World Class Imbeciles

The MoGu has decided to drop his challenge for the Nobel Prize in Economics. Apparently he can no longer compete with all those other dimwits. But don’t despair…there’s always the Peace Prize.

It was a record-setting week in the world of economics, as the Federal Reserve increased Federal Credit to a new record of $749.6 billion. A new record! And Foreign Holdings at the Fed are going parabolic, up another $10.6 billion last week, to $1.220 trillion. Another new record!

This debt is so big, so ingloriously huge, so monstrously immense, so impossibly gigantic, a debt so humongous that I am running out of descriptive words to convey its true size. I am on the verge of lapsing into another long string of obscenities. My anger can now only be partially controlled by powerful medications, and it is only the Supreme Willpower Of The Mogambo (SWOTM) that keeps my rage under the guise of control.

In a way, incurring such debt actually has a positive side! I mean, it is one thing to be so abysmally stupid to amass debts this big in every corner of our financial universe, but for foreigners to actually lend us this much money, and just as we are about to start World War III, must mean they are more stupid than we are! It seems incredible, I know. But it is true!

And believe me when I say we have got some world-class imbeciles on our team. I include Mankiw and that unholy crew on the Council of Economic Advisors, and Greenspan and Bernanke at the Fed, and all the rest of those bizarre people, both in and out of the Fed and the government.

Currency in Circulation: 26 out of 42 Nobel Prize Winners

And speaking of dimwits, I have officially given up trying to get a Nobel Prize. I have made this decision because 1) I am an idiot and admit I can’t even impress little children with my intellectual powers, and 2) the Economist sent me a copy of the 2004 edition of their "Pocket World in Figures," and when I was thumbing through the pages looking for the swimsuit section, I find a table that shows "Nobel Prize winners 1901-2002." There have been 42 Nobel Prizes awarded in economics during that time of which the United States has won 26! The next biggest winner on the list is United Kingdom with 8. Everybody else has two or one!

Americans won over half of them? We have Alan Greenspan, a central bank, a fiat currency, and an economics profession that has not raised its voice one time in horror, and yet we won Nobel Prizes in Economics over half of the time? I am aghast! I spring to my feet and scream, with that patented Mogambo banshee wail of anger and betrayal, "Noooooooooo!" Therefore, even if some knucklehead can recognize my brilliance, there’s no way I want to be tarred with the same brush as those other 42 losers.

But out of the corner of my eye I can see an attendant turning his back to me and quietly filling a syringe with tranquilizers. Using the CCTV, they can see me working myself into a tizzy, and the froth is beginning to collect on the floor in puddles.

So while we are waiting for things to settle down, let’s move back, for a change of pace, to a topic that doesn’t appear in quite so many court documents, namely currency. Thus I bring up one of the more surprising statistics from the week, namely the huge increase in Currency In Circulation. It suddenly ballooned – boiiinnnngggg – up thirteen billion smackeroos!

Currency in Circulation: Bank Robbery or Check Writing

There are many people who maintain, and with good reason, that actual currency – the kind made of simple ink and paper – only becomes "money in circulation" when somebody demands it, either by:

1) Sticking a loaded handgun in the face of a terrified bank teller and ordering them to load up this bag with money, and be quick about it, and don’t do anything stupid and nobody will get hurt, and don’t touch that alarm, because bells make me crazy and I already feel like I’ve got spiders crawling on my skin, so hurry up, hurry up, hurry up or…

2) Writing a check against their account, and as the teller then gives them a fistful of money, the guy turns around and sticks it up under my nose and riffles through that big wad of cash and says: "Look what I got! You want some, and you need some, but you don’t have any! But I do!" And then they laugh at me, and then I chase them out into the parking lot, crying and screaming at him to act like a man and strap on some pistols and we’ll settle thing this once and for all, right here in this parking lot, and I keep yelling at him about how they are yellow-bellied cowards until they finally start their cars and drive away, and then I go back into the bank and I have to get at the BACK of the line because nobody would save my place! I mean – my pain never stops!

But it isn’t so. (In case I distracted you with my rant, I was talking about how currency becomes "money in circulation.") I bring this up because money was printed, and given away, in Iraq. They didn’t demand it or borrow it; we just gave it to them. And as you well know, and as I know, and as everybody knows, the money soon goes "sluuurrrpp" into the Global Economic Body, sort of like the pieces of Terminator 2 when being absorbed back into the Cyborg, after getting broken off chasing Arnold Schwartzenegger.

Thus the money supply of the globe is expanded, and thus the dollar is debased some more, and thus imports cost more. The only difference is that instead of money being created by being borrowed, the damn government just gave it to somebody.

So, take the generous donations together with the Treasury loans, which, last week, took us to another new record in ridiculous, bankrupting debt (the number came in at an eye-popping sum of $7.21 trillion, which is, by sheer coincidence, the exact same figure as the average number of insults I get per week, according to recent computer surveys) and I can only think of one word to conclude this essay with: Inflation. Inflation, inflation, inflation…and morons.

Regards,

The Mogambo Guru
for The Daily Reckoning
June 14, 2004

—Mogambo Sez: Arch Crawford publishes the Crawford Perspectives, which tracks the astrological influences on the market. He says "Sometime between mid-August 2004 to March 23, 2005, we think that the market will crash again" and that this is due to a Mars-Uranus thing that happens every two years. The Wall Street Journal reporter, who wrote this up, notes that "It doesn’t guarantee a crash – but it has been evident during every crash for the last 100 years."

Whether or not you believe that the stars and planets influence your life doesn’t matter. Enough people DO believe in it, people who will sell on that basis alone, and then it WILL happen, just like he said. And I note that there isn’t a newspaper on the planet that does not have a horoscope section – even the home page of my Internet server has one. And they are there because people want it, and may even believe in it. So, it ought to be an interesting time, to say the least.

Editor’s note: Richard Daughty is general partner and C.O.O. for Smith Consultant Group, serving the financial and medical communities, and the editor of the Mogambo Guru economic newsletter, an avocational exercise the better 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.

The papers are full of remembrances, eulogies and praise for Ronald Reagan. Even the liberal press – who thought he was a simple-minded dummy when he was in office – can’t find anything bad to say about the man now that he is dead.

It is fitting to get a little soft in the heart when a good man takes his leave of us, but many reporters went mushy in the wrong place.

Typically, the recollections tell us how the Gipper restored America’s faith in itself with his optimism.
Or, how his uncomplicated sense of purpose helped rid the world of communism.

But it’s a rare silver lining that doesn’t have a cloud wrapped around it. Twenty years later, America’s self-confidence has reached delusional levels. And communism? It seems a spent force…alas.

The sly and unappealing thought occurred to us while we were pumping gas at a station along the autoroute on the way home last night. For $60, we got about half a tank of diesel fuel.

Soon, prices will probably be as high in the homeland.

On the front page of today’s International Herald Tribune is a story announcing a fall-off in oil production, even though reserves have increased.

Normally, production rises with the discovery of new reserves. But lately, reported reserves are still climbing, but the amount of oil coming out of the ground is dribbling down.

Readers may recognize this phenomenon as "peak oil," a hypothesis put forward by a growing number of geologists who think the world really is running out of oil – at least at the kind of prices we’ve been used to paying. It used to be that new reserves were found at a rate equal to or greater than current production. Now, major new oil deposits are harder to find; we’ve already looked almost everywhere. At some point…possibly next year…oil production is expected to peak out; the world will never again pump so much of the stuff.

"Everybody lies about reserves," said a source quoted in the IHT article. Apparently, the more reserves a nation has, the higher its production quota. Knowing that everyone else lies about it, even honest nations are tempted to grease the numbers.

Besides, oil is typically regarded as a strategic commodity. Producers keep the truth to themselves.

So, no one really knows how much ready oil the world really has. And no one knows when, and how, actual production will fall off. But however much oil is left, the amount goes down everyday. And if Americans expect to use it, they’re going to have to bid against Asians for it.

One expert, mentioned here last week, estimates that the price of oil needs to rise by more than 400% in order to bring demand in line with real supply.

How fortunate we’ve all been! The industrial revolution gave us such a head start on the rest of the world, we were able to use up much of the world’s easily available energy before the Chinese and Indians ever got into the race.

And thank God for communism! We never understood why Ronald Reagan was so eager to get rid of it. Instead, we give a cheer for Lenin…and a loud huzzah for Mao too. As long as you didn’t have to live in a communist country, it was wonderful. For many decades, it kept millions of people penniless – unable to compete for the world’s oil. And while the U.S. guzzled cheap oil for half a century, communism retarded the economic development of its competitors.

Alas, you can’t be lucky forever. Now, every remaining barrel of oil comes on the market with people bidding for it from all over the planet…Americans, Europeans, Russians…and 3 billion Asians too!

Over to Eric, for more news:

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Eric Fry, from the corner of Wall and Broad…

– Three days have passed since your New York editor departed from an investment conference in St. Michaels, Maryland – his head spinning with fresh ideas and aching from the prior night’s libations. When delicious wines are flowing as freely as interesting investment ideas, it’s easy to imbibe a little too deeply of both.

– The teetotalling Dr. Steve Sjuggerud, editor of True Wealth, produced the highest insight-to-hangover ratio of any conference attendee. The good doctor produced a steady stream of intriguing ideas…without suffering a single hangover.

– "I call it the ‘Sjuggerud Advantage,’" quipped Steve’s publisher, Porter Stansberry. "The guy’s always clear-eyed, clear-headed and ready to roll…it’s really not fair."

– Most of the conference attendees shied away from macro-economic predictions; preferring instead to highlight the virtues of specific stocks. However, a few broad themes emerged from the two-day ordeal:

– Nearly everyone present admitted to some anxiety about the frothy housing market, while simultaneously admitting that they knew of no direct way to protect oneself from a possible drop in home prices…

– "Let’s study the Argentineans," one colleague suggested. "They’ve endured more boom/bust cycles in real estate than anyone. Somebody down there must have figured out how to hedge against a real estate collapse. Let’s find the ‘Argentine Solution.’"

– "I’m partial to the ‘Brazilian Solution,’" your New York editor suggested, mindful of his girlfriend’s imminent return from Sao Paulo next week.

– ‘Nah, I like Argentina better," countered Steve Sjuggerud, as he launched into a story about a deeply undervalued Argentine real estate stock that he had recommended to his "True Wealth" subscribers a few months back.

– "Hmmm," your editor replied, "wouldn’t it be great if you could lock in the value of your American house and use the proceeds to buy undervalued real estate elsewhere in the world?" (We’ve embarked on a new quest, dear reader – a quest to find ways to hedge against a possible drop in home values…details upcoming in the months ahead.)

– Meanwhile, nearly everyone present anticipated renewed weakness in the U.S. dollar and in the U.S. Treasury market, but pledged agnosticism about the future direction of oil and stocks. Your New York editor, despite his devout agnosticism toward the oil price, believes that the price of crude is heading inexorably higher – maybe not quickly and maybe not immediately, but oil prices will definitely rise…we think.

– Renewed terrorism in Saudi Arabia over the weekend confirms our suspicions that the global oil supply is precarious at best. "al-Queda terrorists appear to have unleashed a new tactic in their violent drive against Saudi Arabia’s rulers," the Associated Press reports. "A stepped-up campaign aimed at driving out foreigners and sabotaging the oil sector." Specifically, al-Queda terrorists killed one American last weekend and kidnapped another.

– "Saudi Arabia relies heavily on a foreign work force," AP continues. "An estimated 8.8 million foreigners work among 17 million Saudis in the kingdom"…and these foreigners are getting a little jittery.

– "Now foreigners are barricaded in gated communities, terrified to venture outside," the Los Angeles Times reports. "Some are abandoning Saudi Arabia altogether. Workers at Aramco estimate that dozens of employees have resigned since last weekend. Nervous workers are urging their spouses and children to leave the country for the summer, or longer."

– Maybe the exodus of foreign workers explains why the Saudis just relaxed their laws prohibiting women from working. Two weeks ago, Saudi Arabia repealed a law that had prevented women from working in nearly every profession. According to official figures, only 5.5 percent out of some 4.7 million Saudi women of working age are employed.

– But now that the foreigners are fleeing, The Saudis must look to a new labor force to run its oil operations…let’s get crackin’, ladies, there’s oil in them sand dunes. [Ed. Note: The situation in Saudi Arabia is playing out exactly as John Myers has predicted. This is of great concern. Al Qaeda has changed tactics – instead of unpredictable bombs, they now use surveillance to find Westerners. The westerners are then murdered.

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Bill Bonner, back in Paris…

*** This just in from our sub-continent correspondent, James Boric…

"Dan and I have a loaded schedule this week – all the action starts tomorrow. We are meeting a large proprietary investor tomorrow morning. I am then taking a ride out to a major Indian telecom company to talk with the CFO. We also have several other meetings scheduled with people at McKinsey, Citigroup, and several other large companies."

"Today I spent 30 minutes talking to the gentleman who cleans my room here at the Taj Mahal. He was great. I talked to him about cell phones, the government, soccer, investing and even my beard!

"From talking to people here in Mumbai, it’s immediately obvious that they are extremely optimistic about the future.

"’50 years ago we had nothing,’ he said. ‘Now we have more. Not a ton more, but more. And we will keep working until we are like you. Give us 10 years. Then you come back and visit – and bring your family. You’ll see.’

"He went on: ’50 years ago no one had a phone. Now, we do. 50 years ago, there were no high-rise buildings in Mumbai. Look out your window, now there are. And 50 years ago, Americans did not visit us. Yet, you are here.’

"Of course, he said all of this as he was working – taking care of my room, changing sheets, vacuuming the floor and polishing the furniture. That’s one thing I’ve noticed – the Indians are a hard working group of people. And now that they are democratic and free, they are optimistic that they can change from being a poor country to a rich one – like the U.S.

"I’ll leave you with one parting thought…my Indian friend reminded me that before the Portuguese came to rule India and before the English came to rule India…India was a powerful nation…maybe even one of the most powerful nations in all the world. I wouldn’t be surprised if they get back to that level again. If they do, investors will be rewarded – big time.

"Of course, it’s a risk. But if people can think long-term – at least 5 to 10 years – it could pay off handsomely."

*** At least 3 Fed governors emerged over the weekend to warn of impending rate increases. Sandra Pianelto, William Poole and Jack Guynn all seemed to be preparing the public for the beginning of the Fed’s ‘baby steps’ to higher rates – widely thought to begin at the end of this month.

*** Officially, inflation is running at 4.4% over the last 12 months. Take out food and energy and the rate sinks to only 1.8%. But it is food and energy that are in short supply in the world, especially in the fast-developing world. New factories in China can produce all the flip-flops the world could ever want, at lower and lower prices. But they can’t produce oil…and they can’t produce beef. As the Chinese get richer, they’re going to want more of both.

*** A core inflation rate of 1.8% hardly seems worth getting too excited about. When Ronald Reagan took office, the inflation rate was 14%. The Gipper cut taxes, eased regulations and backed Paul Volcker at the Fed.

What followed was a huge boom. For the next 20 years, interest rates fell and stocks rose. And today, Americans are so optimistic that they expect the same results for the next 20 years – even though initial conditions are practically the exact opposite of what they were in 1980. Today, confidence is high and rates are low. Ideal circumstances for the lumpenproles to lose money.

*** The Fed probably will raise rates by a piddly quarter-point at the end of the month. That way, it can say it was acting responsibly to avoid inflation…while continuing to flood the world with EZ credit. Short-term, adjustable mortgage rates are less than 5%. Real estate is rising by at least twice that rate. A quarter-point increase will make no difference.

*** A friend sends this…a remembrance of Ray Charles. Perhaps America’s householders will find it useful, he says, as interest rates rise.

Busted
by Ray Charles

My bills are all due and the baby needs shoes and I’m busted
Cotton is down to a quarter a pound, but I’m busted
I got a cow that went dry and a hen that won’t lay
A big stack of bills that gets bigger each day
The county’s gonna haul my belongings away ’cause I’m busted.

I went to my brother to ask for a loan ’cause I was busted
I hate to beg like a dog without his bone, but I’m busted
My brother said there ain’t a thing I can do,
My wife and my kids are all down with the flu,
And I was just thinking about calling on you ’cause I’m busted.

Well, I am no thief, but a man can go wrong when he’s busted
The food that we canned last summer is gone and I’m busted
The fields are all bare and the cotton won’t grow,
Me and my family got to pack up and go,
But I’ll make a living, just where I don’t know cause I’m busted.

I’m broke, no bread, I mean like nothing,

(Substitute "$200 basketball sneakers" for "shoes," "BMW" for "belongings," and "swimming pool" for "cow.")