By David Stockman as originally published on Contra Corner and reprinted here with permission
As we said on Fox Business yesterday, Donald Trump is walking himself right into a miserable trap. He and his putative “advisors” are apparently so blind to the severe headwinds facing the financial markets and the deep structural impairments plaguing the US economy that they have eagerly embraced a veritable fairy tale.
Namely, that after one year of pugnacious and impulsive tweeting and little else, the Donald has brought the American economy roaring back to life. And we do mean little else because the Trump Administration’s ballyhooed reduction in Federal regulations is almost entirely hot air (see below) and the tax bill was not signed until nearly the last day of the year.
So the fact that there has been no acceleration of growth whatsoever during the Donald’s first year should not be surprising. After all, there were no policy changes that could have thrust the faltering US economy forward—even as it labored under the same old, same old baggage which has held it back in the years since the Great Recession.
We are referring, of course, to the $67 trillion of public and private debt that now stands at 350% of national income, and which has not been “de-leveraged” by an iota during nearly nine years of so-called recovery.
As it happened, real GDP in Q4 2017 posted exactly 2.499% above where it stood in Q4 2016. Since the average real GDP growth rate since Q1 2014 has clocked-in at 2.518%, you needed a magnifying glass to spot the difference.
Even then, the truth is that real growth actually decelerated slightly during the Donald’s first year on the job—notwithstanding his noisy SOTU boasting to the contrary.
The real truth of the matter, however, is that both of these numbers are pretty punk— given the brutal recession that proceeded the chart below and the massive monetary stimulus that was injected thereafter.
And that’s to say nothing of the fact that the business cycle clock is running out. If after 104 months of so-called recovery, the US economy has not broken out into “escape velocity” there is something fundamentally wrong that Trumpian bloviation is not going to cure.
To be sure, the Trumpian argument is that this is all prospective. With $2,000 tax cuts in their pockets and $1,000 employer bonuses (in purportedly 3 million cases to date) to boot, average American households are going to, well, shop until they drop—-even as corporate business with $350 billion in extra cash flow during 2018-2020 alone will be investing up a storm in both capital and wages, too.
We beg to differ. Households have been shopping like crazy for the last 35 years—causing debt to soar by 10X while wage and salary incomes barely expanded by 5X. Consequently, household leverage has nearly doubled, rising from 100% of wages and salary income in 1981 to 184% today.
More importantly, after a brief post crisis respite, household debts have resumed their upward climb to a current total of $15.4 trillion. That is to say, the motor force of the American economy for five decades has been the enthusiasm for consumption spending among the 80 million-strong Baby Boom generation.
Now, however, they are nine years closer to retirement, stranded at the tail end of what will soon be the longest recovery cycle in history, but have made virtually no progress in deleveraging their incomes.
That’s a huge problem going forward even if you do credit the Keynesian shibboleth that having Uncle Sam borrow money to put more cash in consumer pockets stimulates sustainable supply side growth.
It doesn’t, of course. And most especially it doesn’t if the resulting Federal debt is not monetized by the central bank, and if the personal tax cut is written in disappearing ink.
In fact, the six major provisions of the individual tax cuts—-lower rates, higher standard deduction, elimination of personal exemptions, doubling of the child tax credit, the partial elimination of SALT and other itemized deductions and revised tax indexing—really don’t amount to a hill of beans in the scheme of things.
Aside from the ATM repeal and the 20% deduction for pass-through businesses, which will benefit mainly the top 4% of filers, the net tax cut on the individual side amounts to just $80 billion in FY 2019, $66 billion in FY 2023 and a then become a $32 billion increase by 2027.
Folks, these are rounding errors. The net cut amounts to just 0.9% of wage and salary income in FY 2019 and then quickly fades out of existence by the middle of the decade.
More importantly, even a 250 basis point increase in average consumer interest rates over that period—-and at least that much is surely coming owing to the bond market shock dead ahead—would amount to $400 billion per year in added debt service. And unlike the initial tax cut at barely one-fifth the size, the debt service burden is not written in disappearing ink.
In fact, the debt service share of baby boomer incomes is going to grow enormously as debt-burdened retirees fall back on shrunken incomes once they leave the full-time labor force—even if they do supplement their social security checks by drawing the minimum wage as Wal-Mart greeters.
Moreover, that’s to say nothing of the real world benefit cuts and tax increases rumbling down the road ahead. The alternative is $40 trillion of public debt by the end of the 2020s—-and the interest rate impact of that would likely be far more debilitating.
In short, the relative crumbs from the individual side of the Trump/GOP tax cut ain’t gone Make America Great Again. They are actually a cruel hoax that will only accelerate the thundering debt crisis ahead.
By the same token, the big corporate tax cut will put money in pockets, all right. That is, upwards of 85% the aforementioned $350 billion from the rate cut over 2018-2020 will end up financing stock buybacks and increased dividends, thereby ending up in the pockets of the 1% and the 10% of households, which own 40% and 85% of corporate equities, respectively.
That’s because under the Fed’s long-running regime of Bubble Finance, the C-suites of corporate America have become addicted to financial engineering. The money printers have made debt financing ultra-cheap and stock options ultra-rewarding by pumping trillions into financial asset markets in the guise of “stimulating” the main street economy.
But with households at Peak Debt and corporations spending $15 trillion on financial engineering (stock buybacks, M&A deals and other leveraged recaps) over the last decade the only thing that has been “stimulated” is the greatest financial bubble in recorded history.
Well, and also the greatest capacity ever known for PR con jobs, to boot. The Donald fell for that one last night when he praised Exxon-Mobil for its recent announcement that it will spend $50 billionon US investments during the next 5 years.
Then again, during the five years ending in 2016, the company invested $53 billion in US based exploration and CapEx, and $170 billion worldwide. It also spent $103 billion on dividends and stock buybacks during 2012-2016.
Needless to say, we are not much impressed by the Exxon’s announced plan to do exactly what it has been doing on the investment front, and are also quite sure it has not failed to drill wells and build refineries owing to excessive costs of capital.
Thanks to the systematic financial repression of the Fed and other central banks, the latter has never been cheaper. And that is exactly the reason that that more than half of Exxon’s $200 billion of operating cash flow during that same five year period went into buybacks and dividends, and why an even larger share is likely to find that use in the years ahead.
Nor is Exxon’s PR staff anything unusual. The prize goes to AT&T for announcing $270 million worthy of bonuses on the eve of its anti-trust review with respect to the AOL merger. What it forgot to put in the press release, of course, is that these bonuses amounted to just 1.4% of its $20 billion payroll, and would likely have been paid, anyway—along with the $80 billion in dividends and stock buybacks it also funded during the last five years.
Beyond these corporate PR campaigns, the Donald has nothing much to write home about except soaring fiscal deficits, a household eruption of credit card borrowing and an epochal Fed pivot to balance sheet shrinkage. Yet the latter will mean a massive unprecedented drainage of cash from the Wall Street casino over the next several years—even as the nation’s public and private borrowing binge goes full retard.
We are of the firm belief, of course, that the law of supply and demand has not yet been repealed by the Fed, the US Congress or anyone else. Accordingly, bond yields are set to march higher, higher and still higher with no relief visible as far as the eye can see—even in the event of the inevitable next recession.
The spoiler alert on the latter, in fact, is that Uncle Sam’s borrowing requirement will absorb every dollar of real money savings available because annual red ink will soar past $2 trillion per year during the next macroeconomic downturn. That’s what happens when you massively increase the structural deficit in the 10th year of a business expansion, which is precisely the mathematical outcome of the policies the Donald touted last night
And that fundamental dynamic will hit the stock market bubble, the aging business cycle expansion and the debt-burdened household and business sectors right in the solar plexus.
So if you believe in economic laws and the dynamics of rational cause-and-effect, there is no way that Trump has fixed anything that matters.
Donald Trump inherited a giant financial bubble, and it has only become 30% more egregiously inflated since election day. Likewise, he inherited a failing economic recovery which was already long in the tooth, and now its even more disabled.
That much he can’t be blamed for: It’s the bipartisan product of decades of ruinous policies in the Imperial City.
But what he is wholly culpable for is embracing lock stock and barrel an incindiary status quo that will soon blow-up in his face.