Wounded Wolves on the Financial Prairie

With interest rates approaching zero and the unemployment rate the highest it’s been in 14 years, the Mogambo again takes to the pulpit, trying to make sense of all this madness. But with so few people to listen, the angriest guy in economics is sadly, yet again, left howling at the moon.

I said out loud to the family, "This is interesting news! Bloomberg.com says, ‘The U.S. government’s borrowing needs will almost double to $2 trillion this fiscal year, prompting the Treasury to revive three-year notes and hold more frequent sales of 10- and 30-year debt, according to Goldman Sachs Group Inc.’"

I forced a wooden smile onto my face as I stood up and slowly – so as not to draw attention to myself – started walking towards the kitchen so as to run out of the back door, bolting like a scared little coward to the Mogambo Secret Bunker Of Security (MSBOS) so that I could frantically lock myself in, throw a couple of security systems to the "Fully Armed" position, and clutch my teddy bear tightly to my chest until I finally settled down.

Normally, this would be catastrophic, as that much money added to the money supply would send inflation raging to the moon. But these days, so much money is being lost that even this $2 trillion is not enough to make bond investors wake up out of their fearful trance and demand higher yields in the face of impending inflation, and these bond buyer guys are real idiots, accepting about 4% as a yield on a 30-year bond! Hahahaha! Morons!

In fact, I assume that bond buyers are all drug addicts who are not aware of what they are doing, morons who are not aware of what they are doing, or grubby slicksters who are buying them on behalf of drug addicts and morons! Hahaha!

Bill Bonner here at The Daily Reckoning is apparently not ready to ascribe to my new Mogambo Drug Addicts And Moron Bond Theory (MDAAMBT), but seems more horrified by how much money has been lost, as "Stock markets around the world have deflated by about $10 trillion. U.S. housing has deflated by about $5 trillion", and I seem to recall that the director of the Congressional Budget Office, Peter Orszag, testified that some $2 trillion in retirement savings has been lost over the past year or so.

And as insane as all that seems, it is destined to get a lot more insane, as we can infer from a Wall Street Journal article titled "Two-Year Yield (If You Can Call It That) Tilts Lower", which refers to the ludicrously low yield on government bonds these days with a humorous degree of surprised disbelief.

The article notes, "Last week, the Fed cuts its fed-funds target rate to 1%. Then, the two-year yield touched a historical low of 1.06%", which is so low that I cannot stop myself from laughing at any moron buying a government bond and paying such a high price for it that the imputed yield is one lousy percent!

Hell, the government’s new and "official" GDP deflator (the amount of inflation in prices that must be wrung from raw GDP data to produce "real" GDP) just jumped to an annual rate of 4.2%! Just how stupid do you have to be to lock up your money for two years in order to get $1.08 per hundred dollars, while you lost $4.20 per hundred in buying power? Hahaha! Morons!

Well, as bizarre as that is, it is going to get even MORE bizarre, as the WSJ article went on to say that rate cuts by the Fed are just getting started, and that "HSBC economists expect the Fed to trim the target rate to zero by the end of June"! What? An interest rate of literally zero? Zero! Hahahaha! The mark of the truly, truly desperate!

And, even more startling, "Credit Suisse predicts the two-year yield will drop to 1% by the end of the year and dive to 0.5% by the first quarter of 2009", which is such insanely low yield in light of the sheer amounts of money that the central banks of the world are suddenly creating, and promise to keep creating, that you involuntarily leap atop your desk and howl like a wounded wolf out on the lone prairie, going "OwwwooOOOOoooo!", pausing only to scratch a few fleas while everyone around you is yelling at you to shut up, and then you snarl at them.

In short, I’m insane, and everybody is insane for ever believing that the morons at the Federal Reserve and their childishly-simplistic, brain-dead ilk that infest the majority of the nation’s universities know what they are talking about, when their stupid neo-Keynesian, equation-driven "econometric" stupidities have failed so miserably!

Perhaps Sam Mathid in his essay at 321Gold.com says it best when he notes that "Nowhere is there reference to prior criminality and stupidity on such a grand scale. There is no historical precedent."

This would usually lead me to a long harangue about how you should be buying gold, silver and oil at these low, low prices in response to such monetary and fiscal outrages, but it is late, I am tired, I already have plenty of each.

And if you, too, have plenty of each, then relax, as you have nothing to worry about, and you should go to bed and get a good night’s sleep, too.

And if you do not likewise have plenty of each, then while I am not in the mood to call you a halfwit lowlife ignorant moron who deserves economic death for not having plenty of each, consider yourself enlightened as to your true status, and tremble.

Until next time,

The Mogambo Guru
for The Daily Reckoning
November 10, 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.

The world’s press spoke with one voice over the weekend:

"Now, the hard part…!"

"Obama faces huge challenges…"

"Not an easy time for president-elect…"

And for once…the press is right. It won’t be an easy time for Obama’s team. But the president elect is moving fast; he’s already got a meeting scheduled with an impressive list of advisors – including Warren Buffett and Paul Volcker.

And he’s already got a plan, or at least the beginning of a plan, to deal with the economic threat. He’s leaning towards what the press are calling the ‘big bang,’ approach – a combination of reform, quackery, giveaways, larceny, distortions, meddling, corruption and national bankruptcy. It will probably include a new health care plan, an energy program, a moratorium on mortgage foreclosures, higher taxes, income redistribution, loans and more bailouts.

"Obama can be a Roosevelt and not a Carter," writes David Blake in the Financial Times. "The cure for inflation is tighter money, tighter budgets and more unemployment," he continues. That is the situation that Jimmy Carter faced. And he faced it well; he hired Paul Volcker to run the Fed.

"The cure for deflation is a mix of interest rate cuts, more spending and lower taxes," according to Blake. What luck for Obama. He can do all the things that people love. He can be a hero…he can be another Roosevelt.

And here is where the press errs. The reporters think a balance sheet depression can be "cured." Just give the patient some of that old time medicine – the sweet syrup of more spending, more money, more credit and lower taxes. And almost all the reports we’ve read suggest that a combination of bold initiatives from Washington, along with Mr. Market’s natural tendency to bounce back, almost certainly mean that things are bound to start looking up soon.

Not likely…instead, the ‘big bang’ is going to blow up in our faces…as we explain in a moment…

But let’s stop and look at what happened last week: the Dow went down more than 900 points on the two days after the ballots were counted. Then, on the third day, the stock market rose from the dead. Or, at least, that’s what the bulls were hoping. The bears were just hoping for another chance to sell out.

In any event, the Dow went up only 248 points on Friday. There were few signs of a turnaround. Oil held above $60. Gold rose $4.70 to $736.

(We asked our old friend – Issy Bacher, who predicted gold’s drop – what he saw next. "The correction is not over," says he. Gold could still lose another $100.)

Obama is lucky he wasn’t elected a year ago. At least now it is clear that he’s innocent. He comes to the office facing problems not of his own making. Instead, they were made by his predecessors – notably, Alan Greenspan and George W. Bush. Working together, the two bumblers squandered America’s fortune, drove off her industry, and put just about everyone deeper in debt than ever in history. Did two more hapless, more incompetent, more conniving half-wits ever before conspire to create such a mess?

Alan Greenspan courted power and fame. He got both. But you can’t get power and fame without being a jackass. At least, that’s our conclusion after reviewing the history of the United States of America. Just look at the presidents who got power and fame: Abraham Lincoln…Woodrow Wilson…Franklin Delano Roosevelt. The first two got the United States into unnecessary and disastrous wars…the last one got the United States into an unnecessary and disastrous depression.

Okay…okay…it wasn’t entirely their fault…but it’s our Daily Reckoning, we can exaggerate if we want to…

Alan Greenspan would have been much less popular had he put the brakes on the dot.com bubble in ’97…and the brakes on the housing bubble in 2005. Of course, he probably would have lost his job sooner. But the United States would have a much healthier economy as a result.

And talk about unnecessary wars! And unnecessary depressions! George W. Bush has brought us both! No president ever presided over such a spectacular turnaround in America’s fortunes:

…from a fake budget surplus of nearly $300 billion under the Clinton administration, Bush will leave office with a real deficit approaching $1 trillion…

…coming into Washington at the peak of the bubble of 2000…he’ll blow out of town leaving behind an economy in its worst slump since the ’30s…

…after taking control of the spiffiest, most widely respected country in human history, in 2000, he leaves a country that is widely regarded as broken down…(Russian president Medvedev recently charged the United States with causing the world’s financial meltdown…the French believe US-style capitalism is collapsing, like the Soviet Union in ’89…the Latinos now mock the idea of taking financial advice from the United States.)

…after coming into office lauding the virtues of humble foreign policy and proud capitalism, the United States has taken up a breathtaking combination of bombastic military intervention abroad and abject, swinish collectivism at home.

*** Our intrepid correspondent, Byron King, sends us this note:

"President-elect Obama campaigned on a platform of launching a massive, 10-year buildout of renewable energy systems. In the process, this means that the government will exercise more control over emissions of carbon from the likes of oil and coal. Will the U.S. Environmental Protection Agency (EPA) start setting national industrial policy? Well, that’s sort of built into the election promise, isn’t it?

"But the election is over. Now it’s time to get real. Sure, we can build a lot of windmills and solar installations. More geothermal would be great, too. But the U.S. and world industrial base is limited in what it can turn out, and at what rates. There are constraints in manufacturing, in materials, in systems integration, in the grid, in the labor force and in the regulatory system. And we are going to overcome this in 10 years? By comparison, putting Neil Armstrong on the moon in the 1960s was a piece of cake.

"So will the U.S. – let alone the world – abandon carbon sources of energy in the next 10 years? You just gotta be kidding me. That ain’t going to happen. If it does happen, your world will turn upside-down. Count on it.

"So the long-term thesis of Outstanding Investments – in energy and resources – should still be valid. We just have to navigate our way through the economic and political land mines that are getting dropped like cluster bombs onto the landscape. Remember what Friederich Nietzsche said: ‘That which does not kill you makes you stronger.’ It’s getting past the ‘not killed’ part that’s the hard part."

*** But let’s get back to Obama. Seems like a decent fellow, as near as we can tell. But he has a great temptation to become a jackass. And early indications are worrying; we think we see his ears are growing (more below).

Obama is beginning to realize what he’s up against. This is no ordinary cyclical downturn. Typically, a slump brings interest rates down. (Usually accompanied by central bank rate cuts.) Cheaper borrowing arouses business and speculative activity…which, in turn, tends to get the economy moving again.

This time, that’s not happening. The authorities are handing out money below the inflation rate and practically begging banks to lend… But who wants to lend when there’s a danger you might not get your money back? And who wants to borrow when everyone is desperate to get out of debt?

Today’s Financial Times announces that another 70,000 jobs could be lost on Wall Street. Who needs so many employees when no one’s doing any deals? No one’s borrowing…no one’s lending…investors are running scared…and private equity is curled up in a cave somewhere…

Why? Because it’s a ‘balance sheet recession,’ not a regular, cyclical downturn. People have lost a lot of money…and they’re afraid of losing more. So businesses are cutting back as fast as they can. The job losses aren’t limited to Wall Street. Today’s news from Associated Press tells us that there are 10 million people out of work – the most in 25 years. The New York Times says unemployment is at a 14-year high. (We didn’t study the figures to see how they differ; but we predict that the figures in the last quarter of this year will be even more alarming…)

Everywhere, investment portfolios are being trimmed… cash is more than king; it has become a demi-god. This despite the fact that there are some great investment bargains around.

After "Black October," says the FT, it’s the "buying opportunity of a lifetime."

Stocks were overpriced for the last 20 years. Now, they’re not so overpriced. In fact, by almost any measure you use, they’re fairly reasonable. Compared to the yield, you get from Treasury bonds, for example – a popular method of gauging the stock market – stocks look like a good deal. P/E ratios, too, are in the ‘normal’ range. Or, you can look at James Tobin’s q ratio – comparing stock prices to business net worth. Here again, stock prices don’t look out-of-the-ordinary.

But a ‘balance sheet recession’ is an unforgiving, mean, and tenacious rascal. After such big losses, businesses, consumers, investors, and banks need to rebuild their balance sheets – by paying off, defaulting on, or working out their debt. And then they need to rebuild their confidence…with rising asset prices and a growing economy. All that takes years…many years.

Worse, a balance sheet recession is like a straightjacket; the harder you fight against it, the tighter it gets. When government tries to prevent assets from being marked to market, for example, it delays and obstructs the process of adjustment. Rather than let the debts and mistakes be flushed out, they remain on balance sheets…blocking progress, frustrating change.

"Change is Nature’s delight," said Marcus Aurelius. Trying to stop change – at least in a balance sheet recession – is Nature’s horror. Balance sheets need to be corrected. Until they are corrected future growth can’t happen. So, the whole system is stymied, clogged, stopped up, constipated…like the U.S. economy in the ’30s…or like Japan’s economy in the ’90s…

That’s all we’ve got for today. Until tomorrow,

Bill Bonner
The Daily Reckoning