David Stockman, the former budget director for Ronald Reagan, is highly enraged by President’s Trump’s first address to Congress. He had high expectations, and, like many others in the financial community, thought that they would receive details about the President’s tax and regulation reform package, his budget proposal, infrastructure and military expansion, and how it would be funded. Unfortunately, in David’s opinion, all we heard was “a potpourri of platitudes, pandering, and profligacy.”
I had to run to my dictionary for that last word. In case you are curious, profligacy, from a governmental perspective, means “reckless extravagance or wastefulness in the use of resources.” I could not have said it better. Lately, we have become accustomed to the “smell of mendacity in the room”, another famous phrase from the stage that relates to the profligate use of falsehoods to promote one’s intentions, but Mr. Stockman is worried about much, much more than a few carefully crafted lies here and there.
Stockman has been a harsh and outspoken critic of our existing central banking conundrum of QE, near-zero interest rates, and failed monetary policy, but his dander is now up since the Trump crowd has professed for the past year or more that they are following Ronald Reagan’s playbook for resurrecting a high-growth economy. His contention is that the conditions in the eighties were totally different and that Trump and his advisors know nothing about what they speak.
What was Mr. Stockman’s opinion of what he heard from Trump in his address?
After his headline quote above, he admitted that, “Trump promised more Big Government practically everywhere — the Pentagon, infrastructure, border control, education, veterans, crime, child care, medical tax credits — with nary a word on how to pay for it. Actually, our wanna-be swamp drainer did not even acknowledge that the fetid waters of the Imperial City were lapping up to his waist as he spoke. That is, there was not a single mention of runaway spending or even a vague directional nod to programs that would have to be cut back or eliminated.”
David does not mince words. His “Contra Corner” website is know as “the only place where mainstream delusions and cant about the Warfare State, the Bailout State, Bubble Finance and Beltway Banditry are ripped, refuted and rebuked.” He is someone that understands the numbers and how politicians love to twist facts into fiction to suit their pet causes.
Stockman was particularly perturbed by Trump’s claim that the deficit had declined $12 billion during his first thirty-five days in office. If Trump and his speechwriter had bothered to look at cash balances in the Treasury Department, they would have noticed that they had declined by $187 billion over his 35 days in office, constituting a fact-checked error of nearly $200 billion in the wrong direction, and that is not a rounding error by any means, even for Trump. It seems that Trump and his crew are burning through over $5 billion a day in cash and are totally unaware of it.
More chilling words from Mr. Stockman: “I think that Trump is so deep in fiscal ‘la la land’ that if he can’t even find the wrong envelope with the right answer. He is saying crazy things… He’s not paying attention. He’s not learning anything and he’s making ridiculous statements… There is going to be a debt-ceiling crisis like never before this summer. That is what people don’t realize. They’ve burned up all the cash that Obama left on the balance sheet… I am seeing reality – the machines [on Wall Street] are simply trading on sound bites, tweets and hourly sentiments. This is meaningless and the biggest suckers rally in history. There is going to be a huge surprise very soon.”
Are other analysts seeing disturbing storm clouds developing on the horizon?
One disturbing development that is causing concern among analysts is portrayed in the above chart. Bond yields have suddenly and unexplainably gone south and diverged from stock prices that have shot through the roof, the “Trump Re-flation Rally”, as it has been called. What is the problem here? Bond yields decline when bonds become more expensive in the market, a sign of increasing demand for fixed-income securities. The message is that huge amounts of capital are shifting away from stocks into safer havens in expectation of a major downdraft. Are bonds signaling a decline in stock values?
In other words, will the “greater fools” suddenly be caught holding the equities bag? Any sign of a major downdraft will send capital scurrying across the globe, a good thing for those that trade in foreign exchange. Volatility will appear like a shockwave, creating an abundance of trading opportunities to beat the band, but when? No one has a good answer to that question, but the advice is to be prepared before, not after, the tsunami reaches your shoreline. The trends will be fast and furious, so take heed.
A few analysts, however, say not so fast. From their perspective, the above diagram does not mean that investors or institutions are rotating out of stocks into bonds. Their take on the data goes back to the last half of 2016. China liquidated over $234 billion in U.S. Treasuries “in order to raise cash in coping with massive capital flows out of the country and a liquidity squeeze impacting its domestic Chinese banks.” The selling has discontinued, and these analysts see the bond markets recovering from that onslaught as the reason for the recent divergence from stock prices.
They also note that fundamental forces have changed: “A notable characteristic about stocks throughout the post-crisis period has been the fact that more than $1 trillion in retail and institutional investor money has flowed out of the domestic stock market on net, yet the benchmark indices have more than tripled from their lows over the same time period since early 2009. What then has been supporting higher stock prices throughout this entire period? The steady flow of central bank liquidity into the global financial system along with corporate buyback activity that has more than outpaced the rate of net outflows out of stocks over this time period are two primary contributors.”
Disposable Personable Income Per Capita is another fundamental concern.
If the U.S. economy is to drag the rest of the world back to prosperity, it will not happen if its service-driven economy cannot create an abundance of disposable income for consumers. “Real DPI” per capita, the figures that have been adjusted for inflation, have been in decline since the millennium crossover. The average for the period has barely been 1% on an annual basis, yet, since 2015, it has been falling again. Something has to be done to reverse this fundamental fact or pro-growth promises will be meaningless pledges that increasingly inflame nationalist pride across the developed world.
The concern here becomes more pronounced if and when oil prices begin to surge again. According to one economist: “Without nominal growth in income there is no meaningful rise in nominal spending estimates, suggesting that these price changes leave consumers to cut back on discretionary spending as to the proportion of non-discretionary items like gasoline that take up that much more of an unchanging budget (either work or fixed income).”
What about Trump’s promise to be the greatest job creator of all time?
The “Washington Post” recent published an article that debunked on a lie-by-lie basis the “potpourri of platitudes, pandering, and profligacy” that were Trump’s fake facts. Their total came to 13 falsehoods, a modern version of Disraeli’s, “Lies, damn lies, and statistics.” Here is one analysis of Trump’s claim that he will put 94 million back to work:
Trump and his speechwriters have been grabbing this figure from a BLS report and have decidedly given it their own special “spin”. To his adoring supporters, it sounded as if he were going to provide a job for 94 million downtrodden and out-of-work citizens that for some reason have been left behind by the recent economic recovery. The only problem is that this figure represents “retirees, students, the disabled, and home workers,” along with a few unfortunate souls, about 6 million, who do want a job, but cannot find one.
What is the concern? The Fed and economists believe that our current level of unemployment, now below 5%, is indicative of a workforce that is fully employed. The system is running at or near full capacity, and any attempt to increase job supply will be met with a lack of inventory or fail to have the required skill sets available to move forward into a higher gear of growth. In the past, immigration has helped to deal with this critical issue, but border and visa controls will only exacerbate the problem.
The realm of “alternative facts” is where we have always been taught that only Pinnochio-type individuals can reside in peace, but for policy to be based on deliberate misinterpretations of basic data is worrisome: “For Trump to claim that these Americans are “not part of our economy” or that they are a “silent nation of jobless Americans” is a completely deceptive misrepresentation of the facts and is an insult to the millions of retirees, full-time students and at-home caregivers who are just as much a part of the US economy as those Americans who are working.”
Trump’s speech may have thrilled his supporters, but many economists that understand the situation, like David Stockman for one, are not impressed. Per David: “Unfortunately for Donald Trump, not only did the public vote the establishment out but that left on his door step the inheritance of thirty years of debt build up and of a fiscal policy that has been really reckless in the extreme. Even though people would like to think that he is the second coming of Ronald Reagan and that we’re going to have “Morning in America”, I don’t think it looks that promising. He is inheriting a mess that pales into insignificance for what we had to deal with in 1981.”
Stockman also foresees a major shutdown in the government, if the powers that be do not come to grips with the reality of the situation – burning through over $5 billion a day in cash will eventually have dire consequences. While placating his base and making promises that he cannot keep may cause his approval ratings to rise in the short term, the recklessness of this administration and the lack of a feasible, realistic plan that Wall Street can buy into will be problematic in the long run.
When will a crash landing occur? Stay tuned!