Point the Bony Finger

The angriest man in economics gets drunk – a volatile cocktail indeed. Stir in a dash of Federal dishonesty and you get, well, er, Mogambo on Monday!

We won’t have to sit around in some smoky bar getting drunker and drunker waiting for the Producer Price report to come out. It came out. Prying open one eye and inexplicably slurring our words, we complained that the words on the page were swimming around, and now that we mention it, the floor seems to be spinning around, too, but we sobered up plenty quick when we realized it was bad news all around, and after reading it we all decided to crawl back into the bar and have a few more drinks to dull the pain.

With a vicious headache and hangover – which came out of nowhere – I squinted at Bloomberg’s report, which declared that "U.S. producer prices rose 0.7 percent in April. Wholesale prices were 3.7 percent higher in April than a year ago. Prices of crude goods, which are used at the earliest stage of production, rose 3 percent. Over the last 12 months, the costs of crude goods jumped 20.4 percent. Energy prices rose 1.6 percent in April after rising 0.6 percent in March. Gasoline prices increased 3.4 percent. The cost of dairy products jumped 10.4 percent, the biggest rise since July 1946. Prices of steel mill products increased 6.3 percent in April, the biggest rise since a 6.8 percent surge in July 1974."

Then, in an odd coincidence that I hope you find as amusing as I did, Federal Reserve Bank of Chicago President Michael Moskow said: "At some point, Federal Reserve policy makers will raise interest rates to ensure inflation doesn’t accelerate." Hahahaha! And what point will that be, Mr. Moskow? Prices are rising at alarming, highly inflationary rates everywhere you look, and they are accelerating with every tick of the clock, tick, tock, tick, tock, all the time with the ticking and the tocking! Prices going up click click click with every tick, tock, tick, and so it comes out sounding like tick, click, tock, click, which is driving me crazy! Crazy, I tell ya! Tick, tock, click, clack! Yaaaaaaaaah!

Michael Moskow: Isn’t This the Same Fed?

The Fed has steadfastly ignored and even lied about inflation, just as they have ignored my calls and letters calling their attention to this fact. But they can’t say that I did not warn them, as all my correspondence with them starts off with "Dear Butthead." And yet Mr. Moskow, who would be squirming in his chair like a cornered rat if only the Mogambo could get into his office and confront him face to face, mano a mano, eyeball to eyeball, thinks that: "At some point, Federal Reserve policy makers will raise interest rates to ensure inflation doesn’t accelerate." Hahahaha! My laugh is mirthless and scornful, sir! Isn’t this the same bunch of Fed – and pardon my French – jackasses who voted unanimously on May 4 to keep the Fed Funds rate at 1%, a 46-year low?

And didn’t this same Fed just say that they will raise interest rates at a "measured" pace to head off inflation? And is one percent – a measly one percent, the astonishingly low rate that they just voted to maintain – a "measured rate"?

This is where I hit the "play" button. We hear a clash of symbols and horns blowing fanfares, and I throw off my disguise to reveal – standing before you in all his glory – The Mogambo! The lights dim as the towering figure of immense power and mystery raises an arm and points the Bony Finger Of The Mogambo (BFOTM) at Mr. Moskow, and with a cold voice of thunder that freezes the blood, the MoGu says: "And now, lowly infidel, are you telling me that they will raise rates ‘at some point’?"

Stunned, and in silence, the theater is transfixed. Then the Mogambo laughs: "Hahahaha!" The audience is delighted, another masterpiece, clap clap clap, and the curtain falls.

M. Auerback, in that ‘never-before-in-any-of-the-annals-of- history-type-of-narrative’ that I find so compelling, points out: "The 10-year yield now is higher, in relation to trailing money market rates, than it has ever been prior to a rate hike by the Fed. And not just by an inconsequential amount, but something in the order of 50- 100 basis points."

Michael Moskow: Inflation Is Already Accelerating

So take another look at that list, Mr. Moskow, and then tell me again how the Fed is going to raise interest rates "at some point…to ensure inflation doesn’t accelerate." Hell, it is accelerating right now! And they did nothing! Nothing! Not only did they do nothing, but they continued to apply the same insanely low rates to the point that they are inspiring changes that have never happened before, ever, in all of history!

I instantly drop down to a cooler level, and with an oily, treacherous voice – that drips honey to disguise the poison of my innermost demons – I say, "And, by the way, while we are on the subject, Mr. Moskow, perhaps you will be surprised to hear that the Commerce Department said retail sales fell by 0.5% in April. The Labor Department reported initial jobless claims increased to 331,000, up from the 318,000 reported last week." I can see he is staggered at the revelation.

Coldly, I relentlessly continue: "The Labor Department, as we just mentioned, released the Producer Price Index, showing an increase of 0.7% in producer prices, an annualized rate of 8.4%." He collapses to one knee under the onslaught, clutching his chest. With no mercy, my eyes are, by now, mere slits, hiding the steely blue eyes that glint with the gleam of cold ice, I deliver the final punch: "The Consumer Price Index was released on Friday, and it shows the same unhealthy rise in price inflation!" He is now on the floor, gasping for breath! The referee counts him out…8…9…10. The crowd roars its approval! Yayyy! Yayyy! Viva Mogambo!

A normal man would have collected the trophy, picked up the prize money and gone home. But I am The Mogambo! So I reach down, and I pull Mr. Moskow’s bloody head closer to me, and I scream in his face: "So let me see if I have this straight, you horrible little twit. Sales are down, people are losing their jobs, and prices are up? And yet nobody sees this as iron-clad evidence that Alan Greenspan and his cabal of idiots at the Federal Reserve are incompetent boobs and their whole preposterous clot of dimwitted wishful theories are all wrong?"

This only proves what I have been saying all along; Americans ARE morons. All except me. And you. Which is not true, I know, but sometimes it sure FEELS like that.

Regards,

The Mogambo Guru
for The Daily Reckoning
May 24, 2004

— Mogambo Sez: I peer through the periscope of the Mogambo Bunker, and I note that things just keep getting more and more weird, and they all see me looking at them through that periscope, and they all think I am getting more and more weird, and I AM getting more and more weird, and so that proves that they are ALSO actually getting more and more weird.

But holding gold in one hand and a powerful handgun in the other seems to calm me down. I am calming down. I am getting calmer and calmer. I am calm. I am perfectly calm. I can make it through another day.

Editor’s note: Richard Daughty is general partner and C.O.O. 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.

William McChesney Martin holds the record for sitting in the Fed chair the longest. Alan Greenspan, if he lives to the end of his next term, will outlast him.

But Greenspan has already gone way beyond Martin in other ways. Martin saw the Fed as a party-pooper. When things started to get out of hand, said the former Fed chairman, the Fed’s proper role was "to take away the punchbowl."

Paul Volcker took the punch bowl away in the early ’80s and practically sent the entire economy into delirium tremens. Investors sweat and shook as stocks collapsed and Treasury bond yields rose above 15%. Revelers were so upset they burnt an effigy of Volcker in front of the Treasury building in Washington.

But his successor is a real party animal; if anyone poops on this party, it won’t be the current Fed chairman.

As consumer debt hits new records…house prices in LA rise at 30% per year…and gasoline becomes more expensive than ever…Alan Greenspan edges over to the punchbowl. But instead of taking it away, he pours in another 5th of booze! Leaning on the short end of the scale, with a 1% overnight lending rate for only the second time in history (the first time was during the Great Depression), the Fed Chairman keeps the juice flowing. Bond investors’ speech is already slurred and their judgment impaired; how else do you account for T-bond yields at about the same levels as during Martin’s era, a half-century ago?

"They allow you to do a lot of crazy stuff," said a mortgage banker in the Detroit Free Press, referring to the lowest interest rates in 2 generations.

Readers from dry counties, if there are any left, may not know this, but alcohol is sometimes called a ‘social lubricant.’ Put enough of it in the punch, and people often slide into situations they will later regret.

Consumers, for example, are not likely to cherish their memories of the debt they ran up while under the influence of Alan Greenspan’s lubrication. Homeowners are likely to regret their large, adjustable rate mortgages, for example, when rates rise and the time comes to pay the money back. Nor are stock-buyers likely to send thank-you letters to the Fed Chairman, after the Dow goes down.

But not every partygoer suffers a hangover. Leaving early, a stock seller might have cause for congratulations, rather than regret. In fact, sellers should be grateful. They might even want to get together now and buy the Fed chairman a little gift. Perhaps a silver punchbowl.

"Company insiders are selling like it’s 1999," begins an article in the New York Times:

"Across corporate America, executives have been selling company stock as if it were 1999…no matter what happens to profits or stock prices over the next year, some executives have already locked in multi-million dollar paydays.

"Executives sold $14.4 billion worth of company stock in the first 4 months of this year, compared to $4 billion in the same period last year, according to Thompson Financial."

Thanks to Alan Greenspan, "never have so many people made so much money," said Charlie Munger at the recent Berkshire hullabaloo in Omaha.

But let’s look at what’s happening right now…with some more news from Eric…

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Eric Fry, reporting from Wall Street…

– Nothing much happened on Wall Street last week. And whenever nothing much happens, the task falls to us journalists to try to make something from nothing…so let’s get started:

– After five days of noncommittal trading action, stocks, bonds and the dollar all had very little to show for the trillions of dollars worth of "buy" and "sell" orders that coursed through the these markets. The Dow Jones Industrials slipped 46 points to 9,966, while the Nasdaq added 8 points to 1,912. "Each day the index spent time above the 10,000 mark," Barron’s Michael Santoli observes, "and each day it closed a bit below it, action that was even less exciting to watch than it is to read about…this is the kind of pattern that can sap conviction from bulls and bears in near-equal measure."

– The bond market advanced ever-so-slightly, as the 10-year Treasury yield dipped one lone basis point to 4.76% from 4.77% the prior Friday. Over in the currency markets…yawn…the dollar slipped about half a percent against the euro to $1.198.

– Even though Wall Street provided little excitement last week, the off-Wall-Street markets partied like teenagers whose parents were away for the weekend. Hong Kong shares jumped 6.7%, while Japan’s Nikkei added more than 2%. Illustrating last week’s newfound – and perhaps fleeting – ardor for exotic stocks, the Morgan Stanley Emerging Markets Index surged about 5% from its Monday close through Friday.

– The commodity markets also provided a bit of excitement, as gold jumped $7.70 to $384.15 an ounce and silver surged 14 cents to $5.86 an ounce. Over in the energy markets, crude oil and gasoline both surged to all-time highs early in the week, before drifting lower into the weekend. The wholesale gasoline price hit a record $1.47 a gallon last Thursday, as the average retail price soared to $2.07 a gallon on Friday – up 14 cents over the past two weeks and up more than 60 cents since the beginning of the year…woe to the patriotic Americans who answered Dallas Fed President McTeer’s call two years ago to buy an SUV. ‘If we all join hands together and buy a new SUV, everything will be OK,’ said the president of the Federal Reserve Bank of Dallas, as a way of urging Americans to spend our nation out of recession. The 4-wheeling patriots must now spend about $60 to fill up their gas tanks.

– But the SUV-drivers may get some relief this week, as OPEC promises to boost its daily oil production. "We now call on all producers to provide adequate supplies to ensure that world oil prices return to levels consistent with lasting global economic prosperity and stability, in particular for the poorest countries," the OPEC ministers said in a statement after their weekend meeting in Amsterdam.

– So what does it all mean? What should investors deduce from the recent trading action, both at home and abroad? Has the American stock market "priced in" all the bad news that has been circulating of late? Or does the Dow need to fall a bit more – to 4,000, say – before achieving that ideal theoretical equilibrium between bad news and rich valuations?

– We have no inside knowledge, of course, but our guess is that U.S. stocks will resume falling after they finish rising. Last week’s "snap back" rally in U.S. bank stocks and in exotic foreign stocks was nothing more than that – a snap back. A sustained rally in either the emerging markets or U.S. financial shares seems like a low-probability outcome in an environment of rising interest rates. After these stocks finish snapping-back, they might simply snap…the interest rate trend will hold the key.

– The weeks-long ennui on Wall Street is perplexing and disconcerting to bulls and bears alike. But the bulls are keeping the faith. Somewhat incredibly, the moneyed lumpeninvestoriat remains as optimistic as ever, according to a recent survey of affluent investors by Smith Barney analysts. The survey showed respondents’ average long-term return expectation for stocks to be 20.8% a year, up from 15.7% last year.

– Thus, the bulls imagine the stock market as a "coiled spring" that’s ready to uncoil at any moment and boost the major averages to new highs for the year. Meanwhile, the bears imagine the market as a "polluted spring," unfit for human consumption – a non-potable waste heap of overvalued and over-hyped stocks.

– No doubt, the truth lies somewhere in between these two extremes. But just the same, we’d suggest boiling the water first…or better yet, take Jimmy Rogers advice: forget the water and drink beer.

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Bill Bonner, back in London…

*** The dollar hit a 2-week low on Friday. Gold rose $6.40. Could gold have bottomed out…finally…$25 dollars below where we thought it would?

*** Stocks went up on Friday. But in the preceding trading days, more than 10 times as many stocks went down as up.

*** "The whole profession seems to have gone bad," said a French accountant over the weekend.

"There are more and more rules…more and more codes…more and more laws. They come not just from Paris, but now from Brussels (capital of the European Union), too. And the more rules there are, the more corruption there is. Because the new rules give opportunities for interpretation and special cases.

"Accounting is really very simple. And you used to be able to trust the profession. If an accountant signed off on a financial statement, even from a huge enterprise, you could be sure that it was pretty much as stated. That’s because the profession used to rely on simple rules of usage…customary rules that everyone knew and respected. You could depend on them. Now, they pass laws to regulate the profession and everyone cheats.

"And much of the problem comes from the Anglo-Saxon world. This is the strange thing. It was the English who used to favor usage over legislation. Their system of laws was based on ‘common law,’ or usage…while on the continent, we’ve had proclaimed laws, like our Napoleonic Code of laws, for a long, long time. But now, from England and America we are importing the worst kind of accounting principles.

"Now, they’ve got all the accountants running around trying to ‘enhance shareholder value.’ What a scam! As if shares would be worth more if you change the accounting procedures! I was so disgusted by the whole thing I wrote a book on the subject."

Oh, how many copies have you sold?

"A hundred and fifty."

*** In the late, degenerate era of modern capitalism, shareholders will believe anything. They buy a share in a company they barely recognize and believe they are investors – just like Warren Buffett. Then, if the company finagles its book to show a larger quarterly profit – they believe their shares are more valuable. No matter that nearly all the profit is already earmarked for pensions and stock options; the little guys will never figure that out.

*** We continue to be amazed and aghast by NY Times columnist Thomas L. Friedman. We wonder what bread he eats, what air he breathes. In last week’s column, he gave advice to India. What counsel did he give to 900 million Indians? He said they needed to "reform" their political system.

Another breakthrough perception, wouldn’t you say? How come the Indians didn’t think of it?

Even his laptop must laugh at him.

And now, today, he’s back on Iraq’s case. After urging America into war with the lure of easy glory and everlasting gratitude from the Iraqis, he now notices that suicide bombers are trying to get rid of us. "People of mass destruction" he calls them. He admits that he doesn’t have a clue who they are but somehow claims to know their philosophic bent. They are "nihilists," says he, adding that they blow themselves up so their prayers will be answered in heaven. It is a strange nihilist who believes in an afterlife, but you can’t ask questions of men in small pieces.

Well, what can be done about this new threat from the Faithful Nihilists? "Shift authority and security in Iraq to Iraqis as soon as they can handle it…(Hmmm…wasn’t this where we came in?)…we must shut down this play before it comes to a theater near us."

Now there’s an idea we can all get behind. Let’s stop this suicide bombing. Okay. Right.

*** A DR reader writes:

"Your recent letter on the subject of people selling their overpriced homes to one another, so they could purchase somebody else’s overpriced home, reminds me of the two Arkansas farmers, one of which had a beautiful purebred hog. He sold it to farmer # 2 who held it for a period and then resold it, for a handsome profit, back to the original seller. Back and forth, these two farmers sold and resold this hog to each other, always for a profit. Alas, one day farmer # 2 sold it to a complete stranger from Iowa, to which, when told of this, farmer # 1 told farmer # 2 in disgust: "Why’d you go and sell that hog to that feller from Iowa fer? We was both making a good living selling that hog to each other."