A Sucker's Rally Like No Other
This week has seen a political earthquake followed by a financial eruption. But don't be fooled. The Dow's 500 point surge amounts to a Sucker's Rally like no other; it was just a case of raging robo-machines determined to tag an all-time high on the charts
After all, what happened Tuesday night is that for all practical purposes the US became ungovernable. The ruling establishment pulled out every stop to smash Trump's insurgent candidacy, and, instead, it ended up getting unceremoniously and shockingly fired.
Indeed, yesterday's ceremonial make nice session between Donald Trump and President Obama said everything you need to know. To wit, the two had never even shaken hands before, meaning that the Imperial City is literally being sacked by political outsiders, outlaws and anti-establishment brigands.
In the longer run, of course, that is a very good thing because the addiction of the Wall Street/Washington establishment to war, debt, bubble finance and beltway racketeering would have brought American democracy and capitalism to its knees. This year's political revolt in Flyover America, in fact, purged the nation's two leading crime families---the Clintons and the Bush's----from public life once and for all, and that's an especially good thing.
Yet in the here and now, the great national nightmare has just begun. That's because the smirking incumbent who greeted the Donald in the Oval Office neglected to tell him about the giant stink bomb he and the odious former House Speaker, John Boehner, deposited on the front door of the US Treasury Department back in October 2015.
In a word, the March expiration of the nation's $19.6 trillion debt ceiling will stop Donald Trump's ballyhooed First 100 Days cold in its tracks. The purported giant fiscal "stimulus" and Trump economic revival plan that the headline-sniffing algos got giddy on during the last two days will be DOA.
At some point soon, it will become evident that the parabolic line in the chart below is what will really dominate, fracture and paralyze the Imperial City during the Trump presidency. The irony, of course, is that this $20 trillion fiscal albatross has been almost entirely accumulated since 1981 when Ronald Reagan was forced to request an increase in the debt ceiling to $1 trillion for the first time.
So the ruling establishment that Trump unhorsed at the ballot box is gone, but not done. The dead-hand of 30 years of feckless fiscal profligacy will smoother his best intentions and efforts in a veritable fiscal death trap.
The latter was built brick-by-brick over the decades since 1981 by the beltway's bipartisan establishment. It amounted to a conspiracy of convenience under which the debt ceiling was raised episodically as needed in order to accommodate the cost of multi-trillion wars, giant un-financed tax cuts, Obamacare and entitlement accretion and the beltway pork barrel as usual. In all, it was the product of a moveable feast of political accommodation among the Imperial City's factions and K-Street racketeers.
But having smashed the bipartisan consensus, Trump will soon find himself in a political no-man's land. He will find it impossible to accumulate a Congressional majority to raise the debt ceiling by the trillions that will be needed to accommodate the soaring built in deficit from pre-Trump policy and the coming recession.
In fact, the de facto public debt today is $35 trillion. That is, there is another $10 trillion built-in from current entitlement, defense, domestic spending and tax policies, according to the CBO, and that's assuming a Rosy Scenario set of economic assumptions and that the US will experience 206 straight months through 2026 without a recession
But that's rank idiocy. The average business cycle expansion since 1950 has been 61 months and the longest was 117 months in the 1990's------an unsustainable aberration that ended in the dotcom crash and ultimately the Great Recession of 2008-2009. Realistic economic assumptions, therefore, including a good dose of pie-in-the-sky growth acceleration from anything Trump might manage to enact, adds another $5 trillion of red ink to the projections.
In short, the job of the next one-term President, and the one after that and the one after that, will be to raise the public debt to $35 trillion or 140% of realistically projected GDP over the next decade. And that task will shatter whatever capacity for fiscal governance that may be salvaged from the coming political chaos in the Imperial City.
Yet we did not even mention Donald Trump's ballyhooed stimulus program because that would come on top; it would take the national debt to $40 trillion or even more. That is to say, the "growth" part of the equation is already built into the current unachievable Rosy Scenario embedded in the CBO's current 10-year projections.
Trump's fiscal nightmare would therefore require trillions more to fund his promises to slash taxes by $4 trillion, rebuild defense, pump more funding into Veterans programs that already cost $150 billion per year, build the Wall and enforce the borders and launch the biggest infrastructure program in American history.
Needless to say, its not going to happen. This week's raging robo-traders will soon see that the letter of the day is not "S" for stimulus, but a giant "G" for gridlock of an insuperable variety.
Or perhaps an even bigger triple letter called FCA or Fiscal Catastrophe Ahead.
In the days ahead we will be reviewing the facts and figures behind the dire outlook described above. Meanwhile, here is the summary of what lies ahead as I explained on Fox Business last evening.