-- Posted Thursday, 31 January 2008 | Digg This Article
| Source: GoldSeek.com
After a wonderful weekend celebrating Mozart's birthday by gorging on German food, I was in a particularly bad mood to be rudely jostled awake by the sound of alarms ringing in the Mogambo Secret Bunker In The Backyard (MSBITBY). Soon enough, I discovered why; Total Fed Credit was down by a goodly $6 billion last week. Wow!
Now, there are a couple of reasons why TFC could be down. For one, Ben Bernanke and his precious little Federal Reserve might be trying to slow the growth of the money supply, and thus finally brake their decades-long inflationary monetary expansion to belatedly head off a dangerously rising inflation in consumer prices. To this possibility, experienced Fed-watchers will guffaw "Hahahahahaha!" with an ill-disguised and disrespectful tone of scorn and utter, utter contempt.
Another reason is that, maybe, nobody wants to borrow any money, and so the Fed doesn't have to create any new money or credit to accommodate them! To buttress that argument, I present Bloomberg.com, which quotes J. Matthew Dalton at Belle Haven Investments saying that, "Liquidity is out of the market, bidders are pulling away. Without liquidity, you've got a real problem."
And speaking of liquidity, I notice that the enormous $723 billion stash of U.S. government securities actually owned by the Fed (which is a private bank creating money out of thin air for their own purposes, and then using the money to buy the debt of the government, which we taxpayers will have to repay), dropped by $5 billion last week, too! Of course, I don't know what it means because it could mean a lot of things, but it is highly unusual!
Perhaps not surprisingly, bank credit declined $8.9 billion, dropping to the still-staggering sum of $9.3 trillion, which comes out to the banks essentially loaning out $31,000 to every man, woman and child in the whole freaking country, and again not surprisingly, Michael Santoli in Barron's reports that, "Public investors, at any rate, are in a dark mood; they yanked some $13 billion from stock mutual funds in the past week", which neatly and spookily dovetails with the latest reading of Consumer Sentiment, which is down, too.
And I guess it is this "yanking" money out of the stock market that has made margin debt go down, as people are not as anxious to borrow money to make stock purchases, as I gather from Chuck Butler of Everbank World Markets and writer of The Daily Pfennig newsletter, who is not only a guy who knows how money works, but is also a guy who knows that I am NOT a guy who knows how money or anything else works, and carefully explains that, "when margin debt is falling, people are taking money out of stocks."
I was delighted to hear this, as this is one of the few things in the world of economics and finance that I comprehend exactly; when more people are selling something than there are people buying it, then the price goes down, and that means that when there are more people selling stocks than are buying them, the stock market goes down, and all those people who owned those stocks took another loss, and then a tiny bit of incrementally more people one day, suddenly, sit up in bed, alarmed and afraid, and say, "Hey! That Stupid Mogambo Halfwit (SMH) was right about investing for the long term in the stock market; it can't be done for the vast majority of people, and only a tiny minority of people will make money from owning stocks! The majority of us must lose! Damn!"
This is preferable, as far as I am concerned, because people are always complaining to me that their ears actually hurt from my loud harangues about this, and that I am wrong, wrong, wrong, and I reply I am not wrong, wrong, wrong, and they say yes, yes, yes I am wrong, wrong, wrong because look at how high stock prices are, so people who own stocks must be making money!
To such rebuttal, I politely reply, "Hahahaha! You are a moron, and you should be sterilized before you produce any of your mutant, moron children!", which usually really upsets them for some reason, as apparently they were unaware that they are complete idiots.
If they had bothered to ask, I could have shown them the "best case" example, where investors buy a stock and sell it for twice as much. In other words, I buy a stock for $1, and then sell it for $2 (making a 100% profit).
And then that investor who bought it from me can make a 100% profit of $2 (doubling his money, too) by selling the stock to someone else for $4. And how does that guy who paid $4 for the stock make a similar profit? By selling the stock to someone else for $8!
I know what you are thinking. You figure, "Hey! This looks easy!"
So, now it is time to add up, so let's add up, which I am usually pretty good at, if the numbers are few, are all single-digit, I can write it all down and can get back to you sometime early next week with the answer. Fortunately, this is such a case.
So, how much profit was made from all of this selling? $7 (=$1 + $2 + $4)! How much money was spent? $15 bucks (=$1 + $2 + $4 + $8)! Hahaha! Everybody so far has made a 100% profit, and yet twice as much was spent as was made in profits? A lousy 50% total ROI? Hahaha!
And the last guy, who may be otherwise known as the Last Fool In Line who bought at the exact top at the exact highest price, still has to find somebody to sell to at a profit, or the system goes into loss mode. If he sells at $7, taking a $1 loss, then total profits for the system are reduced to $6 (=$1 + $2 + $4 - $1)! And yet the total amount spent in all this investing has climbed to $22 (=$1 + $2 + $4 + $8 + $7)! Now ROI is 6/22= 27%! Hahaha!
It gets worse from here, an no matter how you slice it, dice it, package it, or make Julienne fries with it, the majority must lose so that a minority can gain, as it is a zero-sum game. And that minority is usually Wall Street insiders, the banks and the government-parasite industries.
I can see that Mr. Butler is too smart, too big and too wily to let me grab him by the collar of his shirt and rudely hold him against the wall while I explained all of this to him, my face just inches away from me so that he can smell my foul and fetid breath as my clever way of making the lesson even more memorable.
In fact, he ignores my remark completely, because we were originally talking about how a fall in margin debt means people are selling stocks instead of buying stocks with borrowed money, and he says that margin debt falls when people, "are running away from 'risk'", and sure enough proves his own point by citing the news that, "it was reported yesterday that margin debt, after reaching a high in July of $381 billion, has fallen each month since - to $322 billion. This is just a piece of the puzzle folks. But don't be surprised if this indicator holds true to form."
And since we are talking about the stupid, greedy, corrupt banks and how the stupid, greedy, corrupt banks are killing the economy with over-issuance of money and credit so that they could make more profits for themselves and their little friends, just like stupid, greedy, corrupt banks have always done, as that is their nature.
And I will be paranoid and outraged about it, as that is MY nature!
P.S. To get The Daily Reckoning sent directly to your inbox, sign up for our free email newsletter, or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
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. Click here to visit the Mogambo archive page.
-- Posted Thursday, 31 January 2008 | Digg This Article | Source: GoldSeek.com
