Fire And Fury Time

One of Bloomberg’s Wall Street cheerleaders let loose of a deep secret yesterday. When the S&P 500 reversed sharply from its intraday all-time high in response to the Donald’s “fire and fury” demarche, Mark Cudmore explained why the index has probably topped out for the summer:

Not to overplay the value of seasonal patterns, but there’s an intuitive reason why August is by far the worst month for the S&P 500 over the last 20 years — people don’t like fighting the market from the Hamptons.

Say it isn’t so!

The titans of Wall Street are supposed to be doing god’s work pushing the stock averages ever higher, not sipping on a “Hot Skinny Wench” of silver tequila, agave, jalapeno and citrus at their favorite Hamptons watering hole.

Then again, Mr. Cudmore may have been on to something. The casino has become so addicted to central bank liquidity and buying the dip that the only thing which can interrupt the relentless climb of stock prices, apparently, is beach time in the second half of August.

To be clear, we aren’t arguing for a Korea Panic. We just don’t buy CNN’s breathless alarmism about the Donald’s statement or think that nuclear armageddon on the Korean peninsula is about to break-out any time soon. In fact, we are downright suspicious about the “leak” which apparently triggered yesterday’s contretemps.

It seems that just in the nick of time to keep the North Korean nuke “threat” at full boil, the intelligence community (IC) favored the CIA’s house organ, the Washington Post, with a strategically leaked answer to the obvious point. Kim Jong-un’s recent ICBM test doesn’t put Los Angeles in imminent danger. That’s because North Korea hasn’t yet miniaturized its clunky 1950’s vintage A-bombs so that they fit in the cone of a missile.

Well, contrary to common knowledge among experts, suddenly it has.

North Korea has successfully produced a miniaturized nuclear warhead that can fit inside its missiles, crossing a key threshold on the path to becoming a full-fledged nuclear power. The IC [intelligence community] assesses North Korea has produced nuclear weapons for ballistic missile delivery, to include delivery by ICBM-class missiles,” the assessment states, in an excerpt read to The Washington Post. Two U.S. officials familiar with the assessment verified its broad conclusions.

Forgive the cynicism and history reference, but we are tempted to ask: Does Colin Powell concur with the “assessment” of these two anonymous officials?

Are those cited even real spooks, or just some fat guys in the basement of a house in Langley, VA?

When the former national security advisor went off half-cocked based on faulty “intelligence” about Saddam’s WMDs, of course, he did it at the UN in full dress diplomatic language.

By contrast, the Donald was alone with his Twitter account at his Bedminster golf club, where he channeled Mr. Kim’s very own vernacular:

“North Korea best not make any more threats to the United States. They will be met with the fire and the fury like the world has never seen. He has been very threatening beyond a normal state, and as I said they will be met with the fire and fury and frankly power, the likes of which this world has never seen before. Thank you.”

The point is not merely that the Donald’s bluster was inopportune, unscripted, exceedingly dangerous and shockingly blunt. That part of it was made completely “inoperative” within hours by his Secretary of State, who took the Trumpian kettle off the stove and doused it in an ice tub:

Separately, in an attempt at de-escalation, Sec. State Rex Tillerson also stepped in to calm the mood, when speaking to reporters this morning, he says he doesn’t believe there is “any imminent threat” from North Korea, and says that they should “have no concerns about this particular rhetoric of the last few days.” As the AP adds, he downplayed speculation that the US was moving closer to a military option.

In an amusing twist, Tillerson tried to justify Trump’s bombastic threats, saying that “Trump is sending a message to North Korea in language Kim Jong Un would understand.”

What the markets are ignoring is not that Trump’s impulsive tweets might start a catastrophic war, but that the reality is that he has already been sunk by the Deep State and its allies.

There is no way that a Secretary of State would gut the words of a President in the manner of Tillerson’s repost from Guam if the President were speaking for the machinery of state.

Wall Street is not remotely prepared for the upcoming breakdown of fiscal governance and the Washington kabuki dance which will lead up to the Donald’s last ride on the White House helicopter. The straws are already in the wind and by next Groundhog Day the broken furniture will be piled high in front of the Oval Office door.

It can be taken as virtually a given that there will be no FY 2018 budget resolution and that after repeated showdowns and shutdowns during October-November. There will be nothing more than short-term patches on the debt ceiling and continuing resolutions for next year’s $1.2 trillion worth of appropriations bills.

That means legislative food fights over these short-term patches and expedients will become the permanent business of Washington, not the rebirth of pro-growth policies fantasized by Wall Street.

The myth that the so-called GOP majority is capable of passing a sweeping tax cut stimulus, or even any tax bill at all, will be dead by February. As a procedural matter, there is no possibility of a tax bill from the US Senate.

If a GOP consensus on a 10-year budget plan – including the cuts that would be needed to pay for making America’s war machine “great again” along with border construction, veterans and even a modest tax cut – actually existed, an FY 2018 budget resolution would have passed weeks ago.

The talking heads on TV have suggested that there is no reason to sweat a delay on the tax bill. The general sentiment amongst pundits is that the market is a discounting mechanism and that an eventual cut in the corporate tax rate will permanently raise cash flows and stock prices. Yes, and if dogs could whistle, the world would be a chorus!

At the end of the day, all roads lead back to the Gipper and the giant one-of-a-kind tax cut accident of July 1981.  When fully effective in the late 1980s, the Reagan tax cut knocked down Federal revenues by a staggering $1.1 trillion per year in today’s sized economy. But it was all paid for by massive increases in the public debt. That increase was made possible because of a clean national balance sheet in 1980, and by subsequent “tax grabs” in which upwards of 40% of the revenue loss from the tax bidding war of 1981 was recouped.

Those recoupment bills of 1982-1984 and the subsequent bipartisan revenue neutral tax reform of 1986 hang heavily, if unnoticed, over the present tax bill debate. Namely, they removed most of the politically achievable loopholes from the tax code. What is left is a hardcore of “incentives” and “fairness” measures that have weathered 30 years of political challenge.

In short, there are no “payfors” that amount to a hill of beans on the revenue neutral tax bill front. There is no conceivable increase in the national debt ceiling that could enable a Reagan-style deficit-financed tax cut. That fact is that even the Congressional Budget Office (CBO) says that the built-in “current policy” deficit over the next decade will total upwards of $12 trillion before a single dime of new tax cut is added on top.

The chart below, in fact, explains where Trump is starting relative to the Gipper, and why he will end there, as well.

The only thing that can save Trump’s presidency is a successful GOP tax bill. But the clock is running out and the legislative and policy barriers are nearly insurmountable.

The Donald’s single greatest applause line during the campaign, outside of denouncing bad trade deals, was his full throated attack on ObamaCare. But when faced with an emergency continuing resolution (CR) containing an ObamaCare bailout, Trump will be in no position to challenge the Congress.

He will be forced to sign, amid swirling intra-GOP recriminations, a bill that will mark the end of his improbable sojourn in the Oval Office.

With no tax bill and a humiliating defeat on ObamaCare, the GOP will face the prospect of harsh elections in November 2018. That will be especially true because by then Robert Mueller’s squad of legal assassins will have made mincemeat of the Trump family and anyone who supported him in the early days (such as Paul Manafort, General Flynn and Jeff Sessions).

At that point, the GOP’s only hope will be to offer up a scapegoat. As with Nixon, it will do so once the polls show that removal of the Donald has become a condition of survival.

Then the Fire and Fury will really begin.

Regards,
David Stockman
for The Daily Reckoning