The Donald’s signature line at his New Hampshire rally last week will surely go down as one of the stupidest, most arrogant boasts ever to roll off the lips of a clueless politician. Speaking to an arena full of supporters, he averred that the US economy will tank if he is not reelected:
…..”See, the bottom line is, I know you like me and this room is a lovefest and I know that, but you have no choice but to vote for me, because your 401(k)s … down the tubes. Everything is going to be down the tubes…So whether you love me or hate me, you’ve got to vote for me,”
Actually, they don’t. And they likely won’t.
America is heading into tumultuous financial storm that will last for years to come. And since Trump foolishly boasted about what were actually warning indicators of the disaster ahead (i.e. the hideous stock and bond market bubbles), he now owns the coming crisis lock, stock and barrel.
Indeed, when the Great Trump Recession (GTR) reaches its full fury, the Donald’s infamy will last for decades to come and will make that of Herbert Hoover look like a mere warm-up exercise.
Of course, it takes a gargantuan, unhinged ego to boast they way the Donald carries on about America’s $20 trillion economy and $30 trillion stock market as if they were entirely his own doings. But even then, s0meone with an ounce of comprehension about what is actually going on might have at least hedged his bets in light of the risks.
Several crucial realities needs be recognized, therefore, in order to fully appreciate the Donald’s monumental folly:
- The presidential term calendar has virtually nothing to do with the economic cycle and the flow of financial conditions;
- There is a huge difference between the stock versus flow dynamics of the economy at the end of the business cycle; and
- The underlying foundation of the US economy was so rotten with debt, speculation, trade distortions and Welfare State/Warfare State excesses that the Donald’s naïve hope for MAGA never had a chance in the first place—-even if he had had a coherent policy agenda, which he did not.
As we argued in Part 1, the overwhelming source of the GDP’s level and rate of change is the inherent growth impulses of private capitalism, not the machinations of the state’s fiscal, regulatory and central banking branches.
In fact, the only reason that presidents, political parties and Fed heads alike get away with claiming credit for whatever economic growth can be had at any particular point in time is that they have been pretending to be masters of the Economy for so long that it has become a form of ritual incantation. Like the ancients who prayed for rain—sometimes it did, but their importunings were not the actual agency of its delivery.
That conflation of ritual incantation with the product of natural forces is the essence of present day macroeconomics. Because Economic Man generally strives to better his/her/their circumstances, even a badly impaired capitalism like America’s present rendition tends to plow forward like the legendary Ohio State offense of Woody Hayes: That is, three yards and a cloud of dust–even when the state is raining down obstacles on the field of play.
Moreover, these state originated obstacles—especially those emanating from the central banking branch—tend shape the pace and syncopations of capitalism’s advance, thereby fostering what used to be called the old-fashioned business cycle.
In earlier times, central bank and fiscally originated perturbations in capitalism’s relentless growth march operated through credit conditions on the main street economy. Central bankers tended to over-expand high-powered money during and after an economic downturn—whether arising from natural causes like draughts and floods or their own prior policy mistakes—and thereby caused the banking system to generate excess credit growth and so-called “overheating” in credit-sensitive sectors such as consumer durables, housing and business capital investment.
In turn, that overheating triggered central bank curtailment of bank reserve growth. This financial braking action caused credit extensions to dry-up, which in turn led to contractions in credit sensitive output and liquidation of excess inventories, payrolls and fixed assets—an adjustment cycle otherwise known as recession.
After 30 years of Keynesian central banking, however, the old main street credit cycles have become obsolete and inoperative. That’s because the household sector for all practical purposes is at Peak Debt with $15.6 trillion of outstandings and can’t borrow more (relative to income) regardless of the price of carry (interest rate).
Likewise, the business sector, also entombed under $15.6 trillion of debt, has been lured into heavy financial engineering. That is, a preference to channel the cheap borrowings enabled by central banks into self-dealing distributions of capital and cash flows to options-holding management and Wall Street speculators in the form of stock buybacks, enhanced dividends and empire building M&A deals.
Accordingly, the old main street credit market channel of monetary policy transmission is no longer operative. The Fed’s massive injections of fiat liquidity (via FOMC operations and QE) never leave the canyons of Wall Street, where they simply inflate the price of financial assets to ever higher levels—-until the natural greed of speculators becomes so unhinged and manic that it generates a blow-off top and subsequent 50-80% crash in the price of risk assets.
It’s obvious enough that this monetary metastasis has occurred twice already this century, and that its fundamental characteristics is that risk asset prices become massively and egregiously uncoupled from the income and cash streams that are purportedly capitalizing.
That’s clearly the case today because the post-crisis financial reflation by the Fed and other central banks was the most radical attempt yet to spur the main street Economy through the wealth effects channel of Wall Street. But as is evident in the chart below, the $3.8 trillion of bond-buying (QE) by the Fed and the $15 trillion of global central bank QE since the pre-crisis peak in 2007, has simple caused the greatest uncoupling of profits and risk asset prices ever.
Since the US economy stabilized in early 2012, pre-tax corporate profits have actually fallen by about 9%, while the S&P 500 has risen by another 114%.
Needless to say, the cause of the next recession is the yawning gap between the brown line (S&P 500) and the purple line (pre-tax profits).
Ironically, back in the fall of 2016 when the S&P 500 was up only 65% from its 2012 starting point, the Donald called the stock market “one, big fat ugly bubble”.
He was right the first time, of course, but has now embraced a stock market that is 40% higher, even as underlying profits—before C-suite financial engineering, the unpaid for corporate rate cut and ex-items manipulation—have continued to sink.
Meanwhile, there has been no acceleration of the US economy on the Donald’s watch—just the relentless advance of cyclical old age from month #91 of the expansion the day he took the oath to the record 121 month now extant.
As we showed in Part 1, for example, real final sales expanded at a middling 2.87% annualized rate during Obama’s last 10 quarters in the White House, which figure has declined to 2.74% per annum during the Donald’s 10-quarter tenure to date—–an average that will surely come down through year-end given the global trade and slowing growth headwinds now evident.
In fact, this is exactly where the Donald’s delusional view of the greatest economy ever comes in. When you are at month # 121 of a cycle expansion—no matter how weak it has been and now matter how many policy roadblocks the agencies of the state have thrown in the way of capitalism’s advance—-any measure of the stock of economic activity looks good because in this case it reflects 10-years of accumulation, not the current quarterly rate of flow.
That’s why the Donald’s constant invocation of the BLS’ dubious unemployment rates are so misleading. Even ignoring the fact that there are now 101 million adults without jobs and that the labor hours based unemployment rate is still 40%, the fact is, the unemployment rate is just the inverse of the stock of employed workers.
As is evident in the chart below, that was marching steadily higher (brown line) when the Donald took the oath, and has continued to do so since then. Yet the relevant thing in terms of what lies around the bend is the trend of the current flow, not the level of the cumulative stock.
We hinted at that in Part 1 when noting that the rate of new jobs has slowed sharply from the 229,000 monthly rate during Obama’s last 31 months versus the 193,000 rate during the Donald’s 31 monthly reports to date.
The chart below simply converts this into a year-over-year percentage rate of job growth (purple line), and the implication could not be more evident. The growth rate has fallen irregularly from north of 2.0% in 2015 to 1.5% in the most recent month.
This deceleration has nothing to do with the merits of the two presidents or their generally counterproductive policies. To the contrary, it was just American capitalism pushing forward from the line of scrimmage against ever more severe headwinds of debt and speculation fostered by the Fed and other central banks.
Not surprisingly, the Donald may be getting an inkling that trouble may be brewing around the corner. Therefore, he is fixing to employ his patented blame-shifting attack on the Fed, as he made clear in another over-the-top tweetstorm yesterday.
Needless to say, these attacks will only hasten the impending Wall Street crash, which is already baked into the cake and which will become the proximate cause of the Great Trump Recession.
Our Economy is very strong, despite the horrendous lack of vision by Jay Powell and the Fed, but the Democrats are trying to “will” the Economy to be bad for purposes of the 2020 Election. Very Selfish! Our dollar is so strong that it is sadly hurting other parts of the world…….The Fed Rate, over a fairly short period of time, should be reduced by at least 100 basis points, with perhaps some quantitative easing as well. If that happened, our Economy would be even better, and the World Economy would be greatly and quickly enhanced-good for everyone!
What the Donald is advocating is nuts, of course, as we will address in Part 3.
But when it comes to the essential task of thoroughly and unequivocally discrediting the Fed and its destructive regime of Keynesian central banking, the Donald could not be more on target.
After all, he is the Great Disrupter.