Gigantic Pink Elephant In The Room
It’s early Wednesday, on what will be an extremely busy day, given that I will be taping three podcasts this morning. And by initial appearances, my impressive streak of political “calls” appears likely to end – as “miraculously,” an utterly desperate OPEC appears likely to announce a production “cut” in a few hours. Not that my logic was flawed in any way, as up until yesterday, such a “deal” appeared all but impossible. The fact is, OPEC’s penchant for lying surpasses even that of politicians and Central bankers – so blatantly, that despite its second and third largest producers, Iran and Iraq, staunchly disagreeing with the views of its largest, Saudi Arabia, it plans to feign solidarity, even if its policy is for all intents and purposes, is impossible to enforce.
Barring a cataclysmic public relations disaster, oil ministers’ comments earlier this morning that a deal was close will be followed by an official communique later today, despite the fact that yesterday afternoon, following two-and-a-half months of contentious negotiation, Iran (and non-OPEC Russia) said they would not cut, whilst Iraq claimed its actual production (from which, updated quotas would be based upon) was higher than Saudi Arabia claimed. Throw in the fact that Nigeria and Libya, both with grand expansion plans, will be exempt; as highly indebted U.S. shale producers lurk like vultures, ready to grab whatever market share Saudi Arabia, Iran, and Iraq “relinquish,” and it won’t be long before the world realizes OPEC is not only lying, but no longer has the power to “control” global oil production; and thus, prices.
True, they have the U.S. government-led “oil PPT” on their side, aiding their can-kicking efforts with a finely honed combination of market manipulation and propaganda – which thus far, has proven as effective as the “equity PPT’s” support of “last to go” markets like the “Dow Jones Propaganda Average,” and the gold Cartel’s suppression of Precious Metals. However, in the long run, “Economic Mother Nature” always wins – particularly in physical markets like crude oil; where not only are supply/demand fundamentals likely to materially change regardless of what OPEC announces; but once market participants realize they, as always, are lying about what they actually produce – let alone, as U.S. shale and other non-OPEC nations dramatically ramp up production – OPEC’s futility will, once and for all, be universally understood. I mean geez, I’d put Barack Obama and Janet Yellen higher up on the list of credibility than Saudi Arabia, Iran, and Iraq combined!
If in fact a production “cut” is announced – despite historic OPEC and non-OPEC dissension, both economically and politically – it should tell you all you need to know about how desperate they are for prices to lift from levels that, for all intents and purposes, are bankrupting them. And on a larger scale, how desperate all corporations, municipalities, and sovereign nations are for financial markets to remain levitated at historically high valuations – considering historically ugly fundamentals, with nowhere to go but down.
That is, other than in “last to go” markets like the aforementioned “Dow Jones Propaganda Average” – which get the majority of press coverage from the lying, compromised mainstream media. As under the surface, the majority of global stock markets have been weak, particularly in real terms – whilst fixed income markets are amidst their biggest crash in 25 years, and nearly all currencies have crashed to, near, or in many cases well below all-time lows. Which I assure you, any “deal” to support oil prices won’t help any, as it will only stoke further price inflation, in a world where “bond vigilantes” have finally re-awoken; as new, populist leaders, like the one we just elected two weeks ago, promise historic fiscal stimulus, compounding the historic monetary stimulus that has brought the world to the brink of financial ruin.
Yes, there are many “pink elephants” in the room to be wary of – starting with the fact that the vast majority of equity market gains over the past eight years has been solely due to historically easy monetary policy; compounded by unprecedented market manipulation, both overt and covert. In other words, most of such gains are due to monetary inflation – in some cases, to extremes, like the world’s two best performing stock markets, Venezuela and Zimbabwe, which just happen to be the worst hyper-inflators of the day.
Not that the Western world is there yet – although history tells us that in time, it unquestionably will be. However, even at this early stage, it’s difficult to believe this process isn’t starting to be “discounted” by equity markets. At least, those of nations not in imminent danger of crisis; like, for instance, Italy, whose stock market has been plunging all year. As frankly, the post-Trump “market reaction” – irrespective of the historic rigging that has pushed paper Precious Metal prices to the year’s lows, yielding rising physical premiums; and in some places, like India, extreme scarcity – is, for lack of a better word, as crazy as any in the 28 years I have been observing financial markets. Surging stocks and bond yields; collapsing currencies; and a schizophrenic commodity market featuring a parabolic rise in base metals, whilst most others – such as, until this morning, crude oil – plunge; is as baffling, disjointed, and incongruous as any I’ve witnessed.
Let alone, plunging gold and silver prices, no matter what excuse is proffered – which make absolutely ZERO sense given that, in nearly all other markets, rising inflation expectations have become a dominant theme. Not to mention, the historic, sweeping political changes sure to catalyze geopolitical tensions; and foster further, unprecedentedly easy monetary and fiscal policy. Heck, lead and zinc are up 15%-20% in the last month alone due to expectations of a New Deal-like Trumpian stimulus program – whilst silver, of which three-quarters of its production is utilized for industrial purposes – is down 12%! A dichotomy, I might add, that must inevitably revert to the “mean,” particularly when physical prices are so historically out of whack with the rigged paper market.
The “gigantic-est” pink elephant in the room is the unfathomably deleterious impact of surging interest rates – not just in the States, but everywhere – which will unquestionably wreak havoc on a global economy quantifiably at its weakest level in generations; with more DEBT, growing parabolically, than at any time in history; and easier MONETARY POLICY, without parallel, than any era in modern times.
I mean, geez! The most important “input” to financial market valuations is interest rates – which, following their recent, historic surge, have made most equities as, putting it euphemistically, “highly valued” as at any time in history. And subsequently, put a major damper on global economic activity, at a time when it needs “growth” most.
Australian housing approvals – in one of the world’s most egregiously overpriced real estate markets – plunged 25% year-over-year in October; whilst last week’s U.S. refinancing applications, announced this morning, plummeted 16%; as tightening Chinese credit markets have the world’s largest real estate bubble on notice. And yet, as the majority of wealthy San Franciscans elect to rent instead of own, care of their own, historic real estate bubble, stock markets – PPT “help” irrespective” – are surging despite the historic interest raid rise. All, supposedly, due to the ambiguous – and unquestionably, inflationary – plans of one Donald Trump. Who, I might add, just yesterday afternoon, selected former Goldman Sachs banker Steve Mnuchin as Treasury Secretary, mere weeks after proclaiming he’d “drain the swamp” of the evil, deleterious forces that have brought America to the brink of financial ruin; in the process, creating unprecedented wealth disparity, to the chagrin of the millions of Joe and Jane Six-Packs that voted for him.
In other words, as Jim Grant put it yesterday, Trump must embrace the “big fat bubble” he accused the Fed of creating to support Obama and Hillary Clinton, as not only is it America’s only chance of economic survival, but his personally – given that he, as a major holder of highly leveraged, high-end real estate assets, could potentially be bankrupted by surging rates; i.e, the gigantic pink elephant in the room his policies will only grow “gigantic-er,” particularly if he follows up on plans for unprecedented fiscal stimulus and protectionist trade policies.
And then you have the, perhaps, “gigantic-est” pink elephant that is the thousands of pension funds and insurance companies utilizing ridiculously unrealistic return on investment assumptions – such as the insolvent state of Illinois’, whose pension fund is just 39% funded; and the nation’s largest pension fund, CALPERS (California teachers), which is assuming 7.5% annual returns after breaking even last year; and after this month’s epic bond market crash, is likely down this year. Such funds – and insurance companies, which have been raising premiums to compensate for meager investment returns – have been forced by historically reckless monetary policy to load up on long-term bonds with barely any yield; and to take on historic risks by buying higher-yield junk bonds; historically overvalued equities; and illiquid venture capital and real estate assets as well. And while higher rates on paper sounds good, what it translates to in reality is massive bond capital losses; and inevitably, equity and real estate losses as well, given how higher rates, as noted above, translate to lower asset valuations.
Throw in the “wild card” of the aforementioned, sweeping global political changes – such as in Italy, which may well be discounting an economically debilitating “ItaLeave” scenario as soon as Sunday night – and you can see why the “gigantic pink elephant” of rising global interest rates is not only larger than ever, but on the verge of receiving an historic shot of politically-motivated monetary steroids.
Under such a terrifying political, economic, and monetary scenario, the $64,000 question is how long can the “powers that be” prevent financial catastrophe? And in doing so, maintain the pretense of weak paper Precious Metal demand, such as the two identical suppression’s of the past two days…
…whilst continuing to support “last to go” markets like the “Dow Jones Propaganda Average” with prototypical “dead ringer” algorithms, as we saw yet again yesterday, for the fourth time in the past six trading days…
Only time will tell, of course. However, “Economic Mother Nature” has yet to be defeated in 5,000 years of human history; and unquestionably will be victorious this time as well – likely, more dramatically than ever. Let alone, in the historically suppressed Precious Metal markets – which, with each passing day, become more and more detached from physical supply/demand fundamentals, as history’s largest, most destructive fiat Ponzi scheme rockets through its epic, terminal phase.