-->The Wages of Sin

The Daily Reckoning

Vancouver, British Columbia

Monday, August 16, 2004

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*** Future. Present. Past. The markets conjugate...

*** Vagrants, vagabonds, ne'er-do-wells and Marijuana!

*** Bakersfield, Barstow, trailer parks, a lake of smog and
more!

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Markets, moods, lives, seasons - everything gets
conjugated...just like verbs.

They are in the future. Then in the present. And then in
the past.

That is life, dear reader. We take no responsibility for
it. It's not our fault.

Future. Present. Past.

Twenty-five years ago, we told the audience in Vancouver,
the Great Boom...the Reagan years...the Internet...the tech
bubble...reality TV...the collapse of the Soviet
Union...the rise of China...the euro...9/11...

...they were all in the future.

Stocks, bonds and real estate were low. But then, interest
rates were high - over 15% on T-bonds. As the quarter
century moved along, interest rates came down - which
allowed a boom in financial assets. The boom that was
future tense in 1980 became present tense a few years
later.

But what tense it is now? According to every survey and
sentiment indicator, Americans still think the good times
are present and future. Stocks will rise, they say...they
always do. The sluggishness in the economy and the stock
market is only temporary, explained Alan Greenspan as he
raised interest rates earlier in the week.

The past tense seems to have disappeared from investors'
language. Stocks rose. Stocks have risen. What comes after
the pluperfect; what comes next?

The life cycle of the typical bull market on Wall Street is
about 17-20 years. That has been so for the last 200 years.
Analysts find plenty of reasons why the bull market that
began in 1975 and ended in 2000 should continue. But there
are just as many reasons why it should not. And Mr. Market
- bless his heart - doesn't give a hoot about reasons
anyway.

Mr. Market will do what he wants. But the past tense is in
the language for a good reason. Just as there is future...
so is there past. The falling interest rates that so
delighted investors for the last quarter century are now
going up. The days of ever-cheaper money, apparently, are
past. So is the bull market in stocks.

Erit. Et. Erat.

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Addison Wiggin, from 33,000 feet over the Great Midwest...

- It was a fitting end to the week. Like most cities,
Vancouver has its share of vagrants, vagabonds and ne'er-
do-wells. But the Canadian variant is different. They seem
quite attracted to your editors. Naturally, we thought they
must be hyper-intelligent.

- On Saturday, the final day of our wealth symposium, Tom
Allen of HoweStreet.com staged a series of television
interviews with your editors on the steps of the Vancouver
Art Gallery on Hornby St. (not far from where we saw that
woman get hit by a car on Tuesday). Just as we began the
interview, a band of vagabonds set up shop right behind us
and lit up a few marijuana cigarettes.

- As we chatted about the effects of artificial stimulation
by the Fed on the housing market, puffs of the exhaled
cannabis wafted by. And while we prattled on about the
deleterious effect of easy money on the very fiber of
society, the aromatic herb enveloped us. By the time we
began exploring the outbreak of wanton licentiousness, a la
Berlin in the 1930s, thick smoke was permeating our
nostrils.

- At about the same moment, Hurricane Charley was clearing
a path through the trailer parks in Punta Gorda. Mr. Allen
pitched a softball question:"Do you believe," he asked,
"we're setting up for a perfect economic storm?"

- Mr. Allen was, of course, referring to a nasty confluence
of market events. On Friday, we received news that June's
trade deficit had hit an all-time high."It was a perfect
storm," said one analyst (conveniently) in the FT.
"Everything that could happen to push the deficit wider,
did." Imports jumped 3.3%, while exports fell 4.3%, the
worst drop since September 2001."It should be clear that
the United States is experiencing a real and accelerating
deterioration in its international accounts," said another
analyst.

- The price of oil, too, is raising eyebrows around the
globe. Friday saw the 11th-straight record-breaking high
for the black goo. Adjusted for inflation, crude is only
about half its early 1980s' price of $80 a barrel. Still,
historically, its nominal price has never been higher than
$46 a barrel...as it was last week.

- And Greenspan, with his band of merry pranksters, tacked
on another quarter point to the overnight lending rate and
another straw to the consumers' back. And now consumer
confidence, as measured by the University of Michigan, is
falling, says the Financial Times."[The fall] was
partially attributed to concerns about higher energy costs,
which also added to producer inflation data."

- Still, despite the gathering winds, the market remained
calm last week - the S&P was up only 1 point by close on
Friday. The Dow, suffering equally from ennui, added 10
points. But the Nasdaq defied its more staid cousins - and
fell 20 points. Investors weren't happy with statements
from a handful of technology companies - including Cisco -
that warned of"soft demand."

- Perhaps this isn't the perfect storm, after all. Here at
The Daily Reckoning, we envisage something more akin to a
slow-moving low-pressure system that will threaten the
economic skies for years to come."America will have to
find a new economic model," we wrote in our book,"for it
can no longer hope to spend and borrow its way to
prosperity. This is not a cyclical change, but a structural
one that will take a long time. Structural reforms - that
is, changing the way an economy functions - do not happen
overnight. The machinery of collectivized capitalism
resists change of any sort."

- And resist they have. But for how much longer? On the
front cover of the weekend FT we find this headline:
"Concern over softening of world economic Growth." Growth
in both Japan and the eurozone was timid. Japanese second-
quarter growth fell far short of expectations, and nominal
GDP shrank. Eurozone growth, at 0.5%, was abruptly lower
than that of the first quarter.

- By the end of the interview, we felt distinctly queasy.
"We've had a good run," we heard ourselves saying.
"Americans are generally happy... and delusional. But the
end of the world as we have known it IS coming. So...you
might as well enjoy it." At least the vagabonds appeared to
be enjoying our monologue...

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Bill Bonner, back in Vancouver...

*** We didn't spend much time in California. Driving from
Las Vegas, we stopped in Bakersfield, Calif., for gas and
lunch. The city fathers had erected a huge thermometer in
the town center. It registered 114 degrees. It must be
cooler in some parts of hell, we thought.

"Is it always this hot?" we asked the waitress.

"Not always...but this is not too unusual."

"Guess you have to stay inside."

"No, we go out in the evening, when it cools down. The
temperature goes down to about 100. Then, we go out. But
there's nowhere to go anyway...so we stay inside."

Leaving Bakersfield, we crossed more desert and soon looked
down on a lake of smog. The smell of the inland desert
changed to a sweeter odor of sea air and auto fumes.

Before we got into the city, we noticed mile after mile of
new houses in various stages of construction. The houses
appeared to be huge things; thrown up with two-by-fours and
flake board. They are building hundreds, no thousands, of
them all at one go. You see one style for a mile or
two...and then another style for another mile or two...and
then what looks like a shopping mall...and then yet another
style of new house in a further stage of completion. Left
unchecked, the houses seem to be spreading like some form
of virus, filling up all the land all the way up to the
foothills and barren desert. What Godforsaken hole must
people crawl out of to make these places seem like an
improvement, we wondered. One of the trailers on the other
side of Barstow? Here, they are far from anything...and
stacked one against another with barely 10 feet between.
Why not live in an apartment or a condo closer to the
center of town?

It was a mystery to us. But then, so much of what goes on
in America is a mystery. Why do people live in mobile homes
- in the midst of abundant stone and timber? Why do people
live in places hotter than Hades...in the middle of a
desert with nothing to do...and where even a blade of grass
- should it pop up in the early morning - would be dead by
noon? Why do people drive four hours from L.A. in order to
stay in a tacky hotel in Las Vegas...and lose money
gambling? Why would anyone want to buy Google.com at 125
times earnings? Why do parents spend $150,000 to send their
children to college - when most of what they learn is
useless nonsense? Why do people think they are getting
richer - when their incomes are falling and their debts are
rising? Why do people drive heavy four-wheel-drive vehicles
in places where it never snows and hardly rains?
Why do people spend themselves into debt when there is so
little worth buying? Why do so few people plant vegetable
gardens? Or save money? Why don't they make the coffee
stronger?

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The Daily Reckoning PRESENTS: It's The Mogambo on Monday!
The angriest man in economics gets angry...really angry.
Ted Kennedy takes it on the chin...and in the head!

THE WAGES OF SIN
by the Mogambo Guru

This week, I read an essay entitled"The Wages of Sinful
Economic Arguments" by Tom Lehman, who is an associate
professor of economics at Indiana Wesleyan University. It
was posted at mises.org. Lehman says"Forcing larger rival
firms to pay higher minimum wages will not necessarily lead
them to raise prices for their goods and services, as some
small business owners apparently believe."

Well, although he did not mention me by name, I am
certainly one of those people who believe that higher wages
necessarily lead to higher prices! And if this Lehman dude
wants to score some points around here, he had better start
believing it too.

Business owners may not be able to raise prices now, but
they will, at some point, assuredly take steps of one kind
or another to either raise prices or cut costs, because if
they don't, they will make less money.

And the business owner also has expenses, and a wife who
gets upset that things cost more, and who complains that
her husband doesn't bring home enough money so that she can
buy those Gucci handbags she wants and how her happiness is
totally dependent on her getting these things. Of course,
these business owners, like me, desperately keep trying to
find new ways of bringing in more money, because the last
thing we want in this world is for our wives to be less
happy than they are now.

So after I spent the whole day on the phone talking to
Professor Lehman's secretary and demanding to be put
through so I could scream at him until he changed his
opinion, he did finally admit that"It is probable that
large firms faced with artificially higher labor costs will
find it more advantageous to invest in additional
technology and capital equipment that would replace the
lowest-skilled employees who earn the minimum wage. In the
end, the singular-most likely outcome is that a hike in the
minimum wage will harm low-skilled employees who currently
have a job working for a large firm by throwing them out of
that job."

Well, that may be true. But I could not help but notice
that he did not mention that the inevitable outcome will be
higher prices for everything, for everybody!

And as bad and sad as the low-income worker's situation is,
there are a hell of a lot of sad-sack people in this damn
country whose situation is even worse, because they don't
even have jobs!

They are the old, and the crippled, and the severely
handicapped, and the sick, and the chronically unemployed
and all the rest. It doesn't matter who, because every damn
person in this whole freaking country is going to be harmed
by the rise in prices. I am getting sick to death of people
whining about only the minimum-wage workers, because they
are just a small, little, tiny subset of the gigantic pie
chart of rising-price sufferers; everyone has to pay higher
prices.

The only difference between the segments of the population
is their ability to pay higher prices. But at least the
damn minimum-wage income worker has the ability to command
wages, so quit crying for them!

The minimum-wage workers can thus directly affect their own
well being! The fact that they spend a large portion of
their income on crack and booze and tattoos and fancy cars
and the luxury of ostentatious bling-bling is their
problem. If they would only invest their disposable income
on education and if they would just stop buying that silly,
dysfunctional crap, they would probably find things
gradually start to improve.

In fact, here is a scene from the proposed new movie about
the Mogambo, which has the working title"Hot Babes
Prancing Around in Skimpy Outfits Use Raw Firepower to Help
the Mogambo Seek Righteous Revenge Against the Very Idiots
Who Caused Our Misery, Namely the Federal Reserve and Damn
Near Every Jerk That Has Ever Been Elected to Congress for
the Last 70 Years in a Row."

As the scene opens, there I stand, magnificent and
resplendent in my purple cape with fancy gold trim, and my
propeller beanie spinning.

As the camera pulls back, I am revealed to be in the office
of Ted Kennedy, one of the most infamous manifestations of
Leftist Lunacy that eats the guts out of America. I have
grabbed this Kennedy bozo by the hair, and I am shoving his
unwilling head down onto the desk, upon which is opened a
copy of the Statistical Abstract of the United States.

I am screaming at him:"You want a higher minimum wage, you
pompous, preening putz?"

He says,"Hey! That's alliterative!" and I shout back in a
loud and abusive voice, so loud that I get specks of
spittle on his face,"OF COURSE, it's alliterative, you
disgusting bag of leftist crap! I am the Mogambo!"

With a mighty shove, I again slam his head down onto the
book, and he says,"Oof!"

I lift his head by the hair until his face is turned up to
mine, and I scream at him,"Let's just see what has
happened to the damn minimum wage since 1960, when you
idiot Democrat commie-bastard leftist losers started really
cranking up that money machine with your damn deficit-
spending and social-engineering insanity, shall we?" With a
look of pure evil genius, I say through clenched and
gritted teeth,"Sure! Let's take a look at history!" And
with that I slam his head down into the book yet again, so
that he goes"Oof!" again, and I turn to the camera and say
"Hahahaha! Now it's YOUR turn to suffer, you silly
simpering socialist bastard, like you have made so many
millions of people suffer for so long, eh?"

Unfortunately, banging Sen. Kennedy's head down on the book
actually scrambled his last three working brain neurons,
two of which were used to prevent him from drooling and
thus revealing his staggering mental incompetence. Anyway,
this sets up another interesting plot development, so that
is all I am allowed to say about the film, and you will
just have to go and see it when it comes out. But it
promises to be a real tour de force of cinema veritas, and
if you actually think that in real life the real Ted
Kennedy, the weirdo senator from Massachusetts, has more
than three working neurons in his whole brain after you
have heard him speak and looked at the things he has done
to this country, then I have to assume that you have very
few working neurons yourself, so don't come whining to me.

In 1960, the minimum wage was $1.00 per hour, and at
various times it was raised. In 1997, it was increased to
where it is now, $5.15 an hour.

And I know from pure deduction that no Democrat knows how
to use a financial calculator, or else they would not say
the stupid things that they say. So once again an adult
(me) will come to their aid and give them the answer. The
rate of inflation in minimum wage works out to, compounded,
4.53% per year! And it is still not enough to keep up with
the rise in prices as it is!

And you can tell by the way I am gritting my teeth in raw,
seething anger that I am working myself into one of my
"spells." I am here to tell you that every time a new
higher minimum wage goes into effect, there are at least a
dozen American guys who retire on a defined-benefit
pension. And each of these guys watches in growing despair
as their standard of living declines, month after month,
year after year, as prices climb but their incomes remain
constant.

And it just gets worse and worse and worse, until the day
they die in utter poverty. And if you could bring these
guys back from the dead, they would say, in a ghostly
unison,"Listen to the Mogambo! Inflation will kill you!
And since inflation is a monetary phenomenon, and since a
monetary phenomenon is a central bank phenomenon, the
Federal Reserve will, ipso facto, kill you!" Which is, you
gotta admit, pretty astute for a bunch of dead guys.

And if you think for one minute, and I am checking my watch
to make sure that you get all the time you need to think
about it, that the recent and current monetary excesses of
the Greenspan Fed and all the central banks in all the
world, which together comprise an unprecedented monopoly
exercise in absolute monetary insanity, will NOT cause you
to suffer the miseries of price inflation that inexorably
follow the irresponsible increase in money and debt, then
there is something very, very, very, very, very wrong with
you, because even dead people show more smarts that you do.


Regards,

The Mogambo Guru
for The Daily Reckoning

*** The Mogambo Sez: I am scared. The stock market went up
over a hundred points as soon as the Fed increased fed
funds by a lousy quarter-point, which has been advertised
for over a month. This makes no sense. Now you know why I
am scared. And now you know why I suggest buying gold and
large-caliber guns.