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December 13, 2016

Pop Goes the Trump Bubble

By David Stockman, Editor, Bubble Finance Trader

Wall Street is under the profound delusion that the “stimulus” baton will be smoothly and complaisantly handed off to the new Trump/GOP fiscal team early next year, thereby giving the U.S. economy and stock market a shot of adrenaline just in the nick of time. The Wall Street punters are even palpitating about a literal “100 days” of frenetic stimulus action in the vein of FDR in the spring of 1933.
Nothing could be further from the truth. The boys, girls, and robo machines in the casino have virtually zero capacity to read the tea leaves regarding what’s really impending in the Imperial City. That’s because they haven’t gotten beyond hopium and slogans about the intentions and aspirations of Trumponomics.
The truth is Washington’s legislative sausage factory under current circumstances will soon prove to be a killing field of roadblocks, crises, bitter partisanship, stillborn coalitions, and endless delays, stalemate, and policy paralysis. Rather than the 12 cowardly members of the FOMC delivering to Wall Street exactly what it wants, when it wants it, the Imperial City will descend into political chaos as roughly 550 politicians mud wrestle over the impossibilities of the nation’s fiscal condition and the wild unaffordability of what passes for the Trump program.
So as it becomes abundantly clear that Wall Street is not going to get anything remotely close to the Trump fiscal stimulus it is expecting, and in the expedited time frame it presumes, there will ensue the mother of all hissy fits. The Trump bubble will disappear as fast as it inflated—-and it will be all downside from there.
Yet, a stock market meltdown at this late stage of the business expansion (i.e., month #96 by June) would almost surely trigger frenetic inventory liquidations, job cuts, and restructuring actions in the C-suites of corporate America, because that is what they have been conditioned to do when stock prices crater.
That’s essentially what happened, in fact, in the fall of 2008. At the time, and subsequently, of course, the meltdown was characterized as an utterly aberrational 100-year flood-type event, but it wasn’t.
It was simply par for the course in the kind of inflated, unbalanced, one-way trading markets that result from the Fed’s egregious money pumping and financial asset price manipulations. So when the casino doesn’t get its Trumponomics sugar high and the market averages plunge, the C-suites will swing into liquidation mode, causing a recessionary hit to budgetary red ink that is already surging toward the $1 trillion mark.
This scenario is virtually guaranteed because the whole stimulus hype depends on a big tax cut early in 2017. But that will never, ever happen. Indeed, there is not a snowball’s chance in the hot place that a bitterly divided Washington can pass a comprehensive tax reform/stimulus bill before well into 2018, if ever.
Moreover, given the massive baseline deficits already built into the federal budget, any tax bill that might eventually emerge is far more likely to resemble the 1986 Reagan reform than the 1981 Reagan tax cut.
The latter may have been an inadvertent Keynesian stimulus because it almost instantly drove the Federal deficit from 2% of GDP to 6%, but the 1986 act was completely revenue and deficit neutral. It traded off hundreds of billions of loopholes, shelters, and tax incentives for lower rates, and in so doing brought about considerable long-term gains in tax efficiency and equity.
But there wasn’t an iota of short-term Keynesian stimulus to it.
We think the prohibitive budget math of the present era will push Trumponomics toward the 1986 modality whether the new administration intends it or not. In the long run, of  course, lower rates and a broader base would be good for the U.S. economy and Flyover America.
But it would be absolutely no cigar for the impetuous infants of Wall Street who want nothing more than their stimulus bottle, and want it now.
Moreover, in the interim, there is certain to be divisive battles over a plethora of other distractions. These include first and foremost an extension of the expiring $20 trillion debt ceiling (March 15).
There is virtually no chance that will happen smoothly or avoid a protracted scene of brinksmanship, government shutdowns, and Trumpian bargaining threats and faints like the Imperial City has never seen before. This will not be a replay of August 2011, when so-called responsible establishment politicians—-led by President Obama and Speaker Boehner—-conspired behind the scenes to sell out their own troops.
“The Donald” just plain doesn’t function that way, yet he has no clue about the immense difficulty of lining up 218 votes for a multitrillion-dollar debt ceiling increase and what will be a sure ticket to a primary challenge for any House Republican who walks the plank.
Likewise, the planned GOP attempt during the first weeks of the new Congress to repeal Obamacare with a two-year fuse is certain to create an intense partisan firestorm that will drastically curtail any inclination among the wounded Democratic minorities on either side of the Hill to engage in bipartisan compromise on the Trump stimulus.
Even what should be a congressional porker’s delight—-the Trump infrastructure bill—-will get bogged down. That’s because the devil is in the details, and the potpourri of mechanics that are likely to be structured into any infrastructure program—-such as business tax credits, user fees, federal loan guarantees and much more—-will not be prone to easy resolution.
Here again, the slogan-level consensus is belied by legislative viewpoints that are miles apart. The Democrats see it as an excuse for bigger deficits, and substantial elements within the GOP will insist that the program be deficit neutral via user fees and substantial amounts of non-Federal funding.
At the end of the day, all the excitement in the stock market about Trumponomics was based on a blatant contradiction in terms regarding the meaning of November 8. To wit, it was presumed that GOP control of the White House and both houses of Congress was a good thing because it implied an end to the legislative deadlock of the Obama era.
On the other hand, the expected action—-a huge fiscal stimulus jolt from a massive tax cut and surge in spending for defense, infrastructure, and a border wall—-begged the question of the GOP’s deep antipathy to deficits and the $20 trillion national debt racked up during that same Obama era.
In short, the GOP would fracture and splinter under the pressure of what would amount to a $6 trillion–$8 trillion deficit expansion under the Wall Street version of Trumponomics. But given that there is already $10 trillion–$15 trillion of new debt built in under current policy, the Wall Street version of the Trump stimulus is never going to happen in any known universe.
If even attempted, a Trump/Republican government would end up as little more than a smoldering political trainwreck by the end of “The Donald’s” only term.
Indeed, with each passing appointment to Team Trump, the fiscal bloodbath we anticipate becomes more and more likely. For instance, the recent announcement that General “Mad Dog” Mattis will become the secretary of defense—-on top of the super hawkish national security team already announced—-means only one thing. Namely, that the pitched battles over multitrillion-dollar add-ons to the already massively bloated $800 billion national security budget will be still another source of fiscal policy conflagration.
We have been there before in the early 1980s—-under far more sanguine conditions.

Courtesy of David Stockman, Editor, Bubble Finance Trader, via Bonner & Partners 
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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