Remarkably Robust

The Mogambo Guru is challenged to a battle of the wits by a sharp-tongued vixen. Will he blow her mind with wicked tales of the Federal Reserve, or will they walk, hand in hand, down the path toward Economic Nirvana?

There has been a minor flurry of activity around here lately, due to a letter written to The Daily Reckoning about me. A woman, who describes herself as "in her 20s," wrote the letter.

Our young female friend has – I am ashamed to say – seen right through me. Based on her long experience with this kind of thing, this is how she described me: "The nettlesomely verbose, pabulum-spouting, foaming-at-the-mouth Mogambo Moron."

As pretty and angelic as our 20-something reader might be, she ends up sounding like one of the so-called "experts" testifying in one of my sanity hearings. All I hear is "blah blah blah," so my purely reflexive response, honed by years of usage, blurts out of my mouth before I realize it. It is referred to in official court transcripts as the phrase "Up yours, you little egghead pipsqueak!" followed by a very rude hand gesture and wild, maniacal laughter.

She continues, probably based on her many years and of experience and education in theoretical economics accumulated in her long 20-something life, "Despite occasional recessions and forays into the financial doldrums, the American (and world) economy has proven remarkably robust."

Well, I agree that the world economy has proven "remarkably robust," because it has survived, although umpteen millions and millions of people, some of them also in their 20s, in Latin America, the Philippines, Mexico, Argentina, Malaysia, Thailand, Korea, Indonesia, Brazil and a long list of other countries suffered paralyzing losses when their economies collapsed due to their own idiot debtoholic jackass governments pursuing the same debtoholic jackass economic policies that we are following.

Socialist Dogma: Devalued by 98%

And when you adjust all this "remarkable robustness" by the fact that the United States dollar has been devalued by 98% from its par value in 1913, the year that the monstrously evil Federal Reserve was created, you get a wildly different perspective on the meaning of "robust," as I am here to tell you that every cent of that devaluation of the dollar was paid for, all along the way, every day, by lots and lots and lots of people suffering the misery of not being able to buy as much stuff, buying less and less, week after week, spending every dime, but only getting fewer groceries, fewer medicines, fewer clothes, fewer cars, fewer dinners out, fewer everything.

And furthermore, I am afraid that this 20-something woman, despite her obvious genius, confuses the anomaly of the last 54 years with the last 5,000 years. And when one examines that historical record, one finds there has never been an economy that has proven to be sufficiently "robust" to permanently withstand the kind of economic, death-by-debt stupidity that we are exhibiting. They all failed, probably because they all had populations as greedy and stupid as we are here in America, but certainly because their politicians were as corrupt and stupid as ours. And that is why I wax indignant and incoherent; they destroyed their money, which destroyed their people, and when that happens, the rest of their pitiful individual national histories are not very pretty. And that is exactly, and I mean exactly, the situation that we have right now.

And whither from here and all this robustness? Well, if you had asked Henry Hazlitt, one of the biggest of the big shots in Austrian economics, he could have pointed to a passage of his that reads, "If the welfarist-socialist-inflationist trend of recent years continues in this country, the outlook is dark. It is a prospect of mounting taxation, snowballing expenditures, chronic deficits, a budget out of control, an accelerating rate of inflation of the kind endemic in Latin America (at least for the last generation), a collapse of the dollar, increasing world currency chaos and more and more ruthless price, wage and exchange controls, leading toward a regimented economy and dictatorship. And if this trend is interrupted temporarily, it may be by riots, assassinations and a breakdown of law and order."

Socialist Dogma: The Iron Laws of Economics

But all is not lost. There are also examples of people who have NOT lost their minds after being educated in the American public school system, which exists solely to turn out ignorant little government-obeying robots that think the Iron Laws Of Economics do not apply to us Americans. As evidence of this, another reader who wrote to The Daily Reckoning site said, "America at the moment, with its faith-based currency, faith-based economy and faith-based government, might be a heaven for those who love faith, but it’s a hell for those of us that respect evidence." Exactly right! He even quotes a passage from the Bible, namely Proverbs 27:12: "The prudent sees danger and hides himself, but the simple go on and suffer for it."

After I am elected Supreme Ruler of the World (although I am not yet on the ballot in all states), I will amend that biblical section, as the arrogance of the Mogambo knows no bounds, and the Mogambo Version (MV) shall henceforth be known as Proverbs 27:12 (MV): "The prudent sees danger and hides himself in his steel-reinforced concrete bunker and locks the door, whilst surrounding himself with gold, and silver, and commodities, and victuals and many powerful armaments with which to protect the gold and silver and commodities and victuals, and he shall have multitudes of cases of both brewed and sugary beverages with which to slake his thirst, but the simple go on and suffer for it." Another astute reader notes that "Looking at the hard facts of the predicament of the United States in this world – the colossal debt, the profound depletion of resources, the precipitous decline of the industrial base, the demographic challenge – it is difficult to envision how things will work out to create a better correlation of events for this nation in the long term." And the reason that it is difficult is that it is, in a word, impossible, and if you have ever tried to do something impossible, then you realize that it is always very difficult.

And indeed, the United States, for all its "robust" characteristics, is now on the hook for an estimated $60-74 trillion dollars (depending on whose estimates you are looking at) in discounted present-value dollars, representing both present and future liabilities. This huge bill, which is already bigger than seven times the entire annual gross domestic product (GDP) of the entire nation and is indeed over twice as large as all the goods and services produced by every nation on the whole freaking planet, is, and will be for the rest of your life, coming due and payable and, even worse, getting bigger and bigger.

And no matter how young you are, there will never be a time in your life when you will not be paying this bill that has been run up. And you are going to pay every dime of that bill, either by suffering higher taxes or by suffering crippling, ruinous inflation. There is no other way, because if there were, then someone along the way through the last 5,000 years of economics history would have thought of it.

So all that crap about a "robust" economy is just that: crap. It has been bought, but not yet paid for.

But I am happy to note that she is still in her 20’s, so she will have a nice long life ahead of her to realize her profound error, namely thinking that ridiculous socialist dogma and trust in government all financed by unfathomable debt is not, and has never been, the path to economic Nirvana. It is, and has always been and will always be, the path to economic hell.

Regards,

The Mogambo Guru
For The Daily Reckoning
September 27, 2004

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 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.

Day after day…and nothing seems to happen.

Markets appear either sleepy…or in a coma.

We, poor scribblers of the press, have nothing to talk about.

This is particularly galling to us here at The Daily Reckoning. We keep saying, "This can’t go on forever"…and yet it never seems to stop. The trade deficit, consumer spending, the debt bubble, stocks, house prices – all are doomed. But you wouldn’t know it from reading the daily news. Instead, the ebb and flow of quotidian events seems strangely disconnected from the moon and stars that set the tides in motion. The debt bubble has become so large – it is like Jupiter itself, with a gravity that is bound to pull down asset prices. But amid the rush of news – of company announcements, talking heads, daily stock market quotes and the latest economic statistics – the planets, the stars and the moon are forgotten. The cosmic order is neglected. Instead, we watch TV and our computer screens – and never poke our heads out the window.

We confess, dear reader, that you will get no news from us today. We spent the weekend in Venice, at our son’s wedding. We never read a paper or watched TV. We have no idea what happened on Wall Street on Friday, except – according to a reliable colleague – that nothing happened at all.

So we turn to the news team on the east coast…

__________________________

Eric Fry, from downtown New York…

– "Stock Prices Plummet on Wall Street" may be the headline, but "Oil Prices Soar" is the real story…The lifeblood of the global economy gushed $3.29 higher last week, to $48.88. Poor old Mr. Market never had a chance. The Dow plummeted 237 points during the week to 10,047, while the Nasdaq tumbled 31 points to 1,879. The gold price – seeming to waltz along with the oil market – gained $2.30, to $407.60 an ounce.

– The new week is beginning where the old one left off – share prices are tumbling in Asia and Europe, while energy prices are rising…again. Get used to it, folks. As we have been insisting for months, the rallying oil price – and its evil twin, the slumping stock market – will continue to hang around like annoying houseguests. Indeed, they might just take over the place.

– As these two trends take up residence in the global financial edifice, their relatives might also start showing up: like Cousin Commodity Bull Market and Uncle Long-Term Dollar Decline.

– "Over the next five years, you have a better-than-even chance of oil prices going up another 20 bucks a barrel," says Andrew Clark, a senior research analyst at Lipper. Clark’s prediction seems absurdly modest, like predicting that at least one incompetent politician will hold office during the next 100 years.

– If current trends continue, Clark will see his target price in the next five weeks. Already, oil prices are 73% higher than a year ago. Already, the high – and rising – cost of energy is squeezing the U.S. economy. "Wall Street Braces for Oil Price Squeeze on 3Q Earnings," reads a weekend AP headline. "With crude prices at record highs and the winter heating season just around the corner, Wall Street is having a hard time dismissing worries about rising energy costs," the wire story begins. "A number of companies have cited oil prices as they’ve issued third-quarter profit warnings and reports…Those feeling the pinch include the highest energy consumers – air transporters, who must pay more for diesel fuel, makers of agricultural products like fertilizer and chemical producers.

– "Interestingly, consumers are spending less on energy than they have in the past," the AP story continues, "About 5% of their total outlay goes toward energy, compared with 8%in the 1980s and 6.5% in the 1960s and ’70s." True enough; but consumers are spending about 50% more for gasoline and heating oil this year than they were last year…and that’s the sort of price hike that gnaws away at discretionary spending.

– U.S. refineries are operating at 97% of capacity and are sucking up crude oil as fast as we can pull it out of the ground or import it, which is why our "resource guy," Kevin Kerr, has steadfastly predicted a $50 oil price. Early last week, Kevin scoffed at notion that releasing oil from the nation’s Strategic Petroleum Reserve would dampen the powerful crude oil rally. Releasing oil from the SPR, said Kerr, "is like putting a Band-Aid on an amputated arm…$50 [a barrel] is very possible, and heating oil moving toward $1.50 [a gallon] is not unheard of," he concluded early last week.

– This morning’s trading activity finds the oil price dancing higher once again, and flirting with $50 a barrel. Whatever the result of today’s trading, however, the important item for investors is that soaring energy prices are a long-lived phenomenon, not the fleeting price "blips" that most Wall Street strategists have been praying that they would be.

– In other words, the bull market in resources, while no longer an infant, is certainly no older than a teenager. Natural resources funds have been the best-performing U.S. stock-fund category over the past year, according to investment research firm Morningstar, gaining about 38% on average. But there is plenty of fuel remaining in the resource tank to power these funds to outsized gains over the NEXT 12 months.

– The portfolio Kerr oversees at Outstanding Investments features no less than three energy-focused resource funds: ICON Energy, INVESCO Energy and Vanguard Energy. "I remain confident that all three funds will continue to reward investors," says Kerr.

– Lipper’s Clark, meanwhile, favors State Street Research Global Resources and Ivy Global Natural Resources. Oil, natural gas and coal providers represent about two-thirds of the State Street Research fund’s $636 million portfolio. Alternatively, Ivy Global Natural Resources holds an eclectic portfolio of oil, natural gas, coal and metals companies. The fund’s top holdings as of June 30 featured Brazilian iron ore producer Companhia Vale do Rio Doce, Peruvian miner Compania de Minas Buenaventura and Canadian aluminum giant Alcan.

– Saddle up, cowpersons, this is going to be long ride…

____________________________

Bill Bonner, back in London:

*** Fannie Mae may be about to crumble. Dan Denning sends us this note:

"Accounting problems at Fannie Mae may not be restricted to Fannie Mae. It could be systemic. And a snowball may be about to crush the whole mortgage-lending industry.

Gretchen Morgenson of the New York Times: ‘Most of the mortgages underwritten in the nation today use automated programs designed by Fannie Mae…Fannie Mae is probably not alone in playing fast and loose with financial reality. That there is software out there designed to let corporate users manipulate figures to get whatever they desire certainly indicates that other companies want to obfuscate, too.’"

*** On Saturday night, we stood in a garden in Venice, after the wedding. Venice has a few beautiful gardens – but not many. The town is built on the water; when the tide comes in, you can get your feet wet without leaving your living room. The water comes in under the front door.

But the Hotel Abadessa has a charming little garden that made a delightful spot for a reception. Candles were set up here and there. And a few lights over the liquor table. But the brightest, sweetest light came at no expense and required no wiring: from the moon. Almost full, the moon seemed to smile upon the wedding party; at least, that is what we would like to believe, for there was no switch to turn it off!

"How does the moon affect markets…or the rest of life?" we wondered aloud, in the vicinity of a friend.

"Well, they’ve done a lot of studies. The moon does seem to have an effect on stock market volatility, I think. But I haven’t seen any reliable trading systems based on lunar cycles.

"There is no doubt it has an effect on people. People in nuthouses seem to get stirred up when the moon is full. That’s why they call them lunatics. Babies are born. Old timers plant their gardens according to the moon. People fall in love…and so forth. We can’t quite explain the effect of the moon…but we can’t escape it, either.

"You know, you keep writing about how there are certain rules…or principles…that cause things to happen even if you don’t want them to happen…and even if you do everything you can to prevent them from happening. As you might say in French, merde happens.

"But good things happen, too – things so good you can scarcely believe it, things that we never created and can’t control…the best things, really. Like the moon. Or like falling in love. Or sex. Who invented sex?

"You know, now I get all these e-mails offering to make sex better. You probably get them too. They want to add inches to my private parts…or give me a better orgasm or more orgasms. I don’t get it, because it’s already so nice I can hardly believe it. I feel like leaving well enough alone. ‘Better sex’ seems to me either impossible or ungrateful. As if you thought you could improve one of God’s greatest gifts.

"But people do think they are like the gods themselves…that they can write the laws and make the rules…that they can buy low and sell high…borrow expensive money and pay back cheap money…and that if they are just smart enough, they’ll be able to get away with anything. You know, getting rich without working and so forth. "But, then, there’s that moon…."

*** Hurricanes in Florida are said to have cost the economy of the state $25 billion, according to recent estimates. Many economists and talking heads think this will be a "stimulus" for the economy. A clever reader wrote to say that if hurricanes stimulate the economy, terrorist attacks should be good for it too. Here, another reader picks up the theme:

"The reader from Florida who suggested ‘we abandon all our anti-terrorist activities worldwide’ so that ‘when the terrorists start blowing up targets around the country, there will be a great stimulus of the economy as we rebuild’ did not go far enough with their thinking. Obviously, our military will be underemployed after we abandon our anti-terrorist efforts, so why not have them blow up things in the United States? Not only would the resulting rebuilding effort be a great long-run stimulus for the economy, you’d have the short-term effect of more JOBS!"

*** Today’s Daily Telegraph tells us that the mother church of England is annoyed with its American Episcopalian cousins. The Episcopalians must "repent," says the article, for having ordained a homosexual bishop, or it may be kicked out of the Anglican church community…