Posted on 02/06/2003 10:38:54 AM PST by arete
"...It not as if the signs were not there to see. "Leading indicators decline," but the market goes up! "Consumer confidence at nine-year low," but the market goes up! "Bankruptcies at multi-year highs, and climbing," but the market goes up! "Dollar loses 20% of it's value in one year," but the market goes up! "Every state in nation cutting spending and/or raising taxes," but the market goes up! "New federal budget deficit rises to $300 billion," but the market goes up! "Bernanke says Fed ready to print as much money as needed," but the market goes up! "Trade and current account deficits set new records," but the market goes up! See what I mean? Stoooooonnnnnned, maaaannnn..."
The Mogambo Guru
- The State of the Union Address was wonderful, as the administration is going to fix everything! They have a plan. How special. I get kinda tingly all over just thinking about it, don't you?
- John Snow, the new Treasury nominee, said that he is generally disposed to a stronger dollar because it is "in the national interest." Every other nation on the fact of the planet wants their currencies to be weaker, so how come none of them thinks that THEIR currency should be strong in THEIR national interests? And the reason that a strong dollar is in the American national interest because it allows us to continue to buy the collective industrial output of the rest of the globe on the cheap. And, conversely, the weak currencies of other nations allow them to sell their stuff to us cheaper.
Having said that, I favor a weak dollar so that the rest of the world can buy our stuff for a change, so that we can get people to work making things here in the USA.
Of course, this means that the citizens, that's you and me, Bub, will have to pay higher prices for stuff that we import and charge higher prices for stuff that we export if the dollar is weak. Bummer.
And then, having said that, I am not sure why anyone would think that Mr. Snow and the Bush people weren't in favor of a strong dollar! God forbid that Americans have to pay the full price for anything, especially paying the full price for their greedy, consumer lifestyle.
And while we are on the Treasury front, we are enlightened by that load of lying weasels that they may run out of borrowing room by the end of the month. Gosh! Ya think so? They are a lousy $800 million, that's million not billion, from the debt ceiling right now, after spending the whole last year issuing almost a half-trillion dollars in new debt. That is a rate of borrowing of about $45 billion a month. Given their extreme level of debt issuance, their piddly $800 million cushion represents about one-half of one stinking day's worth of average new debt issuance.
- In the old days, from which we get most of our stock market ideas, people almost exclusively drank the Demon Rum, a depressant, to keep at bay the terrors of "living lives of quiet desperation," as it has been referred to by, umm, I forget. Those were the days when hung-over, dour and panicked money succumbed to things like market sell-offs and market capitulations, where the market just went south in a big way one day out of the blue, as everyone finally just gave up the ghost in a "whoosh!"
I figure this was because the participants in the market swoon were in the classic autonomic fight-or-flight paradigm. They just finally reverted to flight. This was because they just grew tired of fighting the tape, and losing money every month, and now the constant conflict of fight-or-flight has been resolved the other way. Or, maybe because they have moved past the Denial stage of the panic reaction and are moving into the Fear stage and maybe even the Anger stage. Or something like that, anyway. A little from Column A and a little from Column B, probably.
I mention this because I'm not sure that the market is all that melancholy here in these modern, twenty-first century times, thanks to the progress of medical and pharmacological science, as measured by the seeming over-prescription of anti-depressants and mood-elevators. I remember reading once, quite awhile ago, 1998 to be exact, of the total tonnage of anti-depressants consumed in America each year. Prozac alone was prescribed 22.8 million times five years ago! I can only imagine with dismay when I consider how much worse the statistics have surely become, since I don't remember reading any headlines since then about how "Americans are consuming less mind-altering drugs, study finds!"
If you want to, you could add to that the significant total tonnage of mind-altering drugs consumed every year when you care to include alcohol, for one. How about adding the other vast cornucopia of legal prescription drugs that also have a psychoactive effect? How about adding all the illegal things like marijuana, cocaine, crack, and a long list of things both vaguely familiar and frighteningly new, but nonetheless a long menu of strange and scary things that people ingest to get a buzz? All measurable in literal tons.
Now I connect this with the number of Americans, 280 million. Subtract babies and kids up to age, oh, eight, and you have, what? 250 million? All that mind-altering stuff spread between only 250 million of us seems like a lot. So, I figure that expecting this same nation to exhibit the sensible fight-or-flight, rat-caught-in-a-trap panic reaction that the facts would seem to indicate as entirely appropriate, from a nation of stoned-out zombies, may be rendering the idea of "rational economic man" totally invalid.
It's not as if the signs were not there to see. "Leading indicators decline," but the market goes up! "Consumer confidence at nine-year low," but the market goes up! "Bankruptcies at multi-year highs, and climbing," but the market goes up! "Dollar loses 20% of it's value in one year," but the market goes up! "Every state in nation cutting spending and/or raising taxes," but the market goes up! "New federal budget deficit rises to $300 billion," but the market goes up! "Bernanke says Fed ready to print as much money as needed," but the market goes up! "Trade and current account deficits set new records," but the market goes up! See what I mean? Stoooooonnnnnned, maaaannnn.
Now, if we really want this thing to continue, I suggest, and if you are a Congressman I suggest you pay particular attention here, an immediate tax credit for anti-depressant prescription drugs for everybody around the globe. Me included. Because man, oh man, I am really nervous and scared, and could use a little hangover-less, happy-land, brain-numbing action right about, ummm, now.
- As scared as we all are, isn't it exciting as hell to be an actual witness to the unfolding of the biggest economic debacle the world has ever seen? I know I am! Both scared and thrilled! So how does that American Indian phrase go, "I am of two hearts"?
It's like watching a really exciting, engrossing movie, and we are in the middle of the movie where the plot starts evolving, and we haven't got a clue as to how in the hell this thing could possibly work out. All we know is that the future will be different. It always is. It's HOW much different that is the Big Question. With the old world order and economy writhing in the throes of wrenching changes, it will be very different, and very soon.
And that is why wars and huge upheavals happen, and usually around this point in long expansions; every person and every town and every country, and every association of those persons, towns and countries, finds a scapegoat for it's problems.
And since everything is about the desire for pleasure or power, which is made practicable by money, then everything is about the money. The Bible writes that the cause of all war is envy, namely envy about who has the money and who doesn't.
And let's not forget that the Chinese use the same sign to mean both "chaos" and "opportunity." So how does one use this historical lesson to make money without any heavy lifting at all? And while you are at it, could you also throw in less risk and higher returns? Gee, thanks!
I have no idea how this whole thing will turn out, except as some degree of "badly for everybody." It will because it apparently must. Not once, ever in the historical record, as far as I can tell from my laughably superficial grasp of history, has profound, prolonged profligacy, which is probably going to be this week's gratuitous alliteration, turned into some societal benefit over the long-term.
"So, professor, heed our plea!" you entreat as you fall to your knees in fearful supplication. "Tell us, pray tell us, what does one do?" Moved by compassion and your display of groveling servility, I smile and, with the most soothing of tones, say, "Sleep well, eat well, and be happy, my children. Sleep well by buying gold bullion. Sleep well by investing in precious-metals mutual funds. Sleep well by buying a diversity of shares of mining companies. For as surely as the historical record is bleak in some regards, it likewise contains gems of wisdom regarding other certainties. And one of them is that gold has never, not once in the same historical record, failed to favor it's caretaker."
- My mind still cannot let go of the figure $33 trillion, which is the total debt issued in this country. Aggregate totals like that are hard to deal with, especially when you have a tiny little brain like I have. For example, suppose I owe you a dollar, and you owe Billy a dollar, and Billy owes Mary a dollar. How much debt is there, in the aggregate? Well, obviously three dollars.
But suppose that I pay you the dollar I owe you, and you use it to pay Billy the dollar you owe him, and he uses that dollar to pay Mary. Now how much debt is there? Zero. How much money did it take to discharge all the debt? One dollar. So, how can you pay off three dollars in debt with only one dollar? Velocity, man, velocity!
But suppose I owe you a dollar, but you don't owe Billy any money, but he still owes Mary a dollar, and Mary owes me a buck. Then suppose I pay you the dollar I owe you. How much debt is left? Two dollars. The same dollar, two different results. So how does one evaluate $33 in debt? What does it mean?
Then I think of the 134 million workers in this country. Idly doodling with a calculator, I wonder what would happen if I divided debt by workers, to get debt per worker.
Now this is no idle and stupid speculation, like most of what I do all the time. Now, get up and draw the curtains to give us a little entre nous privacy, because I am going to reveal to you one of the Dirty Little Secrets of Economics that Nobody Talks About, and you might want to note that this, of course, will be on your final exam: All debt and all taxes and all expenses and all costs and all of everything, literally everything, has to be ultimately paid by the workers in the private economy spending their incomes to finance final consumption. This is because they are the only ones with any money coming in that is derived from profits, and the only ones who have no factors of production with which to sell again to somebody else downstream. Makes you want to go "well, duh!" doesn't it? That's the problem with profound secrets, they seems so obvious once you are told the secret.
And here is a Corollary: Government workers do NOT make money. Since their incomes come out of taxes paid by the workers in the private economy, their money can obviously be ultimately traced back to the workers in the private economy spending money out of their income derived from profits.
So very dollar of anybody's profits and anybody's income and every government's taxes can be ultimately traced back to some poor shnook who, out of his pathetic wages, both a) paid a third of his income in taxes off the top, and b) with the remainder bought something and consumed it. A yummy glob of utility units disappearing from the face of the earth, in a blazing demonstration of ultimate finality as it disappears down the black hole in center of the economic universe, from which nothing, not even light, okay, except maybe some burping and some wrapping paper, escapes. And the residue, the spoor if you will, is the bill. Which is now overdue, and there is another bill collector on the phone, and he wants to speak with you.
And what in the hell does this have to do with anything, anyway? Well, employment in the private sector is falling, and so there are fewer guys who can be called upon to finance everything. And government employment is rising, which means more money will be taken away from this shrinking pool of private workers. This is the ultimate bad news.
So, as the quote goes, how many is we, anyway? Well, sir, if one out of six workers is employed by a government, the total worker base of 134 million has to be reduced by a sixth. So now we are down to you, me, and about 112 million other proletariat worker-bees. I am not sure how to estimate the number of people there are whose income is directly paid by government, such as contracts for goods and services, etc. These people do not produce things for profit, since their money comes from a government check and that comes from, again, the profits made by real workers in the real private economy. But let's assume, for optimistic reasons, that there are none, zero, nada, zilch of these people. Am I being generous, or what?
Now, how much is that tantalizing figure of debt per worker, the amount per each and every one of us 112 million, all punching that old time clock everyday, ka-chung? It is, after entering the data seven or eight times to verify the astounding results because surely I have made a data-entry mistake, but no, almost exactly $294,642.86. So, each of us private-sector dudes out here plugging away, day after day, has to earn AND spend each year, out of income, enough to pay our own debts AND the debts of the guys we buy stuff from, AND the debts of the guys THEY buy stuff from, ad infinitum, which sums, in total, with the government debts included, to the aforementioned 33 trillions of real United States dollars owed.
And since we have to spend enough out of take-home income to make sure that everybody up and down the damn line makes a nice profit, too, we have to obviously spend more than that. And, since you are hungry and thinking only of food, you note that you have not made enough to buy and groceries, yet. But, I want to steer you away from thinking about food to thinking about listening to my incoherent ranting and raving. "But, " I intone, " remember that this example is only looking at debt per freaking exploited worker, the proletariat boob who lubricates the capitalist money machine with his blood!"
As a personal aside, having no debt myself, that means that one of you guys out there has twice that much to pay. And if you are that guy, and if you ever get a spare minute or two, I would appreciate it very, very much if you would write to me and show me how in the hell you manage. I'm dying of curiosity.
But let's look at $33 trillion again in a new light. While we cannot be sure how much new money it would take to pay off that $33 trillion, since I owe you and you owe Billy, etc., one of the only things we can be reasonably sure about is that the money is not being lent at a zero interest rate. What is the interest rate on that debt, on average, you figure? Six percent seems like a low number, but let's use that comically low figure to again skew the results to the positive, optimistic side, shall we? No point in always being gloomy! Then the $33 trillion in debt would require interest payments of $1.98 trillion per year. Wowser! Let's see a ten trillion dollar economy, using an optimistic figure again, paying interest of $1.98 trillion a year comes to around 20% of GDP.
But wait! Didn't I just senselessly belabor the point that only 112 million workers pay the cost of everything? And aren't the wages and earnings of American workers about $9 trillion or less? And aren't government workers one out of six workers? So shouldn't we exclude their income from total personal income? Sure! Why not? So $9 trillion, less one-sixth, is $7.5 trillion of personal income.
And, wait! Wait! This is where it gets good! They also have to repay the principal. So given an average, ridiculously-long 15-year maturity for the sake of illustration and optimism, to bring the average annual payment of principal to the absolute minimum so that it won't be so scary, that comes to a tidy $2.2 trillion per year. So, adding the payments of $1.9 trillion and $2.2 trillion together, we get an annual payment of $4.1 trillion. On an income of $7.5 trillion! I'm dying of laughter here!
Wait! Maybe there IS a way to save this thing. Suppose that the average maturity for the $33 trillion in debt is 30 years! Thirty years! That would bring the annual principal payment to only $1.1 trillion, plus the $1.9 trillion in interest payments, for a total of $3 trillion on an income of $7.5 trillion. Or, if the average maturity is 100 years, then principal payments would only be $330 billion! Or if the average maturity were a thousand years - now we're talking, dude! - then the annual principal repayment would only be a piddly $33 billion! And with infinite maturity, then the annual repayment of principal literally DOES drop to a big, fat zero!
But note that in every step, we have used optimistic assumptions at every turn. "What about when you use the most pessimistic assumptions?" you nervously ask. I understand your trepidation, as you instinctively sense something is amiss. And you are right.
But if I told you what the figures look like when you use pessimistic assumptions instead, your brain would instantly vaporize. Mine did. And now LOOK at me! Do you think anybody gets BORN with a blank, vacate look like this? Do my glassy and empty eyes, unfocused and unblinking, look normal to YOU?
Nonetheless, now you know why the Fed is doing what it is doing. It needs to get inflation in wages to increase that $7.5 trillion income figure. And it also needs the cost of things that us proletariat workers buy out of after-tax income to go up in price, too! Not only for the glorious tax revenue from the higher prices, but also for the macro-economic stimulus of roaring inflation impacting on interest rates, which lets debtors pay off those six-percent interest loans, when they are earning twenty percent on short-term Treasuries! Or, since the six-percent bonds will collapse to nothing in value when interest rates soar, borrow a few bucks from a willing Fed and willing banks, and abetted by a compliant Congress, and then pay the whole $33 trillion off, in cash, with mere pennies on the dollar!
So let's take a look at the stimulus programs at the Fed. Yep. There is that hypothesized monetary stimulus we need for roaring price inflation. And now let's look at Congress. Yep. There is that hypothesized fiscal stimulus we need for price inflation.
So, here they are, trying so desperately, desperately trying, to get price inflation stoked up, and you are NOT buying gold? You are NOT selling Treasuries short? You are NOT getting into commodities?
And is the reason, oh, I dunno, maybe pharmacological in nature?
- If boom times do come back to commodities, the money has to come from somewhere, right? So, will it come from Plan A: somewhere else, like selling equities to get the money to put into commodity futures, or will the money come from Plan B: expansionist fiscal policy and expansionist monetary policy? That is the crucial question, eh?
I'm betting on the latter, only because of overwhelming historical precedence, and the fact that the huge equities culture has permeated every nook and cranny of the economic landscape, and as such it will die very, very hard. For example, how many retirement accounts do you know of that invest in commodity futures?
- Deflation. What a word! Instead of having to say "We're losing our shirts because the stupid investments and stuff we bought, for which we paid waaayyyy too much money, are now reverting to their proper, and much lower, value." So, instead we say "deflation," which is much shorter, and much less embarrassing to say.
You say deflation. I say Orwellian NewSpeak.
- One of the newest estimates of the aggregate budget deficits facing the states has risen to about $100 billion. Big deal. Chump change for Congress. The only thing holding things up is the formulating and finalizing of plans to vastly expand Federal reach and power, and the grubby back-room deal-making, insider corruptions, and all that usual slimy stuff that is so embarrassing and infuriating.
But don't worry about a thing. The money is as good as in the bank. Congress may be separate from the states, but it is the citizens of the states back home that re-elect the brain-dead bozos that we collectively call Congress, and you can be sure that they will commit any financial insanity you can name, if it has even the slightest chance of boosting their re-election chances. Oddly enough, propounding obvious financial insanity used to be a reason NOT to re-elect Congressional bozos. Nowadays, well, it is instructive to look at California, which just re-elected Davis.
- I rise to my feet and nominate Paul O'Neill, the former Treasury Secretary who resigned in disgust, for inclusion on the list of Man of the Year nominees. He not only had ethics and morals, but also the courage to put his convictions where his mouth was. And now he is working as a private citizen to address a few of the aforementioned insanities. I'm impressed.
- Bush revealed his new budget and asks Congress to hold spending increases to 4% for the next few years.
So, let's see here. Congress gets its money from taxes. Taxes consume about a quarter of GDP. So, if spending increases 4%, then that means that the economy will have to grow 16%, at stable prices, to achieve a stand-still. This ain't a-gonna happen.
So where are they going to get the money to pay for increases in government spending at that 4% rate? If they print up the money to pay for the government spending. Or unless the prices of everything rise enough to provide the illusion of growth. Either way, it is not going to benefit anybody I personally know, and that includes you and your family.
Let's not forget the new emphasis on user fees. The idea is that somehow, nobody really knows how, a fee levied on businesses is better than a tax. Wrong-o. If a company has to pay a fee, they simply increase the price of their products to recoup the fee. So whereas a ratty old tax takes money away from taxpayers, a user fee merely increases the prices of things, which the taxpayer has to pay.
But will he pay? That's the big problem. Increasing the prices of things by hitting businesses with fees and charges is worse than a general tax on the public, because whereas a tax hits people who have money, fees have to be paid by everybody who buys the product, even the people who don't have any extra money.
- Gold went to another new high, a headline that is sure to lose it's effectiveness as an eyeball-grabber, due to it's destiny to appear, in the same words over and over, for the next, oh, let's say ten years.
Doctor Mark O, savvy reader and investor, writes that he has "a nice little collection of some gold and silver coins and bars stashed here and there and I have assumed the crash position." And he sums up his investment philosophy with the nifty phrase, "When this game of musical chairs is finished, the ones left holding the paper lose!" And when he says "paper," he surely means fiat dollars, and the paper assets that you think are money. They aren't. Dollars are a variable money substitute, and contracts are merely promises.
And speaking of gold, Richard Russell, he of the Dow Theory Letters, says unequivocally that the Dow and the price of gold will cross at around the 3,000 level, meaning gold at three grand per ounce and the Dow at 3,000. Now, if I had risen up out of the perpetual stupor in which I seem to languish and said that, you would naturally assume that I had gotten my medications mixed up again. But when Mr. Russell says it, you pay closer attention don't you?
- I am up to here, and by that I mean you have to imagine that I am holding my hand at the level of my throat, with some wonderful effects on the trade and current account balances due to a falling dollar. Wrong-o.
The reason is that the same number of dollars spent on imports will mean less ex-forex income to the foreign exporters in their own currency, whose costs and expenses are also in their local currency, which are not going down. In short, they receive the same number of dollars per widget sold to Americans, but less profits after those dollars are translated back into their currencies. Less profits means less money at the end of the month to loan to the USA.
Therefore, they have the incentive to raise prices. And the higher they raise prices, the less they will sell, and the greater the opportunity for some American competitors to grab a little of that market share, which means they will sell even less.
A strong currency is good news if you are an importing country, and for the exporting countries who sell to them. A weak currency is bad news if you are an exporting country and for the importing countries who buy from them.
And, in case you ain't noticed, we are the importing country and everybody else is the exporting country. Now, the dollar is weak and getting weaker. It's bad news for us and bad news for them.
- The news is all a-twitter about Bush planning to overhaul Medicare. I laugh. When I overhaul the engine in my car, the result is not supposed to be higher costs, more pollution and worse performance, which is the egregious result of the planned Medicare "overhaul."
It is nothing more than spending more government money to subsidize more people at higher cost to the taxpayers. The word "overhaul" denotes a new prescription drug benefit to the elderly, with the insurance companies getting their mitts on a chunk of it, because they really, really, really need the money. Some "overhaul," huh? Imagine going to the garage and having the mechanic tell you are going to get an engine overhaul because he and his buddies need more income.
I say it is just more communist/socialist/fascist crap in the Leftist pink-o takeover of America. If they wanted to provide seniors with money for their damn prescriptions, just insert a new line in the deductions section of the 1040 tax form so they can deduct them from income, or alter the Schedule A where you deduct medical expenses to recapture the cost, or even let them get all the money back with a nice bonus by including prescription costs in the tax credit section on the back of the 1040. But there is no need whatsoever for a massive increase in the bureaucracy, government spending, subsidizing insurance companies, etc. Commie jackasses. Ugh.
--- Mogambo Sez: In a quote from the Daily Reckoning website, "Michael Belkin thinks the U.S. stock market is on the verge of mounting a very similar sort of bear-market rally. Belkin is looking for a gain on the order of 40%, before the market rolls over and resumes its decline."
Now, you are wondering what kind of an idiot would be buying common stocks? Well, foreigners who have not held any US equities, for one. They are being told that prices are way down, and with the drop in the dollar they can pick up US stocks on the relative cheap. The question is, will they fall for the pitch?
The Mogambo Guru Lives!
Richard Daughty is general partner and C.O.O. for Smith Consultant Group, serving the financial and medical communities, and the writer/publisher of the Mogambo Guru economic newsletter, an avocational exercise the better to heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning, and other fine publications.
I got an idea. Let's start a war. Better still, let's get everyone else in the world so PO'ed at us, that we be at war forever.
Richard W.
Comments and opinions welcome.
Richard W.
Richard W.
Saw it posted the other day that there are now 10 MILLION more gov workers than private sector workers. This is the ultimate bad news.
At what number do we go over the hump?
Better yet, what was the number when we went over the hump?
Pass the Rolaids, please.
I'm learning more about how those crooks and crinimals work than I ever cared to know. I guess that is why they say ignorance is bliss. Pass the Prozac and the Tums.
Richard W.
It's only a problem if we can't service the debt. Consider the federal government debt. What is almost never discussed is the value of FedGov assets. What if all FedGov land were sold? I haven't done the math, but I bet it would take some of the scare out of the dreaded National Debt.
The main number to watch is the tax rate. Keep it low, and fiscal restraint will follow.
We could probably sell off New Mexico and Arizona to the Mexicans, the land is 90% gov owned anyway, or so it seems.
They could throw in Baja and it looks like a pretty good deal.
At least McCain and Richardson would represent some country other than the USA and that seems to be their agenda anyway.
We could run up the debt some more and eventually sell them Baja and Southern California.
I guess Colorado and Utar could be next...but if they try to sell Texas...we'll just go solo.
The way I've seen it is more govt workers than manufacturing sector workers, not total private sector. Govt has been growing, manufacturing shrinking, and they recently crossed.
No money down and no interest payments until '05? In the case of CA, probably better just to give it to them.
Richard W.
Did you read the article or are you just shooting from the lip. The Guru has always been for fiscal responsibility and a sound dollar. Your current wage of even higher wages will get you nowhere if the value is eaten up by printing press inflation.
Richard W.
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