-- Posted Monday, 25 September 2006 | Digg This Article
Paris, France
Monday, September 25, 2006
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*** We're just watching...waiting...as the great spectacle plays itself out...
*** Autumn's sweet hint of death...LA's desperate homeowners...
*** A lesson in inflation...speculating on Spacs and Starts...the economy may be growing - but are people better off?...and more!
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The big news last week was that manufacturing was turning down. The August drop recorded in the Philadelphia area was the biggest in five years.
What does it mean?
No one knows. But we see things turning down...generally.
And here we offer an erratum serioso. Last week, we reported that the chestnut trees along the Champs-Élysées were still green. We were wrong. True, the plane trees - which are relatives of the sycamore - are still green. But the chestnut themselves have turned brown and gold.
Paris in the springtime is how the popular song goes, but it is in the autumn that we find the city most fetching. Walking to work today, after a rain last night, there was a heavy, moist, decadent odor in the air.
The Champs-Elysées is considered "La plus belle avenue du monde," (the most beautiful avenue in the world). From the Concorde Square to the Arc de Triomphe, fall fashions are on display. Russet flounced skirts match the color of the leaves above them. But like so many other things, autumn in Paris is sweetest because it has a hint of death about it.
We took the news from Philadelphia like a falling leaf. It floated down on Friday...to a swell of murmurs in the financial media...and then lay down on the ground along with the other indicators of fall. Interest rates are going down; the yield on the 10-year U.S. Treasury Note came down to 4.69% last week. Commodities are correcting. Oil seems ready to test the $60 mark. Hedge funds are going bust. And most important, the great bull market in housing is wheezing and gasping.
Four major markets in California now report housing in a death rattle, each one registering lower house prices. The National Association of Home Builders says 10 major markets in the United States are going down and provides a chart that shows what looks to us like the end of the season for the housing boom: one line shows sales collapsing...the other shows inventories soaring. No wonder homebuilders' stocks are at a 15-year low.
And, from Los Angeles comes news that desperate homeowners are offering whatever enticements they can come up with in order to unload their houses. Many provide buyers with news cars and pickup trucks. One offers a fur coat. Another proposes to give the buyer a bottle of Chateau Lafitte Rothschild.
The Idaho paper tells us that sales in Treasure Valley are down 25%.
"Maybe they need some more inflation," said Henry at the dinner table last night.
Henry's 11th grade class is studying economics at his French Catholic school. We were curious; what were they teaching him?
"That inflation is good for an economy," he tells us. "It helps boost economic activity...and it's especially good at increasing exports. At least that's what it says in the textbook."
On both sides of the Atlantic, dear reader, economics as it is commonly taught and commonly learned is more scam than science.
We tried to straighten Henry out:
"Yes, when you inflate the currency, at first the results do look good. Just imagine you had a small town where the total money supply was $100. If the local bank printed up just $10 more...the money supply would increase by 10%. People would feel richer. They'd spend more money. But the supply of eggs, land, and housing would still remain the same...so prices would soon go up...and people would be right back where the started - with exactly the same purchasing power."
"Well, that's not exactly the way my teacher explained it," Henry cut in. "When people begin spending, the money it sets off a boom. People begin to produce more in order to get the extra money. They build more houses and produce more eggs...so people actually have more stuff. Inflation really works."
"No, it's a fraud," we insisted. "Manufacturers may produce more at first, because they get bamboozled into thinking that people really have more money to spend. But actually no one has anymore purchasing power than they had before. They've just got more pieces of paper in their hands. So, the merchants and manufacturers and businessmen may produce more at first...but after they've raised prices to compensate for inflation, then they discover that they can't sell their extra production any more. For the simple reason that people never did have any real increase in purchasing power. They'd just got more pieces of paper off the printing press...they just thought they had more 'money,' or more 'wealth,' or more purchasing power.
"Then, when the producers realize that they can't sell their extra production, they're forced to cut back...so then the economy experiences a contraction...a recession...a slump, equal and opposite to the fraud that preceded it..."
"What do you mean by that?"
"Just that inflated money is a fraud. A swindle. A scam. Inflation is just pieces of paper pretending to be real money. It's counterfeit money. The more of it you put into the system...the bigger the boom at first...but the greater the bust in the end."
"Why don't you just keep inflating?"
"Well, that's what the government tries to do...but the boom gets bigger and bigger...and soon people catch on, and prices rise. And then you've got to have a recession to 'squeeze out inflationary expectations,' as people call it. Then, when people no longer expect inflation, they will fall for the inflation trick all over again."
[Ed. Note: The Feds say U.S. inflation is "under control," but even at the official rate of 4.7% it's by far the worst in the industrialized world. And those official rates are grossly understated...in fact, if you annualize the inflation rates of the last available quarter in 2005, you're talking price inflation of 10%!
What should the savvy investor do? Make sure your money is protected against these factors...see how here:
Profit While Protecting Your Money
More news, from our currency counselor:
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Chuck Butler, reporting from the EverBank world currency trading desk in St. Louis...
"George Soros told us six months ago that the United States would experience a recession in 2007. Of course, none of this means that we WILL have a recession. No one knows for sure...but, the ducks are all lining up on this one."
For the rest of this story, and for more insights into today's currency markets, see
The Daily Pfennig
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And more views:
*** Is this a great business, or what? We read the news and learn about all manner of absurdity and stupidity. Susan Antilla at Bloomberg tells us that Amaranth was not only speculating on gas prices; it was also speculating on Spacs and Starts:
"Spacs are one of those wonderful financial contraptions that only a serious Wall Street mind could devise: A bunch of hedge fund and private-equity types get together with some executives and dream up a name of a new company that might own a business one day. What makes it great fun is that nobody has to work at the Spac full-time.
"With the company duly named, and nobody putting in a 40-hour week, papers are filed with the U.S. Securities and Exchange Commission. Then they invite public investors to fund their venture, which has no revenue, no earnings and, to keep it simple, no operations at all. If they don't find something to do with the initial public offering proceeds within 18 months, investors get most of their money back - that is, if nothing goes wrong, such as a lawsuit that drains the coffers.
"Spac, which stands for Special Purpose Acquisition Company, has a close cousin known as a Start (Specified Term Acquisition Reserve Trust Security). The main difference between the two is the number of different kinds of securities the two hawk to the public."
Warren Buffett says the hedge fund industry is primarily a compensation plan for hucksters in the financial industry. We disagree. We think hedge funds are primarily an entertainment business - for the cynics watching the financial industry. They provide us with an endless supply of laughs.
Amaranth had invested in 25 different Spacs and Starts in 2006. What did the companies do? How did they make money?
Make money? If you have to ask that question, dear reader, you just don't get it. The hedge funds make money by selling their services to unsuspecting investors - often including the most sophisticated unsuspecting investors in the world, those who manage money for Morgan Stanley and Goldman Sachs. The idea is to gamble - not invest - in the hope of hitting it big.
Spacs and Starts are merely another form of way-out-of-the-money speculation. They raise money...and then hope to think of something they can buy that would go up in price. Of course, whenever you buy a start-up company, it's a gamble, because you never know whether it will work out or not. But here, the gamblers gamble other peoples' money on a company even before it becomes a start-up. It is a little like giving money to your brother-in-law and asking him to go to a casino that hasn't been built yet and see what he can do with it. Good luck to all concerned.
*** "America IS a great economy," explained a friend last week. "It not only provides employment for Americans, but also for a big chunk of the Mexican labor force."
Yes, the United States is a great economy. It provides employment for millions...and millions. But the employment it provides illegal Mexicans in 2006 - not to mention recent high school graduates - is not the same as the employment it offered in the 1950s.
Wages, for a big portion of the population, ain't what they used to be. Mexicans do the hard work...but they don't earn very much. This influx of immigrant labor depresses average wage levels. So typical wages go down, even though almost everyone you know seems to be doing better.
Meanwhile, the economy has steadily grown. But are people really better off?
The immigrants are probably better off. But what about the natives?
In the '50s, the typical woman stayed at home. She made dinner. She did the laundry. She took care of the children...and aged parents. All of that activity was out of the moneyed economy...and not counted in the GDP. Since the '50s the GDP has risen - but much of the rise is merely the monetization of activities that were previously unrecorded. Day care centers. Senior centers. Fast-food eateries. Two cars (both husband and wife now commute daily). Gasoline. Lawn care. News clothes for new careers. All these things have boosted the GDP. But have they made life better?
We don't know.
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The Daily Reckoning PRESENTS: What is making the Mogambo crazy with fear this week (or at least as afraid as all the meds he's on will allow)? Just the usual suspects: his wife, the Federal Reserve, and, of course, inflation. Read on...
THE INSANE HELL OF FRACTIONAL-RESERVE BANKING
by The Mogambo Guru
Justice Litle of Outstanding Investments makes the bullish case for gold when he writes, "In oil terms, gold is the one investment that's still very cheap. Historically, gold averaged a cost on par with 15 barrels of oil. Right now, it takes just over eight barrels of oil to buy an ounce of gold."
The good news is that powerful medications I am gobbling by the handful are now speeding to wherever in the hell they go, and are starting to take effect. Hopefully, we will not have a full-blown Mogambo Episode Of Outrage And Vengeance (MEOOAV). Indeed, my spirits are buoyed by the sweet, secure, satisfying knowledge that gold will protect my wealth. And if you don't think so, and you are not putting money into gold and silver and the shares of gold and silver mining companies (and oil, lest I forget to mention it), then I know that you were not a good student in school. To be fair, neither was I, as my whole day seemed to be filled with beating up guys smaller than I and getting beat up by guys who were bigger. And to tell you the truth, that seemed to be a full-time job in itself, on top of the strain of being raised by mere Earthling parents.
And I am also cheered by the "Elliott Wave Gold Update VIII" by Alf Field, which contains the immortal observation that "people who generally buy and hold gold do so because they understand the concept that it is the ultimate store of wealth and that gold provides protection against the inevitable demise of our existing world wide fiat currency system."
And if you were wondering why gold and silver have had such big declines recently, Bill Murphy, of LemetropoleCafé.com, elucidates. "One of my fears was, because of the desperation of those in power in Washington ahead of the coming elections, that they might bomb gold. It seems that was the plan."
And apparently the other central banks are in on the plan, as the ever-affable Chuck Butler, president of EverBank World Markets, reports that he saw a Reuters news item that, "Portugal's central bank sold 15 tons of gold in July and 20 tons in August." He follows this up with the perfect example of central bank stupidity when he writes, "You might recall that central banks all signed an agreement about six years ago that allows them to sell 'X amount of gold each year. Most central banks have stopped selling gold as the price rose." Hahaha! They sell when it is cheap, and they stop selling when they could get more money per ounce! Hahahaha! This is too, too rich! Thanks, Chuck!
And since everybody seems to have a plan, the Big Mogambo Plan (BMP) is to take advantage of this, and buy more gold and silver at these artificially low prices, capitalizing on the corruption and stupidity of the government when this criminal manipulation scheme goes bust, as it must, because that is always the fate of these kinds of lowlife government corruption.
But on the other hand, thanks to all the stress, my nerves are sharp to the point of almost snapping, and the reflexes in my trigger-finger are like greased lightning. The least little thing, and "Blam blam blam!" bullets are suddenly everywhere, although I then have to sit through another hysterical-but-boring "gun safety" lecture from the wife and kids, who aren't even armed, so how in the hell can they know anything about gun safety to lecture me like that?
And besides, I take my cue from the police, like last week around here when some weirdo in a car allegedly smacked his weirdo girlfriend (also in the car) upside the head, and (so they say) threatened her with a gun. Bad enough.
But what happened next is the lesson in economics. At last count, from what I could see on the TV, traffic was snarled for miles, for the entire afternoon, as at least 30 policemen and nine squad cars surrounded this car, now stopped on the side of the highway, plus at least five SWAT team members in full commando armor and with two vehicles of their own, and AN ARMORED FREAKING CAR! Were you asking where all that government spending went? There is a bunch of it, right there, dude! The decades-long bubble in the size of government produced, as bubbles always do, grotesque mal-investments and distortions in the economy. This is merely one of them. An ugly, fascist one at that.
And it is not just America where this kind of idiocy runs rampant, as we learn from Bloomberg.com, "Venezuelan vehicle sales rose to a record in August as President Hugo Chavez used surging oil revenue to increase government spending."
I note with a mix of relief and horror that the governments may be getting a discount for cash to buy all of this police equipment, plus the regular upgrades and new technologies, like CD players in their armored cars, and that is perhaps why the Fed literally printed up another $4,979 million in actual cash last week, which I round off to $5 billion, bringing total dollars of Cash in Circulation to $798.573 billion.
I know what you are thinking. That sharp Mogambo-honed brain (SMHB) of yours is saying, "Hmmm! I am perplexed by the fact that there is only $798 billion in actual cash in existence, and my wonderful SMHB wonders how that little bit of money can produce an $11 trillion economy, a national debt of $9 trillion, consumer indebtedness that is over $30 trillion, $80 trillion in accrued federal government liabilities, $450 trillion in derivatives, a $600 billion annual federal budget deficit, and an $800 billion trade/current account deficit. How is this possible? Or is The Mogambo just an idiot like everyone says?"
I shall answer your questions in reverse order. Firstly, yes, I am an idiot like everyone says. That is why my wife wears a T-shirt that has an arrow pointing to the right that says, "I'm with stupid", and I have to wear a T-shirt that has an arrow pointing left and saying, "I'm the stupid one she is with". She says that it is funnier for her than it is embarrassing for me, and so, she says with an enviable, air-tight economic logic, the shirts maximize that kind of utility. Alas, when she's right, she's right.
But the good news is that, being a now-identified moron, I can scratch my fat butt anytime I want when we are at the mall, and people leave me alone (which is mostly the whole point), and they have pity on my wife, which is what she thinks she deserves anyway. So, it really IS a win-win situation! Who knew?
Secondly, I smile in satisfaction at your wisdom about the monetary insanity, and, putting the last piece of the puzzle into place, merely remark, in typical Mogambo melodrama, "Hear me, doomed ones! It all came from debt, which comes from Federal Reserve credit, from which springs multiplication by fractional-reserve banking, which creates the debt and the money, which is how money now comes into existence! And the fractional-reserve ratio at the banks is so insane that it has financed a debt so huge, so freaking huge, so un-payably huge, so insanely, monstrously huge that no scale created by man can weigh it!"
Taking a question from the audience, "How ridiculous is the fractional-reserve ratio?" I laugh derisively and say "It can only be crudely estimated by the difference between a paltry $798 billion in cash, and the sum total of everything else! Zillions of dollars in assets, created by an equivalent debt! Hahaha! We're freaking doomed! Doomed! Hahaha! Welcome to the insane hell of fractional-reserve banking!"
Apparently, both the Federal Reserve and their fellow American morons missed the significance of the Modigliani Lifetime Income Hypothesis, which holds that, in the particular and in the aggregate, people cannot spend more over a lifetime than they make over a lifetime. If you try to, through assuming debt and then cleverly dying before you have to pay it back, then the loss incurred by creditors will be the offset to THEIR lifetime income, proving Modigliani's original hypothesis.
If, however, you make the big mistake of taking on more debt and then NOT dying, then you will doubtlessly notice that your future consumption will be, by the necessity of the Modigliani's hypothesis, reduced because of your excessive current consumption.
Maybe this is why consumer credit grew at only a 2.8% annual rate, or by $5.5 billion, in July, slowing markedly from June. I dunno.
But nevertheless, it is the inflation in prices that makes me crazy with fear, and sure enough, on Bloomberg.com we read, "Labor costs rose 4.9 percent in the second quarter compared with the 4 percent gain economists expected. Productivity rose at an annual rate of 1.6 percent after a 4.3 percent pace in the previous quarter."
And if you have done your economics homework (which I doubt), then you know that the word "inflation" refers to a growing amount of money in existence, which only later shows up in higher prices. In that regard, Addison Wiggin, co-author of the best selling book "Empire of Debt ", remarks, "If we were to measure economic health by credit expansion, the United States has the worst inflation in history."
And as far as actual price inflation is concerned, TheInternationalForecaster.com estimates that inflation is actually running at 10.8%!
Until next week,
The Mogambo Guru
for The Daily Reckoning
Mogambo sez: I am almost giddy with glee that gold and silver are being manipulated down like this, as it means "bargains galore!" Whee!
Check out EverBank's MarketSafe Gold CD for the easiest and safest way to invest in the yellow metal:
MarketSafe Gold CD
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.
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:
I'm With Stupid
-- Posted Monday, 25 September 2006 | Digg This Article
