The Masked Economist

Who is that brave and valiant man standing there, ready to take on the Federal Reserve and anyone else who stands between him and the good of the U.S economy? Is it Zorro, or could it be…The Mighty Mogambo?

The Fed decided those damn foreign bastards are getting wise to us and have apparently stopped buying our debt, as evidenced by the lack of increases in foreign holdings at the Fed, which are down about $4 billion. So not only are they not buying MORE of our debt, they are selling some that they already bought! Bummer!

So why are these foreign dirtbags, who speak with funny accents and are not even civilized enough to celebrate Halloween by dressing their kids in weird rags and begging the neighbors for candy, NOT buying more and more of our debt so that we can continue to buy things on the cheap? For this part of our lecture, I turn the lectern over to Dr. Richard Appel, who recently posted his essay "Buy America II: The First Shoe Drops" on 321gold.com. He writes, "Further damage accrues to China as the result of the ongoing decline of the dollar. The dollar’s fall is generating currency exchange losses for all of the United States’ trading partners, including the Chinese. This threatens China’s dollar holdings with further depreciation, and gives them an additional reason to find avenues to rid themselves of their dollars before they lose even more of their value."

And how much value has the dollar holdings of these foreigners lost? "From the dollar’s peak at the end of 2001, its international value as measured by the U.S. Dollar Index has eroded by 33%. This places all external dollar holders in a very difficult position. They have already lost one-third of the value of their holdings, and are likely becoming frightened that they will lose more. The recent action by the Chinese in their effort to acquire Noranda and the Alberta oil sands may be the first obvious sign that one of the world’s two largest dollar holders may have reached their limit."

Foreign Dollar Holdings:  The Mogambo Leaps to His Feet

And before you start crying about these poor foreigners and how their stockbrokers lied to them about how all American stocks are a good buy, start thinking about your OWN situation when the dollar’s purchasing value falls and the price of imports, like oil, shoots up.

Andy Xie of Morgan Stanley says, "China’s boom is itself partly the product of the Fed’s super-lax monetary policy." Well, you are a real rookie if you think I am going to stay in my chair after a comment like that! Veteran Mogambo watchers were not surprised to see me leap to my feet and say, "Hold on there, Andy Xie, if that IS your real name! I say that China’s boom is COMPLETELY the result of the Fed’s super-lax monetary policy!" Security guards are suddenly appearing from everywhere, and so I know I have to talk fast! So I say, the words tumbling out in a torrent, "Did you think that the money would only stay in the country that created it? I laugh at the very thought!"

So that may be part of the reason why the Fed produced $3.8 billion in Magic Money last week, giving their little slimy friends in the banks some money to play with. The Fed used some of that money to buy outright another $911 million in U.S. debt, continuing to demonstrate their particular moral, ethical and intellectual bankruptcy.

Bill Gross has taken on the government’s statisticians and Fed Chairman Alan Greenspan, saying they are a bunch of blatant liars on how they calculate inflation. Naturally, he has taken a lot of heat for saying that the emperor has no clothes. He accuses them of purposefully underestimating inflation to make the economy look stronger than it is and keep Uncle Sam’s costs artificially low.

But he is not entirely alone. For example, there is the Mogambo, who is bellowing and thrashing around against the leather restraining straps and the handcuffs and swearing bloody revenge, and whose entire mental illness is an apparent fixation on inflation and how it is such a killer-diller. And then, on the other hand, there is Peter Cohan, a management consultant and author in Marlborough, Mass., who says, "There is just no way the CPI is reflecting the actual increase in costs that the typical American family faces. It doesn’t pass the smell test."

Foreign Dollar Holdings: The Need for Adjustments

But a guy at Action Economics named Englund has a snappy rejoinder, and says, in effect – and here I am putting words into his mouth to make him look ridiculous because that is The Way Of The Mogambo (WOTM) – that the inflation figures are not adjusted for the smell test. It is an interesting line of thought, and it certainly deserves some government research grant money to look into, and then maybe we can have some research that inflation statistics OUGHT to be adjusted for smell according to the smell test. But in the meantime, we have to go with what we have, and that is for us all to be calm and to stick with the adjustments that they have already researched into existence. And Englund actually says academics have been studying this question for over a decade and have sophisticated research to back up the need for adjustments.

It’s not obvious to a bozo like me, but then, few things are obvious to me, except that there are Mole People living under my house and eating all the cookies. But I am delighted to learn that sophisticated research has revealed a "need," and if there is one thing that leftists love, it is uncovering a "need" than can be addressed by some government program or new law, especially one that allows them to lie about the pernicious effects of their previous attentions to other "needs."

Mr. Englund goes on to say, "It is irrefutable that some adjustments have to be made for quality." Instantly, I leap to my feet with the agility and grace of a lithe panther, hacking and coughing because I ain’t a young, agile and lithe panther anymore, and standing astride my chair, I throw my snazzy cape over my shoulder, resplendent in my telegenic and elegant bravado. I shout out, "Says who, varlet? You? Ha! I laugh! Hahahaha!" Grabbing a rope that was hanging down from the ceiling for some reason, I heroically swing onto the stage to confront the poor Mr. Englund.

He stands there, speechless. I stride confidently right up to him until my nose is almost touching his, and you can see that he is getting really nervous that this lunatic swinging onto the stage at the end of some rope and wearing some stupid cape is saying, "Verily I say unto thee, puny earthling, show me, how the German Weimar hyperinflation would have been prevented if only they had adjusted inflation for quality! Show me how the inflationary problems besetting Latin America for decades could have been prevented if they had only adjusted their crippling inflation for quality! For that matter, show me how the inflation that fomented the French Revolution could have been prevented if they had only adjusted their inflation for quality!"

Out of the corner of my eye, I see security guards rushing the stage, and so I grab the rope, swing to the top of the balcony and, leaping down onto my trusty steed, I gallop off into the night. The audience, stunned by what they have just seen, asks "Who was that masked economist stranger?" To which others reply, "I dunno, but he smelled like the Mogambo!" Little do they know!

Regards,

The Mogambo Guru
for The Daily Reckoning
October 25, 2004

It is late October, and everything is falling: the leaves, stocks, the dollar, George Bush. No president has ever won re-election when the stock market was in a slide. But who knows? There is still a week to go…anything could happen.

"Dollar Cracks," said a headline in the Financial Times.

You will remember, dear reader, in the early spring, almost everybody thought the dollar was going down. We thought it should go down, too, but we wondered how it could do what everyone expected. Markets don’t work that way.

Well, it didn’t go down at all. It went up – defying the laws of economic gravity, as well as the expectations of practically all its Newtons and Galileos. Then it began to fall again. We now find the dollar back where it was in the spring…and falling once again. And once again, every economist with any sense is predicting that it will fall more. And once again, we cannot argue with them; the dollar clearly "needs" to fall. But against what? When? How?

Somehow, the markets always have to surprise us. If they did not, what would be the point of having them? People trade assets because someone believes they will go up, and another believes they will go down. At least half of the traders must be surprised. Besides, if they all knew what would happen, they would never have to trade…never have to bargain…never have to take a risk.

The more people all come to believe the same thing…the more they must all be surprised. Because as they become more and more sure of themselves, they so tilt the odds that the person on the other side is almost guaranteed to win. It is a bit like pari-mutuel betting at a horse race. Whatever horse is going to win is going to win. But the payoff, over time, is not in the horse – it is in the odds. The favorite pays off most handsomely when he is least favored; that is, when most people are surprised to see him in the winner’s circle. When he is favored out of proportion to his real chances of winning, you are better off putting your money on another nag…even if you believe the favorite will win. In a two-horse race, the animal who pays off 4-to-1 is a better bet then the one twice as likely to win at even odds.

The more people who stand to be surprised by a given turn in the market, the more the contrarian investor stands to make. Not that he has a copy of tomorrow’s Wall Street Journal under his arm. Nor can he read the future in the stars. He is merely a better judge of man. He knows that when men get together, they tend to amplify and reinforce each other’s sentiments – and tilt the odds. We are not talking about thoughts or intuitions…but about feelings.

The polls show that both the pros and the amateur investors are overwhelmingly bullish. This is a feeling, not a thought. They can give you all the reasons you might want to hear about why stocks should go up. On the other hand, the man with a bearish feeling will have his own reasons – just as good and just as many. Over time, the feelings balance themselves out. But never exactly. Instead, like bilge water, they tend to slosh from starboard to port…and back…in short cycles and long ones…giving us, in the end, the averages…the normal…the ordinary…the in-whack balance that keeps the boat from sinking altogether.

This week, hedge fund managers lean over the gunwales like whale watchers on an Alaskan cruise. They expect the dollar to fall again; we expect another surprise. This time, instead of going up, or gently submerging…Mr. Greenspan’s money may take a sudden dive – so hard, so fast…the splash may soak them all.

And now the news, from our friends on the Eastern Seaboard:

———————

Tom Dyson, reporting from New York…

"The Case of the Vanishing Foreigners."  Everyday, more and more foreign investors are selling their U.S. Treasury bonds

———————

Bill Bonner, back in Paris:

*** Our own friend, Amazon.com, which we called the "great river of no returns" stock, is back in the news. Its price fell 12% on Friday to $34.60.

How the news takes us back! To those glory years of the Information Revolution of the late ’90s. That was when Jeff Bezos’ mug was on TIME and super-shill Henry Blodget projected a $200 price for AMZN shares…or was it $400? Whatever it was, it was too much.

Amazon raised and spent billions of dollars, but until recently, it could never make a dime of profit. We guessed back then that the big muddy might eventually be a
decent business. We guessed that the stock might eventually be worth $10. Heck, we still think so. We order from Amazon. The business model seems to work. Analysts say the company will earn nearly $500 million next year. Heck, if we did the math right – we could be right, after all – the stock could be worth every penny of $10.

*** "What is amazing about terrorism," began our friend Michel over lunch last week, "is not that there are so many attacks, but that there are so few. I was supposedly a terrorist myself in my youth. It’s just not that hard to kill people. And it’s not hard to destabilize people.

"What do terrorists want? They want to disrupt things and, usually, get their names in the paper. How hard is that? Especially now. Every newshound in the world is after the terrorism story. All you’d have to do is to toss a Molotov cocktail on a crowded bus and send an e-mail message to the newspapers. It would be front-page news all over the world. Anyone could do it. Anytime.

"But we’ve only had a couple serious terrorist incidents in Paris in the last few decades. In America, there has only been a couple – only one that really got peoples’ attention. It doesn’t make sense. If there really were a worldwide terrorist network with hundreds or thousands of people willing to blow themselves up in order to destabilize America, you’d think they would have done something in the last three years. Terrorists are blowing themselves up all the time in other places…"