The mules of Wall Street were back at it again yesterday, buying the dips after the overnight whoosh in the futures market.
Apparently, it will take an actual 2×4 between the eyes to break a habit that has been working for 96 months now since the March 2009 post-crisis bottom.
I think it is plain as day, however, that we are in a new ball game that the “stimulus” blinded mules don’t see coming at all. They have been juiced for eight years running by the Keynesian apparatchiks at the Fed who have run the printing presses full-tilt or rescued the market with a new round of QE or an extension of ZIRP whenever the indices began to wobble.
But now even the money printers have made it clear that they are done for this cycle, anyway; and that they will be belatedly but consistently raising interest rates for what ought to be a truly scary reason.
That is, the denizens of the Eccles Building have finally realized that they have not outlawed the business cycle after all, and need to raise rates toward 2-3% so that they have headroom to “cut” next time the economy slides into the ditch.
In effect, the Fed is saying to Wall Street: “price-in” a recession because we are!
After all, our monetary central planners are not reluctantly allowing interest rates to lift off the zero bound because they have become converts to the cause of honest price discovery — nor are they fixing to liberate money rates, debt yields and the prices of stocks and other financial assets to clear on the free market.
Instead, they are merely storing up monetary ammo for the next downturn.
But the Wall Street mules keep buying the dips anyway because they are under the preposterous delusion that one source of “stimulus” is just as good as the next. And since the gamblers have now decreed that the “stimulus” baton be handed off to fiscal policy, it only remains for Congress and the White House to shape up and get the job done with all deliberate speed.
But they won’t. Not in a million years. The massive Trump tax cut and infrastructure stimulus is DOA because Uncle Sam is broke and the US economy has slithered into rickety old age.
In that context, it’s not remotely plausible that the Fed will flood the canyons of Wall Street with cash by buying another $80 billion of bonds with digital credits conjured from thin air.
Fiscal policy is inherently an exercise in herding cats, and an especially impossible one when the cupboards are bare.
The Trump-GOP coalition currently in nominal control of the Imperial City will not be able to generate any fiscal stimulus at all. And ignore the “grow your way out” foolishness that a greying band of supply siders and a desperate throng of Wall Street punters would like to believe.
There is no realistic possibility of passing a tax bill or even an infrastructure spending boondoggle.
Hammering out a budget resolution, passing it in each house and reconciling the differences in conference would take months under the best of circumstances. But given the parlous state of Uncle Sam’s fiscal condition and the partisan acrimony that already suffuses Washington in the era of Trump, passage of a budget resolution by summer would be a miracle in itself.
Indeed, even the thought of surmounting this next daunting legislative obstacle course puts to rest this week’s particular Wall Street fantasy.
Namely, that after being burned by the Freedom Caucus on Obamacare Lite, the Trump White House will now “pivot” to the middle and form a coalition with the Democrats to make a deal on corporate tax cuts and infrastructure spending.
Yes, and if dogs could whistle the world would be a chorus. That is to say, there is no conceivable fiscal policy menu that could be agreed upon by Speaker Ryan, Nancy Pelosi, Chuck Schumer and the Donald, and then be shoe-horned into a 10-year budget resolution.
Yet without a budget resolution and reconciliation instructions there is no fiscal stimulus and no grand bipartisan compromise on building airports and slashing corporate tax rates.
So what lies directly ahead, therefore, is another bumbling attempt by the White House and Congressional Republicans to hammer out an FY 2018 budget resolution and what amounts to a 10-year fiscal plan. And it is there where the whole fantasy of the Trump Stimulus comes a cropper.
The necessary budget resolution must start with the Congressional Budget Office’s (CBO) projection of current law, which generated $10 trillion in new deficits over the next decade and would take the public debt to $30 trillion in 2027 — before even a single dime of the $5 trillion Trump Stimulus ($4 trillion of tax cuts and $1 trillion of infrastructure) is laid on the budgetary table.
So there flat-out must be big-time deficit offsets or there will not be close to 218 votes for what would otherwise be upwards of $15 trillion in added public debt over the coming decade.
Nor can the above baseline picture be significantly ameliorated by assuming a robust Reaganesque economic forecast in lieu of CBO’s. The latter long ago embraced Rosy Scenario and therefore has already built-in an implausibly strong economy for the next ten years.
This includes the credulous assumption that there will not be an economic recession for 206 months — or double the longest expansion in history — and that the nominal GDP will grow by nearly 4% over the next decade or nearly one-third faster than the 2.9% rate of the last decade.
But 5% nominal GDP growth — or 67% faster than that last decade — is not remotely plausible. Even then, the current law deficit would exceed $8 trillion over FY 2018-2027.
And there are not 218 GOP votes for what would be a $12-13 trillion add to the national debt with the Trump Stimulus program over the next decade.
To be sure, this is why the GOP Congressional leadership stoutly insists on a deficit-neutral tax cut. They are keenly aware of the debt monster they have been kicking down the road — even if the headline reading robo-traders of Wall Street are not.
The baseline Federal spending level for 2018 is $4.09 trillion, according to CBO’s January update. But about $300 billion of that is net interest, and even the Donald will end up urging that be paid; and another $2.6 trillion consists of entitlements and mandatory spending — almost the entirety of which the Donald has take off the table.
So that puts nearly 70% of the budget out of reach. But what’s actually worse is that the remaining $1.2 trillion of so-called discretionary or appropriated spending mostly amounts to Trump priorities!
That’s right, the current CBO baseline includes $600 billion is for defense and another $250 billion for Trump’s nondefense priorities including veterans, infrastructure, law enforcement, border control and homeland security.
Moreover, the Donald’s partial and preliminary fiscal plan, or the so-called “skinny budget” actually increased this $850 baseline by about $60 billion per year. Therefore, they would need to cut the tiny $350 billion corner of the budget that is left by 17% just to break-even.
That is, before generating even a single dime to pay for the $5 trillion Trump Stimulus.
In short, the whole enterprise amounts to budgetary madness and demonstrates the monumental magnitude of the Debt Trap that has enveloped the Imperial City.
And the “buy the dip” crowd will soon be getting that 2×4 between the eyes. – David Stockman
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