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Uncle Bill
03-29-2009, 03:07 PM
Here's some food for thought from my usual source. It might not be what it seems. It's getting very tricky. UB


If you had stocks in 2000, and held them until now,... guess how much you would have lost?

60% - in real terms.

If you went all the way back to 1966...how much would have made if you held stocks all the time until today? Zero!

How about stocks for the long run? Well, maybe...but actual performance depends on WHEN you buy and WHEN you sell. If you're lucky, you'll get out when the getting's good...and back in when it pays.

And right now?

"Everybody I know is getting back in...cautiously," says a rich friend here in London. "But I'm not so sure...I don't think there's any hurry."

Nope. No hurry. There's a storm passing over the world's financial markets. We'd let it blow itself out before we made any major investments.

"But what do you do in the meantime? I'm in cash...and I guess I'll stay in cash after reading your report yesterday. Inflation seemed like a sure thing. But as you say, maybe it's not as sure as we think."

Yesterday, the Fed made history. It made a little step for man, and a big step for mankind, down the road to Hell. The monetary base of the U.S.A. is to be increased 500% over the next few months. More than a trillion dollars' worth of debt is to be monetized.

Doesn't this guarantee imminent inflation at much higher levels? Yes...in theory. But there's a many a slip twixt the cup of theory and the lip of actual financial experience. As our friend James Ferguson pointed out, the Japanese had their cup running over for 10 years. Still, no consumer price inflation arrived to quench their recession- parched lips.

What we take from this experience is that inflation is like a temperamental mistress. Sometimes she will be smooth and serviceable...and at other times, she will be as cold and stiff as brass.

If the world is in the grip of a major correction - which it certainly is - commodity prices should be going down. Instead, they're going up. Copper is up 40% since it hit bottom in December of last year. Oil has gained more than 50%. In dollar terms, the commodity index, the CRB, has increased 14% from its bottom a few weeks ago. Are these dead cats just bouncing? Or, is this inflation?

And take a look at what has happened in England. Even in the midst of the biggest deflationary meltdown in asset prices in all of history, consumer prices still rose.

Bread is up 11.2%. Meat is 15% more expensive than it was 12 months ago. Fruit is 13% higher. Natural gas up 33% and electricity is at plus 18%

Britain is a special case. Much of the price increases come a result of the falling pound - which makes everything that has to be imported more expensive.

But everything is a special case, isn't it? Japan was a special case. And now...the whole dollar-based world is a very special case.

And when the Fed monetizes debt, it's not as if it buys it directly from mom and pop. Who owns the debt? Well, the biggest holder is China. When the Fed buys U.S. Treasury debt from China, the cash doesn't automatically fall into the U.S. consumer slipstream.

The Chinese could horde the money. Or they could use it to buy U.S. businesses - big business, such as GM and Caterpillar. In effect, what the Fed is really doing is facilitating a massive transfer of real wealth - from America to foreigners. By holding up the price of U.S. Treasuries (by buying them itself) the Fed is funneling cash to the foreign owners. The foreigners then redeem the cash for major U.S. assets (at low prices).

Maybe that was the deal the feds worked out with the Chinese. Or maybe these are just the collateral and unforeseen consequences of a foolish plan. We don't know. But it doesn't necessarily put a lot of extra cash on the street.

And then, even if it were on the street, it may not stay there for long. The feds can put in a lot more money. It doesn't mean it necessarily chases consumer products and drives prices higher. In fact, in a real depression, people tend to hoard money. They save. The more fearful they are, the more they squeeze their coins and clutch their bills. Instead of circulating freely, money disappears into drawers, bank vaults, and billfolds. Let's say the feds add a colossal sum - $10 trillion - to the dollar money supply. Even that could quickly be stashed away...in pockets...bank vaults...business holdings. Remember, most of it is in electronic form. What difference would it make to consumer prices if every account holder added a zero or two?

Our old friend John Mauldin sends this comment:

"On the Fed printing money: there is one small thing to watch. What if they print it, put it in the banks and then the banks instead of lending it to each other at 1.25% in LIBOR decide to deposit it at the Fed for .25% because they are worried about security and counter-party risk, which is a lot of the reason Fed reserves have exploded. They could print $5 trillion and if it all goes back to the Fed then where is the inflation? We need to pay close attention to where the money goes."


Bill Bonner
The Daily Reckoning

Richard Halstead
03-30-2009, 05:02 PM
My financial situation is better than any time since graduating college. Which is the result of saving money, no debt, and divideds quarterly. No credit card debt is a big reason but, it wasn't always that way. I built my own house in 1979 and had to charge a lot to make ends meet. asince that time period I pay cash and the house is all mine. My investments on the other hand are down about half.

Uncle Bill
03-31-2009, 08:58 AM
Rather than a new thread for the Mogambo Guru, it's just another extension of what Bonner had to say, only different. More food for thought, and confusion. UB

Gasoline on the Money Supply Fire
by The Mogambo Guru
Tampa Bay, Florida


Agora Financial’s 5-Minute Forecast conveniently distills the Truly Horrifying News (THN) of recent Federal Reserve action by saying, “In a single breath, the Fed committed another $1.15 trillion to the credit quagmire” with “$750 billion for purchasing mortgage-backed securities from Fannie Mae and Freddie Mac (on top of the $500 billion the Fed has already promised)” plus “Another $100 billion directly toward Fannie and Freddie’s debt. That’s also atop a pre-existing $100 billion program.”

We all agree that this is truly breathtaking stuff, and the “knockout blow” is that “the Fed will officially begin buying ‘longer-term’ U.S. Treasury notes. The FOMC said they’d spend at least $300 billion over the next 6 months” which is known as “sterilization” and I say is a lowlife stinking fraud where the Federal Reserve creates money out of thin air, then uses the money to buy Treasury bonds, agency debt and/or (literally) buying anything that they want, as much as they want, anytime they want, which they are doing because the Federal Reserve has destroyed the economy by creating so damned much excessive money and credit that nobody in their right mind is going to buy any stinking Treasury bonds yielding (in the original Spanish) el squato when inflation will be raging higher than the puny yield, meaning that bond prices will collapse and interest rates will rise, which is the last thing that the Fed or the government wants.
“Holy crap! The American central bank, with what appears to be cowardly compliance from their federal government, has committed the ultimate economic sin, and we had better get our money out of that stupid currency before it loses all of its purchasing power!”
As the comedian Dana Carvey’s Church Lady character used to say, “Now isn’t that special!”

Of course, there are people in the world who are not as stupid as us Americans, and they look at this and say to themselves, “Holy crap! The American central bank, with what appears to be cowardly compliance from their federal government, has committed the ultimate economic sin, and we had better get our money out of that stupid currency before it loses all of its purchasing power!” which resulted in a fall in the dollar on the forex market, or, as The 5 puts it, a “2.7% drop for the dollar index – its worst one-day performance since 1971 when the index began.”

Neil Irwin at the Washington Post reported, with that subtle-yet- unmistakable hint of panic, “The Federal Reserve yesterday escalated its massive campaign to stabilize the economy, saying it would flood the financial system with an additional $1.2 trillion.”

Aghast, I raise a shaky index finger to direct your attention to Mr. Irwin’s appropriate use of the adjectives “massive”, “flood” and “additional” to describe the sudden scary appearance of “$1.2 trillion” in promised expansion of the money supply by the Federal Reserve, which is so scary that this is where Mr. Irwin lost valuable Mogambo Stylistic Points (MSP) when he forgot to extend “$1.2 trillion” into a phrase that would reflect the preceding phrases.

So, according to the Mogambo Big Book Of Economic Editorial Style (MBBOES), It should have read (in light of preceding adjectives “massive”, “flood” and “additional”), “$1.2 trillion, which is a freaking unbelievable orgy of monumentally irresponsible monetary and fiscal insanity that not only makes you pee in your pants in terror of the inflation in consumer prices that will inevitably follow such enormous expansion of the money supply, but is even more terrifyingly that this same deficit-spending lunacy is forecasted far, far into the future, too, making the total situation of such a horrific magnitude that you can be fully justified in screaming your brains out in horror and outrage, being, as you are, 100 percent sure that it will destroy us completely by the simple expedient of destroying the purchasing power of existing dollars by creating too many new dollars!”

Bill Bonner here at The Daily Reckoning notes, “In response to the Fed’s latest move, the yield on 10-year Treasuries fell more than any time since they started keeping records in 1962. From 3.01% it had fallen to 2.48% when last we looked” which seems paradoxical, since normal people would look at this massive creation of money and know that it means higher consumer prices, which means that bond yields would rise! And yet bond investors bought bonds, driving their yield down! Weird!

But this is the kind of stupidity that makes investing in gold, silver and oil so easy and cheap! Whee!

Until next time,

The Mogambo Guru
for The Daily Reckoning