http://www.dailyreckoning.com/Writers/Mogambo/DREssays/MG011507.html Inflation Trumps Being Toasted <hr>"By this time I am wailing in my pain like a little crybaby, and blubbering 'Enough! Enough! For the love of God, enough about inflation, or I'm coming over there to kick your butt!'" <hr> by The Mogambo Guru Total Fed Credit expanded another $7.3 billion to $859 billion last week and another $3 billion in actual cash was created, but being already safely ensconced inside the Fortified Bunker Of The Mogambo (FBOTM) nicely attenuated my stark terror to, thankfully, barely-controllable levels. A few tranquilizers, some assorted anti-depressants, a bourbon neat with a beer back, a little light Mozart on the stereo, my pockets loaded with gold, the door locked, my back against a wall, and a loaded Uzi in each hand make things seem to be under Complete Mogambo Control (CMC). Burdened as I am with gold and firepower, I can't easily provide a wrap-up to the economic year. So instead, I make a waving motion with the barrel, indicating for you to sit down, shut up, keep your hands where I can see them, and turn to Doug Noland's "Credit Bubble Bulletin" column at PrudentBear.com, who reports "For the year, Bank Credit expanded $809 billion, or 10.8% annualized. Loans & Leases increased $12.3 billion to a record $6.076 TN, with a 2006 gain of $621 billion (11.4%). Commercial & Industrial (C&I) Loans expanded 12.6% during the year. Bank Real Estate loans expanded 14.1% during 2006. Total CP has increased $344 billion, or 20.9%, over the past 52 weeks." Now, I've always thought of myself as a hardened, man-of-steel kind of macho guy who had "seen it all" - my big, bulging muscles rippling beneath my shirt as beautiful women swoon at my feet. But the guns fall clattering to the floor, dropped from my numbed, lifeless hands at this terrifying news, my mouth hanging open in stunned disbelief, made even more dis-believable by him also reporting that it is getting worse, and faster, as "Total CP has expanded at a 27% rate over the past 20 weeks." And here come the foreign central banks, putting another $11 billion worth of Treasury and agency debt into their accounts at the Fed, bringing their enormous load of toxic American debt to a record $1.8 trillion. The Economist magazine figures that, "Though there is no agreement on how to measure liquidity, using the global supply of dollars as a proxy," they estimate that "in the past four years it has risen by an annual average of 18%, probably the fastest pace ever." And as all that money showed up in inflation in prices of some things, Bill Bonner at DailyReckoning.com notes that "So many records were broken in 2006, we could barely keep up with them. Private equity was on a roll by year end - with twice as many deals as the year before…financed, of course, by record lending on the part of recordly reckless lenders with a record amount of loose change in their pockets. "Mergers and acquisitions, too, hit record levels. Corporate profits reached record levels. Real estate deals in New York City hit noteworthy records. And of course, so did derivatives. And the Dow itself, as everyone knows, was at record levels. "The Bush administration must have broken all records for spending money…as well as for overseas military misadventures. Housing properties all over the world hit record levels. All over the world, stocks hit new highs." By this time my head is spinning from all the inflation, and I raise my hand to inform Mr. Bonner that I was planning to turn the subject under discussion to commodities, not to torturing me with proof of rising inflation, which I fear even more than the thought of my wife finding out about you-know-what, because if she does, then I'm toast. So you can almost imagine the horror of inflation if it trumps being toasted. So my eyes were pleading, "Give me a break, dude!" I was obviously hoping he would let up, but without missing a beat, he barreled ahead and, in keeping with the commodities angle, said, "So did commodities. Tin reached a 17-year high by year-end. Corn is at a 10-year high. And uranium is near an all-time record high last month, closing at nearly twice the level at which it began the year. Gas prices rose nearly two cents over the past two weeks, to a record high of $3.02 per gallon of self-serve regular, a national survey reported Sunday. But health care, transportation (largely because of record oil prices), and education rose too!" By this time I am wailing in my pain like a little crybaby, and blubbering "Enough! Enough! For the love of God, enough about inflation, or I'm coming over there to kick your butt!" Abruptly, everything stops! The sudden silence is cold and barren, and I see Mr. Bonner's eyes narrow to slits, his lips drawing into a tight, forced smile. Soothingly he says "The National Association of Realtors said that the median price of a home sold in October was," and he pauses ominously before continuing "$221,000", quickly adding "the same as in September, but down 3.5% from October 2005. The previous record drop was a 2.1% decline in November 1990." He seemed so suave and cordial, and the news about roaring inflation in housing perhaps abating was so nice, too, that my hands actually stopped shaking, and I dropped my guard for that one little fateful instant. Sensing the opportunity, he slaps leather and plugs me with "There were record numbers of foreclosures too. Nearly 90,000 homes entered foreclosure in June…17% above the previous year." Gaah! Right through the heart! I'm dying here! So, now I'm laying there on the floor, gasping out my life in ragged breaths, and I'm thinking that this is all getting too, too weird. In my last moments, I am contemplating various ways that this monetary insanity could possibly work out, other than The Mogambo seizing control of the government, punishing the bad, rewarding the good, re-establishing the Constitutional requirement of a gold-backed money, and taking up where Caligula left off because his imagination was too limited. Thus, primed for an alternative, possible scenario, and wondering what the government would try to do to fix the mess they made, I was therefore a sucker for the Bloomberg.com report that "China's central bank relaxed currency controls to make it easier for individuals to buy stocks and bonds abroad and help reduce the value of the yuan." My ears prick up to Full Mogambo Alert (FMA) at this! This, then, is the deal that Paulson and Bernanke worked out with the Chinese! They don't want any more dollars, but what do they want? They want to fuel their economic growth by making stuff! And to do that, they would like to have the machinery, patents, know-how and trade secrets that are rusting away in America. And now, thanks to this nefarious "deal", they will get it all, and we will get all of our dollars back in exchange for giving them ownership of all our means of production! How does that Thomas Jefferson quote go? Something about how if you act like a bunch of corrupt morons and disregard your own Constitutional requirement that requires money to be of only silver and gold, but instead allow the exact polar opposite with a fiat currency and/or zero controls over the actions of the banks (as coordinated by the Federal Reserve to allow them to create too much money and credit) to create an economic system composed of massive government spending and raw, mindless consumption of a parasitic populace, then you will end up as landless, penniless serfs in the very land our fathers gave us? Well, if President Jefferson were alive today, I would call him up and tell him "Hey! Tom! Here it is, dude!" which I am sure he would appreciate knowing. And speaking of Jefferson, my buddy Jeff C. sent me a forward of the "Firearms Refresher Course" which also had another quote by Thomas Jefferson that I particularly liked, and which seems spookily relevant. It read, "Those who hammer their guns into plows will plow for those who do not." And now, putting it all together into this elegant New Mogambo Theory (NMT), we are allowing the Chinese to own our stocks, which means they own our businesses and all the assets, and you can bet that they will be using their increasing wealth and influence to get Congress to outlaw private ownership of guns, because an unarmed, helpless, desperate and angry serf is much better than an armed, capable, dangerous, desperate and angry one. And if you want to hear something else really scary besides the barrage of monetary excesses, Chinese takeover of the United States, gun control and terrifying rumors of a "fat-free" pizza, from SteveQuayle.com we get the news from NASA that "the next solar cycle is going to be a big one. Solar cycle 24, due to peak in 2010 or 2011 'looks like its going to be one of the most intense cycles since record-keeping began almost 400 years ago,' says solar physicist David Hathaway of the Marshall Space Flight Center"…who should know, I guess. The biggest in 400 years! And if you don't think that there will be some dramatic non-linear results, particularly geophysical and weather-related, from all of that enormous volume of energy constantly hitting the earth, accumulating day after day, month after month for the next eight or nine years, then Chaos Theory will be very, very educational for you when you get around to it. And I figure that things will get much worse for commodities, thanks to the effects this solar cycle thing will have on the weather, especially after reading Howard S. Katz, of the One-handed Economist newsletter, who writes that things like commodities go up and down cyclically over time anyway. I immediately interrupt him to say that "ALL things go up and down over time! Like sunspots! I mean, look at the picture, dammit!" Then I hold up a really nice color photo of a huge solar flare, which is huuuUUuuuuge, and there is a little, teensy-weensy dot on the lower, left-hand side of the page, which represents the relative size of the Earth in comparison to this huge solar flaming thingy. But apparently a lively discussion of solar cycles or dealing with rude interruptions is not on Mr. Katz's agenda, and he just powers ahead, saying that "By 1999 commodity prices were again undervalued. But this time it was much worse. Greenspan, by his repeated easings, forced commodity prices below their levels of 1971." To demonstrate with an example, he says that wheat, for one thing, is "well below its Great Depression lows and even below its 1971 lows." Now, he points out, things are turning around again, as they must, because that is why it is called a "cycle", and now he figures that "the second upswing will probably last, order of magnitude, 15-20 years, which is roughly the same time span that most people cite when talking about the cycles in general and cycles in commodities in particular." And, worryingly, the rise in commodity prices seems to be everywhere, as Sean Corrigan, Chief Investment Strategist at Diapason Commodities Management, writing at Mises.org says that the monetary inflation in China is showing up in prices, and that "Noodles are expensive now, and mantou [steamed bread] becomes smaller" and that "Many Chinese people have found the changes of their breakfast recently. What has driven up the food price is the rising of the prices of grain and cooking oil in the whole country." An estimated $300 billion of consumer spending has already disappeared in the USA, as that is roughly the reported drop in mortgage equity withdrawal lately. If you think that the American economy is so powerful and so dynamic that it can ignore a drop of $300 billion in final consumption, then I want to ask what kind of medicine your doctor has you on, because, brother, I need some of that kind of pharmaceutical "you'll believe any silly crap" horsepower right about now! And apparently Stephen Church at Piscataqua of Research could use some too, as I gather from reading his report "The Consumer Crunch: December, 2006 Update." He agrees that "The slowdown in household mortgage debt flow SHOULD lead to a recession - BUT the Federal Reserve is determined to prevent one." He goes on to say that things are worse than just a lousy $300 billion gone missing, as "The latest economic statistics show that consumers depended on new debt for 90% of their cash flow during 2006. In 2005, 88% of new consumer cash flow came from debt." And sure enough, I think that the preliminary effects of this reported $300 billion slowdown in mortgage equity withdrawal seems to be showing up, as he reports that "M2 mortgage-related accounts have been near 0% growth on a year-over-year basis since the end of September. M2 itself has declined to under 5% growth on a year-over-year basis." He further says that "We are experiencing a monthly cash flow pattern that implies consumer debt service levels have become too high," which means to me that nobody has enough money to make the monthly payments on anything new, because every drop of income is being used to service the existing debt, and I am now reduced to stealing money from the employee pension fund and/or my wife's purse. If I get caught at this blatant theft, then I hope I get the same punishment as Franklin Raines and those other guys at Fannie Mae, who are merely being asked to give back part of the bonus money they arranged to "earn" by being so corrupt that Fannie Mae's books are in such undecipherable disarray that they should, by the rules of the NYSE, be de-listed, but are allowed an exception to the rules because Fannie Mae is so freaking huge that it is, literally, "too big to fail." Of course, I am not sure of any of these facts, and don't really care, as it is just a microcosm of the incredible corruption and gluttonous personal enrichment by the rich and powerful that is always pandemic at the end of long booms fueled by an excess of money and credit. Mr. Church is apparently horrified at my outburst of rude, crude, scandalous, slanderous squawking about the filthy corruption everywhere around us, and offers no comment about it at all. But about the apparent lack of money in the hands of the consumer, he has plenty to say, such as "Our preferred liquidity measure includes all checkable deposits included in M1. This measure has declined to under 20 days of funds in December 2006. At the start of the last recession, we had nearly [one] week more of funds at about 26 days." And, I will dryly note, this means that 26 day's worth of savings was not enough to prevent a recession last time, when the economy was smaller, and so it seems silly to assume that only 20 day's worth of savings will be enough this time, when the economy is bigger! Hahaha! The guys at ContraryInvestor.com hear us in the hallway, laughing and talking about this housing thing, and they come out of their office just as I was wondering if, and how soon, mortgage equity withdrawal would start up again so that consumers could increase their spending again. While they did not actually say "In your dreams, you Stupid Mogambo Butthead (SMB)", they said the same thing by noting that using "housing starts" as a proxy for the mortgage market/real estate sector, "The average cyclical peak-to-trough decline in starts historically spanned a 46-month time frame. The shortest contraction on record over the past 45 years was twenty-eight months. Can it really be that the current down cycle is done after only eleven months? We think not." Apparently, they thought that I was still skeptical, and so put another nail in that housing-boom coffin by saying "Moreover, the average percentage decline in starts from cycle top to bottom historically has been just shy of 62%. So far our current experience has been 30.0%." As if that was not enough, "Current levels of U.S. homes for sale [are] really light years above prior historical peaks. And against this context, mainstream commentators are calling for a bottom in housing? C'mon, do you think we're complete idiots?" As refreshing as it is to hear of someone else being thought of as a complete idiot for a change, the point is about the supply of excess housing for sale, which is the subject of "Incredulity Redux!" by Edmund M. McCarthy, of Financial Risk Management Advisors, writing at PrudentBear.com. He writes that the supply of houses for sale is actually bigger than the numbers suggest, as while "We now see cancellation volumes reaching 30%-40%", the error is made when "These cancellations are not, through a quirk, subtracted out of the 'Houses for Sale' inventory, vastly understating supply" Even without this interesting bit of statistical news, ContraryInvestor.com says that the "simple message" is, obviously, "that unless we are about to very meaningfully depart from what has been very consistent historical experience, the housing cycle isn't even close to a bottom right here." Now, Stephen Church at Piscataqua of Research has already opined that "The slowdown in household mortgage debt flow SHOULD lead to a recession - BUT the Federal Reserve is determined to prevent one" and here is ContraryInvestor.com saying the same thing when they write "although it's a very simplistic comment, the Fed will not sit still and watch housing deteriorate to any meaningful degree in 2007." Indeed, they say that if you look at the historical record of a month's supply of homes for sale against the historical movement of the Fed Funds rate, it is "Highly correlated directionally." Hmmm! One goes up, the other goes up! One goes down, the other goes down! Very interesting indeed! But noticing the dark and gloomy music in the soundtrack, you know that it can't be as simple as that, and that something bad is getting ready to happen to that "Highly correlated directionally" thing. Thus, you are prepared when he says ominously, "what seems quite the differentiating factor in the current period is that during this cycle housing price acceleration was not choked off in large part by restrictive credit." He asks, rhetorically, that since interest rates have only moved about one stinking percent, "Is it really a 100 basis point increase in the cost of conventional financing that is responsible for bringing the greatest residential real estate cycle in history to its knees?" In short, it looks like housing prices are headed down because they had gone up too high in an insane inflationary bubble, thanks to the idiotic Federal Reserve creating all the money and credit that made it possible, and now all the interest-rate grease in the world ain't a-gonna change that woeful fact one iota. For a summary of the jobs report, I had planned to say that it looks like the gains occurred in jobs providing services, but then I thought to myself "Why bother working? I'll bet Peter Schiff of Euro Pacific Capital has something to say about it, and it will be even better than anything you could come up with, you moron!" And then I thought to myself "Why are you talking to yourself in the second person? Are you crazy or something?" and I reply "Yes, I am! And I'm very sensitive about it, too, you rude bastard!" In an angry huff at the rude exchange, I stomp off to go to Mr. Schiff's site, and sure enough, I find that he writes "The bloated service sector added 178,000 jobs, while manufacturing shed another 12,000 jobs. What this means is that 178,000 more workers will be consuming goods while 12,000 fewer will be making them." Hahaha! And perfectly phrased, as I was easily able to read sneering, sarcastic contempt into it! The clever wags at the View From Silicon Valley newsletter put it in an acronym, and say, "we invented a new statistic 'CHARGE' (Construction, Healthcare/ Hospitality And Retail, Government, Education) jobs. A distressingly large portion of what jobs there are show up in this category." One of the basic tenets of Dow Theory is that if consumption is up, then production must be up (to supply that consumption), and transportation must be up because the goods have to be shipped. It's not a good sign when one, or some, or all three of these three are not up. Well, if that is true, then Mish Shedlock of GlobalEconomicAnalysis.blogspot.com has some bad news for us when he reports that "the American Trucking Association (ATA) is reporting that the Truck Tonnage Index Plummeted 3.6 percent in November." Mr. Shedlock explains the significance as "Trucking serves as a barometer of the U.S. economy because it represents nearly 70 percent of the tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods." Thus it seems dire that he quotes ATA Chief Economist BOB Costello, who says "November 2006 marked the single worst month for for-hire truck tonnage since the last recession. Both the month-to-month and year-over-year decreases indicate that the economic slowdown is in full gear. The most troubling number is the 8.8 percent contraction from November 2005, despite the fact that year-over-year comparisons are difficult due to the very robust volumes during the same month last year." Many thanks to my pal Phil S, who sent an excerpt from Ian McAvity's 2007 Forecast Issue - #765 of his "Deliberations" newsletter, with a Very, Very Interesting (VVI) chart of the Dow/Gold ratio (how many ounces of gold it takes to buy the index) from January 1900 through December 2006, which is 106 years. This is important stuff because it shows how easily great wealth can be accumulated over the years! The benefit is that now, when you die and your bereaved family are all sitting around the lawyer's office for the reading of your will, and they start wailing and sputtering when they find out that you aren't leaving any of them a damned dime as part of your Final Mogambo Revenge (FMR), you can, instead, leave them with something much better! Namely, they get this Powerful Investing Gem Of Wisdom (PIGOW) as a kind of afterthought, in case there was one stinking time in their whole lives when they weren't making your life into a living hell, either pooping on you literally or figuratively, but you can't think of any…ergo, the endowment of valuable advice, but (pause) no (pause) cash. Now newly updated, the ratio still has only three peaks (when it takes more ounces of gold to buy the Dow Jones index, since gold is so relatively cheap) since 1900: the first was August 30, 1929 at a ratio of 18.47. You remember what happened next. If not, look up "Great Depression" and see if it rings any bells. The second was January 29, 1966 at the ratio of 28.1, at the beginning of a long, grinding bear market in stocks. And the last peak of the ratio was on July 16, 1999 at a record 43.85, as the run of "gold down and stocks up" reversed for only the third time of the century. This brings up the important part of the whole thing, which is that soon after the peak of the ratio, it always fell, and fell, and fell until after just a few years, it took about only one ounce of gold to buy the whole Dow index! And (whee!) we are on our way there, again, right now! The Dow/Gold ratio is, again "right now", still a lofty 19.61, even though the ratio has already fallen from 43.85 in 1999! Only six years ago! Hahaha! This, of course, reflects the fact that gold has trounced stocks since 1999, and this explains why the holders of stocks are saying to themselves "We're freaking doomed!" Which is unpleasant to contemplate, and why the holders of gold are saying "We're freaking rich!" Which is so much more pleasant, because it signifies, among other things, that the means of revenge are almost within my grasp. In more practical terms for the average investor going forward, from the chart it looks to me like the Dow/Gold ratio will again hit the theoretical bottom (when the ratio is 1.00) around the year, ummm, 2020, which is, according to my watch, about 13 short years from now. The very interesting and very telling Big Lesson In Investing (BLIV) is seemingly proved when Mr. McAvity has taken, as an initial investment, a hypothetical one ounce of gold at the stock market peak in 1929. As each Dow/Gold cycle peaked (gold at the low and the Dow at the high), he sold the stocks and bought gold. When the cycle bottomed (gold at the high and Dow at the low), he sold the gold and bought stocks. He then writes that in 1999, that one ounce of gold in 1929 had grown to 252 "units" of Dow stocks. With the Dow/Gold ratio at an "unprecedented" high of 43.85, "the prudent family converted those 252 units of the Dow into 11,050 ounces of gold! This little fictional fable," he reminds us, "started with one unit of the Dow at a peak in 1929. Two tops, two bottoms, and five trades later, it's 11,050 ounces of gold, in 70 years." Five theoretical trades in 70 years would have, from one measly ounce of gold, a 1,105,000% return in volume of gold? Over a million percent gain? My God! This is freaking incredible! Okay, okay; assuming to catch the exact peak is very unrealistic trading, to be sure, but the lesson is that even catching 60% of the moves, you end up with a hell of a lot of assets without a lot of trading in and out, as so your heirs should be happy - nay, glad! nay, happier than glad! - that you have given them this important inter-generational wealth-producing wisdom, instead of bequeathing them some mere grubby money, which they would have spent in wanton over-indulgence and ended up with enemies, health problems, a bad liver and enough money to horribly prolong their miseries with ceaseless, expensive, and very painful medical interventions. And let's not forget silver, which will make the rise in gold seem trifling. And for today's episode of Incredible Market Fundamentals (IMF), we feature the famous silver expert Ted Butler, quoted in James Cook's Market Update from InvestmentRarity.com, who says that he figures that the total short position in silver is a billion ounces! A billion! Isn't the entire physical supply of silver in the Comex warehouses around 200 million ounces or so? And a billion ounces of paper silver have been created and sold short against this measly 200 million ounces of bullion available to settle the contracts? Wow! Against this huge, huge, HUGE potential short squeeze in silver, which will make the price of silver go to the moon when somebody wants his silver and can't get it because the slimebags infesting the commodities pits can't make good on their contracts, he also says "Silver historically had its biggest gains in past recessions"! It just keeps getting better and better! So, if you are not buying silver at these astonishing revelations, then you are indeed a raw rookie at this investing stuff. So watch and learn, my ignorant little one! In summary, the recent sell-off in silver has Mr. Butler saying, "With the prices down, it's going to be time to load the boat. Silver is under-priced on just about every relative comparison one can make. It's under-priced compared to other industrial metals, precious metals, oil, real estate, stock and bonds, even itself when [looking] at it on a historical inflation-adjusted basis." If you want a reason why things are in such a mess, then look no further than the clueless Steven Hofman, who had a hand in it as the "former director of research and policy for the House Republican leadership" who is now writing the Outside Shot column in the January 8 issue of Business Week. Despite all those credentials, it's the Medicare problem that he thinks needs to be addressed, and with a flourish of mathematical wizardry figures that "if the 35 million non-disabled Medicare beneficiaries reduced their spending by a mere 5%, then $13.12 billion would be saved annually" in the federal budget. Hahaha! $13.12 billion a year? Hahaha! Big freaking deal, Stevorino! That's chump change! Hell, the federal government borrows more money than that every freaking week, you moron! Jeez! Ugh. ****Mogambo sez: It's a very good time to really load up on gold, silver, and other commodities like, especially, uranium and oil, as these prices are unrealistically low. My teeth actually ache from the bargains being too sweet!