in Tola. [We did not think it would be appropriate to interrupt the Padre by explaining that we were not exactly Catholic…but catholic…or Anglo-catholic…or some variety of Catholic of which a conference of cardinals may not approve. Besides, we had a feeling that we were Catholic enough for Padre Walter.] We know we have to work on building a better community, with better schools and more jobs and more opportunities. But we know too that we begin by building better families. It is our duty to Christ and to each other to love one another as good Christians and to love our children as Christ loves us,”
“We have a large family, Padre,” we explained. “We are not all loveable all the time. But we do the best we can.”
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