Negative Inflation: Courtesy of Coke Chocula

The Mogambo Guru - Wed 08 Aug, 2007

Investors who are still sitting on their stocks apparently have a Big Undying Belief (BUB) in the ability of the Fed, Wall Street and the Plunge Protection Team (that was created by an Executive Order issued by President Ronald Reagan to "manage" any stock market "surprise") to keep the markets from falling, or are very stupid, or are all playing with someone else's money, or are whacked out on drugs either prescription, over-the-counter or illegal (or all three at once), or something even more bizarre, like believing in the complete absence of counter-party risk in the hedge "insurance" provided by buying enormous amounts of mysterious derivatives at huge degrees of leverage. The tragic summary is that in the beginning of a monetary inflation, "Everyone benefits and no one pays." Unfortunately, at the end, "Everyone pays and no one benefits. This is the full cycle of every inflation."

I am nervously looking through the periscope of the
Mogambo Bunker Of Ultimate Defensive Posture (MBOUDP),
currently outfitted with the optional Awesome Offensive
Capabilities Package (AOCP), and I am surveying the
smoking carnage in the financial landscape bemusedly.

Investors who are still sitting on their stocks
apparently have a Big Undying Belief (BUB) in the ability
of the Fed, Wall Street and the Plunge Protection Team
(that was created by an Executive Order issued by
President Ronald Reagan to "manage" any stock market
"surprise") to keep the markets from falling, or are very
stupid, or are all playing with someone else's money, or
are whacked out on drugs either prescription, over-the-
counter or illegal (or all three at once), or something
even more bizarre, like believing in the complete absence
of counter-party risk in the hedge "insurance" provided
by buying enormous amounts of mysterious derivatives at
huge degrees of leverage.

And stockholders are screwed anyway, because even if
everybody sells all their stocks, where in the hell do
they put all that money? They have to put it into bonds,
just because there is no other market so big that it can
absorb so, so, so damned much money! And central banks of
the world are making more money and credit all the time,
too, to add to the pressure!

Thus the yield on all U.S. Treasury debt fell to less
than 5% last week when the stock market sold off and all
that money went into bonds. This "flight to the safety of
U.S. bonds" is a Very Poor Move (VPM) because, thanks to
Shadowstats.com, we know that consumer price inflation
(as measured by the old-fashioned way of measuring the
increase in consumer prices) is running at around 10% (or
more!) right now!

So, by buying bonds, these yahoos are getting a nominal
yield of less than half of the rate of inflation? Out of
which they have to pay a lot of taxes, commissions, fees
and expenses, so that they actually end up losing money
at a rate that is nearly triple - TRIPLE! - the bond
yield that they are buying? Hahahaha! What morons!

This is the modern way to "make money"? They think that
they are making money by literally losing three times as
much purchasing power as they are making? Hahahaha! This
is the best that "investment professionals" can do?
Hahahaha! We're freaking doomed! And your retirement
account is in the hands of these guys? Hahaha! YOU'RE
freaking doomed!

Okay, okay, I admit that is not really fair, as federal
rules require that they remain fully invested, and that
means that they can't sell even if they wanted to, which
gets back to the absolute arrogance and stupidity of the
people we elect to Congress (except Ron Paul) who made
these laws, and the average American idiots who, even
knowing this, keep putting their money into these
investments! Hahahaha!

Well, as wrong as they are about that, they are even more
wrong when they actually believe that owning precious
metals is so old-fashioned and stupid, and how they are
so smart to be making whole scads of money in a stock
market that is still priced at an astonishing price-to-
earnings (P/E) ratio of nearly 20!

A P/E of 20 means that you are spending twenty bucks to
buy a share of stock in a company that makes one lousy
dollar per year per share! In other words, the company
itself will not earn enough to equal what you paid for it
until after twenty long, long years of waiting and
hoping. Then, twenty years from now, maybe you will
finally see some profit from your investment. Wow!
What optimism!

This is why this "P/E of 20" thing is around the point
where all previous stock markets, both on this planet you
call Earth and in all the other planets in the cosmos,
both now and in all of history, eventually fell,
corrected, or collapsed and ruined the hell out
of everything.

In case you were wondering, the historical average P/E
for a stock or stock market is around 12 to 14 or so,
although it has gotten down to around 4 to 7 or so at big
market bottoms and around 20 at the tops of bull markets.
In short, stocks ain't cheap, and the evidence is that
there are Very, Very, Very Few (VVVF) instances in
history where stocks went from expensive (like they are
now), to even more expensive, to very expensive, to
extremely expensive, to ridiculously expensive over the
long term, thus explaining why there are no stories of
legendary speculators who made plenty big wampum by
"buying high and selling high". Perhaps this is why the
market wisdom of "sell high" appears only after the
admonition to "buy low", and not after "buy high".

But this is not about how we are the biggest bunch of
buttheads in the universe for coupling the economy, the
government, everybody's assets and everybody's retirement
accounts with a manufactured inflation in the stock,
bond, government and housing markets, because if those
markets ever stop going up, everything else will stop
going up, too, and this means that the Fed would be
pressured to continue inflating the money supply forever,
which means that inflation in consumer prices will
continue forever, too, regardless of how insanely,
criminally irresponsible it is for the Federal Reserve to
do so, or how even MORE criminally irresponsible it is
for the Congress (except for Ron Paul) to abet and oblige
it to do so.

And neither is this about how all of this terrifying
inflation requires that the money and credit needed by
the new buyers will be created out of thin air by the
banking system, and sure enough, Total Fed Credit has
been going freaking bananas since 1997, and the stock,
bond, real estate and government markets have been going
freaking bananas since then, too, all thanks to the
horrid Alan Greenspan, who will surely go to straight to
hell when he dies because of all the misery, suffering
and deaths that will happen as a direct result of him
increasing Total Fed Credit continuously for all (pause
for dramatic effect) those (pause) years, and thus
increasing the money supply for all (pause) those (pause)
years, and now we are going to have inflation in consumer
prices for (insert a long, overly dramatic pause, during
which you may take a drink, scratch something that
itches, or smoke 'em if you got 'em) FREAKING YEARS
TO COME!!!!

And new evidence of increases in consumer prices comes
from Junior Mogambo Ranger (JMR) Chuck from Billings, who
reports that the inflationary rise in the price of
breakfast cereals is being disguised by re-sizing the
boxes down to a smaller size, with the sneaky result that
you pay the same amount of money for a box of cereal, but
get less cereal, which is the alternative to making you
pay more money to get the same amount of cereal.

JMR Chuck figures that this new packaging strategy "will
result in approximately a 13% decrease in the amount of
product in each box, in order to avoid a price increase
(!). Can it just be coincidence that this is also the
approximate increase in the money supply? And that it
reflects the actual rate of price inflation? Um, no,
stupid question, food price increases are not reflected
in the CPI, so there is nothing to worry about. We are
all FREAKING DOOMED TO EAT SMALLER BOWLS OF CEREAL!"

As an aside, The Economist magazine reports that (in
England, anyway) "cocaine is cheaper now than it was a
decade ago." A decade! Maybe the new way that the
government/Fed calculates its hedonically-jiggered
inflation statistics, "proving" that inflation is always
going down or is even "benign", is actually correct in
some things!

The lesson of this? When you can't afford food because of
the rising cost of food, you can use the Fed's new
"substitution effect", which is to substitute cocaine
(which went down in price) for food (which went up in
price) in your market basket, and thus inflation is
reduced to less than zero for you! Hahaha! Who knew?
Drugs as an anti-inflationary device! And probably lose a
lot of weight, too!

Or maybe the government/Fed will just disguise the
inflation in breakfast cereals by pricing breakfast
cereals as "dollars per box" and not "cents per ounce"!
Therefore, since the price per box did not go up because
there is less cereal in each box, inflation in cereals
would be zero!

And with the "substitution effect" in play, we can then
assume that the Fed will say that all consumers would try
to escape higher prices in other foodstuffs by switching
to breakfast cereals (which still cost the same in
"dollars per box"), which in turn would be substituted by
cocaine (which went down in price), driving overall
inflation in food to less than zero! Hahaha!

And the breakfast cereal company itself would have to be
pretty stupid not to at least mention how they are
selling more boxes of cereal (although neglecting to
mention that they are actually selling less actual cereal
since each box has less cereal in it), hopefully driving
the stock, and the stock options of the executives, up!
And taking the whole stock market up with it!

This inflation thing, not to mention the lying about it,
makes me so crazy with anger that I was going to the
window to throw open the sash and begin to again verbally
assail my stupid neighbors for being such economic
dimwits, and how they are going to pay dearly for their
economic and financial follies, and for their political
folly of consistently electing, "I Love Big Government
Programs" morons and moronettes to the federal government
(except Ron Paul), who immediately turned the government
into a giant giveaway machine, and how that is EXACTLY
what the Founding Fathers were trying to prevent when
they took steps to make sure that the government did NOT
have the power to create the money to spend and expand,
and they did this by requiring that money be only of
silver (and gold) for the sole reason that the government
cannot just print the damned stuff.

And to tell the truth, I like screaming at them because I
love the looks on their stupid faces when I tell them how
long and loud I am going to laugh at them, my voice
dripping with contempt, and how much I will enjoy
watching them suffer from the precipitous decline in
their living standards that they will be forced
to endure.

Well, I was halted in mid-stride towards the window when
my thunder was suddenly available, with no work, from
Bob Wood of Kaizen Managed Assets, who quotes Jens
Parsson from his book, Dying of Money. He writes,
"Everyone loves an early inflation. The effects at the
beginning of inflation are all good. There is steeper
money expansion, rising government spending, increased
government budget deficits, booming stock markets, and
spectacular general prosperity, all in the midst of
temporarily stable prices.

"This is the early part of the cycle. In the later
inflation, on the other hand, the effects are all bad.
The government may steadily increase the money inflation
in order to stave off the latter effects, but the
latter effects patiently wait. In terminal inflation,
there is faltering prosperity, tightness of money,
falling stock markets, rising taxes, still larger
government deficits, and still roaring money expansion,
now accompanied by soaring prices and ineffectiveness
of traditional remedies."

The tragic summary is that in the beginning of a monetary
inflation, "Everyone benefits and no one pays."
Unfortunately, at the end, "Everyone pays and no one
benefits. This is the full cycle of every inflation."

I bring this up not because I love bringing this up
(although I do, and in fact I perseverate about inflation
in some bizarre, mentally ill, one-track-mind focus all
the time because it scares the living hell out of me),
but because Total Fed Credit did NOT go up last week! In
fact, it went down by another $3.7 billion! Yow! You
can't have inflation without creating the money to make
it happen!

In fact, TFC has actually been relatively constant at
around $855 billion for the last nine months or so, the
longest stretch of "stable" TFC in Fed history since
1997! (Before that, TFC didn't change all that much on an
annual percentage basis).

I say that this is causing what is making the stock and
housing markets go down; the lagged effect of the
cessation of the constant, continual creation of excess
money and credit needed to finance a bull market finally
overwhelms mere momentum bullishness!

If so, there will be plenty more to come!

Regards

The Mogambo Guru
For The Daily Reckoning

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