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“Markets shrugged off the Brexit vote in a couple of days. They
shrugged off Donald Trump’s election in a single day. They shrugged off the
Italian referendum result in a couple of hours. Heck, in this mood they would
shrug off an alien invasion of planet Earth.”
— Albert Edwards, Société Générale
At this time of year, only the hardest, coldest heart can fail to show
good will to fellow man. That said, the silvery orb of Donald Trump’s
post-election honeymoon may set sooner than expected as Ms. Yellin prepares
to hoist her interest rate petard this week. Even a modest up-bump in the Fed
Funds Rate is liable to prang the orgy of corporate share buybacks fueling
the eight-year bull market that many formerly sane observers think is a
permanent feature of the human condition. The bond market bull also seemed to
last a lifetime and that’s gone south now, too.
Poor Trump’s mammoth ego has led him by the snout into a deadfall trap.
The Trumpublican voters and cheerleaders expect another Morning in
America miracle. Sorry, been there, done that, that was then, this is
now. Conditions were quite different in 1981. For one thing, a brutal decade
after the 1970 all-time US oil production peak, the Alaska North Slope fields
came into full flow, along with the North Sea and Siberian fields.
The Alaska bonanza did not boost US production back to 1970 levels, but it
did take the leverage away from OPEC, and it stuffed the elevated
price-per-barrel back down to levels that an industrial economy could
tolerate. The rest of the Reagan miracle was accomplished with debt. The case
was similar for Mrs. Thatcher over in the UK. She was not an economic
magician, just the beneficiary of a brief oil boom that made Britain a net
energy exporter for two decades, providing an illusion of permanent
prosperity and cover for the financialization of the economy. Now, with the
North Sea oil playing out, all that’s left is the banking necromancy in
Threadneedle Street.
Reagan also came in at the height of Fed Chair Paul Volker’s war on
inflation, when the interest rate on the ten-year US treasury bond topped at
15 percent in September of 1981. Imagine paying 18 percent interest rates on
your mortgage! How was that a good thing? Well, it wasn’t, not at all, it was
a very bad thing for a while — but for Lucky Ronnie Reagan it meant interest
rates had nowhere to go but down. And because bond prices correlate opposite
to rates, the value of bonds had nowhere to go but up, which they did for
30-odd years until right now. And all that time, the world bond market
couldn’t get enough of them — also till now, when big holders like China and
Saudi Arabia are puking them back out.
When Reagan stepped in the national debt was only (only!) about
half a trillion dollars. It will be over $20 trillion when Trump hangs his
golden logo on the White House portico. Oh, by the way, consider that a
trillion dollars is a thousand billion dollars and a billion dollars is a
thousand million dollars. Just so you know. Reagan had room for plenty of
government finance monkey business. Trump has no room. Bush One, Clinton,
Bush Two and Obama dug the deadfall debt trap for poor Donald and the
election shoved him right into it. He thinks he’s on an upper floor of his
enchanted tower; he’s actually down in a pit.
Trump thinks he’s going to rebuild highways and bridges for another
century of Happy Motoring — to make America like it was in 1962 forever.
Fuggeddabowdit. The bond market is poised for collapse as I write, and
Trump’s money people (that is, the Goldman Sachs gang he has assembled) are
talking about issuing fifty and 100 year “Build America” bonds. Their
nostrils must be rimed with the frost of Medellin.
They’re certainly not going to accomplish this trick by raising taxes. On
who? Corporations? Ha! The One Percent? Double-Ha! Everyone else? Pitchforks
and torches!
American oil companies can no longer make a buck doing their thing.
Exxon-Mobil’s U.S. production business lost $477 million in the third
quarter, the seventh straight quarter in the red. Why? Because it costs a lot
more to get the stuff out of the ground than it did ten years ago, and that
high cost is bankrupting oil companies and industrial economies. That is the
stealth action of Peak Oil that so many people pretend is not happening. It
will ultimately destroy the banking system.
The disappointment issuing from this dire set of circumstances is apt to
be epic as Trump flounders and the furious tweets of futility waft out of the
hole he’s trapped in. Christmas will be over, and with it the hopes of a
retail reprieve. Gasoline may remain cheap, but the little people
won’t be able to buy the cars to run it in. Or buy much of anything else. Not
even tattoos. We’ll soon discover the temperamental difference between Donald
J. Trump and Franklin Delano Roosevelt.
* * *
Note: The blog is sponsored this month by David McAlvany’s firm, ICA. Find
out why investors have used them since 1972 to acquire physical gold and
silver, and request free information, by visiting: http://mcalvanyica.com/investorkit/
