by The Mogambo Guru
"It is price inflation that is the killer of economies; and price inflation
is manifested, of course, as higher prices, but which is the same as a fall
in the purchasing power of the money."
Among the vile, sulfurous things I am muttering to myself under my breath is
that the mind-control rays that the CIA is beaming into my head have
affected my golf game, and now I'm slicing my irons into the sand traps and
topping the ball off the tee! The bastards!
Even worse, the Federal Reserve increased Total Fed Credit by another $5.7
billion last week, thus creating more money (when loans are actually made by
the banks) and/or putting downward pressure on interest rates (by increasing
the amount of credit available), both of which are designed to entice people
to borrow money for one reason or another (anything will do, but stocks,
bonds and houses are preferred). The bastards!
The important part, from the Federal Reserve's point of view, is that
somebody is borrowing and spending money, and lots of it - the more the
better. Sort of like my family wants to do - and will do, if I don't watch
them every minute! Except the Fed gets to print their money, and I have to
earn it, which I can't do because I am lazy and incompetent, which, I
patiently explain, "Puts us back to square one, jerk, so shut up!"
And as for foreign central banks, who knows what the hell they are up to? I
mean, they speak foreign languages that we Americans can't even understand,
for crying out loud! Anyway, this suspicious group of outsiders bought up
another whopping $13.4 billion of American government and agency debt last
week, and stashed it into their accounts at the Fed. Even cash in
circulation got a little boost, up another $2 billion last week!
In short, our central bank is still creating excess money and credit with
both hands, thus deliberately trying to create both direct monetary
inflation and, as a consequence, price inflation in something, and then
price inflation in some things, and then price inflation in most things, and
then finally price inflation in all things as the money is eventually
maximally disbursed into all prices - either more or less, according to
their perceived relative value in the resultant new, inflated economic
system of prices.
Thus, I am encouraged by the fear of higher prices to add a whole new
protective layer of aluminium foil to the inside of the Famed Secret Bunker
Of The Mogambo
(FSBOTM) and make a fort out of the cushions from the couch in the living
room (as a sort of rough-and-ready Plan B against a surprise attack).
I subsequently spend a lot of time just sitting and hiding, whimpering about
the irresponsible monetary insanity these days, and how this will lead, as
it always does, to inflation in prices that drives people to acts of
desperation. This, of course, drives The Mogambo's paranoia level off the
freaking scale, which almost always results in random bursts of suppressive
fire in frightened response, which always results in the neighbours whining
and suing me about some mysterious new bullet holes in their stupid garage,
or their stupid washing machines, or their stupid kids'
playrooms, and then daring to argue with me about what's "acceptable
collateral damage" and what isn't!
See what I have to put up with around here?
Thinking and pondering like I do, fingers on triggers, waiting for the
economic earth to open up and swallow us all, I occasionally get up to check
the locks, put some fresh ammo in a machine gun or two, and maybe fire off
some fresh hate mail to the Federal Reserve ("Dear Morons, I hate your guts
because you destroyed my country's economy! Yours truly, Angry in Florida")
with a cc to Congress and the Supreme Court, whose guts I also hate, for the
same damned reason.
And somewhere in my vengeance-laden philosophical musings and venomous
correspondence, I realise that it all comes down to "willing stupidity".
Real Austrian economics (as opposed to the laughable, econometric
equation-based claptrap taught in almost all universities, and used by every
government) is actually quite easy to understand: If you let the banks act
stupidly by letting them create excess money and credit (a monetary boom),
you will soon get an inflationary boom in the economy (as the money is
borrowed and spent, increasing demand for things, and thus increasing the
demand for making more things), and
then you will also get inflation in prices, which
will end in a systemic bust, with all the attendant misery and suffering
that will dwarf the joy of the boom that caused it.
It's the one horrible, indelible, enduring lesson of all of known economic
history, and the reason why the founding fathers tried to make sure that our
money was not so debased from over-issuance by writing into the Constitution
that the dollar must be gold and/or silver.
And another big lesson from "the rest of history" is that the guys who opted
for gold and guns do NOT show up on the list of "guys who ended up penniless
and pissed." Actually, the people who are not on that terrible list are the
idle rich, as they have the ample leisure time to sit around creating lists
of guys who are on it! Hahahaha! That's how you suffer an economic collapse
in style, dude!
It is price inflation that is the killer of economies; and price inflation
is manifested, of course, as higher prices, but which is the same as a fall
in the purchasing power of the money. Knowing that, you are ready to hear
Rep. Ron Paul (hopefully the next President of the United States) writing at
LewRockwell.com, who reports that when you deflate/inflate 2006 dollars to
achieve buying power parity across different points in time, the buying
power of the current $5.15 per hour minimum wage translates to, "$9.50
before the 1971 breakdown of
Bretton Woods." This is, of course, the infamous
year that Nixon finally severed the official gold/dollar link.
And if you want some proof of his towering intellectual competence with
regards to economics, not only relative to his fellow dimwitted
Congresspersons, but also in absolute terms, then I am happy to report that
he went on to say, "Congress congratulates itself for raising the minimum
wage by mandate, but in reality it has lowered the minimum wage by allowing
the Fed to devalue the dollar." This is exactly the mechanism at work!
I understand that as a possible presidential contender, he wisely doesn't
want to appear too alarmist. But, unfortunately for him, he is standing next
to a guy
(me) who is all too happy to proclaim, loudly, the ugly fact that "Everyone
suffers from price inflation, and it is evil!"
And those who will suffer first, and suffer the most, from price inflation
are those who do not (or cannot) increase their incomes to match the
increase in prices, and they will suffer piteously because their fixed
incomes will not buy as much stuff as it did yesterday, and tomorrow will be
worse, and every day for the rest of their lives that they do not, somehow,
miraculously, get an increase in their income, it will be worse than the day
before, and they will grow angry that they must always buy less and less,
and pretty soon people are getting desperate, which turbo-charges "angry."
Of course, one can argue whether technology has made the guillotine passé as
the weapon of choice of rioting mobs of angry people made destitute by price
inflation, or whether the Uzi and the shoulder-fired rocket-
propelled grenade are an advancement or not, but
there it is.
Dr. Paul, judging by the horrified look on his face, is obviously not "into"
how this discussion has degenerated, but, again proving his intellectual
mettle, makes note of the fact that I am not just another raving paranoid
lunatic, but an ARMED raving paranoid lunatic. Big difference! Wisely, he
attempts a sort of compromise, and says, "We must consider how the growing
inequalities created by our monetary system will lead to social discord."
The new official merchandise trade deficit came in
at negative $68 billion for the month. Sixty-eight billion bucks left the
country in one month!
Unfortunately, there are fewer people with jobs to make enough money to buy
all this imported stuff, as from AP we learn "Jobless claims rose to 357,000
last week, the highest level since late November. The increase of 44,000
claims from the previous week was the biggest one-week increase since Sept.
10, 2005, when claims soared in the aftermath of Hurricane Katrina hitting
the Gulf Coast."
Even worse, "The four-week moving average for claims rose to 326,250 last
week, the highest level in nine weeks and an indication that conditions in
the job market have softened."
One of the downsides of inflation in the money supply, leading to an
increase in prices, is that the prices of commodities will go up, to which
you should be particularly attuned, as commodities are what you Earthlings
(meaning "we", since I'm stuck here, too) call "food". And by "food", I of
course mean the delicious, often gravy or chocolate-coated stuff that we
shovel into our gaping, slobbering maws with both hands, gobbling it down
like the ravenous, messy, slurping, feral hogs we are. And we don't care who
knows it, including whose hypercritical, picky wife is crying and wailing
out, "Oh, Jesus! Can't we ever go anywhere nice without you embarrassing us
like this, you Stupid Mogambo Pig (SMP)?"
But your wife's prayers for heavenly release from the torment of
embarrassment may be at hand, as your gluttony will soon be attenuated by
"lack of affordability", because commodities will go up in price not only
because of the fall in the purchasing power of the dollar, but also because
of scarcity of food itself, as implied by an article in Newsweek that read,
"There are ominous signs that the Earth's weather patterns have begun to
change dramatically and that these changes may portend a drastic decline in
food production - with serious political implications for just about every
nation on Earth. The drop in food output could begin quite soon, perhaps
only 10 years from now. The regions destined to feel its impact are the
great wheat-producing lands of Canada and the U.S.S.R. in the North, along
with a number of marginally self-sufficient tropical areas - parts of India,
Pakistan, Bangladesh, Indochina and Indonesia - where the growing season is
dependent upon the rains brought by the monsoon."
The article says that this is nothing new, but now, "The evidence in support
of these predictions has now begun to accumulate so massively that
meteorologists are hard-pressed to keep up with it."
At first I think that the food has disappeared because so many people are so
damned fat, and that they just ate it all! Hahaha! Apparently, nobody is
interested in my humorous and glib explanation, and with a sniff of
condescension they go on to say, "The central fact is that after three
quarters of a century of extraordinarily mild conditions, the earth's
climate seems to be cooling down. Meteorologists disagree about the cause
and extent of the cooling trend, as well as over its specific impact on
local weather conditions.
But they are almost unanimous in the view that the trend will reduce
agricultural productivity for the rest of the century."
Of course, this flies in the face of the huge, and hugely popular, "global
warming" argument. But, either way, the common denominator is that both
camps agree that the weather is changing dramatically, and this bodes ill
for those that eat food that they have to pay for, as a Big Double-Chubby
Cheeseburger Super Deluxe is more than just a couple of seeds, a few pounds
of fertiliser and a cow.
And already there are reports of the increase in the prices of food. For
example, onions, reportedly a staple in the diet in India, have tripled in
price in the last year, and of course, we just had the Tortilla Crisis in
Mexico, as corn meal has soared in price. And I am Very, Very Sure (VVS)
that this is just the tip of the inflationary iceberg, if you like your
metaphors in a Titanic vein.
All of this economic stupidity will end in tears (as it always has) as
inflation in prices destroys economies by destroying a lot of people's
lives. That is the problem with creating money: It shows up in prices,
higher and higher. And after awhile you get really sick and tired of hearing
the whining and complaining of your family about how they can't afford to
buy anything, and how it is all your fault just because you are lazy and
stupid, and how you are the worst parent and worst husband in the whole
world. Then one day you find yourself thinking of murder-suicide scenarios
and what the newspaper headline would say, until you say to yourself,
"Whoa!"
Better that you start thinking about robbery, or better yet, getting money
that does not depreciate in the first place - gold. And if you also want a
little capital gain with that buying-power-security, then Nick Barisheff at
Bullion Marketing Services Ibbotson Associates has some news that will be of
interest to you. It concerns the Eternal Mogambo Truth About Gold (EMTAG).
He claims that he has never heard of the EMTAG, but notice that he does not
explain how he stated it exactly when he said, "It takes fewer ounces of
gold to buy a house, a car, the Dow, or almost any other good or service
than it did in 1971." And even more damning, he admits that he said, "Gold
will continue to increase in purchasing power as long as its inflation rate
(mine supply) is lower than the increase in the money supply."
In case you were wondering, like me, he added, "Mine supply increases by
about 1.5% annually."
So (and this is so exciting!) as the money supply has been expanding by
almost 12%, you would certainly expect gold to rise in price? Well, that is
exactly what has happened, QED (picking my own entry and exit points to skew
the data the way I want)!
And, since the money supply is still expanding exponentially, you can also
certainly expect the price of gold to continue to go up, too! Whee!
Michael Nystrom at BullNotBull.com hears me chortling and giggling like a
little girl in my childish glee about the coming rise in gold, and notes
that Robert Prechter has pointed out that "the nominal Dow peaked at 381 in
September 1929, and today it is hovering somewhere around 11,500, a 30X
increase over 77 years.
Not bad, right? But amazingly, measured in gold, the recent Dow highs are
actually right about where they were at their 1929 peak!"
For those interested in the actual details, he says, "It took 18.5 ounces of
gold to buy the Dow on September 3, 1929. On May 10, 2006, it took 16.5
ounces of gold, so it is actually cheaper."
So gold made slightly more gains! Hahaha! He adds, "As Dr. Gold would put
it: One dollar won't buy what it did in 1929, but one ounce of gold (about
$20 at the time) sure will (about $650 today)!"
I see the audience getting up to leave, obviously taking the lesson to
heart, and are going out to get some gold immediately. I am suddenly in a
panic, as I need them to come back for the next part of the presentation,
where I hopefully sell them a sizable interest in my exciting, new Mogambo
Time-Sharing Investment (MTSI)! So I leap up, seize the microphone, and
order them all to come back and sit down - right now! - or I will hunt them
down, one by one, and shoot them through the head. But, as usual, nobody
listens.
They continue to stream out, only now making rude hand gestures at me.
And I could hardly blame them for their disinterest. I am as full of empty
bluster as I am full of crap about most things - as long as you don't keep
pestering me, like that stupid credit card reader at the damned grocery
store that kept pestering me, pestering me, pestering me to "Enter PIN
number", and I keep telling it that I don't HAVE a PIN number. It's a credit
card, you stupid machine, and it keeps beeping, beeping, beeping for me to
"Enter PIN number", and I am yelling that I don't have a damned PIN number,
dammit. And it is still beeping, and we're all yelling and beeping, and
after awhile I grab a can of stewed tomatoes and shout, "You want my PIN
number? Is that what you want?
Okay, here's my PIN number, you damned beeping machine from bleeping hell!"
I was winding up to really smash that hateful little device to little tiny
pieces when the ashen cashier said, "I'll enter your credit card number from
here, sir! Just don't kill me or break the
machine!" which I figured was a fair compromise. So
I said, "Okay."
But nobody was pestering me, in fact they were doing the opposite by
leaving. But I could not blame them for leaving to buy more gold, either, as
this is the everlasting beauty of gold: It has preserved buying power over
the last century, and over the millennia, while I laugh the Haunting Yet
Scornful Laugh Of The Mogambo (HYSLOTM) at the dollar, the greenback dollar,
the bigshot dollar, the Almighty Dollar, which as lost about 97% of its
buying power in just 94 years, which it will never get back! And it had a
30% decline in buying power in just the last few years!
So if you have not had a net-of-tax, net-of-expenses, net-of-fees,
net-of-everything profit of 43%, measured in nominal dollars, in the last
four years, then you lost buying power, chump! Hahaha! So much for the
promises of "investing for the long haul!" Hahaha! You invested a $20,000
car and netted a $25,000 bicycle!
Well, my laughter rang hollow in the now-empty room, as none of the audience
came back, and now I am still stuck in my own crappy, dilapidated house,
instead of being able to unload that eyesore on a bunch of suckers in the
Mogambo Time-Sharing Investment Scam (MTSIS).
Thinking quickly, I deduce one other good idea to make a lot of money,
enabling me to get out of this dump and say "goodbye" to family, friends and
angry creditors:
Maximise some profits from the guaranteed rise in gold, that can supposedly
be estimated by (for one thing) the percentage change of the fall in the
dollar.
It's a lot, I know that, but now much is all over my head, of course, and
it's all academic anyway. That is why we turn to Puru Saxena, in his Money
Matters newsletter. He reports that the shares of gold mining companies go
up when gold goes up, like you would expect, but (even better!), they go up
as a multiple of the rise in the gold itself! He reports, "So far in this
bull-market, mining stocks of precious metals have on average outperformed
physical bullion by 300%. In other words, investors who bought the mining
shares made three times more money than those who bought the physical
bullion."
I seem to remember that this is also what happened after the stock market
crash in the '30s, and everywhere else before and since then, too, when the
government acted stupidly.
Like in Argentina now, where President Kirchner just had a government
statistician fired when, as the Wall Street Journal put it, "she refused to
alter the 'methodology' used to calculate inflation in January.
Armed guards then escorted a political appointee to replace her." Hahaha!
Mogambo Memo (MM) to Argentinians: Buy gold now, while your money still has
some buying power, because you will soon be screwed otherwise!
Speaking of actual money, Bob C. was wondering about the acronym "FIAT" when
used to describe our "money".
He says, "I believe it is short for Financial Instrument Administering
Theft, but I am not sure.
Could you please confirm? Thanks!"
I can, and will, answer that question in genuine Inscrutable Mogambo
Gibberish (IMG)! With a phony- baloney gravitas, my voice resonates, "No, it
isn't, but at the same time, yes it is. Thank you for coming.
Please leave a donation on your way out. A big one!
Now scram!"
Part of the money to pay for a bigger budget is revealed by Mark Nestmann,
president of The Nestmann Group, who writes to his A-Letter readers that the
Small Business and Work Opportunity Act, "could include a little-known
provision, which demands that expatriates pay a tax on all unrealised gains
of their worldwide estate. The gains will be assessed based on the fair
market value of the expatriate's assets and the tax due within 90 days of
expatriation. Presumably, the phantom gain would be taxed as ordinary income
(at rates as high as 35%) or capital gains (at either a 15% or 25% rate), as
provided under current law." Yow!
Paying a tax on unrealised (paper) gains! You ain't sold nothing, and you
ain't made no profit, and yet you are paying the tax on the paper gain, just
because you don't live in America for one reason or another? Wow!
Things are much worse than I thought if they are starting to pull this kind
of crap!
Suddenly, I am galvanised into arming myself in preparation for the armed
resistance I figure will result from this outrage, because, if this is true,
there are no "paper profits" anywhere that are safe!
Talk about a stampede to get out of U.S. stocks and bonds and houses! And
exchanging the money into gold!
Giddy with excitement and trembling with fear at the same time at the
prospect of people rushing into gold, I am dropping handguns and spare ammo
all over the floor. Mr. Nestmann tries to get me to remain calm and put the
hand grenades down nice and easy by explaining that this could work out
well, as "When the assets are actually sold, no further U.S. tax will be due
(although the gain might be taxed again by the country in which the
expatriate resides, leading to double taxation on the same income)."
I figure that this scheme is almost certainly true, as it neatly solves the
tax problem inherent in investment losses; they are deductible against
future capital gains, and against another $3,000 of income, per year, until
completely recouped! So how much income tax will you pay, over the rest of
your life, if you make $50,000 a year, pay a total of $15,000 a year in
various taxes, but you have losses totaling $200,000?
Hahaha! You'll never pay any tax on gains (if any) for the rest of your
freaking life, and you will pay less income tax, too, by not paying any on
that $3,000 of ordinary income!
Now, if you were a government with its back against the wall, in desperate
need of money, right now, you can see the attraction of this unprecedented
tax policy.
Scary stuff!
But it's not like they need the money right now, as Doug Noland in his
Credit Bubble Bulletin reports, "With one-third of the fiscal year now
completed, y-t-d federal receipts are running 9.7% ahead of comparable 2006.
Corporate tax receipts are running 21.8% ahead and individual income tax
12.6% ahead of last year's level. Indicative of the ongoing systemic credit
boom, y-t-d receipts are running 21% above comparable 2005."
Of course, "Fiscal 2007 y-t-d spending is 2.1% ahead of 2006's level (up
9.7% from 2005)."
He also reported the news from Bloomberg's Shannon D.
Harrington, from whose report today's Mogambo Pop Quiz
(MPQ) is derived. "The credit-derivative product companies, or CDPC, are
seeking to tap into a market where outstanding contracts surged to more
than":
a) $26 billion last year
b) $260 billion last year
c) $2.6 trillion last year
d) $26 trillion last year
e) More money than the human mind can comprehend.
The correct answer is either d or e, which are both completely equivalent in
every respect.
The part where you keep reading and re-reading the same sentence over and
over as your brain refuses to believe your eyes is, "The new entities are
driven partly by the ability to secure top AAA ratings, which allow them to
sell protection without having to post collateral."
And, somehow this, "gives investors on the other side of the trade
counterparties with the highest ratings."
Hahaha! This is insane!
I mean, hell, let me in on this deal! It is so eye- poppingly unbelievable
that I am actually slavering (which is not as charming as it sounds) down
the front of my shirt at the prospect of being able to, "secure top AAA
ratings", for zillions of dollar's worth of instant assets, "without having
to post collateral" or probably even any money! Hahaha! This is insane!
Robert G. called and wanted to know what I thought about a proposal to have
totally electronic money, and to get rid of cash altogether. To this idea I
laugh uproariously, as only cash allows criminal activity, payoffs,
rake-offs, bribes, corruption, political graft, prostitution, drugs, CIA
activity and
everything else that is the least bit frowned upon
or outright illegal.
So, total electronic money? Hahaha! Can you imagine
a world where every expense, by everyone, is traceable all the way back to
the original bank loan that created the money in the first place? Do you
really think that the American government would do what it does, if the
money could be traced that easily?
Hahaha! Actually, "Ugh".
**** Mogambo sez: Gold, silver and oil have suddenly declined in price a
little bit, and that can only mean one thing: It's getting to be time to buy
more, and you would buy some, too, if you had some money, which you don't
anymore. Welcome to the hell of inflation!
Until next week,
The Mogambo Guru
"U.S. mortgage crisis goes into meltdown," screams a headline in the London
Telegraph.
"Panic has begun to sweep the sub-prime mortgage sector in the United States
after the bankruptcy of 22 lenders over the past two months, setting off
mass liquidation of housing loans packaged as securities. The rapid
deterioration could not come at a worse time for British bank HSBC, which
has set aside $10.5bn (£5.4bn) to cover bad loans in the U.S. The cost of
insuring against default on these loans has rocketed in recent weeks, from
50 basis points over Libor to 1,200, raising fears that a credit crunch
could spread to the rest of the property market."
Quoting our friend Peter Schiff, head of Euro Pacific Capital, the Telegraph
described the U.S. mortgage industry as in an "unstoppable meltdown."
"It's a self-perpetuating spiral: as sub-prime companies tighten lending
they create even more defaults", he said.
And from Ohio comes news of an "epidemic"
of foreclosures.
So far, 20 companies in the sub-prime lending business have melted down.
ResMae, for example, turned into a blob last week. It filed for bankruptcy
less than a year after management cut the ribbon on its new headquarters.
The company was making so much money, and expecting to make so much more,
that it built a lavish building, fit for a staff twice or thrice as large as
the 497 employees it had.
Those were flush times for the lending business.
There seemed to be no credit risk not worth taking.
But what happened?
Our Law of Stupidity tells us that useful information declines by the square
of the distance from the source.
As the lending business became more and more "sophisticated," lenders and
borrowers took leave of each other. Finally, they forgot they'd ever met.
The Economist explains:
"Banks are traditionally supposed to know a bit about the borrowers on their
books. But in many cases, their loans did not stay on their books long
enough for them to care. Mortgages were written for a fee, sold to
investment banks for a fee, then packaged and floated for another fee. At
each link in the chain, the fees mattered more than the quality of the
loans, which could always be passed on.
For now, though, the Federal Reserve believes the damage can be contained,
so not to worry, dear reader.
"We don't expect any large impact on prime mortgages from the sub-prime
market," said Fed governor Susan Schmidt Bies.
But, she did admit that there was a "hidden" problem - sellers were pulling
their property off the market, leaving behind a lot of empty houses...and
very soft property prices for a very long time.
Meanwhile, Nouriel Roubini, thinks all this softness will push the whole
nation into recession. As many as 600,000 jobs are being lost...as former
real estate agents and ex nail-bangers look for work. But what are they
going to do? Get a job in Detroit? Go down to Nicaragua? Well,
actually...but, more on that later...
First, the news...
Adrian Ash, watching the 'Crash Warning' flag flap in the wind:
- Is the crash here at last? "Anything that challenges the abundance of
global liquidity is a matter of concern," said an Italian fund manager to
Bloomberg earlier today.
- She was commenting on the news just in from Shanghai... the news that
Chinese stocks dumped 9.2% of their value today.
- The Shanghai & Shenzhen 300 Index had more than doubled in the 12 months
to Monday. Today it lost
$107.8 billion of its value amid the the biggest one- day points drop in 10
years.
- Emerging markets to the west have begun tumbling too as the sun peeked
over the horizon. Russian commodity stocks have sold off...the Polish market
has dropped hard...the JSE in South Africa's lost nearly 2% so far...and the
Czech market in Prague has dropped 1.4%.
- "I wouldn't buy [emerging markets]," says Marc Faber, the Hong Kong-based
voice of doom. "Something has changed in the financial market: It's the time
to sell rallies rather than buy dips."
- By 11am in London today, the MSCI Emerging Markets index stood 1.3% lower
from last night. It had touched a record high last Thursday, rising by
nearly a fifth in 12 months. But that's nothing. The Chinese stock market
had jumped by one fifth during the last nine weeks alone!
- Why the plunging Shanghai & Shenzen? Regular sufferers of The Daily
Reckoning will recall what happened to Thai stocks in December last year.
The country's military junta imposed a 10% charge on foreign investors. So
foreign investors got out, and Bangkok shares lost $23 billion in one day,
retreating to levels last seen 16 years earlier!
- Now it's the bureaucrats in Beijing that are coming the heavy with
finance. "China's highest ruling body, the State Council, has approved a
special task force to clamp down on illegal share offerings and other banned
activities in the market", reports Bloomberg. "The group will provide advice
on regulations and policy explanations of the securities market."
- Hmmm...a ban on illegal share offerings, eh? If that sounds familiar,
you've been reading The Reckoning for too long, gentle reader. For it was
this same provision in The Bubble Act of 1720 that brought about the
collapse of the South Sea Bubble. New share issues were made illegal in the
vain hope that all fresh investment cash would pour into the government's
favourite pyramid scheme.
- But alas! Trying to control the mania created by the South Sea Bubble
simply caused the Bubble to burst instead. Fast forward to 27 February 2007,
and now the Chinese policy wonks are having to relearn the lessons taught to
Westminster's idiots in 1720.
- "In the West, one of the warning signs of a possible crash is a period of
intense activity in the Initial Public Offerings market," writes William
Rees-Mogg on The Daily Reckoning's website, www.dailyreckoning.co.uk "The
Chinese authorities have encouraged the development of the I.P.O. market in
order to transfer some of the financing of business from the banks to the
stock market."
- "Chinese investors only receive a 2% yield on their bank deposits," Lord
Rees-Mogg explains, "and are not allowed to send their money abroad, so
I.P.O.s are attractive to them. "These new Chinese stock issues have been
rationed in the past, but the rationing [had] been eased. So this year, the
big Hong Kong companies are looking to China for more favourable issue
terms. As a result China may overtake Hong Kong in the total I.P.O. market."
- The sheer size of China's run-up says the crash – whether it started today
or was simply announced – will be big enough to scare investors for years to
come yet.
In 2006 prices rose 130% after 5 years lagging the world. The price-earnings
ratio hit 33, up from 16 in late 2005.
- "Now the Chinese authorities want to bring the Shanghai market under
control," William Rees-Mogg continues. "There is talk of a forthcoming
editorial in the People's Daily warning readers against putting more money
in the stock market. I am not sure this will work."
- William Rees-Mogg: "Markets do not much like being talked up or talked
down, either by bankers or by journalists. J.P.Morgan managed to steer Wall
Street through the market panic of 1907, but, after his death, his bank
could not prevent the 1929-33 crash."
- If you've got money in emerging markets then beware, gentle reader. And if
you've got money in the stock markets themselves, you might want to recall
which stocks sink quickest when the air escapes from a bubble.
- Stock in the NYSE Group has already dropped 1.4% in the futures market
today. The namesakes of J.P.Morgan just cut their recommendation on the New
York Stock Exchange shares from "neutral" to "underweight" – meaning "sell"
in plain English – citing the fresh issue of new stock to Euronext
shareholders. All told some 110 million shares are being printed to help pay
for the NYSE's purchase of the Paris, Lisbon, Brussels and Amsterdam
bourses.
- Here in London, meantime, the LSE's stock has more than tripled in the
last 24 months. Thanks to repeated bid rumours and takeover offers, the
London Stock Exchange now trades on a p/e ratio of 46 times.
- But the stock's dropped 1.5% this morning. More to come? Watch this
space...
----------------
Now, more opinions...
*** Oil is over $60. Gold jumped up too. Are these signs of 'inflation' of
the world's money supply? No, says the financial press. They are merely
signs that investors are worried about Iran, say reporters.
We would look at it in a slightly broader way. There are always potential
problems. Economic. Financial.
Political. Natural. An earthquake could hit California.
Or, the Chinese stock market could crash.
Let us stop a minute and consider China's situation.
The Chinese market is in a clear bubble pattern. Its national economy is
directed by aging communists. Its banking sector is said to have $1 trillion
in bad loans. And its cash flow depends on buying from customers who don't
have any money.
Could China "blow up?" We don't know...could the next head of the Bank of
China be Chinese? Could the next
Pope be Catholic?
Typically, when trouble comes, investors try to figure out how they can get
through the crisis without losing their lives or their money. But to do this
they have to guess what sort of crisis awaits them. Protecting yourself from
an earthquake is very different from protecting yourself from a market crash
or a war.
Right now, investors with their wits about them have a generous smorgasbord
of worries they can sample. A wider war in the Mid East is only one of them.
A meltdown in the dollar is another. A crash in the Chinese stock market is
still another.
We do not mention natural disasters, because they are probably impossible to
foresee ....and very difficult to protect yourself from. Should you sell
your home in California because the place might be hit by a tremor?
We have no opinion. But the threats investors face today come from one
source – super-low lending rates that boost speculation and excess
consumption. That makes them much easier to predict. And much easier to
protect yourself against, too. Bubbly asset inflation is bound to be
followed by bubble-popping asset deflation. The best protection is to hold
cash...
preferably in different currencies, and gold.
*** "You know, nowadays, the economy here in Nicaragua depends on tourism.
And people coming down to buy lots and second houses."
Our friend was explaining what was going on in the property development
business in Nicaragua, where we are still vacationing at our beach shack.
""We had a little setback" he went on "when Danny Ortega was elected. But I
don't think Ortega is a real threat. He doesn't control the army or the
parliament.
And it looks like he doesn't even control himself. His wife has the real
power, according to the rumours.
"No right now, we have more trouble with the North Americans than with the
Sandinistas. They get down here...they buy a place...and then they want
everything to stop. They don't want anyone else building anything.
What they don't seem to realise is that if the local people don't get jobs
or can't start businesses, there's going to be trouble. You can't just stop
the clock, not with so many poor people. Nicaragua needs more development,
not less. The government realises that. The local people realise it, too.
But some of the gringos want to preserve things the way they are now.
And in a way, I understand. The beaches here are almost deserted...not many
houses or people which is very nice, especially if you come from a city in
the U.S.
But it can't stay that way. The locals need their jobs and the visitors need
places to stay and things to do.
There's no stopping development now. All we can do is guide it and direct
it, so we don't regret it later."
*** A vacation is as tiring as work. Maybe more tiring.
Without the unconscious routines of everyday work life, we are forced to
think...and improvise. After a while, it becomes a little tedious... even
exhausting.
Yesterday, for example, we had to decide whether to take a long walk on the
beach before breakfast...or a short walk followed by a swim....decisions...
decisions... Then, what to do at mid-day is always a big question. The sun
is too hot for Northern Europeans between 10am and 4pm.
"Just use sunscreen," says our better half, insouciantly. But we don't trust
it. Only mad dogs, Englishmen, and surfers go out onto the beach at midday,
in our opinion... Which leaves us six hours to spend somewhere else.
Should we spend it with Caesar, on his history of the Civil War in Rome...or
should we study our Spanish?
Should we have a beer or a lemonade? Take a nap or chat with the boys?
Decisions...decisions...decisions. We're not used to so much deciding. We
can't handle it. Then, after 4 pm...we have to decide whether to go for a
swim in the ocean...or lie on the beach with a book...or try to learn to
surf. And when we get off the sand, should we stay in our beach shack for
dinner...or go over to the clubhouse restaurant?
All this leisure is making us nervous, restless...
exhausted. Not that we are eager for it to come to an end yet. Still, we
look forward to a break from it....back at our office.
The Daily Reckoning PRESENTS: The Mogambo rages at the latest on the money
flows cascading through the world's financial taps...and the inevitable
consequence that will spring from it...inflation...
No comments:
Post a Comment