The tragic tale of the last fool in
line By The Mogambo Guru
After a wonderful weekend celebrating
Mozart's birthday by gorging on German food, I was
in a particularly bad mood to be rudely jostled
awake by the sound of alarms ringing in the
Mogambo Secret Bunker In The Backyard (MSBITBY).
Soon enough, I discovered why; Total Fed Credit
was down by a goodly $6 billion last week. Wow!
Now, there are a couple of reasons why TFC
could be down. For one, Ben Bernanke and his
precious little Federal Reserve might be trying to
slow the growth of the money supply, and thus
finally brake their decades-long inflationary
monetary expansion to belatedly head off
dangerously rising inflation in consumer prices.
To this possibility, experienced Fed-watchers will guffaw
"Hahahahahaha!" with an
ill-disguised and disrespectful tone of scorn and
utter, utter contempt.
Another reason is
that, maybe, nobody wants to borrow any money, and
so the Fed doesn't have to create any new money or
credit to accommodate them! To buttress that
argument, I present Bloomberg.com, which quotes J
Matthew Dalton at Belle Haven Investments saying
that, "Liquidity is out of the market, bidders are
pulling away. Without liquidity, you've got a real
problem."
And speaking of liquidity, I
notice that the enormous $723 billion stash of US
government securities actually owned by the Fed
(which is a private bank creating money out of
thin air for their own purposes, and then using
the money to buy the debt of the government, which
we taxpayers will have to repay), dropped by $5
billion last week, too! Of course, I don't know
what it means because it could mean a lot of
things, but it is highly unusual!
Perhaps
not surprisingly, bank credit declined $8.9
billion, dropping to the still-staggering sum of
$9.3 trillion, which amounts to the banks
essentially loaning $31,000 to every man, woman
and child in the whole freaking country, and again
not surprisingly, Michael Santoli in Barron's
reports that, "Public investors, at any rate, are
in a dark mood; they yanked some $13 billion from
stock mutual funds in the past week," which neatly
and spookily dovetails with the latest reading of
Consumer Sentiment, which is down, too.
And I guess it is this "yanking" money out
of the stock market that has made margin debt go
down, as people are not as anxious to borrow money
to make stock purchases, as I gather from Chuck
Butler of Everbank World Markets and writer of The
Daily Pfennig newsletter, who is not only a guy
who knows how money works, but is also a guy who
knows that I am NOT a guy who knows how money or
anything else works, and carefully explains that,
"when margin debt is falling, people are taking
money out of stocks".
I was delighted to
hear this, as this is one of the few things in the
world of economics and finance that I comprehend
exactly; when more people are selling something
than there are people buying it, then the price
goes down, and that means that when there are more
people selling stocks than are buying them, the
stock market goes down, and all those people who
owned those stocks took another loss, and then a
tiny bit of incrementally more people one day,
suddenly, sit up in bed, alarmed and afraid, and
say, "Hey! That Stupid Mogambo Halfwit (SMH) was
right about investing for the long term in the
stock market; it can't be done for the vast
majority of people, and only a tiny minority of
people will make money from owning stocks! The
majority of us must lose! Damn!"
This is
preferable, as far as I am concerned, because
people are always complaining to me that their
ears actually hurt from my loud harangues about
this, and that I am wrong, wrong, wrong, and I
reply I am not wrong, wrong, wrong, and they say
yes, yes, yes I am wrong, wrong, wrong because
look at how high stock prices are, so people who
own stocks must be making money!
To such
rebuttal, I politely reply, "Hahahaha! You are a
moron, and you should be sterilized before you
produce any of your mutant, moron children!",
which usually really upsets them for some reason,
as apparently they were unaware that they are
complete idiots.
If they had bothered to
ask, I could have shown them the "best case"
example, where investors buy a stock and sell it
for twice as much. In other words, I buy a stock
for $1, and then sell it for $2 (making a 100%
profit).
And then that investor who bought
it from me can make a 100% profit of $2 (doubling
his money, too) by selling the stock to someone
else for $4. And how does that guy who paid $4 for
the stock make a similar profit? By selling the
stock to someone else for $8!
I know what
you are thinking. You figure, "Hey! This looks
easy!"
So, now it is time to add up, so
let's add up, which I am usually pretty good at,
if the numbers are few, are all single-digit, I
can write it all down and can get back to you
sometime early next week with the answer.
Fortunately, this is such a case.
So, how
much profit was made from all of this selling? $7
(= $1 + $2 + $4)! How much money was spent? $15
bucks (= $1 + $2 + $4 + $8)! Hahaha! Everybody so
far has made a 100% profit, and yet twice as much
was spent as was made in profits? A lousy 50%
total return on investment? Hahaha!
And
the last guy, who may be otherwise known as the
Last Fool In Line who bought at the exact top at
the exact highest price, still has to find
somebody to sell to at a profit, or the system
goes into loss mode. If he sells at $7, taking a
$1 loss, then total profits for the system are
reduced to $6 (= $1 + $2 + $4 - $1)! And yet the
total amount spent in all this investing has
climbed to $22 (= $1 + $2 + $4 + $8 + $7)! Now
return on investment is 6/22 = 27%! Hahaha!
It gets worse from here, and no matter how
you slice it, dice it, package it, or make
Julienne fries with it, the majority must lose so
that a minority can gain, as it is a zero-sum
game. And that minority is usually Wall Street
insiders, the banks and the government-parasite
industries.
I can see that Mr Butler is
too smart, too big and too wily to let me grab him
by the collar of his shirt and rudely hold him
against the wall while I explain all of this to
him, my face just inches away from his so that he
can smell my foul and fetid breath as my clever
way of making the lesson even more memorable.
In fact, he ignores my remark completely,
because we were originally talking about how a
fall in margin debt means people are selling
stocks instead of buying stocks with borrowed
money, and he says that margin debt falls when
people, "are running away from 'risk'", and sure
enough proves his own point by citing the news
that, "it was reported yesterday that margin debt,
after reaching a high in July of $381 billion, has
fallen each month since - to $322 billion. This is
just a piece of the puzzle folks. But don't be
surprised if this indicator holds true to form."
And since we are talking about the stupid,
greedy, corrupt banks and how the stupid, greedy,
corrupt banks are killing the economy with
over-issuance of money and credit so that they
could make more profits for themselves and their
little friends, just like stupid, greedy, corrupt
banks have always done, as that is their nature.
And I will be paranoid and outraged about
it, as that is MY nature!
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.
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
