One Bubble Pops…Another Inflates

Buenos Aires, Argentina Monday, April 7, 2008 ——————— *** The real problem with the inflation/deflation battle…when your farthings aren’t worth what you thought… *** Which way will this tug-of-war go?…the end of a 28-year long road…the trouble with food… *** Dismembering the financial sector…the loose financial mores of the U.S. financial system…and more! — Special Offer — Buy Gold – With Your Pocket Change Gold has already briefly touched $1,000 an ounce – and one expert believes that it will hit $2,000 by the end of 2008. But no matter how high gold goes, you can take as big a position in the yellow metal as you like – for a penny per ounce. Take advantage now… ——————— “U.S. loses jobs at the fastest rate in five years,” says a headline in the weekend’s Financial Times . Economists had been expecting a drop of about 50,000 jobs last month. Instead, the non-farm total came to about 80,000 – the highest total since March 2003. As the FT points out, this number will keep the pressure on the Bernanke team to cut rates. It didn’t mention that it will also keep pressure on the dollar – as speculators will expect the dollar to fall as a result. That’s the trouble with this battle between inflation and deflation – many of the soldiers don’t seem to know what side they’re on! When speculators unload dollars, it doesn’t have the effect on U.S. lending rates that Bernanke intends. In fact, it has the opposite effect. Pushing down on the short end of the yield curve (the Fed sets the rate at which member banks borrow from it, short-term), Bernanke hopes to drag longer-term rates along. Easier said than done. If speculators fear inflation, they sell the dollar, lower prices on U.S. credits and raise yields. All else remaining the same, prices on T-bonds go down, while yields go up. But in this post-1971 world of ours – nothing stands still. You can no longer save a farthing a week…watching your little pile grow up…and looking forward to the day you can use it as you wish. Now, when that day comes, you’ll find your farthings aren’t worth what you thought. The ground has shifted under your feet…and your loyal soldiers have gone over to the other side. The Bernanke team had a good week. By the middle of the week, everything seemed to be slipping and sliding his way. That is, stock prices were up and gold was falling. But by week’s end, whoever is on the other side in this tug-of-war had dug in its heels, refusing to budge. Gold was back up over $900…the Dow was off…and Bernanke was back in the news, saying that a “recession is possible”. There is a big question that we’ve been unable to answer: Which way will this tug-of-war go? But we realize that this is the wrong question. Of course, it will go both ways. We will neither have our cake nor eat it. Instead, we will have both inflation and deflation…losses from consumer price increases, and losses from defaults. Between the two, the value of both our credits and our debts will go down. In addition to the bad unemployment news, the weekend brought word that bankruptcies had risen 30% in market. Strip malls’ vacancy rates are the highest in 12 years (there is far too much retail space in the United States…it will take years to work it off). Gasoline hit a new record in Texas. Even the American Mortgage Bankers Association can’t pay its rent. And when pollsters put the question to them, 81% of Americans thought the country was going to Hell in a handcart. Yet, in spite of all this disturbing news, stock markets seem to want to go up – or at least not go down. The short sellers are in trouble; there are far too many of them and every small increase forces them to cover their positions, buying back in and sending prices higher. Still, we do not want to hold U.S. stocks – other than the special situations we find from time to time. If our analysis is correct, the inflation that is holding up stock prices will be felt even more in other places – namely, in commodities, gold and consumer prices. When one bubble pops, the next one always appears somewhere else. So don’t even think about buying back into the finance sector. That trend is over. George Soros says it’s the end of the road for cheap and easy borrowing. That is to say, it’s the end of a trend that has been going for the last 28 years. We may not see another boom in the financial industry during our lifetimes. We remind readers, too, that while stocks are no lower today than they were 10 years ago, stock market investors have lost about a quarter to a third of their money to inflation. The next ten years could bring another, similar loss, even without a crash or bear market on Wall Street. Meanwhile, in what could be the NEW bubble area – gold was back over $910 on Friday, corn hit $6 a bushel…rice is disappearing from the market…and the developing world, according to the Washington Post , is in a panic. *** All over the world, food is causing trouble. Why? Not because there is too much of it or too little, but because it has gone way up in price. Why has it gone up? Well, for one reason, Ben Bernanke and other monetary authorities are pushing more money into the world financial system. The cash has to go somewhere. Much of it seems to be finding its way into the commodities markets – including soft commodities, notably food. In other words, worldwide inflation of food prices is a monetary phenomenon, as Milton Friedman might have put it, not a feature of the weather. But rather than attack the cause of inflation, the authorities are aiming squarely at its consequences. Of course, there are other reasons for food price increases. There are a lot more people in the world than there used to be. And the new people have to eat too. Since many of these new people are entering the ‘middle class’ they have more money to spend on food, so they can bid up prices. And, typically, they want more meat. It takes more land to produce meat than it does to produce grains – putting further pressure prices all up and down the food chain. Another reason food is in the news is governments’ own food policies. This is on our mind, because when we went to lunch today we discovered that our favorite meat – churasquito – was unavailable. “Because of the blockade, you know…” the waiter explained. Here in Argentina, politicians can do the math. There are more urban voters than rural ones. And as elsewhere, government is in the business of providing bread and circuses. Bread is getting expensive; the urban mobs are beginning to grumble. So the government of Senora Fernandez de Kirchner effectively forbade the farmers from selling their grain on the world market, imposing a 49% tax on foreign sales. It seemed like a no-brainer, until the farmers blocked the roads into Buenos Aires. “They’re trying to starve us into submission,” explained a cab driver. Word on the street is that both sides have agreed to a ‘cooling off’ period. Meanwhile, beyond the pampas, three billion rely on rice for their daily rations. The price of rice rose 50% in the last two week, causing fear of riots all over the world. Vietnam, India, China and Egypt have all banned foreign sales. Nations either export rice or import it. The exporters are coming under pressure to export less – in order to lower prices at home. The importers, meanwhile, have no choice but to try to get as much of it as possible, as soon as possible, in order to head off shortages. Result: a run on rice. Oh…if only we’d bought some rich, wet rice land…instead of bone-try cattle country. Beef is about the only farm product that has gone down in price! *** And now, we turn to the news from Wall Street. “It was getting to be pretty obvious, but I appreciate the candor,” says colleague Byron King. He was referring to a report in the New York Times , in which John Reed, who put together the landmark 1998 merger between Citicorp and Travelers Insurance, called his big deal a “mistake.” At the time, it looked like a mistake to us too. It’s hard enough to run a small business. Trying to run a finance company on that scale was asking for trouble. Still, the press was impressed. The NYT : “At the time of its creation, Citigroup – which combined Citicorp, Mr Reed’s bank, with Mr [Sandy] Weill’s Travelers insurance and brokerage business – was hailed as ushering in a new era in finance by creating a one-stop shop for consumer and corporate customers. “In a rare interview, Mr Reed said it was unclear whether the company’s model or its management deserved the greater share of blame for its problems. But he said Citigroup turned out to be a “sad story”. “The specific merger transaction clearly has to be seen to have been a mistake,” Mr Reed said. “The stockholders have not benefited, the employees certainly have not benefited and I don’t think the customers have benefited because our franchises are weaker than they have been.” The company’s shares have been cut in half over the last year. And it had to raise another $30 billion of share capital, further diluting existing owners. Who’s to blame? Everything was fine when Mr. Reed left in 2000, he says. Mr. Weill thinks the deal was a great success…noting that the share rose more than Berkshire Hathaway from ’98 to ’02. The business was in better shape than ever when he left in 2003. What went wrong, then, must have happened after that – when Chuck Prince was running things. Mr. Prince, who no longer holds the post, (but still seems to be holding the bag) was replaced by Vikram Pankit in December. Normally, these old geezers keep their mouths shut. No one would care what they had to say anyway. But these are not normal times. Something is happening on Wall Street and in the City that hasn’t been seen for a long, long time. The finance sector is being de-leveraged. Soon it will be dismembered too. Finance, as a percentage of total business earnings, went from 10% at the beginning of the boom in ’80 to 40% last year. Whole legions of bright eyed, bushy tailed young people have entered the trade – usually with spiffy degrees from Wharton or Oxbridge or HEC. They are the cogs of this great, globalized polyglot machine. On a recent tour of private banks, we were greeted by a young man of Indian origin who had trained in Canada and now works for Barclays. Another meeting, at HSBC, featured two young women – one of English, the other of African, origin. Over at Pictet, our interlocutor was a Frenchman who has worked in the City for more than 10 years. They all speak the same language, though – a kind of financial Desperanto. Ask them about the Black Scholes Option Pricing model or about rebalancing portfolios to take more advantage of decoupling…or about alpha; you will get roughly the same answer. During the boom years, putting together these interchangeable parts must have been too tempting to resist. But it has produced some rather ungainly monsters. UBS, for example. Former CFO Luqman Arnold was forced out of UBS in 2001. Under Marcel Ospel, the bank became one of the biggest employers in the industry, adding a whole range of products and services. But now, Arnold is on the attack, saying the whole thing needs to be reassembled. The shareholders are up in arms too. In Basel, 6,000 shareholders got together…mostly to complain about what they see as gross negligence on the part of the people running UBS. News reports say they also had it in for the United States of America, whose loose financial mores they think have infected the Swiss financial industry. “The American El Dorado has become a scene from a Western,” declared one middle-aged shareholder, Therese Klemenz. “UBS was the figurehead of Swiss business. As a good housewife, I know you shouldn’t put all your eggs in one basket. A bank is not a casino.” Thomas Minder, a local shareholder activist, was even more outraged. “What happened here is a scandal,” he thundered. “You’re responsible for the biggest loss in the history of the Swiss economy. Put an end to the Americanization of the Swiss economy!” Mr. Minder wasn’t going to leave it at that. He took a run at the podium, perhaps with liquor on his breath and certainly with vengeance on his mind, but was restrained by security guards. UBS bet $80 billion of shareholders’ money on US mortgage securities. So far, it has lost $37 billion. UBS shareholders seemed to think that what happened to them should have been illegal. So do a lot of people. And here comes David Komansky, former CEO of Merrill Lynch, with the kind of eye witness testimony we were looking for. Asked what his successor, Stanley O’Neal, had contributed to Merrill’s problems, Komansky said: “What he did to Merrill Lynch was absolutely criminal… The thing I resent about Stan’s tenure is his attempted destruction of the value system and culture that existed at Merrill Lynch.” Until tomorrow, Bill Bonner The Daily Reckoning — Special Offer — Your Chance to Repeat History… …and double your money in less than 3 years Investing in India today is very much like investing in China 13 years ago. Imagine for a moment how wealthy you’d be if you’d started investing in China in 1995! That’s the opportunity that lies ahead for you in India… Don’t miss out . The Daily Reckoning PRESENTS: The Mogambo’s Let’s Make A Deal (MLMAD) could have been the most popular game show on television, since the contestants were always guaranteed to win 7 wishes. But when economic death got thrown into the mix, people realized what a bad idea the MLMAD actually was. Read on… THE GOVERNMENT GENIE FLIPS A COIN by The Mogambo Guru Junior Mogambo Ranger (JMR) Gary S. sent me the chart of “30-Day Gold Lease Rates” from Kitco.com, which definitely shows that the one-month gold lease rate was less than zero. He asks, “The lease rates on 30-day gold and silver are negative?!?! What does that mean? Are banks paying other banks to lease gold? Are banks so desperate to raise cash that they are giving away gold???? Am I using too many question marks?” As for the questions of punctuation, the answer is no, as multiple question marks indicate the appropriate level of complete freaking befuddlement at such a bizarre statistic; leasing gold at less than zero percent interest! This is oddly in line with a clever satire at epi.org, sent to me by JMR Mikael, titled “Fed lowers benchmark interest rate by 50 points (a satire…)” in which Jared Bernstein proposes the same thing as regards the Federal Reserve! His humorous fiction starts out, “In a surprise move aimed at stimulating moribund financial markets and the larger economy, the Federal Reserve surprised markets with an unprecedented 50 point rate cut, taking their target rate down to -47%.” Hahaha! An interest rate of a negative 47 percent! Hahahaha! This reminds me of the last episode of the old TV show Barney Miller when the precinct was being closed down. The rumor was that the old police station was going to be torn down and replaced by “low-income luxury housing”, which was a really funny line at the time, but in subsequent years “low-income luxury housing” actually came to pass in some places, and so maybe a negative 47% interest rate is not as absurd as it seems, either! Anyway, the next paragraph of the satire was, “The statement accompanying the surprise cut was also unusual, employing bolder language than is typically the case. For example, the phrase ‘the committee judges inflationary and growth risks to be roughly balanced’ was changed to read, ‘Screw it! We’re going nuts over here! You got a financial problem? Need some fast cash? We’ll pay you – that’s right, you heard us – to borrow money from our bank.” But this biting satire and raw sarcasm has given me the idea for a new television game show of my own. Thus, I proudly announce the latest television hit show, Mogambo’s Let’s Make A Deal (MLMAD). The essence of the 30-minute show is that I say to a randomly-picked audience member who is dressed in some ridiculous garb, “If you think that a negative lease rate for gold is weird, and if you think that the banks reporting total reserves of $44 billion while at the same time non-borrowed reserves are an astonishing negative $61 billion is weird, and if you think that banks’ ‘free reserves’ are a sudden, staggering negative $75 billion is weird, or if you think that borrowed reserves in the banks are a sudden, terrifying $80 billion is weird, and if you think that private-sector investment banks borrowing from the Federal Reserve itself for the first time in history is weird, then you are not only 100% correct, but you win! You are a winner! You have won the chance to choose between the two Mogambo Doors Of Mystery (MDOM) and claim the fabulous prize that is waiting there for you!” The camera pans down to two mysterious doors on stage as I say, “Step right up and pick which door you wish to open, and discover the surprise behind that door! And why don’t you tell us what is behind the two doors, Bob?” at which point Bob the Announcer says, “Right you are, Mogambo! Behind one door is a government that will grant you seven wishes, making all your dreams come true! Behind the other door is the economic death from the government making someone else’s seven wishes come true.” Waiting for the applause from the audience at the prospect of being granted seven wishes to die down, I say, “And there you have it! Which door will it be?” The audience chants rhythmically, “Which door? Which door? Which door?” louder and louder and louder, like some demonic jungle voodoo rhythm, until the contestant finally, and excitedly, chooses a door! If he guesses right, he gets seven wishes and he goes off to enjoy them. If he chooses wrong and chooses the door behind which waits “economic death from making someone else’s seven wishes come true”, then thugs rush out to strip the surprised contestant naked before dragging them out to throw them into the cold, filthy gutter while our audience watches in air-conditioned comfort as our lawyers loot the contestant’s house, their bank accounts, retirement plans, brokerage accounts, their safe-deposit box at the bank and then burn their house to the ground. All gone! Well, all the network people, all of the money people and everybody who heard of my new show said it was the worst idea they had ever heard, which I cleverly counter by saying, “The moronic population of this country loves this game already, even though nobody has ever had to pick the wrong door until now! Where in the hell did you think all this government spending was going?” And if you think, like everybody else seems to think, that this is an ugly, vicious and stupid idea, then get used to it, because you are going to see all kinds of weird things from now on, as the governments – not just American but everybody’s – are now realizing, too late and to their horror, that we are all freaking doomed by the vast expansions of fiat currencies and indebting taxpayers to fund massive amounts of government growth and government spending, and now they are going to do every slimy monetary, fiscal and legal trick that they can think of. And with the awesome, unlimited power of a fiat currency that can be increased in volume literally at will, all fiscal and monetary plans are, suddenly, possible! Negative interest rates, tax rebates, tax cuts and increased government spending all at the same time! It’s literally possible, and without end! Ask Zimbabwe! But it is, alas, impossible that they will succeed in alleviating the problems. As Clyde C. Harrison at Brookshire Raw Materials correctly said, “Governments and central banks are completely incapable of keeping tomorrow from coming”, which is too bad, which in turn reminds me of the funny line, “Tomorrow is the greatest labor-saving device today”, which seems oddly and chillingly apropos, considering what the government and the Fed are doing is merely fighting for another day of economic reprieve! Until next week, The Mogambo Guru for The Daily Reckoning The Mogambo Sez: The recent downdraft in the precious metals has prompted a big influx of email to me, mostly in the vein of, “You said to buy gold and silver and now they have gone down, and now I hate you, hate you, hate you! If I wanted that kind of crappy advice, I would have tuned in to CNBC!” My answer is that if gold is going down, then the dollar must be going up, and to that I say, “Hahaha!” which you would be wise to interpret as, “That just ain’t going to happen, bozo, because for it to happen would mean that the Federal Reserve or the Congress are doing at least one thing, at least one damned thing, to make the dollar stronger, or at least show a little smarts, but they are not!” So what we are left with is desperate machinations and desperate orchestrations by a desperate government and a desperate Federal Reserve, and by no means is this the end of the bull run in gold. Instead, this is a glorious, wonderful, heaven-sent buying opportunity being given to you by the most corrupt bunch of government and bankster losers and crooks in the history of the world! How can gold lose? Whee! 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 Mogambo Guru is quoted frequently in Barron’s , The Daily Reckoning and other fine publications. Click here to visit the Mogambo archive page . Investing in Gold “Dollar Stores” Are Losing Money Commodities Discover How You Can Rake In Enormous Profits from the “Most Aggressive Wealth Creation In History” – With Just this $17 Stock! Click to Learn More About Mobs, Messiah’s and Markets.

Agora Financial Resources: Economics & Politics Crisis & Opportunity Gold Oil & Energy Growth, Tech. & Med. Options Investing Daily Reckoning Editors: Founder & Editor: Bill Bonner Executive Publisher: Addison Wiggin Managing Editor: Kate Incontrera

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