Tales of a rookie traders life

Home Sales Collapse

2007-10-01T19:21:00.000Z

"New home sales had collapsed 8.3%, not the 10% rumored. So it was a 'sell the rumor, buy the fact' morning, and the dollar was released from the woodshed. But why? Isn't a fall of 8.3% bad enough?"

by Chuck Butler

In This Issue…

* GDP is revised down…
* Euro hits another record high!
* Game On!… Again!
* A surprise rate hike for Norway!

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And now…today's Pfennig!

Home Sales Collapse

Good day… And a Happy Fabulous Friday to one and all! This is going to be shorter than normal… And that's OK, we all have other things to do on this Fabulous Friday!

We saw the euro (EUR) trade up to 1.4182 yesterday. As the morning began, I received word that the new home sales report had been leaked, and that they were going to show a drop of 10%! News spread pretty quickly, and the dollar was immediately taken to the woodshed.

When the report actually printed later in the morning, it "wasn't that bad". New home sales had collapsed 8.3%, not the 10% rumored. So it was a "sell the rumor, buy the fact" morning, and the dollar was released from the woodshed. But why? Isn't a fall of 8.3% bad enough? I, for one, would think that a fall this big would be enough evidence that the housing market continues to struggle at best! I also think the credit crunch in August aggravated the declining prices in homes, and this ever increasing inventory of homes is going to weigh on home prices for some time to come.

If the report hadn't been "leaked", I think the fall of 8.3% would have been looked at as catastrophic and the dollar would have been sold all day, instead of just early in the morning before the report. Oh well, the markets are well… The markets… There are times they just don't make sense!

But not to worry! Overnight, traders have taken the euro back to 1.4182! You just can't keep a good currency down… A truly "inspiring currency" to borrow a phrase from ECB President Trichet!

Second quarter GDP in the United States was revised downward to 3.8% from 4% in the final print. I think as we look to finish up the third quarter today, and then look back in a few weeks at the growth in the quarter, we're going to see that the housing meltdown will be a huge subtraction from growth. However, we may see an offset to that subtraction with exports, given the weakness in the dollar… But, that remains to be seen, so we'll have to wait-n-see!

Earlier in the week I was referring to the carry trade's on again, off again trading as a scene with Wayne and Garth playing street hockey… "Game On!" etc. Well… It's been a couple of days since I last checked the pulse of the carry trade, and once again it looks as if it is "Game On!" Risk aversion is being swept under the rug, as the markets forget the pain of August. Risk appetite is building to strong levels again, so watch those high yielders rally, while Japanese yen (JPY) gets sold.

Speaking of Japan… Industrial production surged 3.4% in August and at the fastest pace in four years. But before we go waving the rally flag for yen, we have to deal with the fact that risk appetite has returned to the markets, and tht's bad news from consumer prices, which fell 0.1% in August. Now don't get me wrong here… I'm always ranting about inflation… But in Japan, a little inflation would be a good thing! They've had deflation for so long, a little inflation would help to get consumers spending!

Yes… This is the tale of two economies. The United States can't stop spending and has inflation out the ears, while Japan won't spend, and deflation hangs over the economy. Again, don't get me wrong here… I love "savers"… But there's still room for some spending, Japan… Come on!

And just when some dolts thought we had seen the end of $83 oil… Guess where oil is trading again? That's right… Over $83! I just can't get over the long run of commodities… I remember being in Phoenix in the spring of 2003, and the USA TODAY had a front page article that claimed the Chinese economy was going to slow down, and the bull run in commodities would be over… And for about a month, the commodity currencies of Aussie (AUD), kiwi (NZD), Canada (CAD), and South Africa (CHF) all took it on the chin.

And here we are five years later… China's economy is still strong, and their demand for commodities and raw materials is as strong as ever! And the commodity currencies? Well… Kiwi has gained about 50%, Aussie about 60%, and so on since that article.

A few years ago I kept telling people that I had read Jimmy Rogers' book on commodities, and in it he outlined the history of bull markets for commodities going back 200 years. History shows us that every bull market for commodities has had a trend that lasted 17 to 22 years. We've only been in this bull run for about six years now. The other day, Mr. Rogers was on Bloomberg TV, which I bet someone recorded! No wait, I won't go there, it's a happy Fabulous Friday! What I'm talking about here is that no one in our company thought to record my talk on Bloomberg TV. No one! I guess that tells me what they think of me, eh?

OK… Back to Jimmy Rogers and his talk on Bloomberg TV… Mr. Rogers said that with the Fed's rate cut, he's sure that the bull run will last another 15 years… Which would put us at the far end of the historical bull markets for commodities.

Of course the shiny metal that is gold, has been the cream of the crop in commodities… But don't forget those base metals. Copper has been a moon shot, nickel, and many more have all seen price increases as the demand for them increases. I've talked about this before, but the food prices are really beginning to push the envelope… Sugar… And so on.

What is this an indication of? Inflation… Pure and simple. You won't see this in the stupid CPI report… But if you really want to see inflation, check out the commodities… Oh, and probably your child's tuition (thank goodness my son goes to public school!) or health care, insurance, medicine, movie tickets. It's all there, and it's all chock full-o-inflation!

Norway's Central Bank, the Norges Bank, surprised the markets yesterday with a rate hike… I was busy getting ready for a very long interview (1 hour) and Ty yelled across the desk that the Norges Bank had hiked rates. Well… I half expected them to continue their work with rate hikes to offset the rising price of oil… So it wasn't that big of a surprise to me! Here again, is Norway… Flying under the radar, along with Sweden… Alternative currencies to euros, should you already have a boatload of euros. They've been at the top of my Hit Parade for over two years now. When will they be at the top of yours?

And don't look now… But the dollar index is just a tick above the all-time low of 78.19 this morning… I'm not a chartist, nor do I play one on TV, not that anyone would have recorded it if I had, but I believe a break below this all-time low is not a good thing.

Currencies today: A$ .8810, kiwi .7550, C$ 1.0015, euro 1.4180, sterling 2.0285, Swiss .8550, ISK 61.80, rand 6.8680, krone 5.44, SEK 6.4920, forints 176.84, zloty 2.6620, koruna 19.4170, yen 115.40, baht 31.64, sing 1.4850, HKD 7.7610, INR 39.7250, China 7.5025, pesos 10.92, and out newest member to the currency roundup will be Brazil 1.8420, dollar index 78.20, Silver $13.70, and Gold… $745

The Indeflating Sub-Feral Government

2007-10-01T19:18:00.000Z

"I took the box of porn and pizza mess and put it all over the office of my assistant, and HE got canned when I fired him! You should have heard him scream about how he was innocent! Hahahaha!"

by The Mogambo Guru

Of course, nothing could be more insane than the news from the AP, "Senate panel sets national debt limit at $9.82 trillion, $4 trillion higher than when President Bush first took office".

Now put this together with Goldmau.com, "The debt growth rate is now higher than GDP growth, a recipe for eventual hyperinflationary outcome."

And all this new debt is certainly needed, as my buddy JMR Phil S. sent a chart from some guys that calculate that it now takes $5.53 in debt to create $1 of GDP growth!

And sometimes not even that, as JMR Dan B. sends a pithy little summary saying, "China has increased their money supply 53% while the U.S. has increased it 12% during the same time period. I don't know if that implies some level of corruption, but it must bring tears of joy to the eyes of Helicopter Ben."

Well, I am happy to report that the situation DOES bring tears of joy to the eye, as the same thing recently happened around here! I mean, at one moment, there I was, mentally cleaning out my desk after being canned, and I was imagining that my boss was there ("I've waited a long time for this, you Worthless Mogambo Human Trash (WMHT)") and the security guard ("I've waited a long time for this, you Worthless Mogambo Human Trash (WMHT)") and all the people from the other offices ("We've waited a long time for this, you Worthless Mogambo Human Trash (WMHT)") and how, this one time, I'd like to go with pride and dignity, with my head held up high, instead of being dragged out, screaming and fighting and crying and slobbering all over myself ("Please, please, please don't fire me!"), by cops working as enforcer-goons for the mental health workers ("We've waited a long time for this, you Worthless Mogambo Human Trash (WMHT)".

My keen, analytical mind realized that, if that was truly my plan, I ought to at least clean out all the old pizza boxes and pornography from all the desk drawers. So I gathered up a big box of the stuff out of the bottom drawer of the desk, but then I realized if I did that, then there would be nothing else in the damned drawers, and they would be empty, and then everyone would say, "We were right! He really WAS stupid!", whereas with the pizza boxes and porn everywhere, they would naturally say, "He was, we admit, smart enough, talented enough, even brilliant perhaps, but he was just too distracted and sleepy from eating all that pizza, and maybe we ought to hire him back! And at a big increase in salary and benefits! And a secretary with great legs and short skirts to look at, so that he could at least have some empty desk drawer space!"

Well, that is the way I had it all planned out, but it didn't work out that way after all. I took the box of porn and pizza mess and put it all over the office of my assistant, and HE got canned when I fired him! You should have heard him scream about how he was innocent! Hahahaha!

Anyway, without anyone at the executive level around here to take over, I am still employed and holding my own, just like the dollar against the yuan (CNY)!

Anyway, Dan didn't seem the least bit interested in my crafty career moves as a parable on the changes in the money supply, and instead says "on another note" that foreigners stopped investing in U.S. bonds as sales "dropped from $97 billion to $19 billion in August. That was before the interest rate cut!!" He calls attention to the two exclamation points, which I take as a secret signal to look for conspiracies and corruption everywhere, trust no one, and prepare to take refuge in a bunker of some kind, like the Mogambo Ultimate Bunker (MUB), shooting first and asking questions later.

Probably sensing with dismay the direction the discussion has suddenly taken, he changes course and says, "California is already $750 million in arrears in collections versus commitments. Do you expect foreign pullback to be Sudden Mogambo Death (SMD) for sub-feral…no no no, I mean sub-federal government?"

The answer is, "Yes. Yes, of course", and was preparing to preface my remarks with a long, haunting death-wail, which seemed so symbolically appropriate, when I was interrupted by an email from David K., which began with the customary salutation. "Oh, Mighty Mogambo," it read, "if you will take a moment to go to Lew Rockwell's site, lewrockwell.com, you will notice that there are two articles, one entitled 'The Fed Is Deflating' by Gary North, and the other, 'The Fed Is Inflating' by Murray Sabrin.

"My question to you is: What the French, Toast? Dr. North makes some very good points, and I agree with his conclusion. Mr. Sabrin makes some very good points, and I agree with his conclusion.

"So what in the hell is going on? Is the Fed deflating? Inflating? Indeflating?"

I immediately wondered, "Indeflating? What in the hell is indeflating?" I figured it was a secret message of some kind, so I didn't let on that anything was amiss, and replied, "Dear JMR David, They are both right! Did you think that my wife's love for me, dropping like a stone until one day I can see her, hiding behind the hedge, looking at me through the crosshairs of the telescopic sight of a .30-.30 deer rifle and smiling to herself, means that neither you, nor anyone else, cannot find true, everlasting love? Of course not! You can exult, waxing prosperous, happy and sleek, whilst I sulk and wither and die of a broken heart and a knife in my back.

"Except for the 'everlasting' part which is, of course, a big load of crap, as there is very little of an evolutionary advantage in it after the kids are big enough to be put to work hunting, begging, stealing or working, and yet still too young to legally keep you from stealing them blind, or too little to keep a crazy man bigger than them and with a baseball bat from coming over there and taking any damned thing he pleases, including not only a damned full tank of barbeque propane in exchange for my empty one, but anything else I take a fancy to, because you probably stole it from me to start with."

At this point I realized that I was getting off the track and into one of my paranoid persecution delusions, which never seem to end well. So I hurriedly changed back to the topic and continued "Nevertheless, the answer to your question is that some things will go up in price until you are squealing like a stuck pig, and some other things will go down in price until you are squealing like a pig, too", which summed it up perfectly.

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 Daily Reckoning

2007-10-01T19:16:00.001Z

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*** Big gains flee the go-go areas…money in Miami does a disappearing act…stock deals can't roll without wheels…

*** China still no match for gold…artists wanted - dead or alive…whatever they claim to know, we know even less…

*** Greenspan can't stop talking…commodities looking good, unless you need to eat…new flights to an Olympic-sized economy…and more!

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"A fresh blow to the housing market," is how the Financial Times describes it.

The Daily Telegraph comes up with a more bodacious headline:

"US housing market in freefall as prices crash."

And follows up with this:

"Sales of new homes in the US plunged in August at the fastest rate since modern records began, prompting fears the economy is sliding into a full-blown recession…

"Total sales dropped 8.3% on the month and are now down 21.2% during the past year, a sign that the credit crunch has cut off mortgage funding for large numbers of people."

Both papers give us new data on house prices:

"The median home sale value fell 7.5% from $246,200 to $225,000, its lowest since January 2005," says the FT.

Two and a half years of price increase - wiped out.

But in go-go areas, even bigger gains have gone-gone. Miami was one of the hottest housing areas in the nation. Now, its condos are being marked to market. Here's the report:

"There are at least 50 buildings under construction or nearly completed in the downtown Miami area alone, consisting of about 20,000 units," reports David Sutta from CBS4.com in Miami.

"To move inventories along, developers have gone to the auction block to get them sold.

"On Thursday evening, at the Miami Biscayne Bay Marriott Hotel the gavel struck as auctioneers sold about 20 units in the 119-unit Platinum development owned by Alex Redondo.

"When it was all over, [one bidder] walked away with a two bedroom unit on the 19th floor. To put the price in perspective, a one bedroom priced at $350,000 sold on average at auction for $176,000, almost half.

"A two bedroom unit that sold for about $600,000 last year, sold on average for $295,000."

Yes, dear reader; if you are thinking of moving to Killeen, Texas, you better act soon. Those big housing gains are disappearing. In Miami, prices are being cut in half.

You might be thinking…well…one man's loss is another man's gain. But think again. While the bidders got apartments at half-price, the owners of other apartments saw their assets lose 50% of their value almost overnight. A week ago, they may have had an apartment worth $600,000. Now it is worth only $300,000 - and falling.

What happened to that $300,000? It vanished. Poof. That's what put the 'd' in deflation. Money d-isappears. Wealth d-issipates. Values d-ecline. The economy d-egenerates. People get d-epressed.

Meanwhile, stocks held steady yesterday. Stock market investors seem to think they've got a "Bernanke Put" on their hands - an option that will always protect them from losses; if stocks begin to go down…Bernanke will just cut rates.

But Robert McAdie, head of credit at Barclay's Capital, addressed the issue yesterday. He noted that though the Fed may cut rates, and may bail out a few large speculators, there is no guarantee that money will find its way into the hands of the people who really need it. A bank can borrow from the Fed at the Fed's rigged rates, but that doesn't mean it isn't going to be careful with the money. Rates dropped after the Fed funds cut last week, but long-term finance rates actually went up…and the gap between the Fed's rate and the banks' own interbank lending rates remained unchanged. What gives? Lenders are still worried. They're afraid they might let out some money…and not get it back. So, they demand a little extra return, as protection. In July, the spread between commercial paper and the fed funds rate was only four basis points. Now, it's 62.

Money is cheaper, generally, but as McAdie put it:

"Cheap money is now history. There are not going to be any more of the big leveraged buy-out deals for a long time because the CLO [collateralized loan obligations] market that financed them is effectively closed."

Oh my… The homeowners can't sell their houses. And the Wall Street hustlers can't sell their deals. How d-isappointing. How d-iscouraging. For example, the Bank of Montreal - Canada's fourth largest lender - announced that it couldn't get rid of its asset-backed paper. And the global mergers and acquisitions market got hit in the head with a brick. After setting a record in the first nine months of the year, the deals declined 42% in the third quarter.

What's an investor to do? Without 'deals on wheels,' what will keep stocks rolling? And without rising house prices, how will consumers keep spending? And without consumer spending (it is 72% of the economy…no economy in history ever depended so much on people spending money they didn't have on things they didn't need), what will prevent the U.S. economy from going into recession?

We don't know. But, as a dear reader remarks below, there are many things we don't know…

First, you will recall our Trade of the Decade. Sell the Dow…buy gold.

Well, in 2000 an aunt died and left our children a very small inheritance. We took our own advice, more or less. We set up an account for each of the children, put the money (not enough to merit diversification) into Newmont Mining (NYSE:NEM), and forgot about it. But now, Maria has turned 21. She has to take charge of her account herself.

"What should I do with this…maybe I should invest in something else? I think I should invest in China…that's where the growth is," she pointed out.

She is right. Chinese shares are rising at about 10% PER MONTH! CITIC, a fast-growing Chinese brokerage, is now said to be priced at $40 billion - or $8 billion more than Lehman Bros. (NYSE:LEH) and $24 billion more than Bear Stearns. (NYSE:BSC)

Looking at the entire basket of emerging markets, we find extraordinary growth. Gold has done well over the past seven years - up more than 150%. But Chinese stocks have risen that much in the last 15 months. Emerging stocks generally, have gone up about twice as fast as gold since the year 2000. Since the bottom in 2002, emerging market shares are up four times.

Newmont Mining has done well; it is worth about twice what it was when we bought it. But it is a laggard compared to emerging market shares.

If you were to look back another decade, you still would have done remarkably well in emerging markets. The MSCI index, in dollar terms, rose from about 200 in '90 to about 1200 today - a 500% increase. (Meanwhile, the price of gold rose only modestly.)

Looking back even further…to that fateful year, 1971…when the dollar and gold parted company for the last time, where has the big money been made?

In U.S. stocks - up about 13 times. In emerging markets - up a bit more. And in gold - up from around $41 to over $730 - an increase of nearly 18 fold - though, admittedly, with long periods of time when gold was going down in dollar terms. But gold is not really an investment. All it does is measure out the pace of the dollar's decline. For the past 36 years, simply betting against the dollar has out-performed every major investment class.

Yesterday, the dollar sank to a new record low against the euro (EUR). Compared to gold, the dollar sank too - putting the gold price up to almost $740. Oil climbed back over $80. And the commodity index hit a new record high.

What will happen next? Will the money that comes from trees finally find its roots? Will it stand as tall and straight as a mighty oak? Or will it continue to dry up…and whither like an autumn leaf? Might it will even blow away?

"I would stick with Newmont for a little while longer," we told Maria.

Finally, a dear reader offers this comment:

"I greatly enjoy The Daily Reckoning and have bought more things than I could possibly need from you over the years and made some money from them despite you not knowing anything about anything. Notwithstanding the fact that you don't know anything, I bought gold at under $300 and more at under $400 at your recommendation and I'm sure that you have no idea when I should sell this poor investment that has barely doubled my money in two years.

"However, when you talk about the U.K. housing bubble (compared to the United States), is it really like with like, when you consider available land and future housing requirements?

"I know you don't know and I certainly wouldn't take your advice if you did know. I have a house and I don't care if it goes up or down, as house prices are (or should be) of academic interest only to people who already have them.

Regards

"PS: What piece of America shall I buy with all my dollars when I sell this gold? Hang on though, you won't know this either…"

Our writer is a shrewd observer: 'Never take advice from a man who claims to know what he is talking about,' is his message.

In that sense, you are safe with us, dear reader. We know nothing.

The beginning of our ignorance dates back to 1980. Before that, we knew everything. But then gold began to fall. We couldn't believe it. We assumed it was temporary. Everyone we knew back then expected the price of gold to keep going up. We were more sure…we knew it was going up. But it didn't go up. It went down…and down…and down - for the next two decades.

And with each dollar gold declined - from above $800 to under $300 - some of what we knew for certain disappeared. By the time it reached $275…our head was completely empty.

But what we lost in certain knowledge, we gained in humility. As our gold stocks went down, our stock of humility went up. The more we lost, the more we gained. What we paid in tuition, we earned in wisdom…or so we'd like to think.

Of course, we'd rather have the money. But you have to make the best of what you have. And now, we have a full tank of humility. In fact, we're about the most humble financial commentator we know. Whatever they claim to know, we know even less.

But we notice that gold is finally coming back. It is still below the record set 27 years ago…but considering all that has happened in the intervening years - the invention of the CDO, the explosion of hedge funds, the global liquidity glut, Warhols that sell for $72 million, Alan Greenspan, George W. Bush - we wouldn't be surprised to see this cycle carry it well beyond the high set in January 1980.

But what do we know?

Enjoy your weekend,

Bill Bonner
The Daily Reckoning

2007-07-28T15:40:00.000Z

THE COLLAPSE OF COLLAPSE
by Bill Bonner

The following is based on a speech given at this week's investment conference in Vancouver.

Gloom and doom ain't what it used to be.

Our old friend Dr. Gary North was - and still is - a master of the Armageddon genre. The turning of the millennium seemed to cry out for some kind of catastrophe. Gary came up with what seemed like a suitably disastrous scenario - Y2K. Remember that? It sounds like a joke now, but it was no joke then.

Computers are set up to do things at certain times. Gary guessed that when the world's computers got to the year 2000 they would freeze up. They hadn't been programmed to go beyond December 31, 1999. Even if most computers made the transition gingerly, there were so many computers, handling so much data, some of them were bound to go haywire. It wouldn't take many errors, he figured, for the whole data system to collapse. People wouldn't be able to use their credit cards. The government wouldn't be able to send out retirement checks. The railroad yards and truckers would lose control over their freight. Stores wouldn't be able to restock their shelves. Municipal water systems would shut down. Deprived of food and water, city dwellers would go on a rampage and many thousands would die.

But then the big day came and nothing happened. As far as we know, not a single computer-controlled system in the entire world failed because of a date-related malfunction.

Poor Gary. He had moved his family to the backwoods of Arkansas in order to avoid the urban riots, starvation and lawlessness that he saw coming. He had staked his reputation on Y2K trouble; his fortune too. But the trouble never came. Those of us who knew him felt sorry for him. We were afraid he was depressed. So we called him up with sympathy and consolation.

"Too bad about that Y2K," we would say. "No collapse…no panic in the streets…no mass starvation. Really, too bad.

"But don't worry. There will be plenty of other crises. Maybe this global warming thing will catch on. Maybe the whole planet will fry. Or bird flu could turn out to be a mass killer.

"And we've heard that there is a meteor that might strike the earth and wipe out all human life.

"So, cheer up."

You know, the life of a financial advisor is not easy. We've been in the business of publishing financial analysts and advisors for nearly 30 years. We've seen plenty of them come and go. And many have gone under very unpleasant circumstances. One whom we knew was shot dead on the beach. One went to jail. Another one went crazy.

From time to time, a young man will come to see us. He'll say he wants to get in the business. So, we warn him. You don't know what trouble is, we say, until you become a financial analyst. When your recommendations don't work out, your readers will despise you. And when you do well, they'll be disappointed you didn't do better. Worse, you might begin to think you really know what you're talking about. And then you're completely useless - and a danger to everyone, especially yourself.

So take our advice, we tell them. Go into law or dentistry. But if you decide to go ahead…remember, you can always come to us for advice and help. And if things really go badly for you, we always keep a loaded pistol in our desk drawer; we hate to see a financial analyst suffer.

But the trouble with this modern world of ours is that there isn't enough trouble in it. There used to be more. Which is what made the good old days so good. Back then, people had real trouble and they really appreciated it. Now, they just toss it off. They're not worried about it because they don't know what it really is.

When we were young, we fully expected that we would never be old. Nuclear war or runaway population growth would see to that. As to the former, the threat was very real. "We will bury you," said the leader of the Soviet Union, in the august chamber of the United Nations one day. We thought he meant it. And during the Cuban Missile Crisis, the world was probably only an upset stomach away from annihilation. If either Kennedy or Khrushchev had been in a bad mood, we might never have lived long enough to enjoy this great economic boom.

There was also the danger of too many people; India could never feed herself, the experts said. Food production worldwide couldn't keep up with population growth. Hundreds of millions would starve; it was only a matter of time.

As to financial matters, the average family was only a paycheck or two from total disaster. Losing a job could be catastrophic. No one had credit cards. There was no EZ mortgage finance available. Besides, adults back in the '50s and '60s were deeply suspicious of debt. It was the lesson they had learned during the Great Depression. That generation knew trouble…real trouble.

I often compare my own situation to that of my father. He was born in 1921. His father died in 1923. And there he was. The family was so poor that to eat, they had to dig up potatoes out of a field where the farmer had missed them. And to keep warm, he walked along the railroad and picked up coal that had fallen out of the rolling stock. Then, when he was 10 years old - along came the Great Depression.

In the 1930s, one out of every four American workers lost his job - with no unemployment insurance…and no welfare system…to fall back on. My father had a knack for being in the wrong place at the wrong time. He tried to escape the poverty of his family by joining the army - in 1939. Then, he thought he had gotten extremely lucky when he drew the best assignment in the army; they sent him to Hawaii. He said he was recovering from a hangover on the base when Japanese airplanes appeared overhead. They tried to kill him for the next three years.

But Americans had it easy during the war, compared to others. Britain was bombed for months. France was occupied…Italy and France were both battlefields.

There were severe financial shocks, too. Britain went broke. France had to form two new governments…and replace its currency - again, twice. But, imagine the time of it your parents and grandparents would have had, had they lived in Russia, China, India, Germany, Argentina or Japan: War. Hyperinflation. Starvation. Police repression. Mass arrests. Occupation. Bolshevism. You name it; they lived it.

As long as the generation that had lived through the Depression and WWII were in charge of things, America was in pretty good shape. But in the 1980's, a new generation - our generation - took over. And there were three key events during that period that caused trouble - as we had known it - to take a holiday.

First, there was the Crash of '87. Stocks fell hard. But then, they got right back up again, as though nothing ever happened. Then, people began to think that crashes were no trouble. Even if stocks fell, they'd soon be on an upswing again. Books began to appear such as "Stocks for the Long Run." People began to believe you couldn't go wrong in stocks, no matter how much you paid for them.

Second, in 1989, the Berlin Wall was dismantled. Suddenly, we no longer had any enemy worthy of the name. We weren't going to be exterminated in a nuclear war after all. From here on, it would be clear sailing.

Third, Ronald Reagan and the neo-cons transformed the Republican Party. "Deficits don't matter," said Dick Cheney. They don't matter to the Democrats. And now they no longer matter to Republicans either. After the '80s there was no longer any organized political party in favor of fiscal and monetary conservativism.

With these changes in place, trouble could take a holiday. Since then, every warning has turned out to be a false alarm. The Tech Bubble burst and it didn't really matter. The recession of 2001-2002 was so mild few people even noticed. Even terrorists disappeared from North America after the stunning attack in 2001.

But the trouble with trouble is that when you don't have enough, you have to go looking for it. That is probably what drew Britain and America into Iraq. And it is the lack of financial trouble that is drawing people all over the world to do strange and troubling things. What homebuyer would sign a contract where his payments automatically went up to more than he could afford, except someone who wanted problems? And what is a subprime ARM but an invitation to rumble? And who would buy a package of these Collateralized Debt Obligations but a moron…or a man looking for trouble?

As mentioned above, despite the crack-up of two Bear Stearns funds, the Financial Times reports that investors continue to put record amounts into hedge funds. And from Miami comes word that 20,000 new condos are under construction - even as the American property market sinks. Savings are at a record low. Debt is at a record high.

People looking for trouble are bound to find it.

Bill Bonner
The Daily Reckoning

No Short Supply of Freaking Doom!

2007-07-04T08:09:00.001Z

"Then, abruptly out of ammo, with clouds of burnt cordite tingeing the air, the tragic Mogambo falls slowly to his knees, his Mighty Mogambo Head (MMH) hanging. He is beaten, destroyed."

by The Mogambo Guru

I don't know why I am so edgy here lately. Maybe because Federal Reserve Credit last week only increased a little, going up $2.3 billion to $852.3 billion, which is about the same level of Total Credit as it was in January, six months ago.

Or maybe it is because Anthony M. Cherniawski of thepracticalinvestor.com writes that, suddenly, three Hindenburg Omens have been sighted.

So what is a Hindenburg Omen? Robert McHugh of Main Line Investors, accurately assessing my limited intellectual abilities, explains just the essence of it, which is "the alignment of several technical factors that measure the underlying condition of the stock market - specifically the NYSE - such that the probability that a stock market crash occurs is higher than normal, and the probability of a severe decline is quite high."

Mr. Cherniawski says that according to the facts at Wikipedia.com, this "now confirms the probability of a major decline in the next 120 days. The probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen within the next 41 days after its occurrence is 77%, the probability of a panic sellout is 41%, and the probability of a real big stock market crash is 25%."

He admits that the 77%, 41% and 25% statistics are a long way from any precision as far as forecasting goes, and, "The occurrence of a confirmed Hindenburg Omen does not necessarily mean that the stock market will go down. On the other hand, there has never been a significant stock market decline in history that was not preceded by a confirmed Hindenburg Omen."

And on the third hand, a 77% probability ain't hay, either!

"Closing the 'Collapse Gap': The USSR was better prepared for peak oil than the US" is an essay by Dmitry Orlov at EnergyBulletin.net. He writes, "An economic arrangement can continue for quite some time after it becomes untenable, through sheer inertia. But at some point a tide of broken promises and invalidated assumptions sweeps it all out to sea."

That sounded so strangely familiar! Then I realized that it was a virtual replay of the Father's Day we just had around here! So, suddenly, I was in a panic when I thought that he too was talking about me, and how everyone should get as far away from me as possible because I am worse than worthless and trailing a lot of broken promises (mostly of the "I'll never do THAT again!" or "I'll pay you back!" types) and invalidated assumptions ("He'll change for the better one day!") and how life is too short to waste it with trash like me, and blah blah blah, but he was, thankfully, not. Whew! Once is enough!

Instead, what he was really saying was economics in nature, as in, "One such untenable arrangement rests on the notion that it is possible to perpetually borrow more and more money from abroad, to pay for more and more energy imports, while the price of these imports continues to double every few years."

And why not? He reveals the problem so elegantly, almost Newtonian, when he explains, "Free money with which to buy energy equals free energy, and free energy does not occur in nature."

And how to explain that it IS occurring right now? He easily brushes me off, like he would some pesky fly buzzing around his head, by saying, "This must therefore be a transient condition. When the flow of energy snaps back toward equilibrium, much of the U.S. economy will be forced to shut down."

And what does this mean by "shut down" in terms of the essential staples of modern life like, you know, 24-hour convenience stores with gasoline pumps, 24-hour coffee shops and 24-hour adult novelty stores? I see him mentally check those three items off the list, and then he says we should, "certainly expect shortages of fuel, food, medicine, and countless consumer items, outages of electricity, gas, and water, breakdowns in transportation systems and other infrastructure, hyperinflation, widespread shutdowns and mass layoffs, along with a lot of despair, confusion, violence, and lawlessness."

And what about a gigantic system of governments, all of which think that they can "do something"? One could almost hear his snort of disdain and contempt for the whole idea when he said, "We definitely should not expect any grand rescue plans, innovative technology programs, or miracles of social cohesion."

And that, I am happy to report, brings us to another episode of the famous, award-winning Mogambo Pathos Theatre (MPT). This week's riveting melodrama is an original vignette I call, "Been down so long it looks like The Mogambo was right when he said the damnable Federal Reserve creating all that excess money and credit will destroy us all by destroying our money, and now the stinking gutter looks like up to me."

The curtains open, revealing a silent, darkened stage, except for the single magenta-colored spotlight on The Mogambo, who sits slumped over in a plain wooden chair in the center of the stage, his mighty shoulders gently heaving as he weeps piteously, softly crying out in pain, "Inflation! It's killing me!"

Then, almost imperceptibly, he slowly raises one hand to point towards the heavens, and raising his head and eyes to follow his lead, says with a ringing voice like Richard Burton at his Shakespearean best, "Yet forsooth, the villainous part of 38% inflation in prices is that it is but slow, agonizing death to the poor wretch who has absolutely nothing, in whose mouth is only the dry dust of despair, and whose painful belly is as empty as his pockets. I starve! I suffer! Somehow scraping up $2.25 for a nice, warm, bean burrito supremo was hard enough, and now it's $3.10! Oh, woe, cruel Fates! I wax woeful! Woeful!"

Turning and bellowing to the ether, "May I please borrow $3.10 so that I might not die, and at least fart to amuse myself and others until I can get another $3.10?"

From offstage a chorus of voices calls out, "No way! Go away!"

Suddenly, the air is filled with a wail of babies crying in hunger and a swirl of people sweeping around the stage like ravenous harpies, crying out, "Buy me something nice! Buy me something expensive! Buy me stuff! Buy me stuff!"

Again The Mogambo wails, "Please give me a lousy $3.10!" and again an unseen chorus replies "No way! Go away!" joining the cacophony of babies screaming and people demanding, demanding, demanding money, louder and louder until, reaching a maddening crescendo, The Mogambo snatches up two Uzi submachine guns and starts blasting indiscriminately, eardrums throbbing from the sonic assault, spent cartridge casings flying through the air, shooting the hell out of everything blam blam blam blam blam blam and pieces of wood and plaster and crap are filling the air with dusty debris, blam blam blam blam blam and the audience is screaming and crying and scrambling to get the hell out of there, and it is pure freaking Apocalyptic bedlam! What a thrilling, memorable moment of American theatre!

Then, abruptly out of ammo, with clouds of burnt cordite tingeing the air, the tragic Mogambo falls slowly to his knees, his Mighty Mogambo Head (MMH) hanging. He is beaten, destroyed. Gradually, the cacophonous sound of babies crying, incessant demands for money and his own stomach growling slowly fade, fade, fade away as the scene fades to sinister black, until a leaden silence hangs like a sickening shroud over the dark theatre.

The crowd, hushed at the powerful, powerful scene, erupts with cries of "Boo! Boo! Worst performance ever! We want our money back!" I laugh at them! Hell, they wouldn't know fine, classy art if it came up and took a big ol' crap on their shoes!

But this is not about how my theatrical masterpieces are not appreciated by a cruel and tasteless world, but about what happens when inflation in prices gets out of hand, which comes after inflation in the money supply gets out of hand (made worse by the fact that the money went to pay for the growth of the government, which got waaaAAAaaay out of hand for decades), and everybody gets so miserable that mindless violence seems somehow justified in the face of such overwhelming misery.

But the stupid audience is not interested in this important, timeless lesson, and all they can think of is that they want their stupid money back. I say "Screw 'em!", as they can afford it now that the minimum wage was raised from $5.15 an hour to $5.85 by Congress, which is supposed to offset the staggering, criminal incompetence of Congress in not restraining the awful Federal Reserve, to keep the damned banks from creating too much money and credit, which produces inflation in prices.

And since not even a conceited, arrogant, stupid Congress as conceited, arrogant and stupid as this one can force prices down, they feel utterly justified in forcing wages up to make up for it! Hahahaha! Incompetent morons!

But this is not about how much I despise damned near every government you can name, but that the minimum wage will next go to $6.55 in July, 2008 and finally reach the federal maximum, taking the minimum wage to $7.25 in July, 2009, two years from now.

The total raise is (click click click on the calculator) $2.10 per hour, although in reality, they will make about 7.5% less, as FICA gets its share off the top. So their new, maximum "adjusted gross income net of FICA" raise in pay is about $1.94 an hour.

Let's see, that's a 38% increase in wages in two years, where it will undoubtedly stay for a few years as the economy tries to digest the increases in the prices of everything, including the labor of the guy who was already making $7.25, but is going to be making only minimum wage in 2009 unless HE gets a nice raise, too, creating the wage-price spiral of story and song. So prices will go up!

To prove the inflation I scream so incessantly about, I point to Larry Edelson at MoneyandMarkets.com, who looks at the Commodity Research Bureau's Index, which is a composite of 23 widely traded commodities. "According to the index," he says, "prices of raw materials are up nearly 30% since the first of the year."

Junior Mogambo Ranger (JMR) Len M. writes, "I recall ten years ago when I looked in the local paper that there was a section devoted to just cheap cars for sale. The listing was for cars '$3,000 or less'. Now, cheap cars are listed as '$5,000 or less'. That is an increase of 66.6% in ten years."

And it is not just cars, as all that excess money and credit, supplied by the Federal Reserve so that the government can spend it, seeps into the prices of everything, and already the price of food - yummy, yummy food! - is rising over 6% here in the USA, not to mention food prices rising 7% in China or the big rises all over the world. And so in five years, what is the compounded rate of an annual 6% increase in food prices? 34%! Hahaha! The increase in the minimum wage was only 38%!

It all comes down to what Andy Sutton of My2CentsOnline.com was talking about when he wrote about the "disconnect in understanding between money and purchasing power." To remedy that, he gives us an example: "Say a man in 1933 stuffed twenty dollars under his bed. In 1933, the price of a gallon of gas was around 10 cents. So the twenty dollars was worth 200 gallons of gas."

Now contrast 200 gallons of gas in 1933 with, "In 1970, gas sold on average for 34 cents/gallon. The twenty dollars was now only worth 59 gallons of gas."

Now contrast both of those with, "Today, I paid $2.89/ gallon. The twenty dollars would buy only 6.92 gallons of gas. To recap, the twenty dollar bill that in 1933 bought 200 gallons of gas today only buys 6.92 gallons."

Thus we see in precious gallons the ravages of inflation in prices thanks to the damned Federal Reserve.

TheStreet.com reports that "Paul (R., Texas) is so disgusted with the Fed and its role in failing to stem inflation that he wants to eliminate the entire institution, including its army of economics Ph.D.s and other money wizards", which refers to a bill that he filed in Congress, HR2755, that would do just that.

As Junior Mogambo Ranger H.H.H. puts it, this shows that "Ron Paul will go to his grave with his honor and dignity intact, which is far more than I can say for most members of our government."

Why does Rep. Paul want to eliminate the Fed? Well, according to me at my loudmouth, know-it-all, arrogant best, it is because the Federal Reserve has been a complete, dismal failure in every freaking respect, and especially in their duty to protect the value of the dollar.

Well, nobody ever wants to hear what I think, and so I am happy that the question is admirably answered by the epic truth revealed by Antony Mueller at Mises.org and handily posted at Agora Financial's 5-Minute Forecast. "Central bankers," he writes, "sometimes describe their activity as 'more art than science', which is implicit recognition of their ignorance. The 'art of central banking' is the art of pretending to know what one does not know. Not only is it not a science; it is not even an art. At best, it is alchemy; at worst, it is a gigantic cheat."

Or as the Law of Logical Argument puts it, "Anything is possible if you don't know what you are talking about".

This leads to the Law of Lying and Statistical Manipulation, which I just made up, which is, "If you have a willing, co-conspirator like Congress, then the Federal Reserve can do and say anything it wants, whether it knows what it is talking about or not, and nobody will try to stop them, and the Fed will create so much money and credit that price inflation will destroy us all, which it will, and we are freaking doomed, doomed, doomed as a result."

Vaclav Klaus is Professor of Finance at the Prague School of Economics and is a former Minister of Finance, and is quoted in the Financial Times as saying (although originally in reference to something else), "I am not ashamed of this ignorance of mine. On the contrary, I am ashamed of the confidence of those who claim to know the answer. I see a big difference between science and 'national scientific establishments'. To believe in scientific establishment is impossible, this is just another powerful rent-seeking group."

In short, being just as disrespectful as I can muster, the Fed and the Congress are two symbiotic parasites guaranteeing their own free ride by telling and believing lies, which is only possible under a fiat-money standard, as under the gold standard, "you have fixed exchange rates and free mobility of capital, but you give up domestic monetary policy," says Robert Wright, who is a professor of economic history at New York University's Stern School of Business.

Perhaps because he is at a university that receives huge amounts of government money, he forgets to mention that a gold standard also constrains fiscal policy of the government, too, as they don't dare just spend and spend, because borrowed money has to be paid back by raising taxes! And the spending had better be good, too, because if it isn't (like spending tax money for stupid crap like creating huge entitlement programs and, ummm, funding universities), then the gold will actually flow out of the country as foreigners get scared of our idiocy and take their money away, actually shrinking our money supply!

Therefore, under a gold standard, the government and the banks had to be smart and act smart. Now they don't. And obviously aren't.

If you want to see the real beauty of "gold as money" and the wonderful economic bliss that comes from it, then it is inferred when Mr. Wright brings up "the phenomenon of falling nominal wages."

Note the use of the word "nominal" wages, which merely means wages expressed as a strict dollar amount (such as dollars per hour). "Real" wages, on the other hand, means nominal wages expressed in terms of inflation-adjusted buying power, which is experienced as rising prices.

I mean, if your income doubles, but all prices double, too, then you are not better off, are you? No.

But if your income stays the same and prices go down, then you ARE better off, right? Of course you are! Welcome to the gold standard!

The "problem" Mr. Wright refers to is that the gold standard was so successful that "Many of the conflicts between labor and factory owners in the 1800s had more to do with adjusting workers' wages downward in line with the overall price level than they did with owner-inspired greed, as is popularly perceived."

Aha! In short, thanks to our money being gold, the standard of living of the country was increasing! People's lives were getting better! And they had more! And they bought more, although their nominal wages were exactly the same! And in fact, things were so good that the workers were becoming overpaid! Overpaid labor! What a Utopia!

And so who is so evil, so dastardly, so despicable as to screw with such a successful system?

Note the dark and gloomy soundtrack of wolves howling and the distant screams of people being eaten alive. The banks and the government! It's always the damned banks and the damned government!

A lot has been made of the AP report that the Swiss National Bank said "it will sell 276 U.S. tons of gold reserves over the next two years. The sale would fetch about $5.2 billion (3.9 billion euros) at current prices."

But you can relax; this is not another Screeching Mogambo Rendition (SMR) of the sheer scope of the cancerous fraud of grossly mismanaged Federal Reserve monetary policy, a corrupt and stupidly ideologically-driven Congress that aided and abetted it, and a compliant free press interested only in the scandalous and salacious sound-bite with revealing photos (because that is what their shallow and happily-ignorant audience demands), all of which made the cancerous growth in government possible, which has now turned predictably fascist in its panic and determination for self-preservation at any cost.

Rather, this is about how gold is performing exactly how you would expect in the face of such monetary and fiscal stupidities! It went up in price!

The point of the Swiss selling all that gold is that gold is so valuable that "The share of gold in Switzerland's currency reserves has risen to 42 percent from 33 percent since mid-2005 due to the increase in gold prices." Hahaha! So this sale of gold by Switzerland, says Mr. Jordan, "would return the share of gold in the currency reserves to their previous level."

But don't feel too bad for them, as "Once completed, the national bank will hold 1,040 metric tons (1,146 U.S. tons) of gold."

And lest you think that this is something new that is going to tilt the global balance, it ain't, as "Between 2000 and 2005 Switzerland sold 1,300 metric tonnes (1,433 U.S. tons) of surplus gold reserves."

And what did they do with the money? Hahaha! I'm glad you asked! "The proceeds - about 21 billion Swiss francs - were distributed between the federal government and the country's 26 cantons (states), who used the money to pay off debts." Hahahaha!

So where do you think THIS new infusion of money, from selling 276 U.S. tons of gold, will go? Me, too. Morons.

From SafeHaven.com we get an interesting perspective on global warming from The National Post, which had an article by R. Timothy Patterson, who is a professor with the Department of Earth Sciences at Carleton University. He writes that he and some buddies were performing a "time series analysis" on the "colouration and thickness of the annual layers" in core samples drilled down into the ground, sorting through a zillion years of earth's history, and one day they, "discovered repeated cycles in marine productivity."

For example, "we find a very strong and consistent 11-year cycle throughout the whole record in the sediments and diatom remains." It gets very, very interesting when he notes, "This correlates closely to the well-known 11-year 'Schwabe' sunspot cycle, during which the output of the sun varies by about 0.1%. Such records have been kept for many centuries and match very well with the changes in marine productivity we are observing."

The result is that "Our finding of a direct correlation between variations in the brightness of the sun and earthly climate indicators (called 'proxies') is not unique. Hundreds of other studies, using proxies from tree rings in Russia's Kola Peninsula to water levels of the Nile, show exactly the same thing: The sun appears to drive climate change."

What? The sun causes global warming? Wow! How's that happen? He says, "Sunspots, violent storms on the surface of the sun, have the effect of increasing solar output, so, by counting the spots visible on the surface of our star, we have an indirect measure of its varying brightness."

And I note that they are trying very hard be staid and sober scientists, and not to be alarmists like The Mogambo who goes freaking berserk at everything these days, and they did not mention how the brightness of sunlight is just an indirect measure of the sheer amount of increased power from the sun that is increasingly slamming into the Earth every minute of every hour of every day, month after month, year after year.

And if you don't think that this big, BIG increased amount of energy being absorbed by the Earth will cause big, BIG changes, which will then cause big, BIG changes in everything else after just a few iterations of the system, like a big, BIG, insanely huge Chaos Theory butterfly flapping its big, BIG enormous wings, then stick around, because you are in for a big, BIG surprise as to how things really, REALLY work!

And it gets even more interesting when "We also see longer period cycles, all correlating closely with other well-known regular solar variations. In particular, we see marine productivity cycles that match well with the sun's 75-90-year 'Gleissberg Cycle,' the 200-500-year 'Suess Cycle' and the 1,100-1,500-year 'Bond Cycle.'"

In fact, apparently a couple of these cycles seem to be overlapping, as "it seems Solar scientists predict that, by 2020, the sun will be starting into its weakest Schwabe solar cycle of the past two centuries, likely leading to unusually cool conditions on Earth."

He says that the lesson is that "It is global cooling, not warming, that is the major climate threat to the world, especially Canada".

Even so, The Mogambo says that, short-term, the more immediate lesson is that the Earth is still getting warmer, however temporarily, and will continue to get warmer, meaning (I assume) more drought, more crop failures, more demands for energy, etc., as according to this guy, it's another 13 long, dry years until the cycle even peaks, for crying out loud!

And there is also a lot of money to be made in commodities and on the back of government attempting to "combat global warming" with doomed-from-the-start boondoggles (like ethanol) between now and then. And this is not to mention the sharp decrease in standards of living that will obviously happen as a result of these, and so many other, ugly things, all bought and paid for by the excess money and credit created by the filthy Federal Reserve.

I sigh. We're doomed. We're freaking doomed. Ugh.

Mogambo sez: I run down the checklist: Weapons? Check. Gold? Check. Silver? Check. Oil stocks? Check. Now ask yourself why I am doing this. Now ask yourself why you aren't.

What is the price of gold?

2007-06-30T06:53:00.000Z

Below is a snippet from the latest weekly issue from www.GoldForecaster.com | www.SilverForecaster.com

The classic question has to be asked again, what is the price of gold? If we answer $xxx, then we have to ask the next question, what is the price of a $?

Is the $ so reliable a store of value that it can be used as a measure of gold? This questions the very foundation of the paper currency system. Can one trust the $ or even the international monetary system? It’s all a question of degree.

§ The U.S. holds mainly gold in its reserves, because it is the issuer of the globe’s reserve currency. This does imply that it is completely dependent on its own currency, the $, in the global economy. As the foundation of the world’s monetary system, should the currency lose the confidence of its own or other nation’s citizens, the international money and trade relations across the world will be damaged severely. It is thought that this process is well under way.

§ The Eurozone community’s Central Bank drew off 15% of its reserves in gold from its members. This does not mean they intend to only hold 15% of its reserves in gold, nor does it imply that there is a rigid exchange rate between gold & the €. But the question of how to measure 15 of reserves is raised. From the beginning of the Central Bank Gold Agreement the E.C.B. decided to sell a fixed tonnage of 235 tonnes of these reserves for paper currencies, ostensibly to keep this rough proportion in their reserves. The E.C.B. is fully aware of the dangers of measuring gold in the $ and in the € for that matter, but for the sound functioning of the paper currency world it is crucial that gold be subject to measurements in paper currency terms and not the other way around. With the higher prices this is around 25% of the E.C.B. reserves, perhaps a level they prefer?

§ Germany, who gained the option to sell up to 500 tonnes of its gold, has not done so, citing that “gold is a useful counter to the swings in the $”. Of course a doubling in the price of gold since making this decision is paying off handsomely. We commend the pragmatism of the Germans, for reserves are there for a rainy day and are not a pension fund scheme to make it grow profitably. Certainly this can be a secondary objective but never take over first place. The reserves have to be credible in times of distress and acceptable to all ones trading partners. Germany is aware that the times are a changing and are keeping their eye on the future of the global economic and monetary order and guarding against it.

§ Italy has no plans to sell any gold, which is unsurprising given the very poor history of the Italian Lira. They too have seen several currencies come and go in the last one hundred years, so they have few illusions about the joys of compound interest, after all adding noughts to a currency doesn’t make them more valuable, it’s the buying power that counts. So, will the $ today, with interest added over the next decade or two, be worth more than today’s equivalent in gold in a decade or two?

§ The Swiss Franc has always been one of the most stable of the globe’s currencies within one of the most stable and constant of economies. In times of global war or uncertainty, this peaceful anti-war country becomes itself a ‘safe-haven’ for foreigner’s savings. So it is almost a source of safe money and financial security in itself. So their concept of a rainy day contains far less moisture than other countries. It is therefore financially more secure and less dependent on its reserves than other countries whilst being small enough to adjust if reserve holdings within the foreign exchange markets capacities at present. With the mix of gold and currencies in their portfolio, their character being taken into account, you can be sure they have covered their backs on the risk front and stand to gain either way the cookie crumbles. So it is of little account that they sell some more gold. We see it as a gesture of support for the paper currency system, a gesture they see as protecting their overall reserves portfolio.

So why sell gold, or more pertinently, why sell a little gold and retain sufficient for bad times? It is to ensure the retention of value in the overall portfolio; it is not the getting rid of the gold content therein.

Clearly, Switzerland with its constantly sound position as bankers to the wealthy of Europe and its dependence on the banking industry, has a vested interest in a mix of global paper currencies more so than those nations that have an unsound Balance of Payments, smaller reserves and face greater economic risks in the global economy [Other countries with current account deficits include Australia, New Zealand, Britain, France, Italy, Greece, Spain, Czech Republic, Poland, India, Pakistan, Colombia, Mexico, Hungary, Turkey, South Africa and others].

The big question is will gold have a greater real value in times of distress than yield earning national currencies? In the last world war, what value did the Deutschmark or the U.S.$ have internationally [remember forgery is one of the acceptable weapons of war]? And what value did gold have? – No contest.

With economic power shifting Eastwards and the Asian nations growing away from their dependence on the U.S. economy, inevitably reserve currency dependence such as we are used to with the $, is changing, is fragmenting with other currencies coming onto the scene and with national interests clashing and exerting pressure on the different important global currencies. Should these pressures grow beyond a certain almost indefinable point, then paper currencies will not garner the same level of confidence as they do now, and the unquestionable international reliability of gold as a measure of value will ascend above paper money.

Prime Minister Brown of the U.K. went the way Switzerland is, again, going to go in 1998, looking for a more profitable content [?] to the U.K.’s gold and foreign exchange reserves and paid a heavy price that is growing as the gold price rises. Did he act for political reasons in support of the € and the more controllable paper currency system? We believe Switzerland may be following the same line of reasoning as Brown did. After all, if we measured the proceeds achieved from the last sale and the total value of those plus the interest thereon, what would the shortfall against today’s value of that gold?

So the mix of foreign exchange and gold reserves is essentially a gamble on the future.

The last bears throw in the towel

2007-06-25T18:07:00.000Z

The Daily Reckoning
London, England
Friday, June 22, 2007

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*** When the last bear throws in the towel…floating high on the giant swells of liquidity…

*** Too many clowns on stage…market risks are only worth it if you're already rich…

*** Moments of beauty don't make a city beautiful…a report on sorely missed fanfare…and more!

--- Special Announcement ---

Get our newest $995 investment research service - for free:

http://www.isecureonline.com/Reports/AFR/EAFRH685

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The great show goes on.

Yesterday, the Dow bounced a little. Bonds fell - leaving the 30-year Treasury with a yield of 5.28%. The collapse of Bear Stearns' derivatives funds sent "shockwaves" through the CDO (collateralized debt obligations) market, says Bloomberg. And a pair of hedge funds in Dublin went bust.

Meanwhile, Chinese stocks are back in the news - hitting record prices. And China's neighbor, Japan, incidentally the second biggest economy in the world, is growing faster than expected. And like China, it is accumulating dollars. Exports rose at a 15% rate over the last year, adding $3.2 billion to Japan's dollar surpluses in the month of May alone.

The speculators speculate. The reporters report. The pundits pund.

Often the hardest thing for investors (and spectators) to do is to remember the plot. There are so many clowns on stage…so many doors slamming…so much greasepaint roaring…such smelly crowds.

So let us try to recall what has happened.

The U.S. stock market now stands at its highest level ever. By most measures, it is as pricey as '29, '68, or 2000. The correction that began in 2000 was washed away by huge new waves of liquidity, which now slosh over the globe and lift up everything - including a lot of trash and debris. Upon this sea of easy cash and credit, practically every stock market on the face of the planet floats higher and higher.

Meanwhile, the captains of the financial industry never had it so good. They're earning billions by doing deals…which is essentially transforming this huge flood of credit into debt, equity, property and consumer items for the rich - such as luxury yachts, sumptuous estates, snazzy airplanes, and various objects of ersatz art and genuine ridicule.

At the Paris Air Show, for example, one of the Bass brothers is shopping around plans to build supersonic executive jets at $80 million a copy. Heck, why not? Think how much more productive an executive could be if he could get from New York to London two hours earlier. Then, he could get back to New York in time for dinner. Think of all the deals he could do! Besides, it saves picking up the phone.

Of course, a supersonic jet is not a necessity. It is a vanity. But vanity plays an important role in this performance. Like a Greek tragedy, our protagonists are victims of their own vanity; they think they can get away with anything! And spectators and speculators can't help themselves. They see our heroes - the hedge funds, the private equity funds, the bankers, the lawyers, the math geniuses and derivative impresarios - making fortunes. They see them in the newspapers, gloating over their billion-dollar paydays. They see them in Architectural Digest in front of their Greenwich mansions. They see them in the society pages - giving millions to charitable causes. And they see them at Christies and Sotheby's holding up their hands to bid millions for some abject oeuvre by some no-talent hustler. Seeing all this, how can others not want to join them?

Even some of the greatest and most experienced market observers, and here we think of Richard Russell, have finally given up fighting 'em. They've decided that this really is a New Era (more below)…and that this is the time to join 'em. This worldwide bubble is more worldly and more bubbly than any in history, they say. It may get much, much bigger. And they have good reasons to think so. All those billions of Asians…all those trillions of new money…all those new hedge funds…all those new investors…all those reserves of dollars…all those new financial instruments. How can they help but blow this bubble up even bigger - so big even the moon will have to get out of the way.

But wait…isn't there an old market adage: The bull market is over when the last bear throws in the towel?

Are there more bears still out there?

We don't know. But there can't be many of them.

And more views:

*** But let us not forget the plot…and our role in it.

Unless you are able to get in on some of this bubble loot - by starting up your own hedge fund, for example - you're better off staying away. Because, while there is some potential profit on the upside, there is probably much more risk in the other direction. There are already several big leaks in the U.S. housing bubble. And there are dozens of pins poking up everywhere.

Markets that are at epic highs, typically, pose more of a threat than an opportunity. And investors - if they are smart - do not really put their money into expensive investments hoping that a greater fool will come along tomorrow. A professional speculator might. A billionaire might make a careful calculation…betting that the bubble will grow for another two years. He might put a few million into a wild gamble. If he wins, he is richer by millions more. And if he loses? It will have little effect on his standard of living. His children will still be able to go to college. He'll still be able to take a vacation and retire when he wants.

The more you have, the less each additional increment is worth. By the time you get beyond a few million, the value of each additional dollar is minimal. It is only valuable in an abstract sense…as a way of keeping score. Soon, extra dollars are just "play" money - you use them just to prove a point…or to show off…or to gamble with.

If you're in that situation, and you want to take a gamble on this bubble getting bigger - then, why not? Give it a whirl. Have some fun.

But here at The Daily Reckoning headquarters, we'll continue to fly our 'Crash Alert' flag…and sit tight.

*** The International Herald Tribune reported on the "World's Most Livable Cities," yesterday. We were shocked. Our hometown, Baltimore, didn't make the list. But then, neither did Philadelphia…or New York…or San Francisco. In fact, the only American city to make it into the top 20 was Honolulu.

People who do these rating services tend to have a grudge against automobiles…which puts American cities at a disadvantage. The United States has the best cities in the world - no question - from a car's point of view.

At the top of the list was Munich…followed by an assortment of the usual European cities. Also among the top 20 were two cities in Australia - Sydney and Melbourne…and two in Canada - Montreal and Vancouver.

Paris, France, from which we are currently estranged, was listed - but not at the top.

What makes a city livable? Some of the things are obvious. You don't want to worry about getting shot when you walk around. You want to be able to go to nice restaurants. You want things to look nice. And you want a certain amount of convenience.

What dooms American cities is that they tend to be dangerous. We haven't looked at any figures on the subject in a while, but we're willing to believe that Baltimore is much more dangerous than Geneva. American cities also aren't very pretty. They have pretty parts to them, but if you look out your car window at any given moment, you're as likely to see something ugly as something attractive. In a city such as Paris, by contrast, almost anywhere you look, you will see something that is pleasing to look at. Even bad neighborhoods have pretty buildings. Even the people tend to be more attractive in European cities than in the typical burg in the United States. People tell us what a great city New York is. But in our experience, it is rare that you see something fetching in the Big Apple.

As for what you eat, in a big American city, you can get some of the finest food in the world. But in the typical American restaurant, the middle-American chain eateries, the emphasis often seems to be on quantity rather than quality.

It is difficult to generalize about infrastructure; there are so many particularities. Swiss cities tend to be very well organized, small, clean, and efficient. You can get through the Zurich airport, on a train and to the downtown area, for example, in just a few minutes. In Paris, when there is no traffic, connections are easy too. But during rush hour, you can spend a couple of hours stuck in traffic. London, on the other hand, is a sprawling place. Its airports are frequently on the verge of pandemonium. Just yesterday, for example, travelers were warned to expect breakdowns in the airport security and passport control systems this summer…including long waits and long lines.

*** Last night was the shortest night of the year - in the northern hemisphere. It is also the night of St. John throughout Christendom…and the "Fete de la Musique" in Paris. Bands set up on street corners. The party goes on all night long. In our lonely exile, we weren't able to participate, but our son Jules sends this report:

"Stay away from the Latin Quarter. It's just too crazy. Too many people. Too much noise. Bands compete with each other. I was there last year; it was awful. The type of music varies by neighborhood. Up in the old Jewish quarter, for example, they have techno and heavy metal. Where we live [in the bourgeois 16th arrondissement] the music wasn't so bad…there was a jazz band across the street from the Chinese restaurant where we had dinner. My friends were going down to the Latin Quarter late at night, but I couldn't face it. I just went home and went to bed."

Death By Inflation Report

2007-06-21T21:45:00.001Z

"You and your money, and the money of your little goon squad storm troopers here, is what is dying, and is going to die! And you will follow it into the grave as inflation kills you all!"

by The Mogambo Guru

My mouth went dry when I saw that Total Fed Credit dropped by a huge $7.9 billion last week, and even foreign central banks were not buying with their usual gusto of snapping up quite a few billion in government and agency debt every week, and actually sold $134 millions' worth.

My hands visibly shook as I also learned that the official rate of inflation inched up to 2.7%, which is marginally higher than the official 2.6% last month, which is down from the official 4.2% we had a year ago.

Disguising my terror with a cruel sneer in my voice, I say, "Note the wide disparity between this official 2.7% inflation to the official GDP Deflator, which is an official 4.0%, my darling Junior Mogambo Rangers (JMR)! Inquiring minds want to know, 'What in the ding-dong hell is going on around here?'"

The answer is that consumer price inflation is actually raging at over 10%, according to John Williams of shadowstats.com, who calculates the actual rate of inflation the "old" way, which is the way that people have always calculated inflation, which is to look at how much things cost, and then compare that to how much they cost last week/month/year/decade/in all of freaking history.

But now, thanks to the loathsome Alan Greenspan - in league with the despicable Michael Boskin to come up with this new "hedonic adjustment" crap - the official policy of the United States is that we don't measure just prices to establish inflation in prices; we now adjust prices for changes in an assumed increase in some quality or utility of the item! Therefore, inflation can be anything you want it to be! Hahaha! What a scam!

How is this possible? It was made possible by the "aiding and abetting" of an insane Federal Reserve system, a corrupt see-no-evil Congress, a complicit press of ignorant "journalists" and a traitorous school system staffed with ignoramuses! It's easy when you know how!

So I was chuckling merrily to myself about the idiocy of governments, news media and schools when my heart froze as my wife suddenly kicked open door of the Mogambo Bunker Of Manly Solitude (MBOMS) which I had carelessly left unlocked.

She had a piece of paper in her hands and a wicked smile on her face, and her eyes glowed with the heat of raw vengeance as she bellowed "Prepare to die, creep! The latest Consumer Price Index Summary from the Bureau of Labor Statistics says, 'During the first five months of 2007, the CPI-U rose at a 5.5 percent seasonally adjusted annual rate (SAAR).'"

My brain was stunned! 5.5% inflation! I fell, moaning, to my knees, my hands frantically clutching my chest as my heart was pounding, pounding, pounding in terror!

Out of the corner of my eye I can see her just standing there, smiling to herself, watching me flopping around, writhing on the floor at this horrible news. With a heroic, manly effort I started to rise to my feet to launch a counter-attack, but she pre-empted my loud and scathing rebuttal by relentlessly continuing, "The index for energy advanced at a 36.0 percent SAAR in the first five months of 2007'!"

36%! My worthless life swam before my eyes as consciousness flickered in and out. I knew that she never tired of seeing me suffer, so my plan was to stall until I recovered enough to roll over onto my stomach, with the idea of kicking her if she ever came near me, but she had seen that trick too many times to be fooled again, and instead launched another salvo.

"How do you like this one?" she asked, her voice rising in an unmistakable cackling glee. "It says 'Petroleum-based energy costs increased at a 63.9 percent annual rate and charges for energy services rose at a 6.8 percent annual rate.' Hahaha! You like that one, Mogambo? 63%! You like that? Hey! Quit puking up blood and look at me when I'm talking to you!"

By this time my daughter comes in to see what the racket is all about, and quickly sizing up the situation, excitedly says, "Hey! Let me in on this!" Grabbing the report out of my wife's hand, she scans down the page and says "Hey, pop! Check this out: 'The food index has increased at a 6.2 percent SAAR thus far this year! Hahaha!'"

6.2%! My blood ran cold at her scornful laugh and at the terrifying news about rising food prices! After that, details become murky, and the police report is, of course, filled with lies and is all a big frame-up, as I prove when I distinctly remember that the police were experimenting with shooting their Tazer guns at me and ineffectually holding back my wife, who was screaming and spitting and kicking at me, "Anybody who can be killed by a stupid inflation report deserves to die! Die!", and I was screaming back, "No, you moron! You and your money, and the money of your little goon squad storm troopers here, is what is dying, and is going to die! And you will follow it into the grave as inflation kills you all!", but none of this was even mentioned in the report, even though it is the crux of the whole thing!

And while neither of my beloved family members knew it, it will probably get worse, as commodities guru Kevin Kerr at DailyReckoning.com is reporting that this "inflation in food" thing is to be expected, as "the United States Department of Agriculture said 49% of the spring wheat crop was already harvested and only 32% of it was rated good to excellent. That's down from 67% a year ago. This year may be even worse, and demand is growing."

He goes on, "The situation gets even more grim as the United Nations Food and Agriculture Organization is reporting that nearly two-thirds of the winter wheat crop in western and northern China has been wiped out by a prolonged drought. Some other areas have experienced a 40-50% cut in the winter wheat harvest."

This of course has had an effect on us money-grubbing speculator swine out here, and Mr. Kerr reports that "The rumbling in the pits is that red winter wheat, while volatile, is one of those crops that simply will go higher in the long term, due to increased demand and ever-decreasing supply."

Demand and supply? Immediately I grab some paper and start graphing out charts of the supply-demand dynamic, and busily move the supply curve up and down and around, and the demand curve up and down and around, and I'm trying to remember where you put prices. Pretty soon I am confused and hopelessly lost. I look at Mr. Kerr with my Big Sad Mogambo Eyes (BSME) as if pleading for him to solve my problem, and he does! He says, "Sounds like a good time to buy."

Not only that, but the Bernstein research firm actually tracks a dozen agricultural raw materials in its Food Commodities Index, such as wheat, barley, milk, cocoa and edible oils, which are used by food companies. Their Food Commodities Index shows a food cost inflation of 21% this year, which is "by far" the largest increase since they started the index almost ten years ago.

To make matters worse, corn is not even in this index, although it is a basic staple in a lot of processed foods, besides being a main livestock feed, the source of taco shells from whence you get delicious, crunchy tacos, and the most popular ingredient to make a jillion new gallons of ethanol, the latest huge Congressional boondoggle.

They say that there are 46 million Americans who do not have health insurance. Not true. Everyone in America is fully insured by me and other people who pay for health insurance, and we are paying their bills; Congress has long since made it a law that hospitals must provide healthcare to anyone who asks for it, regardless of their ability to pay, but have capped the payments to the providers under Medicare, Medicaid and myriad other government programs.

And Congress and the courts have agreed that if these people do not get complete, first-class treatment and a satisfactory outcome, they can sue and collect damages, adding to the bill.

And since there is no one left to pay except me, health insurance for my wife and me is now $10,512 a year, to which one must add a $2,000 deductible for each of us and a 20% co-pay, which comes out to about $15,000 a year.

At this rate, more and more people will soon be forced to drop health insurance coverage altogether, and only grossly over-compensated government and public employees will have health insurance, which is paid for by a government raising our taxes, which we probably can't pay, and they take our houses, and when they get to me they will find an adversary very, very heavily-armed and insane with anger. That is the true "healthcare crisis."

The Bank for International Settlements (BIS) has reported that the total clot of global derivatives in existence is now $415.2 trillion, with comes out to 789% of global GDP.

In typical Mogambo parlance, grubby financial bets financed by banks and the financial services industry now total almost eight times the value of every freaking good and service produced on the entire freaking planet in an entire freaking year!

And according to the McKinsey Global Institute, the ratio of global financial assets to annual global output soared from 109% in 1980 to 316% in 2005!

I scream "Gaaaaahhhh!" All of this central bank idiocy of creating more and more money and credit is not news to Jason Hommel of the silverstockreport.com, but a grown man screaming "Gaaaaaahhhh!" at the top of his voice seems to be startlingly novel, judging by his reaction.

Nevertheless, he writes, "Money in U.S. banks, M3, is growing at a rate of about 12% per year, or more. So, in the last 12 months, it grew by about $1.3 trillion dollars, which is $1,300 billion dollars."

So why is a guy who is primarily interested in precious metals talking about the growth of the money supply? Well, we learn why when he wonders aloud how much the 2,500 tonnes of annual world gold production (80 million ounces) is worth at $675 per ounce.

I immediately started sweating bullets, thinking that I was certainly not expecting a damned pop quiz in math, especially one multiplying such large numbers. So I breathe a huge sigh of relief when I learn that he already did the math, and says, "It's worth only $54 billion dollars."

Then he stops and looks at me with this expectant expression on his face, like I am supposed to draw some important conclusion from this or something, but I am sitting there with this big, dumb look on my stupid face, as I don't get it. Sensing my problem, Mr. Hommel helpfully reiterates the facts by saying, "$1300 billion of new money printed. $54 billion dollars worth of new gold mined, at $675/oz."

Obviously, this is supposed to mean something to me, but it doesn't. Again, I just sit there, dumbfounded, feeling uncomfortable and trying to look small so that maybe he won't see me.

After what seemed an eternity, he finally got tired of waiting for me to show some uncharacteristic smarts, and just tells me what this means. "So," he says, "the U.S. is actually creating new paper money at a rate 24 times as much as new gold. 1300 / 54 = 24!"

I say "That's a lot! And thanks a lot!" as I get up to leave in case this breaks out into more math, as I have enough problems as it is, no pun intended. But he is not done with me yet, and grabs my attention with "And of course, this is hardly a fair comparison. I'm comparing U.S. dollars to world gold production. We should compare total world paper money creation rates, to world gold mining rates."

Intrigued, I sit back down to learn more about how much money the world is creating versus how much gold. Then he says, "But that's a lot of work, and I don't know if I can source it all out."

As soon as I heard the word "work" and how he was "sourcing this out", I was instantly scrambling to get the hell out of there. But again, before I could get more than a few yards towards the door in my panic, he lets me know that he was merely toying with me by saying he has, again, already done the work, and, "My well-researched guess is that the U.S. dollar is only about 1/4 of the world total increase of paper money. So, let's multiply by a factor of 4."

By this time I am lost again, and realize that by this time I had forgotten what in the hell he was even talking about in the first place. Again I was saved when he laid it all out in front of me with "$1,300 x 4 / 54 = 96! Thus, the world is creating new money at about a rate nearly 100 times faster than the world's value of new gold." A hundred times more money than gold!

Wow! Finally, a light bulb, albeit low-wattage, goes on over my head! The amount of gold per unit of currency is rapidly falling to record levels, all over the globe, indicating that gold is a Big, Big, Super Big Bargain (BBSBB) right now, and getting more so every day, and for everybody on the planet!

Now you know why I am always screeching that gold will soar, as the dollar is just another of the world's disastrous experiments with a fiat money and unrestrained fractional reserve banking, meaning that it will go to zero in buying power, or (in the original Latin), magnus squatus profundus. And now it is happening all over the world, as we all use fiat currencies!

The fact that gold is not rising in price right now makes me squeal with glee (SWG) "Whee! A chance to buy more gold, and at prices effectively cheaper by the minute!"

But gold is so alien to most people that even when you are screaming in their faces about how stupid they are, they still don't go out and buy any! Weird!

Junior Mogambo Ranger (JMR) Milan R. writes, "You say: 'Since all money is created by debt nowadays, and interest is due on all that money, you have to keep expanding the money supply at faster and faster rates just to achieve an economic standstill, and even more to offset inflation in prices, you witless jerk!'"

He brings this up because it turns out that "the time rate of change of acceleration in physics is called jerk (sometimes jerk rate)!" He thoughtfully included a link to the Smithsonian/NASA ADS Physics Abstract Service, where we find the abstract for "Jerk: The time rate of change of acceleration" by Stephen Schot, who is "affiliated" with the Department of Mathematics at American University.

Anyway, the abstract is, "The time rate of change of acceleration has been called the jerk and is important in certain applications of mechanics and acoustics. For planar motion, the jerk vector is resolved here into tangential-normal and radial-transverse components, and the normal component is expressed in terms of an affine differential invariant known as the aberrancy. Using known aberrancy properties of curves, several geometrical properties of the jerk vector are established for plane motion."

Imagine my surprise, as I actually remember this particular thesis! I remember that a draft copy came across my desk, and I immediately realized I had no idea what in the hell any of it meant. Inspired, I tried to get Mr. Schot to expand his paper to use what is apparently a load of completely indecipherable gobbledy-gook to perfectly illustrate how the Federal Reserve is a bunch of idiots and losers who think that they can use incomprehensible stuff like this to guide monetary policy!

But Mr. Schot cruelly turned his back on The Mogambo and America, and in case he tries to wiggle out of his shocking lack of responsibility, I have the transcript right here!

I will now quote from the relevant part of the transcript:

"Mogamb So you are unwilling to bend to the Will Of The Mogambo (WOTM) and use your utterly baffling theory to save America from the loathsome predations of the Federal Reserve, whose theories are equally as dense, and whereas you say your thesis actually is correct and verifiable, the Fed's economic theories are a load of hooey? Is that what you are saying?

"Mr. Schot: Who in the hell are you? Stop bothering me."

I think I have made my point as regards Mr. Schot, and I will mercifully not linger on how I can't count on him for a little help in enlightening America to the idiocies of the Federal Reserve and their bizarre economics. Instead, I will note that the Financial Times report that Ben Bernanke, chairman of the Federal Reserve, is ignoring all the big problems, and is pursuing similar academic arcana, as we learn from the headline "Bernanke Hints at Thinking on Housing".

The big idea is (as I understand it) that people with more equity in their houses will be less likely to default on a mortgage loan, and thus the interest rate they should pay on equity loans should decline, the homeowner will then have more disposable income, and that this is some new "financial accelerator effect". This translates as, "If banks, for some strange reason, suddenly demand less than the maximum amount that the market will bear and thus screwing unwitting borrowers all the damned time, then this 'lost money' will show up in the pockets of the consumer instead of in the pockets of the money-grubbing banks", to which I contemptuously laugh "Hahahaha!"

This dream world, of course, will be in addition to the already-established "wealth effect", which posits that when you get richer, you spend more of your take-home pay since your basic needs are now such a pittance compared to your total wealth. Thus, spending increases by as much, or more, than income increases! Economic magic!

Of course, his "financial accelerator effect" is all complicated by the type of mortgage, credit-worthiness, shifting populations, the value of the dollar, the current-account imbalance, monetary policy, fiscal policy and a zillion other variables, which means that the problem is unsolvable and a big damned waste of time. But this is how Bernanke, the chairman of the Federal Reserve, spends his time! Hahahaha!

What has everyone all worried is that this works in the opposite direction for the people on the other end of the bell curve where people are NOT experiencing any "financial accelerator effect", and how their "access to credit" will be curtailed as the interest rate they have to pay is higher, due, I guess, to a "financial brake effect." If they can even get a mortgage at all!

So how did we get into this mortgage mess? Greg Ip at the Wall Street Journal Online writes, "Alan Greenspan was arguably the country's most powerful financial cop in his 18 years as chairman of the Federal Reserve. But Mr. Greenspan's regulatory record has received far less scrutiny than his management of the economy."

Now, to show you a prime example of censorship in America, the next line of Mr. Ip's column was supposed to be, "It used to be that the brave and heroic Mogambo was the only person calling Alan Greenspan the most horrible, terrible, lying, deceitful, traitorous, and thoroughly despicable piece of crap that ever befouled the American economy because he allowed the Federal Reserve to explode the economy with massively excessive creations of money and credit for almost twenty years. Now that we are now on the verge of economic destruction from the ruinous inflation in prices caused by this ruinous inflation in the money supply, and the vast, untold misery and suffering this will cause, other people are starting to notice. So while it used to be that only the Manly Magnificent Mogambo (MMM) was critical of Mr. Greenspan, that may be changing."

What emerged from under the censor's knife was the much shorter and blander sentence; "That may be changing." The specific issue was that "A former colleague says Mr. Greenspan blocked a proposal to increase scrutiny of subprime lenders under the Fed's broad authority." This allowed "questionable lending practices now blamed for soaring defaults by mostly low-income borrowers."

When asked, "Mr. Greenspan, in an interview, says he doesn't recall a specific discussion of the idea but confirmed his opposition to it. There is 'a very large number of small institutions, some on the margin of scrupulousness and very hard to detect when they are doing something wrong,' says Mr. Greenspan. 'For us to go in and audit how they act on their mortgage applications would have been a huge effort, and it's not clear to me we would have found anything that would have been worthwhile without undermining the desired availability of subprime credits.'" Hahahaha! I love this!

So, imagine my anticipatory excitement about the next time that my boss comes sniffing around here and starts getting in my face, you know, about how I don't monitor the activities of my subordinates, or appear to actually do any work of any kind, or how everything connected with me and my gross incompetence is a huge deadweight loss dragging the company into bankruptcy, or blah blah blah. Now, next time I am going to use this invaluable new excuse!

My delicious plan is to calmly ask her to sit down, and when she does, I will get up from my desk and slowly walk around to stand right in front of her while saying, "I understand that you think that my performance is below par. Perhaps it is best that we get together to talk about it."

Soon, standing right in front of her, I will bend over so my face is up close to hers, right in her nasty little face so she can smell my bad breath and start fearing that she is going to catch my cooties or something, and tell her (almost verbatim from the former chairman of the Fed himself), "It would have been a huge effort, and it's not clear to me we would have found anything that would have been worthwhile without undermining the desired availability of total license for everyone to act imprudently, if not completely irresponsibly. So it is not my fault, and we aren't going to talk about it anymore!"

It is a gutsy move, I admit, but I figure that since nobody is persecuting Alan Greenspan for his incompetence, malfeasance and stupidity upon admitting this, it won't happen again to me, either. We'll see!

Anyway, apparently this kind of stuff will appear in a book by Edward Gramlich, former Fed Governor, titled "Subprime Mortgages: America's Latest Boom and Bust", to be released by the Urban Institute. In it, Mr. Gramlich says, "There are certain things that unsupervised lenders do that a Fed supervisor would not let you get away with," such as "not escrowing taxes and insurance, not verifying an applicant's stated income, or", and this is the defining moment for me, "assessing the borrower's ability to repay based on an introductory 'teaser' rate." Hahahaha! "You can afford the house if interest rates are zero! Sign here!" What a disgusting scam!

And who are these scamsters? The banks! It's always the scumbag banks! And who are Greenspan and Bernanke trying to protect? Themselves! The damned banks!

Mr. Gramlich does not stoop to the level of screeching such scandalous and slanderous conclusions, but allows that "According to Inside Mortgage Finance, an industry publication, in 2006 three of the eight largest subprime mortgage lenders were units of bank holding companies." Ugh.

Mogambo sez: Today, students, we read a passage from the Book Of Mogambo (BOM). "And verily did The Voice Of The Mogambo (TVOTM) roar like thunder across the multitudes, 'Oil went over $69 a barrel on Monday, proving that you can't go wrong with holding only gold, silver and oil! Maybe not always optimally, but never wrong!'

"Thus did the enlightened leave with wisdom, and bought gold, silver and oil. The others did not, and came to rue that decision, and their suffering chastened them, but they still had a bad attitude all the days of their lives."

Bad Generals Make Good

2007-06-21T21:41:00.000Z

By Eric J. Fry

Sometimes it's good to be a bad general.

On the battlefield, bad generals tend to "fight the last war." They utilize military tactics from prior campaigns, rather than devising new tactics for the campaign they are in.

But on Wall Street, a bad general would be a good investor, because a good investor tends to fight the last war. In other words, successful investing demands repeated campaigns against familiar enemies: like rising interest rates.

Whether cause or effect or sheer coincidence, rising interest rates tend to coincide with bull market mortality. Thus, as bull markets approach their final days, the earliest signs of failing health tend to appear in the financial sector. In other words, bank, brokerage and utility stocks tend to top out weeks or months prior to major stock market declines.

"I've kept a close on the share price of Merrill Lynch (MER) for over ten years," our colleague, Jeff Clark remarked in the January 12, 2007, edition of the Rude Awakening ("Time to Sell Short?"), "and don't ask me why, but the stock is one of the best leading stock market indicators I've ever seen. If the price action of MER is bearish, you can almost always bet the overall market is due for a fall. I even had a saying around my brokerage office, 'As Merrill goes, so goes the stock market.'

"Right now, the chart of Merrill Lynch (NYSE: MER) looks bearish… and if it breaks to the downside, it will be an ominous sign for the broad stock market."

As it turns out, Jeff called the exact top…of Merrill Lynch stock (NYSE: MER), that is. MER has slumped 10% since mid-January. Meanwhile, however, the stock market has continued to charge ahead - up more than 8% since the day Merrill topped out.

This curious divergence is not as curious as it may appear. MER is simply one of the many interest-rate sensitive stocks that tends to peak before the overall market peaks. The Dow Jones Utility Average also tends to provide a leading indicator of overall market weakness…and it, too, has been drifting lower.

Since interest rates have been rising for the last three or fours years - and rising sharply for the last three or four months - interest-rate sensitive stocks of all sorts have been faltering. Over the last two years, the yield on 10-year Treasuries has advanced from 3.89% to a recent 5-year high of 5.29%. Interest rates at the short end of the yield curve have also been climbing.

No surprise then that the Utility Average topped out one month ago, and has tumbled 8% since then. But the broader market averages remain buoyant nonetheless.

We've seen this battlefield before. Back in mid-June of 1987, interest rates were rising along the entire yield curve. Merrill Lynch shares topped out in January of that year. The Utility Average topped out in March. But the Dow continued charging ahead - up 28% through mid-June of 1987.

The Dow continued soaring until mid-August, when it topped out with an astounding year-to-date gain of more than 40%. Two months after that, the "Black Monday" crash of October 19, 1987, converted the Dow's sizeable gains into sizeable losses.

The fact that stock market trends of 2007 bear an eerie resemblance to stock market trends of 1987 is not automatically cause for fear, but it is absolutely cause for concern. Adding to this cause for concern is the fact that investor sentiment has become extremely complacent and optimistic, which, as a contrary indicator, suggests the market is approaching an important peak.

"The giant stock market rally has brought the broad market put/call ratio to the levels that prevailed at prior market tops," observes the seasoned options pro, Jay Shartsis. "One such ratio is the 21-day 'dollar-weighted' put/call ratio for the S&P 500 futures. Now standing at about 44 cents of puts traded for every $1.00 in calls, this ratio is way down from levels near $3.25 in puts per $1.00 of calls at last summer's market lows and $2.40-to-$1.00 at the market low in early March, 3 months ago. The current level, therefore, represents the lowest level of put-buying - hence highest level of option trader optimism - in several years and is of course contrarily bearish. One of these fine days all these 'Fearless Fosdicks' are going to get smacked real hard on their snoots and sent home crying to their mommas."

Furthermore, Shartsis concludes, the "Titanic Indicator" triggered last week. This powerful sell signal occurs whenever "within 7 days of a new Dow high, there are more new lows than new highs on the NYSE. This indicator has quite accurately identified past market tops."

Hmmm…time to prepare the defenses.

EARTHLING ECONOMICS

2007-06-21T20:15:00.001Z

EARTHLING ECONOMICS
by Edmond J Bugos

Gold "gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head" - by a well known investor

Why humans would guard something that has no utility must have escaped notice there.

I'd like to know what kind of society the Martians in this allegory had. I mean, under what system of social cooperation were they able to arrive at the far superior technology required to observe humans from way off in the distance? Do the individual members exchange ideas, or goods? If not, how were they able to economize on scarce resources in order to produce their technology, or is there no such thing as scarcity in outer space? What motivates them to act? Are they centrally organized like a simple ant colony or collectively motivated like the coercive Borg in Star Trek, or is their division of labor organized by a complex but voluntary system of the free exchange of property titles, which here on earth forms the basis of civilized societies?

If not, I wonder then why "anyone watching from Mars" would not also scratch their head about paying someone to guard this hoard, let alone of the concept of utility, especially to an "individual"? In fact, if such a system were so unfamiliar, what sense could a Martian make of any human action? Maybe the philosophy of exchange is not foreign to this observer.

If that were true, neither could a common medium be all that foreign. In fact, if our Martian observer knew anything of our history or of such a system of cooperation, the reasons for the puzzling activity would be no less clear to him than to any informed economist right here on earth. Corruption.

But let's fast-forward the economic mumbo jumbo and cut straight to the chase. Since we're in outer space already, amongst superior beings, we may be forgiven for our excursion into a little fantasy.

Imagine that we had the technological capability to travel through time, and you signed up for an expedition that would catapult you, say, 5,000 years into the future, what would you choose as money to bring with you… assuming that you were only allowed to choose one of the following prospects? Keep in mind that your decision could mean the difference between life and death!

1. Gold
2. Silver
3. Brazilian seashell necklaces
4. As much top grade Light Crude (Oil) as you can carry
5. Salt
6. Cigarettes
7. Dutch tulips
8. Cattle (or a lamb?)
9. A bottle of 5,012 year old scotch
10. Federal Reserve Note (US dollars)
11. Euros
12. Government bonds / bills d'etat
13. Chinese Remnibi
14. 1923 German Reichesmark
15. Microsoft or Apple shares, or other kind of claim on asset

I know your answer.

You already know what the Martians apparently don't. Aside from a few drunks and jailbirds debating the merits between the scotch and smokes, I'd bet that most 'humans' probably picked gold or silver.

The value of gold as the medium of exchange is a topic in itself but we don't have to go there today - we don't have to know why humans have preferred it to other goods to know that it has outlasted any of them. What other commodity, or currency, has survived as money for any similar length of time?

What has held its purchasing power better? Many of those above have been money at different times and different places, but scarcely any of them has been money as long as gold. Gold is one of the oldest, and it is still accepted where it isn't restricted by a state protected legal tender monopoly.

It was first coined at least 2500 years ago; it adorned Egyptian kings as far back as 4500 years ago; yet suddenly, in only the last three decades, it has apparently lost all of its utility, as if history vanished, and barbarism with it… as if empire and dominion, conquest and plunder, or any of those activities usually associated with the history of gold no longer exist. Indeed, for our Martian observer to be scratching his head over this implies that he must have only begun his observation in the last thirty years, and is totally ignorant about the 4500 years of human history before 1975. I'd say that's out of line with most Alien accounts, especially since widespread sightings of UFO's date long before 1975.

Gold has a monetary value, which can only mean something that is attributed by a market.

The state can say something is money but the concept of value being attached to something implies the market has a say. Allow me to contend that what this Martian observer puzzles over as a waste of resources is not the "utility" of the metal, or the question of why we bother mining it. If he only started with this utility as a given, implied by the act of guarding it, and wrote it off to some human affinity or other, what would really puzzle him is the same thing that should puzzle you: that the state would go to so great an expense to withhold such a desired thing from freely circulating. Indeed, the costs do not end with the remuneration of the security guards at Fort Knox, or wherever. They only start there.

Truth may not need the support of government, but fiat and fractional reserve bank notes do.

It takes additional resources to force individuals to accept something as money which isn't by choice; and if the integrity of this money is subject to the inflationary whims of a fractional reserve banking cartel, the costs can quickly pile up. Genuine savings are depleted, debased or frittered away… the control over the means of production compromised, inefficiencies burgeon, inhibiting progress and technological innovation, and instability reigns. Moreover, the policy undermines both the moral fabric of society and its adhesive force: the division of labor. Why would humans, as an observer who was not foreign to human history might astutely question, allow such self-defeating and costly institutions?

This, at least, is what puzzles me.

The answer is ignorance… induced by a misinformation campaign that is costly in itself.

The value of a sound money is that it prevents planners from redistributing the wealth and savings of the productive classes to the political classes in order to finance expensive unproductive agendas - or from depleting the savings of fixed income earners, or the wages of the poor… as Greenspan wrote many years before becoming a central banker:

"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation" (published by Ayn Rand in 1966).

Alas, the Martian observer can no longer be confused about either the utility of this metal or the reason that it is being guarded (rather than allowed to circulate). Its absence from circulation has been answered: it is part of a scheme to raid the savings of productive classes.

The utility of this metal should thus be clear: it restricts the coercive elements of society and protects savings; it is but an instrument of the sound money principle… and it is interchangeable with the idea of freedom.

There is no way to understand the utility of gold - or to make sense of the entire activity described in the quote - if one does not grasp history, or these ideas.

Comedian Jerry Seinfeld, who specializes in irony, perhaps reveals the fallacy best when lamenting that if Martians were watching (human) dog owners follow their pets around with a doggy bag, they'd probably think that the dogs were in charge. Just what you need… another head scratcher.

Regards,

Edmond J Bugos
for The Daily Reckoning

Gold report

2007-05-23T08:48:00.000Z

Structural shift in gold, money markets

Introduction

April is traditionally a quiet time in the gold market, but not this year. Suddenly, the gold market time bomb appears to be on a short fuse.

May, 2006/May, 2007. What is the difference between the last run to $700 and this one?

When you contemplate the gold price nearing $700, the first question that comes to mind is whether or not the price is for real. In other words, what is behind the recent strength in the gold market? The second question is whether or not the price is sustainable. After all, we've been here before, my fellow goldmeisters, and from here we took quite a tumble just a little over a year ago -- back to the $570 level. The short answer is "that was then and this is now." The facts of economic life on the planet line up much differently in May, 2007 than they did in May, 2006.

The most profound change has been the wholesale run from the dollar led by Japan, China and various oil exporters. In December, 2004 Japan held $690 billion in U.S. long and short term bonds. By December, 2006, not only had the net Japanese position failed to increase, it had actually declined to $627 billion. Recently, China publicly joined Japan in shunning U.S. debt paper and so have several of the oil exporting states. Though this troubling change of direction has been de-emphasized by the mainstream financial media, it has not been ignored by the foreign exchange and gold markets. It explains the $2 pound; the $1.35 euro and the near $700 gold price.

Altogether, the IMF recently reported that 80% of the annual U.S. fiscal deficit is now financed by foreign sources. Common sense begs the question "Who is going to fill the gaping hole left by the exit of America's top creditors?" A prime candidate, and perhaps the only candidate, is the U.S. Federal Reserve itself with its magical ability to manufacture money. It will write the check for whatever Treasuries are not taken up by the marketplace. The federal government, with two wars on the table and a third brewing, will cash that check. However, it will not be without a major cost in the form of ramping inflation, and perhaps, if things get dicey enough, inflation in the extreme.

When considering what is different between last May and now, and whether or not the gold rally can be sustained, the withdrawal of Japan, China and several oil exporting states from the Treasuries market, looms large. This amounts to a structural shift so profound that few really understand the full implications. The economists, politicians and Wall Street pundits who always believed that the dollar quid pro quo would go on forever are now suddenly forced with the prospect of its complete and imminent collapse. Whereas the run to $730 last May came as a final speculative blow off before the correction, this run to $700 looks more like the beginning of new leg up fueled by a fundamental break down in the operating international quid pro quo.

A rumor that Goldman Sachs is short 1000 tonnes. What does it mean for gold investors?

When Dennis Gartman, who publishes one of Wall Street's most widely circulated insider newsletters, passed along the rumor that Goldman Sachs' is sitting on a one thousand tonne gold short position, he reignited long-held suspicions in the gold market. Gartman also linked the short position to the 1999 Bank of England's gold sales intimating that Goldman influenced that decision to sell over half its reserve. What's more, given the copycat behavior of the financial engineers these days, if Goldman has a problem, it is likely that other bullion banks do as well. Thus Goldman's problem could be the tip of a massive iceberg.

This tells us that in the future investors might be competing not only with each other for available physical gold, they could very well be competing with well-connected bullion banking institutions that have the inside track on gold supplies. Since the long term trends indicate a steady decline in mine production and official sector sales (the two largest sources of gold), covering shorts of this size could create an explosive mix.

So what does this mean for now and would-be gold investors?

Though such a brew could be a major positive for the gold price, there is a darker side to the story. At some point down the road, private investors could be squeezed out of the physical gold market by a pack of hungry bullion banks. If you do not own gold, or do not own enough, you run some serious risks by waiting. First, it is likely you will pay more later simply because the gold price will continue rising in response to the shortcovering. Second, there could come a breaking point where the premium on physical gold items goes through the roof. Last, you might find yourself unable to locate gold at all as the free supply dwindles to nothing.

For those who consider such thinking farfetched, keep in mind that in the late 1990s premiums on pre-1933 European coins shot up aggressively in response to the Asian contagion and ramp-up to year 2000. Relatively common items like the British sovereigns and Swiss 20 franc gold coins sold at premiums of 30% over the gold price and more. The gold market is relatively small compared to the high-volume stock and bond markets. The number of gold brokers nationwide is probably equal to those housed at two or three nice-sized Merrill Lynch offices. The gold business in terms of manpower, item availability and infrastructure is simply ill-equipped for what might happen to it if even a minor gold panic should develop.

Why Gordon Brown's calls for IMF gold sales have become a reliable indicator of an up trend

Recently, with gold pressing $700, Britain's Chancellor of the Exchequer Gordon Brown, on cue, renewed his push for International Monetary Fund gold sales. There was a time when Brown's antics were cause for alarm in the gold market, but no more. As it turns out, one of the more reliable indicators of an impending spike in the gold price is Gordon Brown pressuring the IMF to sell its gold.

Just prior to the Bank of England sales in 1999, Brown pressured the IMF to sell a portion of its gold. When that sale failed to materialize, he prevailed upon the Bank of England to sell instead. Gold hit a bottom shortly thereafter at $280 and then sharply rallied to $450 per ounce, the beginning thrust of the current bull market. Then again in 2005, Brown was knocking on the IMF's door trying to persuade it to sell, and again he was turned back. Gold, which had been stalled in the low-$400s, promptly found new life this time rising to over $700 per ounce -- the second leg in the bull market.

Brown's latest attempt to persuade the IMF to sell gold suggests that the bullion banks are still having difficulty finding physical gold, and if that is the case, they are likely to bid up the price to meet whatever obligations are on the table. If the past is an indicator, Gordon Brown's new call for IMF gold sales might be predicting another explosive move upward.

Note I: The real problem for the bullion banks could be that global gold depositors, including central banks and private parties, have become very skittish about the dollar, probably for the reasons outlined in this issue's opening article. They would probably feel more comfortable with their gold in hand, or at least in an allocated account. Thus, they are asking, in essence, to have their gold deposits returned. If Gordon Brown were successful in bringing some gold liquidity into the picture via IMF sales, it might salve frayed nerves, but it will do little more than buy time.

Note II : We should all keep in mind that IMF gold sales require approval by the U.S. Congress. Both U.S. political parties -- each for their own reasons -- are opposed to any action that might depress the gold price.

Note III: The London Times (Rupert Murdoch owned) has decided to make an issue out of the Bank of England gold sales pushed by Gordon Brown. Those sales, if you will recall, occurred at the bottom of the gold market in 1999. The method of sale -- by auction -- insured that the liquidation price would be ridiculously low. Thus far, the British government has lost billions on the sale due to gold's sharp price increase -- an embarrassment for Brown and the Office of the Exchequer ever since. Now the Times is turning up the heat and so is the British Parliament which has called Brown to testify on the matter. It would like to know what Brown and the British government were really up to with those sales. Maybe, just maybe, this time around we will finally get to the bottom of the whole affair. Brown will replace Tony Blair soon as British prime minister.

Note IV: The Times article linked below (a recent USAGOLD NewsGroup must read presentation) not only makes the case for gold as a national asset; it makes the case for gold as a personal asset. The Times, as it points out in the article, is pushing to receive Bank of England and Exchequer meeting minutes from the 1999 gold fiasco, and they've been stonewalled. The obvious question is "Why?"

Gordon Brown's Blunder - London Times - 4/15/07

Inflation and Metals: Rookie Trader says buy with both hands before its to late

2007-05-21T07:38:00.000Z

"In an ideal world with a stable monetary base (zero monetary inflation), prices of almost everything (with a few exceptions) would be in decline. That would be a sign of real economic progress…"

by Puru Saxena

INFLATION/DEFLATION - Analysts and economists seem to be divided over this issue. According to some market observers (including me), we are living in a highly inflationary environment. After all, money supply growth is extremely strong in most countries (Figure 1) and this represents inflation.

Figure 1: Explosive Inflation!

Source: The Economist

The other camp argues that since prices of certain consumer goods are either stable or in decline, we are indeed witnessing genuine deflation. In my view, these "deflationists" seem to miss the point that falling consumer prices (due to improvements in technology or the relocation of manufacturing to relatively inexpensive developing nations) have nothing to do with deflation and everything to do with economic progress. In fact, I would argue that in the current economic environment; due to technological advances, rising productivity, free trade and cheap labour, prices SHOULD be declining. After all, this is the whole point of genuine economic development!

In an ideal world with a stable monetary base (zero monetary inflation), prices of almost everything (with a few exceptions) would be in decline. That would be a sign of real economic progress as people's savings would buy them more goods with every passing year. In our far from ideal world however, the factor preventing this from occurring IS monetary inflation. Due to central-bank sponsored inflation, prices of assets (whose supply is relatively limited when compared to money) are going through the roof! As a result of the ongoing inflation, even basic commodities which are critical for human survival (land, energy and food) have become very expensive, hence scarce for the average person. So, next time when someone tells you that we are witnessing deflation, tell them to look no further than the escalating cost of housing, energy, food, education and medical care.

Finally, if we were indeed witnessing genuine deflation (contraction in the money-supply), all asset-prices would be declining rather than flirting with multi-year highs!

PRECIOUS METALS - We are in a primary bull-market which is currently undergoing a healthy medium-term correction - everything else is "noise". Such corrections are normal and serve the purpose of shaking out the latecomers and the "weak hands". More importantly, such periods of weakness give us the ideal opportunity to increase our positions. I am not sure about you, but I always prefer to buy assets when the sentiment is negative and there is widespread fear amongst the investing public. Furthermore, I never purchase anything after a big rally. This is the reason why despite the brutal sell-off in commodities over the past several months, our managed accounts have held up reasonably well.

I have no doubt in my mind that both gold and silver will appreciate considerably over the coming years. Here are the reasons why:

Terminally-ill US Dollar

Rampant monetary inflation equals debasement of currencies

Record-high US trade and current-account deficits

Major top in the US bond-market and rising interest-rates (which will hurt housing)

Sky-high debt levels in developed nations; only option is to inflate the currencies

Rising geo-political tensions and increasing resource wars

A major bull-market in crude oil due to rising demand and tight supplies

Gold and silver are inexpensive in real-terms (inflation-adjusted basis)

Extremely cheap in comparison to financial assets (stocks and bonds)

As I explained in my previous reports, I do not expect gold and silver to surpass their May 2006 highs in the near future. I am of the opinion that both gold and silver are likely to decline into the summer months before embarking on a huge rally towards the end of this year. This action will shake out more weak hands and set the stage for a big advance.

However, if we do get a major conflict in Iran, you will be really glad that you own precious metals.

At present, Asian central banks hold a miniscule 1.5% of their total reserves in gold (Figure 2). You can imagine what will happen to the price of gold when Asian countries start diversifying into the yellow metal. Recently, China announced that it plans to invest US$200 billion of its US$ 1 trillion reserves in strategic assets. So, this move out of "paper" is already underway.

Figure 2: Asian Reserve Holdings

Since the commencement of this bull-market, precious metals mining shares have provided a leverage of 300% compared to physical bullion. However, over the past few months, physical bullion has outperformed the mining shares. These changes in relative strength are normal and I would advise you to utilise any near-term weakness in mining stocks and invest heavily.