-- Posted Saturday, 15 March 2003 | Digg This Article
"...Kurt Richebächer writes "Few people seem to realize that this is the most dangerous economic and financial situation for America since the Great Depression of the 1930s, and accordingly also for the world." Now, I am as curious as the next guy as to what Doctor Richebächer means when he says "dangerous." If a car has plunged over the cliff, but has not yet reached the ground, does the driver look out of the windshield and, noticing that the rocky ground is rushing at him, think to himself, "This is dangerous"? If I look up and see a piano plunging from a penthouse apartment straight down onto my darling head, am I supposed to think to myself "This is dangerous"?..."
The Magambo Guru
- The Fed snapped it's fingers last week and created another five billion bucks of raw credit out of thin air. They bought outright another two billion of US debt. Foreigners and their central banks also gobbled up another five billion smackeroos in the same week.I can imagine what those foreign citizens would say if they knew. "What? We are in budget deficit ourselves, and yet we are buying hundreds of billions of American government debt, so that they can finance a huge budget deficit, so that we show our smarts by locking in yields that are not only the lowest in forty years, but are already lower than price inflation, which is still rising even as we speak, which in effect guarantees us real, inflation-adjusted losses, on top of the losses we will incur as a result of the dollar dropping in value? This is insane!"
Yes, it is. But insanity is now official central bank policy.
Or is it heresy? Daniel Denning writes in the Strategic Investment newsletter, "And so the world's central bankers have now publicly accepted the idea of purposely causing inflation - something that would be been heresy ten years ago."
The Treasury, as usual, went bananas in the last week, and issued another fourteen billion in new debt for us collective Americans to pay off. Mr. Snow's Treasury Department is now a cool $60 billion over the statutory debt limit, a sum which was incurred in three lousy weeks, and showing no signs of stopping. In the last twelve months alone the Treasury has issued $463 billion in new debt! In one stinking year! This is almost nine billion dollars PER WEEK, EVERY WEEK, FOR AN ENTIRE YEAR! And I am supposed to get all googly and my knees turn to jelly when I hear that Congress and the Bush administration are going to have a $300 billion budget deficit? Ooooh! I'm all atwitter!
- There is almost no difference between the Libor rate, the 3-month T-bill rate and the 6-month certificate of deposit rate. Now, admittedly these three generally track each other up and down, but they are not usually so similar in absolute terms. The screwball conspiracy-nut segment of my pathologically fragmented personality is sure that this is more irrefutable proof of international conspiracies, with perhaps intergalactic implications. Probably Klingons.
- The banks continue to invest, if that is the word, in government securities and loaning money for mortgages, and dabbling in that grab-bag called "other securities." The mortgages, I assume, are in the process of off-loading to Fannie Mae or something.
The banks buying up government securities, using long-term deposits to lock in yields that are less than inflation, would seem to be a loser of an idea to guys who are supposed to be in the business of financial savvy. But the banks are not known, nor have they ever been known, for their economic or financial savvy, and will one day soon come begging for another bailout by the citizens when their latest foray into what they smugly consider financial wizardry pans out as well as all their other smug attempts at financial wizardry.
Bankers as a collective whole are obviously idiots, as the history of financial crises in the USA is almost always the result of the banks getting into one grubby little mess after another, and having to be bailed out at considerable expense by the government, which bills the citizens.
Some things never change...
- Is it just the paranoid delusional side of me, or does it seem odd to you, too, that whenever the markets get close to breaking the October 2002 low that the market surprisingly turns up? It may not be just our imaginations.
Let's suppose, for the sake of idle speculation, that the S&P 500 turns down a few points today, but stays above the October closing low of 797. Then the possible statistic in the headlines tomorrow will be "S&P 500 at lowest in five months." Since neither one of us is exactly a spring chicken, although I can't help but notice that the years have been very kind to you, what with your sprightly step and inner glow of youthful vitality, so when it comes to the stock market, as shocking statistics go, five months is hardly worth mentioning. "The market is at the lowest in five months, you say? Ho-hum."
But! Let a woman in your life and your serenity is through! No, wait! That's from the musical comedy My Fair Lady. Sorry. What I meant to say was, But! Let that S&P 500 go a lousy few MORE points lower, to less than 797, then the headline suddenly becomes "S&P 500 at lowest in six years!" Yikes! Now, six freaking years, and notice that I'm talking six long YEARS here, seems plenty to get excited about. The kind where Chicken Little would be running around screaming "The sky is falling! The sky is falling!"
Uh-oh. That quizzical look on your face gives me pause. You are wondering, "Is it just coincidence that the market always bounces just before it hits new lows?" Now I can see by the expression of shock and surprise on your handsome face that your computer-like brain has suddenly remembered the boasts by Bernanke and Poole and Greenspan and all the rest of the Fools at the Fed (wasn't that a Beatle's song?) that they are pledged to prevent deflation at all costs. And if you define deflation as "lower prices for anything," as they do, then Greenspan and his little playmates are actually pledging a sacred oath to insure that people, ordinary people, people just like you and me for instance, bumbling through our dreary lives day after day, will never pay lower prices for anything ever again. How comforting, eh?
As an interesting aside, the Japanese Nikkei has dropped back to where it was in 1983. Twenty years ago. A bear market that lasted twenty years! These are the guys with a huge trade surplus and a populace that saves incredible amounts of money. What was the S&P 500 twenty years ago, meaning the stock market of a country that has an enormous trade deficit and saves practically nothing? About 130.
I can actually hear those little gears turning in your brain, and isn't that a little bead of sweat on your temple?
- Every day seems to bring some new estimate of the burgeoning budget deficit for the next, oh, decade. The range of the cumulative deficits is in the trillions of dollars. Well, first off I want to assure you that projections by the CBO that far into the future are so valueless that the very fact that they came up with the damn projection in the first place is evidence that they have waaayyyy too much time on their hands as it is, and they are reduced to filling up their day with make-work. And, in the second place, I figure that all of the estimates are way, way, waaayyyyy too low.
When the dollar starts sinking in earnest towards something closer to zero value, prices will surge into the stratosphere, interest rates will climb to the same stratosphere, and the effect on the federal budget will be to make a lousy trillion dollars or two in budget deficits over a decade seem like the good old days.
- One statistic that I consider to be salient is the Total Consumer Installment Debt, which climbed again by another $13 billion in January to the new record of $1.739 trillion. Another, related, statistic is the revelation that 308,000 jobs were lost.
So, more debt and less jobs to pay the debt. Fabulous. Just absolutely freaking fabulous. Arching my eyebrows and adopting a countenance of pure snotty smugness, and dripping with sarcasm, I intone, "This is going to work out swell."
- Speaking of the Fed, the consensus is that they will lower interest rates again. After twelve reductions over the course of more than a year, all to zero positive effect, you would think that the average man would suddenly sit bolt upright say, "Huh? Maybe continuous reductions in interest rates are NOT magical, after all!"
But, nooOOOooo! If there is one thing you have to say about the Fed, about Greenspan and about the rest of the clueless weasels that constitute the bulk of the economics cohort of the country's shallow intelligentsia, they are unshakably consistent. And what is that old saying about a foolish consistency being the bugaboo of small minds?
The Fed and the banks and the central banks of the world all colluding to drive interest rates artificially lower has produced not only no positive effects, but has produced myriad negative effects. For example, for every borrower there has to be a lender. Forget for a moment that these days, it seems that, in the majority of cases, the government is the borrower, and the Fed is the lender, and the Fed is lending the money that it has just printed up in the basement, which boils down to government lending to government.
But those low interest rates have also mean a gigantic loss of income for a gigantic section of the real society. And remember that whole compounding thing? Remember how compounding of interest produces those remarkable, magical effects once the situation as been in place for a long enough period? Remember the example of a penny being invested since the time of Jesus would equal some huge number, something akin to a jillion trillion gazillion dollars?
Well, interest rates, and thus income yields to lenders, especially investors in money market funds and bank certificates of deposit, have been so low, and falling so low for so long, that there is a compounding of the pain. And the graphical description of that pain is the mirror-image of the magic of the happy side of compounding.
In the first year, lenders having their yields slashed from somewhere around 6% to 1% causes a loss in income of 5%. Bummer. Unfortunately, spending patterns are usually not altered by 5%, so there is a loss of additional savings at the same time that here is less yield ON those savings. The old double-whammy, or, when using the same metric as the strict loss in income, a double-bummer.
Now, add in the tax bite on that measly yield - income. Triple-bummer.
Now add into the mix that inflation is higher than this puny net yield, which has now been reduced to almost insignificance. This produces a real, that is inflation-adjusted, loss, this time of purchasing power, as each dollar is worth less and less. And this loss of purchasing power is inflicted not only on the yield, not only on the yields of other investments, but on the whole of everything you own! Now this seems that it should be more than a quadruple-bummer.
Up to now, we have only been describing some of the effects in the first year. But, if you care to recall, the whole point of this shrill harangue was the compounding thing. So, now that we are back on track, I posit that in the second year these scrawny rates produce another real loss to savers, investors and everything else. And then the third year more losses, and the fourth year more losses and the fifth year blah blah blah.
- Kurt Richebächer writes "Few people seem to realize that this is the most dangerous economic and financial situation for America since the Great Depression of the 1930s, and accordingly also for the world."
Now, I am as curious as the next guy as to what Doctor Richebächer means when he says "dangerous." If a car has plunged over the cliff, but has not yet reached the ground, does the driver look out of the windshield and, noticing that the rocky ground is rushing at him, think to himself, "This is dangerous"? If I look up and see a piano plunging from a penthouse apartment straight down onto my darling head, am I supposed to think to myself "This is dangerous"?
- For some reason, everybody wants to flap their lips about whether or not deficits cause increases in interest rates. The answer can be obtained in the same way as asking the question "Does speeding in a car cause death?"
The answer is "sometimes yes and sometimes no." But in the end, even if you are not killed outright, or if you do not kill someone else, constantly speeding and attendant excessive braking will cause problems with the engine, with the brakes, with the cost of paying speeding tickets, with having your driver's license revoked, with the cost of gasoline due to your poor miles per gallon results, blah blah blah.
So do deficits cause interest rates increase? Sometimes yes and sometimes no. I'll be more able to address your question, and remember that it must be in the form of a question, when you supply the answer to my question, namely, "Where did the money come from to buy the debt?" Did savers use some of their little nest eggs, their savings accounts at the banks, to buy government debt? Then yes, the deficits will produce the famed crowding-out effect. Or did the Fed print up the money? Then no, there will not be a crowding-out effect, and therefore not directly influence interest rates based on supply and demand for money, but it WILL produce price inflation down the road. Which will THEN raise interest rates. So yes and no.
So, once again, the wisdom of not running deficits, and the ultimate folly of running deficits, is made manifest.
And, also once again, and I can hear you whining under your breath, "Oh, no! He's not going to bring up the damned Founding Fathers again, is he?" the wisdom of the Founding Fathers in mandating, in so many words, in the Constitution, that money shall only be of silver and gold. And now that our money has no relation to silver OR gold, and the government/Fed can now merely print it up at will, and they are doing that very thing at this very moment, then we inevitably get back to why the Founding Fathers did what they did, why they said what they said, why they wrote what they wrote, and where they wrote what they wrote.
But, starting with that arch-communist FDR and continuing all the way up to Alan Greenspan and the present Congress, every single one of these world-class jackasses all figured they were so much smarter than a bunch of old, dead white guys in powdered wigs, short pants and stockings, who merely looked at the whole of world history for advice and inspiration.
- We cannot back out of having a war with Iraq. If tomorrow Saddam says, "Hey! You win! I'm outta here!" what would happen to the "war premium" that is in bonds?
I mean, if the world suddenly went to some happy mode, then what chump in his right mind would loan money to a profligate government at less than the rate of inflation? And that means that bond prices would drop like stones in the market-place. And interest rates would have increases measured in hundreds of percents. Imagine that tomorrow interest rates on short-term money market money went from today's roughly one percent, sometimes even less than one percent, all the way back up to, oh, say, six or seven percent! That would be a 700% increase in rates! Now close your eyes and envisage the newspaper headlines. "700% inflation in interest rates! Economists in shock! President plotzes! Full story, and college pigskin preview, page eight."
Now imagine that short rates go from roughly one percent to twelve percent! How about twenty? How about thirty percent A MONTH? Sounds funny and laughable, huh? Now that you are happily chuckling, and by the way you look so cute when you nose crinkles up like that and your laugh is like music to my ears, come up with the reasons why it will NOT happen! Quick! Come on! Let's go, Mister Chortle Guy! Huh? How will it not happen? Let's hear it!
And an ancillary lesson of history is that people who hold gold will not suffer overmuch. Sometimes they prosper, but they never suffer for very long. Have you ever heard of one instance, in all of history, when gold went to zero purchasing power? Is there one single apocryphal anecdote that somebody ever went broke holding gold? Midas went broke because he had all that worthless gold? They killed and ate the goose that laid the golden eggs, since they needed meat more than gold, and you could not buy meat with gold, since gold was so valueless?
I bring this up because I want it to be very clear in your mind, with a crystal-like clarity, so clear that every syllable seems limned in sparkling sunlight, reminiscent of the way my eyes seem to sparkle whenever anybody asks if perhaps I would like to have some cookies, that I am saying that we are embarking on a period of time that will seem unprecedented, and it will be very unpleasant in the extreme, both in numbers of people affected and the cost to each, and as we shade our eyes with our trembling hands and look out over the coming years we see that it will be for a long time. As measured in decades. And the one thing that you can count on, looking at the historical evidence, is that gold will protect you from whatever happens. Short of confiscation by the government. Which will probably be what happens. The bastards.
The folks at the Daily Reckoning website say, "We recommend that you buy gold, not because we know what will happen, but because we don't."
But since I am such an egotistical and conceited bundle of know-it-all snot, I will bravely go one giant step farther, and say that I personally DO know what will happen. That's right! I know precisely what will happen! And, so, I am recommending that you buy gold, and with both hands snatching it up like a greedy two-year old scrambling for dropped candy, because I DO know what will happen. And what will happen will be bad for every thing that is NOT gold! Or silver. Or commodities. It's just that gold is so handy, small and portable.
- Speaking of gold, Kelly Patricia O'Meara, of Insight Magazine, writes that "What the Bank of Portugal revealed in its 2001 annual report is that 433 tonnes [metric tons] of gold - some 70 percent of its gold reserve - either have been lent or swapped into the market. According to Bill Murphy, chairman of the Gold Anti-Trust Action Committee (GATA), a nonprofit organization that researches and studies the gold market and reports its findings at www.LeMetropoleCafe.com: 'This gold is gone - and it lends support to our years of research that the central banks do not have the 32,000 tonnes of gold in reserve that they claim.'"
"So why would banks do that?" you ask? Well, the deal was that the central banks had all this gold left over from the old days, see, and it costs money to store and guard all this gold, which was an expensive hassle and pain in the old wazoo, and so what they decided to do, in order to get a few bucks rolling in, you know, sorta getting some pin-money but at least "putting assets to work" which was a mantra that was all the rage at the time, was to loan the gold to gold-mining guys who would sell the borrowed gold to customers instead of having to go to the trouble and expense of actually digging the stuff out of the ground and getting their hands all dirty.
And everybody prospered, especially since the artificial explosion in supply kept driving the price down and down, year after year, making the whole thing more and more profitable the whole time.
Murphy goes on to explain: "The essence of the rigging of the gold market is that the bullion banks borrowed central-bank gold from various vaults and flooded the market with supply, keeping the price down. The GATA camp has uncovered information that shows that around 15,000 to 16,000 tonnes of gold have left the central banks, leaving the central-bank reserves with about half of what is officially reported."
"So what?" you ask? Well, now that the price of gold is rising, the huge, gigantic short position is becoming unprofitable for the short position. How big is the short position? Well, if you accept the notion that the 2,000 tonne per year total global output of new gold would now be used for closing out the short position, then it would require 100% of all the gold mined for the next seven years. Seven years!
As a reference, the total short position on the stocks of the NYSE, measured as a percentage of average daily volume, is measured in days, and is 5.4 days at latest calculation, but NOT weeks, and certainly NOT months, and emphatically NOT years, and, with voice rising in volume and actually shaking with emotion, NOT SEVEN, I'M TALKING SEVEN FREAKING YEARS!
But even this is not the big news. We all already know that the price of gold will rise dramatically, and for a long time to come. No, the big news is that, according to Mr. Murphy, "The cartel has been able to get away with lying about the amount of gold in reserve because the...IMF instructed them to count both lent and swapped gold as a reserve." In other words, the IMF told the central banks to practice a variant of fractional banking on a global scale, allowing them to count as reserves something that they loaned out already.
The IMF denies that it did any such thing. But, the article goes on to say, "A footnote on the Website of the Central Bank of the Philippines (www.bsp.gov.ph) in fact directly contradicts the IMF's claim: 'Beginning January 2000, in compliance with the requirements of the IMF's reserves and foreign-currency-liquidity template under the Special Data Dissemination Standard (SDDS), gold swaps undertaken by the BSP with noncentral banks shall be treated as collateralized loans. Thus gold under the swap arrangement remains to be part of reserves, and a liability is deemed incurred corresponding to the proceeds of the swap.'"
To further nail down the case that the IMF is a lying bunch of communist idiots, well, actually that they are liars, and it is me loudly exclaiming that they are communist idiots, O'Meara goes on to note "The European Central Bank (ECB) also made it clear that the IMF policy is to include swaps and loans as reserves. The ECB responded to GATA: 'Following the recommendations set out in the IMF operational guidelines of the 'Data Template on International Reserve and Foreign Currency Liquidity,' which were developed in 1999, all reversible gold transactions, including gold swaps, are recorded as collateralized loans in balance of payments and international investment-position statistics. This treatment implies that the gold account would remain unchanged on the balance sheet.' The Bank of Finland and the Bank of Portugal also confirmed in writing that the swapped gold remains a reserve asset under IMF regulations."
Case closed. The IMF is a bunch of liars that I think are communist idiots.
Now we open the file labeled, "How to make a few bucks on this tasty tidbit of news." Wending our way down to a later sentence in the same article, we read, "John Embry, the manager of last year's best-performing North American gold fund and manager of the Royal Precious Metals Fund for the Royal Bank of Canada, says he is putting his and his clients' money on the 'lunatic fringe' in this dispute." And if you care to examine my credentials, you'll notice that I am, indeed proudly, a card-carrying member of the aforementioned lunatic fringe. So if he were managing any of my money, and he is not, as far as I know, he would be doing the same thing that I am doing and I recommend that you do, too, and that is putting my money on gold.
- Doug Noland writes "Since the beginning of 1998 the ratio of Total Credit Market Debt to GDP has increased from 256% to 303%." Now this is somewhere close to the maximum, historically. Every chart you look at, even the ones that go back to before humans even evolved, and our primitive forebears were still living in trees, don't show debt ratios going higher. And those were stupid monkeys, for crying out loud! If anybody can be expected to be profligate with credit, you would think it would be some stinking primordial primates living in the jungle! So, judging from the historical record, don't go looking for an explosion of new debt formation by modern human beings, the money then used to buy things, and thus to propel the economy higher anytime soon. Maybe if those damned monkeys lined up some credit, okay, but not with modern homo sapiens.
Debt, it is said, can only be dealt with in one of two ways. Either you paid it or you repudiated it. And since the levels of debt are now so high that they cannot reasonably be expected to be paid off, that leaves repudiation of debt.
- There are still people shaking their heads at how mild the recession was. Like this is something unexplained and oddly optimistic. It is not. The mildness of the recession can be easily explained by noting that government hiring and government spending never really dropped. I maintain that the collective government system IS the economy, and as it goes so goes everything else.
- In the Daily Reckoning site today we learn that without fictional pension plan profits, earnings of the S&P 500 would have been $68.7 billion in 2001, rather than the $219 billion they said they made. That means real, take-it-to-the-bank earnings were about a third of what they reported.
And since nothing much has changed since 2001, except maybe get a lot worse, let's see what a revised P/E on the S&P 500 would be with these new, revised earnings. Right now, that index is about 810. Taking a third of the reported $30.34 in earnings, means about ten bucks in earnings. 810 divided by 10 gives a new P/E of, yikes! 81!
And the bad news is that this P/E of 81 uses the optimistic assumption that things did not get worse between 2001 and now. Which they did. In spades. Ugh.
--- Mogambo Sez: There will be a new bull market starting soon, except that this time it will not be in common stocks. It will be in commodities. And in stocks of Chinese companies. Fortunes will be made, more and more, year after year, until busboys in restaurants will be gloating about how much money they made in soybean futures and shares of the Beijing Foundry and Fish Company, and the whole bull-market euphoria and irrational exuberance thing will be in full flower again. Relax.
The Mogambo Guru Lives!
Richard Daughty is general partner and C.O.O. for Smith Consultant Group, serving the financial and medical communities, and the writer/publisher 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.
-- Posted Saturday, 15 March 2003 | Digg This Article
