Indicators signal turn for the
worse By The Mogambo Guru
As is usual for me, I was dismayed by the
report from Bloomberg.com concerning the
Conference Board's latest release of their famous
Leading, Coincident and Lagging Indicators. The
Leading Indicator, they say, "points to the
direction of the economy over the next three to
six months".
They do not, as I do, say
that it is also an indicator of future profits.
Either way, "the index of US leading economic
indicators fell more than forecast in December,
highlighting the risk of recession", as the index
fell 0.2%. It was, even more ominously - as you
can tell from the background soundtrack, which is
the sound of ravenous wolves howling and people
screaming as they
are
being eaten alive by their debts - the third
decline in a row. The third straight decline in
future profits!
This fall in the Leading
Indicator seems intuitively obvious when Bloomberg
explains, "The collapse in home construction, less
hiring and a slowdown in consumer spending may
spell the end of the expansion that started in
2001." I say, "Well, duh!"
Gratuitous
snotty remark aside, the future looks dim,
according to this indicator, but you feel
compelled to say, "Hmmm! This is the perfect spot
to say that you, Big Doofus Mogambo (BDM), like
most people, underestimate the government's
response to any and all economic crises!", and
then point to last week's "emergency rate cut" by
the Federal Reserve, when they slashed the Fed
Funds rate by a gargantuan 0.75%, taking the rate
down 18%, dropping it to 3.5% from 4.25%! Wow!
Talk about desperate! Well, if interest rate
cuts are all that is needed to cause problems and
then solve them, then this brings up the
philosophy of Homer Simpson, who famously said
that, "Alcohol [is both] the cause of, and
solution to, all of life's problems."
On
the ho-hum side, the Conference Board's Coincident
Indicator, a gauge of current economic activity,
rose 0.1% in December, which is almost nothing.
The coincident index "tracks payrolls, incomes,
sales and production". Remember, this is current
activity, and it isn't doing so hot, either.
The Bad, Bad News (BBN), as far as I am
concerned, is the Conference Board's Lagging
Indicator, which contains costs and inventory
burdens, and thus can be thought of as an index of
future inflation. So (substituting) inflation
"increased 0.4 percent after rising 0.2 percent
the prior month".
And, worse, the Lagging
Indicator has been outdistancing both the Leading
and Coincident indicators for months and months,
too, indicating that costs are going up. And they
were. And they are. And they will continue to do
so.
And, in an odd coincidence, the
Lagging Indicator started going up at about the
same time I started having nightmares about
inflation, never getting any sleep, and then it
got really, really weird at home and now
everywhere else too, as I gather from the way
things are shooting up and down all over the
place.
And just when we are looking at all
of this volatility, here comes Jack Crooks at
MoneyandMarkets.com, who writes that the charts of
the last few decades show that, "Volatility in the
currency markets follows a fairly predictable
pattern. When crisis strikes or recession sets in,
the currency markets turn erratic."
It
turns out that this has a big effect on the "carry
trade", where people borrow from places where
interest rates are low, and then use the money to
invest in places where interest rates are high,
and then pocket the difference.
How it got
to be so big was that in the last 18 years or so,
Japan had the lowest interest rates in the world
since their stupid economy collapsed in 1990
because their stupid central bank had stupidly
created too much money and credit for too long,
and instead of letting the stupid idiots and
stupid crooks lose their stupid money, the stupid
Japanese government forced interest rates to
almost literally zero so that stupid bankrupt
businesses could always borrow enough money to
keep from having to declare bankruptcy! Hahaha!
What a racket!
Thus, the carry trade was
born when everybody else piled in, too. I thought
that this was so clever in saving the butts of
stupid and corrupt people that I have used it
several times myself, over the years, to try and
save my own stupid butt and my own stupid job.
In case you were thinking of trying this
at work too, let me warn you that it is, in the
real world, fraught with failure. The way it
usually works is that I go into the CEO's office
and inform him that Japan has proved that taking a
corporate loss because of my bungling incompetence
and complete lack of attention is wrong, and that
bankruptcy could have been prevented if we, like
Japanese businesses, had found somebody to loan us
money at 0% to make up for the losses! So it's HIS
fault for not securing that financing!
I
have found that CEOs are usually initially silent
and immobile when informed of this, and kind of
just stare at you with this odd look on their
stupid CEO faces, like they don't understand a
word you are saying until finally, in frustration,
you shout out, "So it's YOUR fault for not
securing interim financing at zero interest rates,
bozo! And if you didn't foul up, then where is the
money? There is no money because you didn't go and
get any free money! That proves you screwed up!
So, YOU'RE the incompetent loser moron around
here, and not ME for one damned time in my whole
damned life! Hahahaha! How do YOU like somebody
yelling at you because YOU screwed up, moron?"
Well, Mr Crooks is not interested in why
my career has so many periods of sudden
unemployment and inexplicably moving far, far away
to start fresh in a new town with a new name, and
merely says that there are crises erupting all
over the place, and now all those carry trades
that were so pleasurable when things were calm and
stable are now unwinding because, "Investors and
institutions inside and outside of Japan are
pulling away from risk and repaying their yen
loans" as the volatility increases losses and
makes everyone really, really nervous.
All
of this means that there is a reason to think that
the yen would get really, really strong, which
would mean that the dollar would get really,
really weak, which means that gold would really,
really go up in price, at which point I usually
stop and remind everyone to buy gold, and lots of
it, and right now, which nobody does, and then I
get frustrated and angry and end up getting
really, really drunk and laughing at them in my
hazy stupor and call them bad names. And loudly,
too.
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.
Republished with permission from The Daily Reckoning.
Copyright 2008, The Daily
Reckoning.
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