Peril in the Casino — You're Fired!

[Ed. Note: To see exactly what this former Reagan insider has to say about Trump and specifically what he believes must be done, David Stockman is sending out a copy of his book Trumped! A Nation on the Brink of Ruin… And How to Bring It Back out to any American willing to listen. To learn how to get your free copy CLICK HERE.]

Trump’s dramatic opening gambits will kick Imperial City’s usual horse trading and arm-twisting into overdrive.

For example, in order to get Attorney General-designate Jeff Sessions quickly confirmed and prevent the Department of Justice (DOJ) from degenerating into Saturday Night Massacre 2.0, the Senate GOP leadership will demand stiff concessions on further implementation of the interim travel ban and on the nature of the White House’s permanent plan for “extreme vetting” of travelers and refugees from the world’s war zones.

Accordingly, the “Muslim Ban” will eventually be diluted down to a gussied-up version of the status quo.

That is, some bells and whistles will be added to the rigorous vetting process for refugees that already exist, and enhanced investigatory precautions will be authorized with respect to visa-bearing travelers from a broadened list of terrorist impacted countries.

But these impending concessions to the Senate GOP establishment, in turn, will give rise to a severe time, energy and political capital-draining struggle with Congress over Trump’s trumped-up campaign to secure the nation’s borders from the terrorist hordes.

But the whole effort will amount to a pointless diversion from the rest of Trump’s agenda — especially the fiscal stimulus program of tax cuts and infrastructure spending and the repeal and replace strategy for Obamacare.

Trump’s stay on Pennsylvania Avenue may be abbreviated because he took on the wrong issue. Flyover America is hurting economically and Trump could have done two powerful things to alleviate its condition.

He could have cleaned house on Day One at the Fed by demanding the resignations of Yellen and vice chair Stanley Fischer and replacing them with sound money advocates who would end the Fed’s destructive war on savers (ZIRP) and jobs and wages (2% inflation).

And he could have focused on lifting the $1.2 trillion payroll tax albatross from workers and businesses by some version of the House GOP scheme to tax consumption and imports, not America’s high-priced uncompetitive labor.

But he didn’t do either.

Now, it is absolutely certain that the lesson of Muslim-gate among the GOP rank and file on Capitol Hill will be to substantially prolong and dilute the Obamacare repeal and replace campaign. “Do it right” will replace “lickety-split” as the GOP modus operandi, and that means enactment of a significant Trump Stimulus is definitely off the calendar for 2017.

A chastened Congressional GOP majority will end up having either replaced Obamacare with something that will be hard to distinguish from the original item (Obamacare-lite) or will have punted entirely.

That’s also the matter of a ticking time bomb known as a reactivated debt ceiling. As of yesterday, the public debt outstanding was $19.9 trillion and the Treasury’s cash balance was $380 billion.

When the debt ceiling “holiday” ends on March 15, I estimate the Treasury’s borrowing limit will be frozen at $20.1 trillion and that it will have a “cash burn” kitty of 4-6 months on hand.

More importantly, rather than a sweeping stimulative tax bill on the President’s desk in August, as occurred under Ronald Reagan, there will be a thundering debt ceiling crisis, no budget resolution and no enacted appropriations bills as the fiscal year draws to an end on September 30.

In short, by at this particular moment in history, paralysis is good.

Consequently, and unavoidably, the entire fall and winter will be absorbed in a debt ceiling negotiations and extensions, short-term continuing resolutions, actual and threatened government shutdowns and, above all, political conflict and dysfunction like the Imperial City has never before experienced.

My own bet is that the casino will catch-on to this breakdown scenario right soon. And when the air comes swooshing out of today’s hideous stock market bubble, the Donald’s final mission will be undertaken.

That is, he is certain to attack the Fed, and rightly so. He was absolutely correct when he said during the campaign that the Fed’s lunatic money pumping and 100 months of ZIRP had created a “big, fat ugly bubble.”

And it’s gotten even bigger since his unlikely election. Ever since the wee hours of election night it’s been a case of “what are they thinking?”

The only possible reason for the 15% rally off the midnight lows was that a giant Trump Stimulus would hyper-charge the flagging U.S. economy and send profits — which have been shrinking for the last eight quarters — soaring into orbit.

After all, even the Keynesian money pumpers at the Fed have run out of excuses to keep interest rates pinned to the zero bound, and the business cycle at 93 months of age is already exceedingly long in the tooth.

So when the S&P 500 reached the grand peak of 26X reported earning last week, the remaining denizens of the Wall Street casino had bet all their chips on Orange.

The Wall Street stimulus hounds are still lost in a mindless paint-by-numbers exercise in hockey stick extenders. That is, the notion that a corporate rate cut from 35% to 20% or 15% means a $15-20 per share bump to S&P earnings, and therefore provides justification for today’s lunatic stock prices.

That is, they had recklessly bet that the most disruptive, erratic, impulsive, glandular, and unpredictable citizen ever to move into the White House would quickly mobilize Washington’s fragmented, dysfunctional and paralyzed machinery of governance and hammer through a giant infrastructure and tax cut “stimulus” that would be the modern equivalent of FDR’s fabled “100 Days”.

As the Donald himself might say, STUPID!

The irony is that in his very first week in office he has set in motion a train of events that insures the bubble will implode spectacularly during his initial year in office.

Needless to say, the incorrigible dip-buyers will come back into the market time after time as the risk asset implosion gathers momentum.

But this time there will be no stick save by the Fed or Washington. This time the casino will be a scene of unmitigated peril as Donald Trump brings down the curtain on the era of Bubble Finance — the 30-year long inflation of debt and finance that fostered the Trump Empire and ended in the Donald’s unlikely accession to the Oval Office.

And now the daily drumbeat will grow louder and more incessantly demoralizing. Namely, if you still own stock you are every bit as exposed to Trumpian caprice as were the seven-nation visa holders who got off their planes at American airports Friday night.

Get out of the casino now while you can.

Regards,

David Stockman
for The Daily Reckoning