Boy, I’ll tell you what folks: the verdict is in on Trump’s exceptionally ill-advised decision to pile fiscal stimulus atop an overheating economy amid a deficit-funded tax cut. And the verdict is “guilty” – of being stupid.
Of course being “smart” isn’t something anyone but Trump has ever accused Trump of being, so this comes as no surprise. We’ve written voluminously about what’s going on here and how it fits in with the necessity of keeping his nebulous promise to his base.
Consider, for instance, these excerpts from a piece we penned for Dealbreaker on Tuesday:
The problem here is glaringly obvious. Steady-as-she-goes growth is not only not acceptable under MAGA, it’s explicitly forbidden. There is nothing “great again” about growth that’s less spectacular than it’s been in the past. Growth that’s lower than yesteryear is the exact opposite of “great again” if you equate “great” with growth.
So come hell or high deficits, Trump is going to restore that bygone era of American “greatness” and in his Simple Jack world, that’s as “easy” as tax cuts and fiscal stimulus. And you know, if we weren’t where we are in terms of the cycle and we weren’t nearing what certainly looks like a peak in economic momentum, that might be fine. But we are where we are and so what he’s doing is going to juice things further in the short-run at the expense of the medium- and long-term.
I’m sure this is abundantly clear to most people, but in case it’s not, allow us to reiterate: piling fiscal stimulus on top of an economy that’s already running hot and then throwing in an unfunded tax cut for “good” measure is likely to end in tears.
This dynamic is one of the main drivers of the bond selloff that’s sent 10Y yields to four-year highs. If there were already worries about the possibility that a sudden uptick in inflation pressures could force central banks to hike aggressively for fear of falling too far behind, what Trump is doing is exacerbating those fears.
Long story short, this has the potential to short-circuit the “Goldilocks” environment by transforming “slow and steady” into “rapid and batshit” – or maybe “rabid badger” is more fun if you like crappy alliteration.
Next up will be higher deficits and rate hikes and tighter financial conditions and that’s obviously dangerous for markets, especially in light of stretched valuations and how accustomed everyone has become to well-anchored inflation and steady but not blockbuster growth.
This is creating a nightmare scenario for Jerome Powell as it could end up forcing the Fed to accelerate the time table on rate hikes and thereby effectively cut the market out of the loop when it comes to helping co-author the policy script. The withdrawal of that communication transparency with markets would be destabilizing enough on its own, but now you have to consider the very real possibility that the rookie Fed chair makes a mistake and accidentally hikes us straight into a recession. Whatever the case, the gist of the whole thing – and this is the point that everyone including and especially us have been making for about six months – is that Trump is going to bring this cycle to a quicker end than it would have otherwise met.
Well on Thursday, as a Valentine’s Day gift, Albert Edwards is out reiterating all of this in a fantastic new note which is even more pressing now that the CPI print surprised to the upside this morning in the U.S.
“Whatever the arguments are in favour of tax reform in the US (and there are many), this is probably the singularly most irresponsible macro-stimulus seen in US history; to say it is ill-timed and ill-judged would be a massive understatement,” Edwards writes, adding that “the outcome of this front-end loaded stimulus package is patently obvious – it will rapidly accelerate the end of the economic cycle.”
Amen. And as Albert alludes to there, that is painfully obvious to everyone with the possible exception of Trump.
Again, this is weighing heavily on markets as each and every sign on inflation takes on outsized importance thanks in large part to the fiscal backdrop. This is one of the primary reasons why everyone is keying so much on numbers like the AHE print that sent markets into a tailspin earlier this month and Wednesday’s CPI beat.
“Any further whiff of inflation, either at the wage or consumer price level, will certainly send ructions throughout the markets already very nervous of the fiscal stimulus that is imminently coming down the tracks,” Edwards continues, before predicting that “because of the starting point of US fiscal policy, I have a very high confidence that in the next, not so distant, US recession, the US general government deficit will soar way beyond the 13% the OECD say was the peak for 2009, a ruinous fiscal deficit in excess of 15% of GDP will be Trump’s legacy.”
Boom. And oh the many ironies inherent in that eventuality.
To be clear, Albert isn’t making a political statement here – he’s just calling it as he sees it and this is one scenario where a whole hell of a lot of people agree with him.
Here is the epic bottom line from Edwards:
Either way, wage inflation will begin to rise more quickly, driving market expectations of longterm Fed Funds higher. Just like the peak of the last two economic cycles, it will be the implosion of financial markets that causes the next recession. And President Trumps grotesquely ill-timed fiscal stimulus will be identified in retrospect as a if not the trigger.