Cursing the loss of purchasing power
By The Mogambo Guru
Thomas G Donlan's new essay in Barron's is titled "Lands of Waste and Debt"
with the subhead "The states send signals that it will not be a happy spring",
which makes me ask the obvious question, "It won't be happy for who?", as I am
all in gold, silver and oil, and I am dead-bang sure that I will be VERY happy
for a long, long time because I know what happens to those particular items
when a moronic, corrupt government teams up with a central bank, especially one
utilizing some bizarre computer models to determine monetary policy; inflation
that screams your death knell.
So maybe it won't be a happy time for some working people having their death
knells screamed at them, or their families
screaming at them because things cost so much and they whine, whine, whine
about it all the damned time until you want to scream a death knell of your
own, as the latest employment report showed that 80,000 jobs were lost in
March, which does not even account for the fact that the two previous month's
job losses were each revised upward by 76,000! In two months, 152,000 more jobs
were lost? Yow!
And these are only the reported job losses, and I've even seen estimates as
high as 400,000 jobs lost!
And people with houses to sell are not going to be too happy, either, as Bill
Bonner here at The Daily Reckoning reports, "So far, US homeowners have lost
probably about 12% of the wealth they thought they had in their houses. The
total capital value of the residential housing market is about US$20 trillion.
So, a 12% loss is equal to about $2.4 trillion."
Apparently, Mr Bonner recognizes the look of horror on my face and the way I am
gasping for breath at the prospect of a country with a GDP of $15 trillion
losing $2.4 trillion in wealth. To make me feel better, perhaps, he added, "A
few foreign housing markets have been hit harder - Ireland, Spain and Iceland,
for example." Yikes!
Back here in America, the National Association of Realtors reports, "The median
price of an existing single-family home dropped 8.7% in February from a year
earlier, the most in four decades of record keeping."
And it is not just first mortgages that are in trouble, as Ed Steer of GATA
sent the International Herald Tribune article "US Equity Loans Are Next Round
In Credit Crisis", which contains the chilling statistic "Americans owe a
staggering $1.1 trillion on home equity loans - and banks are increasingly
worried they may not get some of that money back."
And they should worry, as, "In December, 5.7% of home equity lines of credit
were delinquent or in default, up from 4.5% in 2006, according to Moody's
Economy.com", and "In places like California, Nevada, Arizona and Florida,
where home prices have fallen significantly, second-lien holders can be left
with little or nothing once first mortgages are paid."
To make sure that they get their money back, "many lenders are taking the
extraordinary step of preventing some people from selling their homes or
refinancing their mortgages unless they pay off all or part of their home
equity loans first." What makes this all the more worrisome is that "In the
past, when home prices were not falling, lenders did not resort to these
measures." Cue ominous soundtrack, with wolves howling and banshees wailing.
And it won't be happy for those guys holding stocks of the S&P500, as that
index had earnings sliding again, this time to $66.18. In case you were
wondering, less than six months ago, the earnings of the S&P500 were almost
$86.00! It's amazing that the stock market HASN'T collapsed in the face of an
earnings slowdown of 23%!! Earnings are slashed by almost a quarter, but the
underlying stocks haven't sold off, but actually seem to rise? Wow!
This amazing phenomenon proves either that the government's Plunge Protection
Team exists and is massively operating to intervene in the markets, or that
people are truly idiots. Or maybe delightful little fairies guard our dreams
and protect us in life! Something.
Either way, the earnings yield of the S&P500 is a miniscule 4.83%, which is
the lowest since sometime in 2004. Nice "growth" there, dudes!
And it won't be happy for many shareholders at all, as Jack Willoughby in
Barron's reports, "The average US diversified stock fund lost 10.11% in the
opening quarter, slightly more than the Standard & Poor's 500 index's drop
of 9.44% over the same span."
It also looks like all the other stock funds (big cap, low cap, high growth,
blue chip) had losses, too, ranging 7% to 15% in the first quarter, with the
exception of everybody's favorite, the gold funds, which gained 5.22%, and some
short funds that were up 11.93%.
And the news is not any better in bonds, and Ty Andros of TraderView.com has
been looking at the gigantic bubble in bonds. He says that bond prices "have
been this high, and rates this low, ONLY one other time in over 50 years, and
that was the 2nd quarter 2003."
Wow! 50 years! Then, since he knows what a drudge I am about inflation, he
innocently asks, "How about purchasing power? Let's use the rule of 72 [a
method for estimating an investment's doubling time or halving time] to figure
out what type of purchasing power losses these holders are about to face. 72
divided by inflation of (I will be kind) 9%."
The results are that, "In the case of the 10-year note, it will lose half its
value over the next eight years, and in terms of the five-year, a 31% loss of
purchasing power will be seen between now and redemption time." My God! These
are staggering losses, considering the sheer tonnage of bonds that are already
extant in the freaking world!
And why will bond investors face purchasing power losses? Easy! Mr Andros says,
"MZM [money with zero maturity] is expanding at 30%, and reconstructed M3 is
running at over a 17% growth rate." I am stunned! In short, the Federal Reserve
is creating money seemingly as fast as it possibly can, which devalues all the
existing currency by just that little bit more!
On the other hand, he says, "As long as they create fiat currency and credit as
they are, stocks can NEVER be expected to decline for long. They will just rise
to reflect their re-pricing in the currency in which they are denominated
[currencies don't float they just decline at different rates] with nominal
gains to reflect the loss of purchasing power, not to be confused with REAL
gains as measured in gold."
And to prove it, look at Zimbabwe, where a single cigarette now costs over
Zimbabwe $750,000; their stock market shows the biggest gains of all the stock
markets in the world!
Too bad the entire capitalization of the Zimbabwe stock market is roughly equal
to a used Chevrolet with bald tires! Ugh.
The Mogambo Sez: If I was ever a bull on gold, silver and oil, I was but a
novice, as I am much, much more so now.
And so should you be.
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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