One of the greatest pastimes I enjoyed as a youth was
reading books, and until adolescence, when I began to focus on history, my
favorite reading genre was horror. Mary Shelley's "Frankenstein,"
Bram Stoker's "Dracula,� and "The Mummy" by Anne Rice were all
books that resided in the bookshelf in our family room.
However, the author whose work always entranced me by the
second or third chapter was Edgar Allen Poe, whose sense of the macabre was
beyond any of the aforementioned authors. Tales and poems such as "The
Fall of the House of Usher" and "The Raven" and "The
Murders in the Rue Morgue" all went on to become magnificently campy
Vincent Price venues, but the one book that used to captivate my morbid sense
of obsession was "The Pit and the Pendulum," with particular
fascination with Poe's description of the slowly descending path of the
razor-sharp pendulum as it gradually approaches the captive's throat.
In my opinion, the world of global finance is similar in
scope, danger and outcome to that of the poor religious dissenter who found
himself at the bottom of that convex pit in Poe's masterpiece. The horrific
levels of debt egregiously piled upon itself over and over and over again,
whether to bail out the banking systems or to ensure an incumbent's
reelection or to reverse flawed fiscal policies, has the fragility of the
world lying prone in the pit with the pendulum of insolvency slowly
descending.
The irony is that the eventual meeting of pendulum to
throat�aka sovereign insolvency�can only be postponed by hyperinflation,
otherwise known as currency debasement. With all of the post-election
analysis spinning a "Dow 20,000!" narrative, infrastructure build-out
designed to juice the number of jobs and increase the Labor Participation
Rate can only be achieved by more credit creation, which is the
counterfeiting of the national currency.
To lift the poor captive out of the pit and away from the
pendulum will require negotiation, legislation and accommodation on all
fronts, notwithstanding the fact that Mr. Trump has to get INAUGURATED first.
And while we all await a wondrous and magical elixir to fix American
unemployment, structural deficit and social division, the likes of which have
not been seen since the mid-1800s, the pendulum slowly and deliberately
descends. All of the financial commentators at CNBC and CNN are working at a
feverish pace pitching the Trump KoolAid so they can make their benchmarks by
year-end, and if it wasn't so tragic, it would be laughable.
Bond prices have been annihilated since the election, as
the USD has screamed to par and beyond; mortgage rates in Canada and the U.S.
have spiked; and the 10-year (U.S.) Treasury just traded north of 2.23%. The
cost of borrowing is critical to the housing and construction industries.
With the amount of overlevered homes in big cities around the planet (and
particularly Canada), rising bond prices are NOT necessarily good for the
banking business if the existing mortgage portfolio suddenly becomes
default-ridden.
Speaking of banks, they have been charging since the
election, and the excuse is that "they will capture the spread,"
meaning they will have a wider profit margin on their loan books. Well,
excuse me for pointing this out, but even if we get three rate hikes in 2017
and the mortgage rate goes from 2% to 3%, that is still MINISCULE as compared
to even ten years ago. What the banks have been doing is borrowing from the
Fed at 0% to reinvest at 0.25%, so they effectively capture 0.25% of free
money ("counterfeit fiat") paid back to them from the pockets of
the American taxpayer.
Interestingly, what this latest,
interventionalist-induced stock market "Trump Rally" has done is
move the Shiller P/E to the highest level since the dot.com bust in 2000, and
to the same level it was at in the 2008 financial crisis. Stocks, my friends,
no matter what your advisor tells you, no matter whether "infrastructure-related"
or "trade war friendly" or "bankster-spread captures,"
are NOT cheap. There is only one reason P/Es are reaching escape velocity,
and that would be because people are jettisoning cash (and they are). Every
time there is a print above 25 in the Shiller P/E, Edgar Allen rolls over in
his grave and the pendulum descends a little further.
So, finally we see copper being "massaged" up
to the big downtrend line, and cries from the rooftop of
"Infrastructure!" resonate throughout the trading desks in London,
New York, and of course, in Beijing, where massive speculative buying juiced
the December futures to the long-term downtrend line, where it did a complete
$.28/lb. reversal, putting in a massive engulfing candle, and has not seen
daylight above $2.55/lb. since.
What really hit me was the COT for copper issued earlier
in the week, where we just saw the single largest net increase over a
reporting period EVER, at 31,000 contracts. The aggregate short position in
copper is now 38,000, the largest since 2005. To put this into perspective,
each copper contract is 25,000 lbs, so the increase into the spike to
$2.78/lb was 775,000,000 lbs, or 351,000 metric tonnes.
From my reporting of the COT for gold, you know the track
record for the banks that hedge production. Whoever increased those hedges certainly
did not expect HIGHER prices, and this all occurred BEFORE the U.S. election.
We shall see whether Dr. Copper earns his moniker. . .
As we move into the second full week of trading with the
financial blogosphere crammed with Trump-nostications of all sorts and ilks,
I simply await the moment in time that market participants wake up to the
reality that the world is drowning in debt, sitting at the bottom of the pit
staring up into the mortality of the descending pendulum. And by the way, in
the book, the victim actually escapes from the pit only to be confronted with
molten-hot walls converging inwardly, black-robed demons staring outwardly,
faces afire. . .
