The Daily Reckoning - Gold, Water and MREs (Mogambo Guru)

verfasst von Firmian, 21.06.2004, 23:08

-->Gold, Water and MREs

The Daily Reckoning

Paris, France

Monday, 21 June 2004

Longest day of the year in the Northern Hemisphere...

---------------------

*** Still in Nowheresville...

*** New record deficit in current account... Bull's Eye
Investing...

*** Gold jumps... is it a good investment? Nah...
Go ahead, jump... what do we care? And more...

---------------------

Nothing much happened last week. Fine with us.

Nothing much is likely to happen this week either. But -
and here we are beginning to sound as tedious as a health
warning on a pack of cigarettes - there will come a week
when something does happen. On that week, and those weeks
that follow, you will wish you had done something to
protect yourself.

What we are doing is simple. We are out of stocks... except
for a few old stray dogs and cats we can't turn out. We see
no reason to be in stocks; they are near the upper end of
their price range. Inflation will take them down. Deflation
will take them down. An oil shock, higher interest rates, a
war... anything could take them down. The only thing that
will not knock them down is nothing. And the trouble with
nothing is that you can't count on it. Something always
happens.

Happily, nothing is what people expect. So, they under-
price the odds of something. Serious inflation, for
example. Protection is cheap. Gold is still below $400. And
TIPS, the government's inflation-indexed bonds, were
selling for only about 2% above regular 10-year notes - the
last time we looked.

And look at bond spreads. You pay almost as much for a
risky 'junk' bond as you do for a Treasury. Relatively, the
Treasury is a bargain. Again relatively, the junk bond is a
hidden land mine. Step on the thing at the wrong time and
it will blow you up.

House prices rose nearly 40% in San Diego County last year.
Rentals, by comparison, are cheap.

The Greenspan Fed continues to encourage the fantasy that
high consumer debt levels don't matter; houses are going up
in price, they say, so the debt declines as a percentage of
assets. But just imagine what would happen if all houses
suddenly rose over $1 million, more than 4 times today's
average price. Householders could double - or even triple -
their debt and still be okay, right?

Just one problem. How would they pay it? An average man
with a house could only realize his 'wealth' by selling his
house. But then... where would he live? And whom would he
sell to? At 6%, the interest alone on a $1 million house
would be greater than the entire man's salary.

Already, houses are becoming a burden. The median house in
California has risen to $453,000. You need a minimum income
over $100,000 to afford it. But only 20% of Californians
have household incomes greater than $100,000. The safest
bet is probably to sell the $453,000 house... and rent one
just like it for $2,500 per month, or less.

The problem, generally, is that capital assets - including
stocks and houses - are expensive. The risk of owning them
outweighs the potential upside reward. Something will
happen and they will fall in value. And because so few
people expect something to happen, the cost of insuring
against something is low. Stocks went nowhere last week.
They went nowhere this year. They've gone nowhere in the
last 6 years. You give up no capital gains by not owning
them. Nor do you forgo much in the way of dividends. At
less than 2% - let someone else take the risk.

Houses, on the other hand, are going up. But unlike stocks,
they can't go up much more - people of limited means have
to be able to afford them. And, like stocks, either
inflation or deflation, will knock them down. Inflation
leads to higher interest rates, which brings housing to its
knees immediately. Deflation puts people out of work - so
they can no longer afford to buy houses.

As in Japan, houses have risen for 4 years following the
break in stock prices. As in Japan, it is now time for
houses to give way too. Why take the chance? Rent; let
someone else take the capital risk.

And here's Eric with the latest news from Manhattan:

---------------------

- Sometimes we wonder why the New York Stock Exchange even
bothers to open its doors. What has it accomplished this
year? The Dow is ahead.6%, while the Nasdaq is down
6%... why bother? Last week, the market's rudderless trend
persisted, as the Dow rose 6 points to 10,416 and the
Nasdaq lost 13 points to hit 1986.

- These days, the market seems resilient and vulnerable -
resilient to the frosty winds of rising interest rates,
surging oil prices and endless terror attacks in the Middle
East, but vulnerable to the very same trends it has
withstood thus far.

- Whatever it's resilience or vulnerability, the market has
been as directionless as a stop sign, for months,
tormenting most professional investors. All of the hedge
fund managers with whom your New York editor regularly
communicates are whining about how tough it is to make a
buck in this market, and about how easy it is to lose
one..."A half-year in a noncommittal market has given
everyone enough time to develop self-doubt," says Barron's.

- While stock investors struggle, kvetch and curse their
luck, bond investors have no luck left to curse. Bond
prices have been falling steadily for months.

-"Cycles in the bond market are monumental, literally
epochal," writes James Grant in the latest edition of
Grant's Interest Rate Observer."In the United States,
yields fell in the last 40 years of the 19th century. They
rose in the first 20 years of the 20th. They fell between
1920 and 1946, and rose between 1946 and 1981. They fell
between 1981 and 2003. Now, we believe, they are going back
up again. If past is prologue, they might go up for a very
long time... [A new] generational bond bear market, which,
if our cyclical clock is keeping the correct time, began on
June 13, 2003, as the 10-year Treasury touched 3.11%"

- If Grant is correct, the new"epochal" bear market in
bonds just celebrated its first birthday, and turning back
the clock will be a near-impossibility. During the last 12
months, the 10-year Treasury bond yield has jumped 160
basis points, from 3.11% to 4.71%."To push the 10-year
back to 3.11%," says Grant,"the Fed will need an even more
persuasive stable of speechwriters or an actual
deflationary crisis."

- Despite the sharp rise in rates, however, buying real
estate with barrels full of borrowed money, especially
money that's borrowed at"low-cost" adjustable-rate
mortgages (ARMs), remains a winning strategy. But we
suspect that the armies of ARM-toting consumers are
marching toward their Waterloo. Rising rates will break
their ranks like the Charge of the Scots Greys. In a
desperate attempt to buy homes they can ill afford or to
maintain spending habits their incomes alone cannot
sustain, millions of Americans have assumed the risk of
floating-rate loans, also known as adjustable-rate
mortgages (ARMs). As long as these loans adjust lower, all
will be well. But if they begin to adjust higher, trouble
will ensue.

- Consider young Robert Cromer, a"Tycoon in the Making,"
according to CNN/Money. The prospective land baron intends
to amass his fortune by borrowing at low short-term rates
and investing in long-term assets, specifically, houses.
Many have attempted this daring financial feat, but few
have succeeded.

- Cromer's family, which earns about $175,000 in a good
year, has deftly accumulated $3.2 million worth of housing
assets over the last six years by also accumulating $2
million worth of mortgage debt. What's the man's secret,
you ask? Simple daring-do, or what we here in New York call
chutzpah. To buy their various properties the Cromer's have
accumulated mortgage debt totaling $2 million,
"predominantly in the form of 5-year interest-only
adjustable-rate mortgages," explains Martin Hutchinson in a
column carried by UPI.

-"The rents receivable after expenses on the family's
properties are $3,100 per month less than the interest
payments," Hutchinson continues,"and their payment
outflows will increase by $20,000 per annum for each
percentage point rise in interest rates.

-"The Cromers have alleviated their cash flow problems so
far by going into the residential real estate sales
business, thus increasing their earnings to $175,000 per
annum in this buoyant market. Of course, that doesn't
actually reduce their exposure to a real estate downturn!"

- What becomes of our tycoon-in-the-making if interest
rates should fail to cooperate with his plans by going up,
for example, instead of down? Or what becomes of his dreams
if property values should fall instead of rise? Or, to
imagine the unimaginable, what happens to the Cromer Party
if interest rates rise while property values fall? The buoy
to which Mr. Cromer has moored his family's financial
future might then metamorphose into an anchor.

---------------------

Bill Bonner, back in Paris...

*** Our friend John Mauldin has written an excellent book
called"Bull's Eye Investing." The tome is so thick and
thorough, we get tired just looking at it. But serious
investors ought to pick it up and read it, because it shows
why what most people believe about investing is wrong. To
our argument above, that this is a good time to not be in
stocks, for example, people will say that"while you can't
know when stock prices will rise, they always rise over the
long run... so you have to stay fully invested, or you might
miss the big move."

It is true, John explains, that stocks do make big moves up
in short periods of time. It is also true that you are
likely to miss them if you're not invested all the time.
But it is not true that you're best off being invested all
the time for fear of missing the growth spurts. Markets run
in cycles, from bull to bear, bust to boom, peak to trough.
The average length of a full cycle over the past 200 years
is 28 years, peak to peak. But"your actual returns for any
one 10-year period would be totally dependent on when you
made your initial investment," John writes. Being in the
market all the time doesn't help, in other words. Your
investment merely goes up and down with everyone else's.
Sometimes you're up. Sometimes you're down. About the same
amount of time for each. Your total capital gains, in real
terms, during the entire 200-year period, were only 2.2%
per year. Buy and hold for the long term? Forget it. The
only way to make money is to buy low and sell high. Imagine
that.

***"Aren't you embarrassed? You told people to buy gold at
$400. Since then it fell below $375."

We have not actually gotten that question from a Daily
Reckoning reader. Not that we didn't deserve it. But
readers were too polite to ask.

We answer anyway.

Over the weekend came news that the U.S. current account
deficit widened to $144.9 billion - a new record - in the
first quarter. That is nearly $600 billion per year... and
nearly 6% of GDP. Banana republic countries sometimes run
such extreme deficits. But for the world's largest
economy... the experience is unprecedented in history.

What it portends we don't know. But the traditional way
such imbalances are corrected is by a steep drop in the
value of the currency. Were the dollar to go down, it has
to go down compared to something. And since so many things
are calibrated in dollars, the most likely event will be
for it to go down relative to a lot of things - yen, euro,
oil, etc. We might simply guess that the dollar will go
down and everything else will go up. But it is not as
simple as that. For on the other side of the equation, much
of the rest of the world economy depends on Americans
squandering their wealth. Were they to cut back, demand for
both finished goods and primary commodities would go down.
Prices, even in dollar terms, could fall.

What's more, the U.S. economy is saturated with
debt... which is to say, with obligations, promises and
wishful expectations that are not likely to be kept. The
debts are also measured in dollars. Dollars will be in
demand. The financing gap of the U.S. government alone is
estimated at $52 trillion. It is simply not possible that
that gap will be closed with additional revenue. Instead,
it - like so many promises in the private sector - will be
closed by defaults, bankruptcies, workouts and abnegations.
But people will scramble for every dollar they can get
their hands on.

We cannot know which way it will go... or when. Will dollars
be suddenly scarce - and more valuable? Or, will people
rush to get rid of them. First one... then the other, most
likely. But if anyone knows for sure they do not work here
at the Daily Reckoning. We buy gold because we can't
predict what will happen. It is merely insurance, and it is
still cheap.

Is gold a good investment? Not really. It is just
protection against a lot of bad investments.

Gold jumped on Friday, closing at $395.

*** We love Paris in the spring. Summer. Fall. And winter
too. Friday, walking back from lunch, all of a sudden horns
began blaring. An entourage of French WWII heroes was being
escorted across town by a group of police on their blue BMW
motorcycles. In the lead car sat an aging general, in full
dress uniform... with so many medals on his chest it looked
like he could barely breathe.

After the official group had passed, we noticed two
policemen grappling with a man on the edge of the Pont
Neuf. The man had hopped over the stone railing and seemed
to want to jump into the Seine. The police - a man and a
woman - were struggling to hold onto to him. Passers-by
stopped. A few came to the aid of the police. But then,
after an exchange of words with the man, the police let go
and stepped back.

"Oh let him jump if he wants... the son of a bitch," said
one.

They walked away. The man stood there, on the edge of the
bridge. People went about their business, walked on... no
one, not even the police, bothered to turn around to see if
he jumped.

No sirens wailed. No squad cars stopped traffic. No
psychiatrists were brought in to talk to the man.
What a civilized place.

*** And this just in from our Pittsburgh correspondent:
Byron King...

"But it seems to me that the war has already commenced,
with the other side taking the initiative while we were
otherwise occupied. The fall of the Shah (thanks to Jimmy
Carter) gave radical Islam a state sponsor, and a set of
secure internal lines of communication for
intellectualizing and planning a war against the West."

"Afghanistan gave radical Islam its boot camp and advanced
infantry training, in learning how to fight a militarily
sophisticated foe.

"The Internet has given radical Islam its day-to-day
communications and connections to the world at large. And
Western complacency ("What, me, worry?") has given radical
Islam its fifth-column in every target set. (For example,
the 9/11 hijackers were hiding in plain sight, taking
flight lessons, marrying German girls and collecting
welfare in Hamburg... )

---------------------

The Daily Reckoning PRESENTS: Freddie Kruger, The Grim
Reaper, Count Dracula. We all have our fears; Mogambo's
just got back from vacation. So please forgive him if,
today, he seems a little edgy...

GOLD, WATER AND MREs
by The Mogambo Guru


Doug Noland got back from vacation. For two weeks now, my
simple mind has been liberated of those awful nightmares.
You see, while Doug was lounging on a white sandy beach
somewhere, he was not able to ferret out any more
horrendous economic idiocies and point them out to me.
Without all these hideous concerns over debt and inflation,
my achy-braky heart had a chance to heal itself. The air
smelled sweeter! The birdies, perching in the lush, green
trees, sang with a new beauty! The sun seemed to shine with
a bright glow, and all was a picture of utter tranquility
and delight.

But now (insert dark and gloomy soundtrack) he's back! He's
baaaaaaaaccckkkk! And like a sledgehammer hitting me
between the eyes, he starts off his weekly bulletin at the
Prudent Bear with -"Total Non-Financial Credit expanded at
a seasonally adjusted annual rate of $1.927 trillion during
the quarter. Examining seasonally adjusted data, Federal
Government debt expanded at an 11.6% rate, State & Local
9.6%, the Household sector 10.9%, and Business 4.1%. One
can only be discouraged by the continuing surge in non-
productive debt growth."

Did he say"discouraged?" Who is this Noland guy that he
can look Death in the face and say he is"discouraged"? I'd
give anything to be only discouraged! If I was only
discouraged, then maybe I could sleep and not have to be
strapped down to the bed every night with these big leather
things with buckles on the end. And I wouldn't have to
endure my wife and our angry, sleepless neighbors, cramming
rags into my mouth every night at 2 a.m. as they try to
muffle my screaming tinged with raw, primordial fear.

Mr. Noland obviously doesn't care about me, because he goes
on to say,"The Household sector increased debt at a record
annualized $1.008 trillion. Total Mortgage debt increased
by $251.3 billion ($1.01 trillion annualized), or 10.7%, to
$9.618 trillion. Total Mortgage debt was up $1.04 trillion
over the past year (12.1%), with growth of 24% over two
years and 83% over the past 25 quarters (since the
beginning of 1998)."

I'm flopping on the floor! This is insane! I heroically
pull myself up onto one elbow, look deeply into your soul,
and say,"Look into my bloodshot eyes so that you can
comprehend my cosmic intensity, and attend my words, my
little grasshopper! There are only 138 million people in
the damn country who have jobs! Look at me when I am
talking to you! And sit up straight! I said that there are
only 138 million people in the country who have jobs! And
about one of out six of them, 17%, works directly for the
government! If you were as handy with a calculator as I am,
then you, too, could have impressed people by determining
that that annualized householder debt increase comes to
$7,304.35 for every last worker in the country, including
government workers. Notice that I have figured it right
down to the cent! To the very penny!

Of course, this is after rounding off the number of
employed people to the nearest million or so, which is a
cheap statistical trick that the government is also fond of
doing. And since it is obviously so popular with everybody,
then maybe if I do it too, I will also be popular! And
maybe then I will get invited to parties! And maybe I will
finally find a friend who won't turn me in for a reward!
And maybe I can finally get a real life of my own that does
not revolve around court dates, or mental health
professionals talking about how vivisection might reveal
some important clues about what the hell is wrong with me.

But I am not here to talk about my problems. The crucial
bit of information is that, on average, everybody who has a
job will go farther into debt by another $7,304.35, and
once again, for all you obsessive-compulsives out there, I
included the 31 cents.

"Household Mortgage debt expanded at an 11.4% rate during
the first quarter ($819bn annualized), 26% over two years
and 85% over 25 quarters. Since the beginning of 1998,
Total Mortgage debt has increased from 65% to 85% of GDP."

Suddenly, my eyes would not obey my brain, which was
screaming:"Look away! Don't look at it! Look away!" Like a
man in a trance, I remember reading"Foreign sources
accumulated U.S. financial assets at a stunning pace during
the quarter, expanding at a record $423 billion (not
annualized) to $8.43 Trillion (a 21% growth rate)."

Why would"foreign sources" do this to themselves? And why
would Alan Greenspan let this happen? One of the big
mysteries to me is why Alan Greenspan, a guy who once wrote
a defense of gold as money, while writing, at the same
time, a classic denunciation of fiat currency, would do
what he does. It makes no sense.

I am not the only one to have pondered this enigma. Many
theories have been propounded, including one vicious rumor
that I tried to start, in which I postulate that Alan is
some kind of robot who married another cyborg robot, named,
I think, Andrea Mitchell, and who is, in real life, a
shrill Leftist harpy from waayyyyy back, and who regularly
hangs out with other robot Leftists who are trying to turn
our government, Frankenstein-like, into a brain-dead
communist cannibal that eats the guts out of an economy.
Okay, I admit that was veering off onto a slight tangent.

But remember that the history of space, from one end of the
cosmos to the other, is full of examples of some poor,
pathetic planet that was destroyed by idiotic central bank
monetary policy after the Starship Enterprise and that
horrid Captain Kirk had visited them. And that is why they
are, in turn, using central bankers to destroy the Earth,
instead of using laser ray guns, which only end up burning
things and making a big mess. And laser ray guns aren't
cheap either.

To get back to the point, you don't have to be the Mogambo
to realize that the record of the Federal Reserve is one of
abject failure. I suggest you load up with about 700 MRE's
(Meals Ready to Eat, the kind that the Army uses) per
person per year, all safely tucked away somewhere, and a
nice, deep well to get water. Oh, and a nice bag of gold
might also come in handy.

In the meantime, let's start an uprising.

Regards,


The Mogambo Guru
for The Daily Reckoning


---Mogambo Sez: It just keeps getting weirder and weirder,
and I just keep getting weirder and weirder, too.

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gesamter Thread:

• The Daily Reckoning - Gold, Water and MREs (Mogambo Guru) - Firmian, 21.06.2004, 23:08
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