Donald Trump's Big Fat Ugly Bubble Is Ready to Pop
[Urgent Note: The nation’s future hangs in the balance as Trump approaches his first 100 days. That’s why I’m on a mission to send my new book TRUMPED! A Nation on the Brink of Ruin… and How to Bring It Back to every American who responds, absolutely free. Click here for more details.]
There have been numerous eruptions of irrational exuberance since Alan Greenspan launched the modern era of monetary central planning in response to the 25% crash of the stock market in October 1987.
But for my money, the Trump-O-Mania since the wee hours of election night is the greatest folly of all.
That’s because Donald Trump is destined to be history’s Great Disruptor — not the 11th hour savior of the mutant financial system and giant bubbles that have been generated by our Wall Street/Washington rulers over the past three decades.
The latter is a product of massive financial asset inflation fueled by the Fed’s cheap debt, falsified financial prices and the tidal wave of Wall Street speculation they have induced.
But the Fed (and its convoy of central bank imitators around the world) is finally out of dry powder. If it resumes quantitative easing (QE) preemptively to thwart the now incipient recession, it will generate a panicked sell-off — stoking fears in the casino that it “knows” something the gamblers don’t.
Likewise, if it even hints at reversing course toward sub-zero interest rates, it will bring the aroused populations of Flyover America, which elected Donald Trump, descending upon the Imperial City with torches and pitchforks.
The savers and retirees of America have already been so severely savaged by 96 months of zero interest rates (ZIRP) that they are not about to take it any more or have their savings flat-out confiscated by the elitist fools who inhabit Eccles Building.
In short, after having impaled itself on the zero bound and hideously bloating its balance sheet — from $900 billion to $4.4 trillion since the Lehman event in September 2008 — the Fed has no capacity whatsoever to forestall the oncoming recession or reflate the economy and financial markets once it begins.
The market should currently be in panicked retreat because it is inconceivable that the Donald will appoint to the Fed even more aggressive money-pumpers than the paralyzed posse currently in command, led by clueless Janet Yellen.
But in one of the most ludicrous stick saves ever confected in the bowels of Wall Street, the day traders and robo-machines have been induced to slam the “buy” button on a theory so preposterous that even CNBC’s chief circus barker, Jim Cramer, could not have invented it.
That is, the notion that Donald Trump is the second coming of Ronald Reagan and that a huge deficit-fueled “stimulus” is just around the corner is just plain nuts.
There will be no such thing.
Trump-O-Mania is the greatest eruption of irrational exuberance yet because it occurred in the wake of an election outcome that is a repudiation of the very regime of Bubble Finance from which it took flight.
Donald Trump’s shocking election victory was in fact due to the fact that the nation’s economic prospects and future growth potential has dimmed dramatically since 1987.
Since the Greenspan era of Bubble Finance began in October 1987, the value of corporate equities owned by households has soared from $1.8 trillion to nearly$15 trillion, representing a 7.5%annual gain.
That means that equity values have increased 65% faster than the 4.5% annual gain in GDP during the same 29-year period.
There’s a word for that sort of imbalance: unsustainable. Does anyone with a pair of brain cells to rub together think it can last much longer?
But the greatest headwind Trump faces is his wildly inconsistent and irresponsible fiscal program. It will not result in a smooth hand-off the “stimulus” baton from the Fed to fiscal policy and the vaunted “Trump Stimulus” as Wall Street so blithely expects.
Instead, it will actually produce a political conflagration and Fiscal Bloodbath like the Imperial City has never before witnessed. Trump’s already facing Congressional opposition to his spending plans and Inauguration Day is still two weeks off.
Consequently, the current extreme stock market euphoria will give way to its opposite as the casino gamblers come to recognize that the jig is up. With the debt ceiling holiday bomb ticking toward its March 15 ignition date, the message from the beltway will become increasingly cacophonous and disconcerting.
Namely, it will become obvious there is no known combination of Congressional votes — Republican, Democratic or mixed — that the Trump White House will be able to marshal on behalf of deep corporate and personal tax cuts, a major defense spending increase, a huge infrastructure program, more money for veterans, border control, the Mexican Wall, domestic law enforcement and homeland security — while given a free pass to the giant retirement entitlement programs, social security and medicare at $1.6 trillion per year.
That’s because the current public debt of nearly $20 trillion will grow by $1 trillion per year to upwards of $25 trillion during the Great Disrupter’s first term, and that’s before one dime of the ballyhooed Trump Stimulus is added to the equation. To add $500 billion per year or more of additional red ink to the equation is beyond the pale.
That’s true even for the spenders who inhabit the Imperial City — especially after they realize the bond vigilantes who keep careful watch of federal spending were not extinguished back in 1994, but only went into a long hibernation that is now over as the era of central bank money printing has reached its end game.
So unless Donald Trump can accomplish the seeming impossible — get Congress to raise the public debt ceiling on March 15 to $25 trillion or higher in one fell swoop, his entire and largely misbegotten fiscal stimulus program will be stillborn.
It will simply disappear amidst endless budget battles and debt ceiling showdowns/government shutdowns which will make the budgetary fireworks of August 2011 look like a Sunday School picnic in comparison.
And that gets us back to the whole idea that the Reagan Boom of 1983-1984 can be replicated from a cold start at the very end of a long-in-the-tooth business cycle. The fact is, the original event was not a supply side miracle in the slightest.
It was a “borrow and spend” eruption that depended upon a massive expansion of the Federal deficit from 2% of GDP under the outgoing Carter budget to an unprecedented 5-6% of GDP during the Gipper’s first term.
Even then, the celebrated Morning in America boom during 1983-1984 was not remotely what it is cracked-up to be by Trump’s aging posse of supply siders like Stephen Moore and Larry Kudlow.
During the six quarters of 1983 through Q2 1984, fully 27% of the real GDP growth of 7.8% was accounted for by a huge but one-time restocking of business inventories— after they had been flushed out of the system by Volcker’s 20% interest rate medicine during the 1980-1982 battle against inflation.
That is not remotely relevant today because inventories stand at cyclical highs, and are virtually certain to be liquidated — not restocked — in the period ahead. Moreover, the investment and business side of the U.S. economy actually contributed nothing on net to the so-called Reagan boom (as is discussed in my book Trumped!).
Even the housing surge happened during this interval because mortgage rates were plummeting after the crushing double-digit rates generated by the Volcker anti-inflation campaign.
Self-evidently, after 8 years of ZIRP, mortgage rates will now be rising, not falling, as far as the eye can see. In fact, the Fed’s 100 basis point interest rate increase since last summer’s lows have already put a crimp into the tepid rate of residential housing activity as represented by new contract signings and new permits.
Finally, when the Reagan boom began, the stock market’s price/earnings (PE) ratio had been hammered down into single digits by the prior decade of soaring inflation. So it had nowhere to go except up — the very opposite of today’s 25X multiple, which flirts with PE ratios normally associated with those preceding violent market crashes.
In short, the greatest Sucker’s Rally in history is now nearly over. And the Wall Street casino is about to feel the full brunt of the Great Disrupter — and one of an altogether different kind than that invented by the Wall Street brokers on election night.
As a contra-Cramer might say, there will never be better time to sell, sell, sell!