Stockman Slams "The Awesome Recovery" Narrative

Tyler Durden's picture

Authored by David Stockman via Contra Corner blog,

One of the great philosophers of recent times was surely Sgt. Easterhaus of "Hill Street Blues". As he assigned his men to their daily rounds in the crime infested streets of the Big Apple he always ended the precinct's morning call with his signature admonition:

"Let's be carful out there."

That wisdom has been long lost on both ends of the Acela Corridor. In the face of blatant dangers and even existential threats, their denizens whistle past the graveyard with alacrity. So doing, they turn a blind eye on virtually all that contradicts the awesome recovery narrative, the indispensable nation conceit and the Washington can Make America Great Again (MAGA) delusion, among countless other fantasies.

For example, the GOP should be literally petrified by an horrid fiscal scenario for the coming decade that entails Social Security going bust, another $12 trillion of current policy deficits and a prospective $33 trillion public debt by 2027. And even that presupposes a macro-economic miracle in the interim: Namely, a 207 month stretch from 2009 to 2027 without a recession-----a feat which is twice the longest expansion in recorded history

Image result for images of three monkeys of see no evil, hear no evil, speak no evil

Instead, they have passed a FY 2018 budget resolution which implicitly embraces all of the above fiscal mayhem, and then adds upwards of $2 trillion (so far and counting interest) of incremental deficits to fund an ill-designed tax cut that is inherently an economic dud and political time bomb.

As to the former, the GOP is lost in ritual incantation and foggy Reagan-era nostalgia. Unlike the giant Reagan tax cut of 1981, the pending bills do not cut marginal tax rates measurably---or even the individual income tax burden in any meaningful sense.

In fact, if you set aside the so-called pass-thru rate for unincorporated businesses (see below), the entire 10-year tax cut on the individual side amounts to just $480 billion. In the scheme of things, that's a tiny number; it represents only 2.2% of the $22 trillion CBO baseline for individual income tax collections over the next decade; and it also is equal to just 0.2% of the projected nominal GDP over the period.

By way of comparison, the Reagan tax cut amounted to 6.2% of GDP when fully effective; and the net cut for individuals taxpayers alone averaged 2.7% of GDP over a decade. In today's economy, that would amount to a tax cut of $6.5 trillion during 2018-2027 or 14X more than the $450 billion net figure estimated by the Joint Committee on Taxation.

To be sure, the abused citizens of America are more than entitled to even this tiny tax cut and much more. That is, if their elected representatives were willing to cut spending by an equal amount or even raise alternative, more benign sources of revenue (i.e. a VAT on consumers vs. the current levy on producer and worker incomes). But unless a rapidly aging society wishes to bury itself in unsupportable public debt, it simply can't afford deficit-financed tax cuts for either the principle or the politics of the thing.

Moreover, to pretend that the tax concoction fashioned by Congressman Brady---- with a pack of Gucci Gulch jackals nipping at his heels--- will actually generate enough growth and jobs to largely pay for itself is to make a mockery of Sgt. Easterhaus' admonition. Rather than an exercise in fiscal carefulness, it is the height of recklessness to assume that much enhanced domestic growth, employment and Treasury receipts will result from any part of the $2.8 trillion cut for the rich and corporations that is at the heart of the GOP tax bill.

Actually, it's the heart and then some. With recent modifications (including dropping of the $150 billion corporate excise tax intended to prevent companies from hiding domestic profits via over-invoicing of imports from their own affiliates), the net revenue loss of the Brady bill is calculated at about $1.7 trillion.

That means, of course, that fully 165% of the net tax cut goes to: (1) 5,500 dead rich people's heirs per year ($172 billion for estate tax repeal); (2) 4.3 million very wealthy loophole users ($700 billion for the minimum tax repeal); and (3) the top 1% and 10% of households who own 60% and 85% of business equities, respectively, who will get most of the $1.95 trillion of business rate cuts.

In this context, we cannot stress more insistently that Art Laffer's famous napkin does not apply to business tax cuts in today's world of globalized trade and labor rates and artificially cheap central bank enabled debt and capital.

That's because the business income taxes are born by owners, not workers. The wage rates and incomes of the latter are determined in a saturated global labor market where the China Price for Goods and the India Price for internet based services sets wages on the margin.

At the same time, owners are not deterred from making investments by the proverbial "high after-tax cost of capital". That's because it isn't.

Even at the current statutory 35% tax rate (which few pay), the absolute cost of equity and debt capital is cheaper than ever before in modern history.

In fact, the after-tax cost of equity to scorched earth investment juggernauts like Amazon is virtually zero, while the cheap debt-fueled boom in conventional plant, equipment, mining, shipping and distribution assets over the last two decades has stocked the planet with sufficient capacity for decades to come.

In short, if you lower the business tax rates to 20% and 25% for corporations and pass-thrus, respectively, you will get more dividends, more stock buybacks and other returns to shareholders. Those distributions, in turn, will go to the very wealthy and to pension funds/non-profits. The latter will pay no taxes on these distributions while the former will pay 15%-20% at current law rates of o%, 15% and 20% on capital gains and dividends, which the Brady bill does not change.

In short, maybe the $2.8 trillion of tax cuts for business and the wealthy will generate a few hundred billion of reflows over the decade. And even that will not be attributable to the "incentive effect" of the Laffer Curve at all; it's just tax collection mechanics at work as between the personal and business taxing systems.

By the same token, the Sgt. Easterhaus principle is also being ash-canned by the GOP on the politics side of the tax bill, as well. In fact, Republicans have been chanting the "tax cut" incantation for so many decades that they apparently can't see the obvious. Namely, that among the middle quintile of households (about 30 million filers between $55,000 and $93,000 of AGI) the ballyhooed "tax cut" will actually be a crap shoot.

When fully effective, roughly two-thirds of filers (20 million units) would realize a $1,070 per year tax cut, while another 31% (roughly 9.5 million filers) would experience a $1,150 tax increase!

That's a whole lot of rolling dice----depending upon family size, sources of income and previous use of itemized deductions. Yet for the heart of the middle class as a whole----30 million filers in the aforementioned income brackets---the statistical average tax cut would amount to $6.15 per week.

That's right. Two Starbucks cappuccinos and a banana!

So we'd call the GOP's noisy advertising of a big tax cut for the middle class reckless, not careful. Indeed, the Dems will spend hundreds of millions during the 2018 election season on testimonials and tax tables which prove the GOP's claim is a pure con job.

They will also prove the opposite--- that the overwhelming share of this unaffordable tax cut is going to the top of the economic ladder. After all, the income tax has morphed into a Rich Man's Levy over the last three decades. So if you cut income taxes----the benefits inherently and mechanically go to the few who actually pay.

Thus, in the most recent year (2015), 150.5 million Americans filed for income taxes, but just 6.8 million filers (4.5% of the total) accounted for 35% of all AGI ($3.6 trillion) and 59% of taxes paid ($858 billion).

By contrast, the bottom 64 million filers reported only $928 billion of AGI, and paid just 2.2%  ($20 billion) in taxes. That is, owing to the standard deduction, personal exemptions and various credits the bottom 44% of taxpayers accounted for only 1.4% of personal income tax collections.

Even when you widen the bracket to the bottom 123 million tax filers (82%), you get $4.3 trillion of AGI and just $284 billion of taxes paid. In other words, the bottom four-fifths of filers pay only 6.6% of their AGI in tribute to Uncle Sam. They may not be getting their money's worth from the Washington puzzle palaces, but you can't get blood from a turnip, either.

In short, Flyover America desperately needs tax relief for the 160 million workers who actually do pay up to 15.5% of their wages in employer/employee payroll tax deductions. Yet by ignoring the $1.1 trillion per year payroll tax entirely and recklessly and risibly claiming that its income and corporate tax cut bill materially aids the middle class, the GOP is only setting itself up for a thundering political backlash.

Nothing makes this clearer than some recent (accurate) calculations by a left-wing outfit called the Institute for Policy Studies that boil down to the proposition that "It Takes A Baseball Team".

That is, the top 25 US persons (like the full MLB roster) on the Forbes 400 list now report about $1 trillion in collective net worth. That happens to match the net worth of the bottom 180 million (56%) Americans.

Needless to say, that egregious disproportion does not represent free market capitalism at work; it's the deformed fruit of Bubble Finance and the vast inflation of financial assets that the Fed and other central banks have enabled over the past three decades.

In terms of the Sgt. Easterhaus metaphor, monetary central planning has planted some exceedingly dangerous political time bombs in the precincts, neighborhoods, towns and cities of Flyover America. Accordingly, if the GOP succeeds in passing some version of its current tax bill, it may be what finally brings the Dems back into power on an out-and-out platform of socialist healthcare (single payor) and tax redistributionism with malice aforethought.

Even as the GOP recklessly plunges forward with gag rules and its sight unseen legislative steamroller (echoes of ObamaCare in 2010), it will never be able to hide what is buried in the bill's tax tables. Namely, an average tax cut for the top 1%---even after accounting for elimination of upwards of $1.3 trillion of itemized deductions----that would amount to $1,000 per week.

Moreover, for the top o.1% (150,000 filers), the Dem campaign ads will show a cut of $5,300 per week; and for a subset of 100,000 of the top 0.1% filers, the GOP's tax cut would amount to $11,300 per week .

That's right. Each and every one of the very ultra rich would get a tax break equivalent to that which would accrue to every 2,000 middle bracket filers under the Brady bill.

As Sgt. Easterhaus might have said: They have been warned!

Meanwhile, at the other end of the Acela Corridor, the good precinct sergeant gets no respect, either. Indeed, gambling in today's hideously over-valued and unstable casino is exactly the opposite of being careful; it's certain to lead to severe---even fatal---financial injuries on the beat.

In this context, we have been saying right along that the essential evil of monetary central planning is that it systematically falsifies asset prices and corrupts all financial information. That includes what passes for analysis by the Cool Aid drinkers in the casino.

But when we ran across this gem from one Steve Chiavarone yesterday we had to double check because we thought perhaps we were inadvertently reading The Onion.

But, no, he's actually a paid in full (and then some) portfolio manager at the $360 billion Federated Investors group who appeared on CNBC, and then got reported by Dow-Jones' MarketWatch just in case you had the sound turned off during his appearance on bubblevision.

So here's how the bull market will remain "alive for another decade." According to Chiavarone, millenials who don't have two nickels to rub together will make it happen. No sweat.

“Millennials are entering the workforce, but their wages are going to be under pressure their whole career,” he explained to CNBC’s “Trading Nation” on Friday. “They won’t make enough money to pay down their debt, fund their life and fund retirement where there is no pension. So, they’re going to need equities.”

Then again, aspiration and capability are not exactly the same thing. In fact, the frequent yawning difference between the two puts us in mind of the Donald's characterization of his primary opponent as Little Marco Rubio. The latter never stops talking about himself as the very embodiment of the American Dream come true----so for all we know perhaps Marco did aspire to be an NBA star.

But when he famously couldn't reach his water bottle from atop a stool during his nationwide TV rebuttal of an Obama SOTU speech a few years back, it was evident that NBA stardom wasn't ever meant to be.

Nor during the coming decade of stagnant wages and rising interest rates is it any more obvious how millennials will beg, borrow or steal their way to massive purchases of equities. That is, how they will finance what will actually be an avalanche of stock sales by 80 million fading baby boomers who will need the proceeds to pay their nursing home bills.

But never mind. MarketWatch caught the full measure of  what shines on the inside of Mr. Chiavarone's financial beer goggles:

 The risk is not being in this market,” says Chiavarone, who helps run the Federated Global Allocation Fund. The firm’s current price target is for 2,750 on the S&P by the end of next year and 3,000 for 2019.

 

“We are probably frankly low on both of them,” he said. “Tax reform could push up the markets.” That’s not to say there won’t be some pain along the way, specifically the potential for a recession in 2020 and 2021, according to Chiavarone.

 

What’s an investor to do in that case? “Buy the recession,” he said.

Indeed, it doesn't come any stupider than the market blather that is constantly published on MarketWatch. Today it also informs us that not only have US earnings been galloping forward in recent quarters, but its actually a global trend:

However, this is hardly a U.S.-only story. Corporate earnings have been improving globally, and some of the fastest growth has come from international companies, as seen in the following chart from BlackRock, which looks at U.S. growth against the globe, excluding the U.S.

The chart below is supposed to be the evidence, but we are still scratching our heads looking for the point. It seems that global corporate earnings ex-US based companies have surged.....all the way back to where they were in 2011!

You can't make this stuff up. Did these geniuses notice that China just went full retard in credit expansion to insure that the coronation of Mr. Xi was the greatest since, apparently, the Ming Dynasty invited the civilized world (not Europe) to the coronation of its fourth emperor in 1424?

In fact, the 19th Party Congress is now over, and the Red Suzerains of Beijing are back to the impossible task of reining in the massive malinvestment, housing, debt and construction bubbles which have turned China's economy into a $40 trillion powder keg. So right on cue it reported a sharp cooling of its red hot pre-coronation economy last night.

Thus, value-added industrial output, a rough proxy for GDP, expanded by just 6.2% in October compared to double digit increases a few months back.

Likewise, fixed-asset investment climbed 7.3% in the January-October period from a year earlier. Notably, that's way down from high double digit rates during most of the century, and, in fact, is the slowest pace since December 1999.

Needless to say, the latter data point amounts to a clanging clarion. At the end of the day, the ballyhooed Chinese growth miracle is really a story of construction and debt-fueled asset investment gone wild. And that party is now over.

So whatever Sgt. Easterhaus actually meant during the seven seasons of "Hill Street Blues" which always started with his famous admonition, we are quite sure that today it would not have meant buying the dips in a casino that is rife with unprecedented danger.

Finally, when it comes to real danger we think the most precarious spot along the Acela Corridor is about one mile from Union Station. We are speaking, of course, of the Oval Office and the Donald's questionable tenure therein.

Even as he meandered around Asia double-talking about trade and basking in the royal reception put on by his duplicitous hosts in Tokyo, Seoul and most especially Beijing, the Donald did manage to hit a fantastic bull-eye stateside.

Indeed, his takedown of the three stooges---Brennan, Clapper and Comey-----of the Deep State's spy apparatus will be one for the ages. Not since Jimmy Carter has a president even vaguely admonished the intelligence agencies, but as it his wont, the Donald held nothing back---naming names and drop-kicking backsides good and hard:

“And then you hear it’s 17 agencies. Well, it’s three. And one is Brennan and one is whatever. I mean, give me a break. They’re political hacks. So you look at it — I mean, you have Brennan, you have Clapper, and you have Comey. Comey is proven now to be a liar and he’s proven to be a leaker,” Trump told the reporters on Air Force One.....   

Yes, the next day he backed away in what appeared to be a pro forma nod to be his own courage-challenged appointees.

We don't think so, however.

Image result for picture of brennan, comey and clapper in prison uniforms

The truth is, the Deep State is already in the precinct house. And Sgt. Easterhaus is talking to the wall.

 

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Clock Crasher's picture

End Game is the eventual ownership of all shares of all coporations, shares of every paycheck when everyone is in full time debt just to eat and have a roof over their head and ownership of all real estate.  

We need a meltdown from which reform, radical reconstructive surgery or a meltdown from which the one bank owns everything and everyone from coast to coast for the next thousand years. 

Not one man in a thousand

holdbuysell's picture

Quintessential neo-feudalism. This will take some time, but they will own it all by simply printing what's required (see SNB and BoJ actions), pensions will be dependent on them for their daily bread and impoverished by the inflation as it goes, a fait accompli.

Caloot's picture

All I know is you better keep funding EBT.   Cause the day that EBT card stops working you will have a French revolution.    If the serfs really knew how good the top ten percent have it, they'd be cutting off the heads of everyone they could find.  Keep riding those elephants, ski the Alps.   You'd come back and find your house has been confiscated by the workers. This cycle is playing with fire.

Dorado's picture

I like Stockman but he has to stop making predictions.  Last year be predicted a stock market collapsex and then the markets went on a tear upward.

DocBerg's picture

Eventually he will be right, and then Katie bar the door!

A. Boaty's picture

And your tax bill numbers and analysis look exactly the same.

GETrDun's picture

Everything is awesome?

Isn't it?

That's what Janet keeps saying.

TBT or not TBT's picture

She fantasizes about that dual man date she keeps hearing about but cannot get. 

francis scott falseflag's picture

If you like going to a supermarket that still has groceries on its shelves,

then, Yes, EVERYTHING IS AWESOME.

forestgump227's picture

Trump is a blackmailed swamp creature

 

Exact quotes from the lawsuit:

Katie Johnson, alleges that Donald J. Trump, did wilfully and with extreme malice violate her by sexually and physically abusing Johnson by forcing her to engage in various perverted and depraved sex acts by threatening physical harm to Johnson and also her family.
Katie Johnson alleges that Donald J. Trump and Jeffrey E. Epstein also did willfully and with extreme malice violate her by conspiring to make Johnson their sex slave.
Katie Johnson alleges that she was subject to extreme sexual and physical abuse by Donald J. Trump and Jeffrey E. Epstein including forcible rape during a four month time span covering 4 month in 1994 when Johnson was still only a minor aged 13.
On the first occasion involving Donald J. Trump, Katie Johnson was forced to manually stimulate Trump with the use of her hand on Trump’s erect penis until he reached sexual orgasm.
On the second occasion involving Donald J. Trump, Katie Johnson was forced to orally copulate Trump by placing her mouth upon Trump’s erect penis until he reached sexual orgasm.
On the third occasion involving Donald J. Trump, Katie Johnson was forced to engage in an unnatural lesbian sex act with her fellow minor and sex slave, Maria Doe, age 12, for the sexual enjoyment of Trump. After this sex act, both minors were forced to orally copulate Trump by placing their mouths simultaneously on his erect penis until achieved sexual orgasm. After zipping up his pants, Trump physically pushed both minors away while angrily berating them for the “poor” quality of their sexual performance.
On the fourth and final sexual encounter with Donald J. Trump, Katie Johnson was tied to a bed by Trump who then proceeded to forcibly rape Johnson.


https://donaldjdumb.com/wp-content/uploads/2016/06/jeffrey-epstein-lawsuit-docs-signed.pdf

ParticularlyStupidHumanoid's picture

That's not a real news site. #fakenews

Singelguy's picture

Those are the exact ALLEGATIONS in the lawsuit. That does not make them true. Can you at least wait until the trial is over and a verdict is rendered?

raki_d's picture

Been slammin the same shit since 2009 who the fkk cares anymore

RafterManFMJ's picture

you cocksucker, i tried twice to kill the gnat on my ipad! Nicely played.

Giant Meteor's picture

David, you , you .. are you tellin me.., are you saying ..

It's ALL bullshit !?

“And then you hear it’s 17 agencies. Well, it’s three. And one is Brennan and one is whatever. I mean, give me a break. They’re political hacks. So you look at it — I mean, you have Brennan, you have Clapper, and you have Comey. Comey is proven now to be a liar and he’s proven to be a leaker,”

Trump told the reporters on Air Force One.....

Sometimes the truth just sorta slips out ...

francis scott falseflag's picture

I found this to be one of Dave's better articles.

I get a little nervous when he tries to describe

the mass hysteria and universal denial that is

now epizootic in Lower Manhattan.

HardAssets's picture

It goes back waaaay before Trump.

If they actually did what was required to (maybe) restore America- - the immediate impact would be unpredictable but definitely explosive. End bankster fed ‘legalized’ un-Constitutional counterfeiting cartel. Get back to following the US Constitution. Declare all un-Constitutional made up outta thin air ‘debt’ void (Jubilee). What is impossible to pay won’t be paid; it’s only function is to put the people in serfdom, and make them easier to control. Jail the banksters. End the neo-con overseas wars & actually defend America instead. Tell the Chinese that we raised them up to being an economic powerhouse when they couldn’t even feed their own population prior to Kissinger/Nixon opening up to China. US industry was off-shored to cover the loss of purchasing power of the US dollar. So why don’t we decide to forget about starting thermonuclear WW3 and call us even.

The odds of the so-called American ‘leadership’ class (what a joke) doing this are about zero. So instead they amass as much wealth as they can get & do all they can to weaken & divide the American people before it all inevitably crashes to the ground.

TheEndIsNear's picture

If there's anything in the world I hate, it's leeches.
https://www.youtube.com/watch?v=2ngGbEJR7Ag

francis scott falseflag's picture

Not my favorite scene from that otherwise great film.

Rex Andrus's picture

"One of the great philosophers of recent times was surely Sgt. Easterhaus of "Hill Street Blues"."

Hill Street Blues!!? David, WTF? if you can't differentiate TV simulacrae from the world old man, you are in a world of hurt. If however you are using tv metaphors to explain yourself to the herd, you're still behind the propaganda unit that constructed these 40 y.o. metaphors you use. TV is a disease.

You need to learn to hijack their metaphors. You went to their schools. You lived in their box your whole life. Now you're just a brand, hocking your secondhand hack opinion of censored data to an assumed receptive audience of receptive idiots. This isn’t the NAZI MKULTRA experiment anymore. We got immunity. Not just to psyops. To you too. All you can do now to help mankind is reveal your own experience.

We are not receptive. We are attentive.

Because of this experimental indoctrination your boomer generation went through there is a whole world around you that you can't even see, smell, taste, feel. You are programmed to fear it. Awareness of us causes you discomfort. Emotional discomfort, and nausea.

I experience nausea around you and yours too. I was adopted by your kind. It was as bad as you can imagine.

Remember when you were 3 years old? You can, if you try. If you can't, go look at some 3 y.o.s. It'll jog your memory. Remember how you felt. What your impressions of the world were. https://www.youtube.com/watch?v=8u6roQsoatQ (((I see ...stars)))

Listen to the wind, child. Listen to the trees. Do not put on a wig, neru jackets and go go hip waders to try to convince me you get it. Just walk the path and comment on it. Like James Joyce. Like Ezra Pound. Like my fractal, Neal Cassady. Like Ken Kesey, and Timothy Leary.  Just get it.

John Trudell is real. https://www.youtube.com/watch?v=yrCOFUpRg8w It's about power over YOUR CLASS, David. I? I don't care about money. I just care about the Earth flowing its gifts of clean water and clean air and clean food, tax free, as it has always done.

https://www.youtube.com/watch?v=dJp5pxFG6Sg

This is more than you deserve, old slave. Tell your friends.

francis scott falseflag's picture

 "I just care about the Earth flowing its gifts of clean water and clean air and clean food, tax free, as it has always done."

 

 Tyrannosaurus, Dude, you've been extinct for 65 million years.  Go back to Jurassic Park before some bitch

hits you with her SUV.

 

https://www.youtube.com/watch?v=e7qQ6_RV4VQ

francis scott falseflag's picture

Amazing how we are turning into socialism

and socialism is turning in to US.

luna_man's picture

 

David, tells it, like I like to hear it!...Give me more!

seattleslewsz's picture

for what good if prediction i9s wrong

Harry Lightning's picture

You don't need Stockman to tell you what's going on, its really obvious and its about to explode. Bill Blain referred to it yesterday..its the global Bond market. 

 

We already are seeing it in the High Yield space, as "asset" (if you can call junk bonds "assets") values have begun a monumental decline. Soon it will come to the corporate arena, then to the lesser sovereigns, and finally to the big Treasury markets of the G7.

 

And when that happens, the stock market will follow, just as stocks followed bonds for the last 20-something years. As cheaper money was offered due to a combination of central bank flooding of markets with money and investors borrowing that money and pushing bonds to progressively lower yields, companies took advantage and borrowed capital at progressively lower rates of interest. That savings in borrowing costs was a huge shot in the arm for profits, and as profits rose so did stock prices. 

 

But now that process is unraveling. In the summer of 2016, thanks in large part to the aggressive and unwarranted money creation of the European Central Bank through their unprecedented purchases of Corporate bonds, yields for many sovereign as well as corporate bonds went into negative territory, all the while happening as economies around the world were growing rather than recessing to the point where negative interest rates might have made sense. At that point the wisest investors in the bond market started heading out of bonds, which was the smart move. Regrettably what they did next was not so smart...as they withdrew money from the bond markets, they sent it into the equity markets, and that was the fuel that gave us the huge rally since Trump's election.

 

Ostensibly, the possibility of corporate tax cuts and obamacare savings were the impetus of the money transfer, but as we see now that was the charade that was used by the pros to get retail to support their fool's errand. Truth is these fools did not invest because the stock market was worth investing in, they invested in stocks because the bond market was way over valued and they had to do something with their investment capital instead of leaving it at risk in poor yielding bonds.

 

Several Central Banks recognized the real cause for this disintermediation, and that it was that the Central Banks themselves put way too much money on the table to be borrowed for way too long a time, and now that money was distorting the financial markets, So a few enlightened banks - if a Central Bank can ever be considered "enlightened", for if they were enlightened this problem never would have occurred - decided to move to reduce the availability of borrowed money. The US, Canadian and British all have begun tightening programs that are starting to sop up the excess capital that floods world markets. Soon, the biggest culprit of late, the European Central Bank will follow suit, and then all the wheels will be in motion to suck up excess capital where ever it can be found. 

 

Companies tend to structure their borrowings with two thirds of all owed money having a maturity of between three and five years. They use this structure so that if they make a mistake about interest rate direction, they can correct the mistake relatively soon. Which means that the money borrowed at nothing or less than nothing in 2015 and 2016 will start having to be replaced in 2018 and beyond. The new borrowings will be completed at significantly higher rates of interest than the last borrowings, as the actions of the central banks is ramping up into full gear and liquidity rapidly will be leaving the financial system.

 

So starting soon, companies will have two choices about how to finance : they can borrow at the new higher rates and take a significant hit to earnings, or they can issue stock at these incredibly overvalued levels, which will hurt earnings per share while not affecting earnings. My guess is they will choose to issue stock. But regardless of what they choose, both choices are bad for the stock market.

 

Back on the bond farm, there will be a whole lot of panic for the plethora of companies that now have to refinance, many of whom are private concerns and do not have the option to issue stock to foolhardy and desperate investors. So these borrowers will have to renew their borrowing in a bond world that has significantly less capital available to lend than it had when all these borrowers came knocking a few years ago. Interest rates will continue the steady move to higher levels they have been pursuing for the last year, except that the speed of the move will increase. Stocks will wind up playing off of bonds, and then bonds off of stocks. A virtuous cycle, especially for the shorts in both market. Both will fall together until the amount of money being borrowed is equal to the amount of money available for borrowing, which means all that money that left the bond market in the last year will be coming back as rates move higher. The reduction in Central Bank liquidity will mean that even more will come out of the stock market than went in, since the borrowing needs will now have to be satisfied with less help from the world's governments.  

 

As time moves forward, the money available for borrowing will come at an ever-increasing cost, for once the stock market comes down to a level considered fair value, getting every marginal dollar to swing from stocks to bonds will take progressively more effort on the part of borrowers. This was how stock markets unraveled the way they did in 1987, the bond market led the way to both markets dropping in price after both markets had risen in lockstep for the prior five years. Because of the extreme magnitudes of stock prices and bond yields today, the notional change in value in both markets this time should be substantially greater than in 1987, even if they are similar in percentage terms. So a 25% drop in stock prices from here, taking the Dow back to levels seen in June 2016 just before bond yields bottomed would be a first target. If you factor in the amount of money that the Central Banks will have taken back by the end of 2018, 2019 and every year thereafter, then we are looking at somewhat lower prices. 

 

Here's a good and easy calculation that may add insight to this discussion : If the Central Banks had not provided all the excess liquidity they offered for the last nine years, long term US 30 Year Treasury Bond yields would trade at approximately 275 basis points higher than trailing 12 month consumer inflation as measured by the overall Consumer Price Index. That was the spread that those bonds traded at n 2008 before the problems hit, the spread was even higher in the four years prior to the financial crisis. Presently the trailing one year CPI is at 2.30%, and so if we add on the traditional 2.75% of a non-Central Bank manipulated world, the US bond yield now should be at 5.05% rather than the 2.79% they trade at now.

 

Interestingly, the last time the US Treasury Bond traded at 5.00% was in August of 2007, just when the housing problems that caused the financial crisis were starting to explode over the financial markets. Remember where the Dow Industrial Index was then ????

 

 

13,465

 

As the ski instructors like to say, have a nice trip down the mountain.

 

 

sonoftx's picture

Please post more often. It took me several minutes to figure out what you were saying but it is at the base very wise. Thank you.

Dr. Bonzo's picture

Make ZH Great Again. Excellent piece.

seattleslewsz's picture

Stockman or gartman what ever her name is has been so wrong the stock markets maybe she is trying to make diversion. smart traders and invstors anways look for past record of a analyst. 

ZH would be goodto put more of the Shepwave articles on here again    They are only analyst s form united states who call right calls.  

PUNE's picture

True.  calls in stocks are only right.  I fear they are rigged.  It is virtually impossible to make those calls on a regular basis like they have been doing.  

SlothHedge's picture

Stockman is proof that people are gullible.  Can't believe his articles are still on here.  Stay with waveman!

Darth Rayne's picture

If memory serves, Reagan tripled the debt.

The system that Stockman served needs Trump to, at least, double it to forty trillion, over a two term presidency.

Stockman; you and Reagan are no different to Trump or Clinton. You serve the same system based on the same principles. You represent a continuity of govt which enforces society on humanity. Until you understand this, could i politely request that you fuck off.

Only joking, please continue to exercise your free will. You may wish to choose to be happy rather than try to prove you are right. (Spoiler, you are wrong.)

Singelguy's picture

Correction, Reagan wanted tax cuts AND spending cuts. The Democrat controlled Congress said, let’s do the tax cuts first and then we will tackle the spending cuts. The tax cuts passed but the Congress blocked every spending cut proposal. If you want to blame anyone for the tripling of the debt, blame the Congress; they control the purse strings.

Darth Rayne's picture

No blame was intended. I believe that Reagan was well intentioned and a great human being.

The system needs debt to double every 8 years. The system loved the eight years that Debt tripled. My question is, what happens when the system does not get what it wants?

You take care

Harry Lightning's picture

Actually the context of the number you cite disrove your conclusion. Sure, Reagan tripled the debt, but the det was far too low relative to the size of the country's economy, which was a mahjor reason that the US economy was in the worst recession since the Depression when Reagan took office. Reagan leveraged the capital of the US by a slight amount relative to the total GDP or taxing power of the government, and produced the greatest peacetime eceonomic expansion in the nation's hstory to that point. 

Remember another thing...if there had been just one dollar of exisiting debtr when Reagan took office, and he borrowed two more dollars during his terms, the country would have three dollars of debt. But if the country was producing eight dollars of goods, which it did - a 33% increase in total production of goods alone in his eight years in office - because of the investment of the extra two dollars of borrowing, that would be a good thing.

Debt viewed by itself tells you little. Its the context in which the debt was engaged, and the results produced by that debt, that tells you if it was a wise or foolish endeavour. 

Match that to obama, who nearly doubled the US debt. On the face of it, you would say oh, he only doubled the debt when Reagan tripled it, so obama did less harm with his borrowing. And that of course would be a fool's errand, because obama raised the nations debt by 90% and only produced a 10% increase in the production of goods and services in the country's economy. A classic proof of the law of diminishing returns, which is why as a business or economy grows larger, the marginal notional increases to debt should be shrinking, not increasing, because every dollar of borrowing as an economy gets larger prodices less output. Unfortunately for the US, obama's experience as a community organizer did not include a course in first year macroeconomics. 

One other thing to remember is that bebt should be considered also in the context of tax revenues and spending. The first Regan budget in 1981 anticipated that the government would borrow $200 billion per year,, which would be paid for in part from increased tax revenues produced from increased economic activity that the borrowing would generate. In fact, in Reagan's first four years in office, his tax cuts and borrowing program produced $500 billion MORE in tax revenues than had been forecast, meaning that nearly all of the borrowing would have been paid back at the end of those four years. The problem was that during those first four years, the Congress spent $550 billion more than had been forecast to begin with, squandering all of the surplus pruduced by the increased economic activity and preventing any paydown in the amount borrowed. 

Which provides another lesson that too often has fallen on deaf ears... and that is in Washington, it does not matter how much any plan produces in new revenues because the Congress almost always will spend it. And that is a much bigger problem than the deficit or the debt. They tried t stop this nonsense with the line item veto, but that was ruled to be unconstitutional. And it is impossible to get enough Congresspeople and Senators to approve a Constitutional amendment that would permit a line item veto, not when the existence of one of the political parties in America relies upon bankrupting the national Treasury to buy votes for re-election. 

Darth Rayne's picture

Agreed, productive debt is a far different animal to unproductive debt. As you point out, Reagan did a great job. 

However, the system does not care whether debt is productive or not. The amount of ALL debt must always at least double every eight years. When it does not we will be living in extremely interesting times. Then business as usual or perhaps something far better?

Harry Lightning's picture

Doubling debt every eight years ? Why ? its a recipe for catastrope, it causes a debt trap where the interest payments become greater than the total revenue. 

The way I thought it was supposed to work is you borrowed when times were bad and paid off the debt when times were good. Total borrowing should not exceed 28 percent of total annual revenue, and monthly accrued interest and principal owed cannot exceed 35%of total annual revenue. These have been the classic investment and commervcial banker standards since the time of Keynes. If anything, total debt could double every 18 years since the long run rate of inflation makes money worth half as much in terms of buying power ever 18 years. So because of inflation, if you double your debt no faster than every 18 years, inflation will provide you with the funds to pay off your principal

Where does the eight years doubling come from ? In fact, the only Presidents in the years after FDR to double the US debt were Reagan and obama. The first ush was on his way to that had he been elected to a second term. Going forward, the US will need amounts wequal to the present debt to satsfy promises made to the baby boomers, but I think they will satisfy that cash need by borrowing directly from the Federal Reserve...in other words, they will print the money to monetize the debt. The effect on financail markets will be far more benign than if they tried to issue another $20 trillion in debt securities I don't even think thety could raise that kind of money, as it was obama had to rely on the Fed to buy four trillion of his debt because the rest of the world was not interested in it at the yields it was offered at. 

Blue Steel 309's picture

Why are you talking to yourself?

Darth Rayne's picture

There are actually two of us.

Darth Rayne's picture

By debt, I really do mean all debt. (Not just govt debt.) Your opening paragraph is exactly 'how it is'.

If i may paraphrase the rest of your comment. The government is the borrower of last resort and the FED the lender of last resort.

We have been in last resort mode for about ten years. So, are we in for catastrophe or a benign future? If we carry on as we have for generations, it will be as benign as much as we are able before collapsing into catastrophe.

So expect more of the same for as long as possible. Banker bail outs, corporate bail outs, pension bail outs, etc. As you mentioned, to satisfy boomer pension promises.

Forget about all the rules and guidelines - they are simply a distraction. They exist only to give credibility to the incredible.

This game will be played until public confidence in the dollar starts to collapse, then expect the defaults to start and bail outs to stop. Interest rates will spike upwards, asset prices will crash. "Lessons will be learnt" and whatever rules necessary to regain public confidence will be solemnly sworn. The game starts anew, with debt doubling every 18 years if that is a number we all,mostly, believe in.

So govt debt is not the whole story but it is significant. I forget where I got my 8 year doubling of debt from, I did calculate it rather than simply read about it.

I am not Harry Lightning. (Although we are all one. That is probably a bit deep for most but true anyway.)

You also use the word 'trap', which is what the govt / financial system is but that level of understanding goes against our current level of belief. You Sir are becoming aware, not an easy process. Prepare accordingly.

Eagle40's picture

You seem to forget that Congress were the ones who increased spending (Democrats). Under Reagan income tax revenue doubled while spending tripled. That was not Reagan but congres and politicians doing what they do best....Over spend and corrupt the system. 

How much have we spent on all these social programs since 1965 and the Great Society programs of the 1960s. LBJ can be blamed for the $14 trillion spent on welfare for many that do not want to work in the past 50 years.

This is just one example of many problems of our government, society, and economy which is extremely complex. There is A LOT of blame to go around but blaming Reagan is just nonsense. Both federal and state governments are concerned with only a few issues. 

1. Entitlements/Welfare

2. Government jobs # Not laying off.

3. Government Pensions/benefits. 

4. Top 5% wage earners

5. Gov't Unions 

6. Putting money in their own pockets. 

In PA the state employees and teachers pension is 60 billion in tbe hole. Those unions have fucked tax payers for decades. A retired teacher gets 89% to 100% of their salary plus health Care until Medicare kicks in. All nonsense. The state cannot afford this bullshit yet they kick the can down the road to kiss the union's ass and collect campaign money. 

The reality is the pension system will go bankrupt and those spoiled rotten gov't employees will demand tax payers who cannot afford tax increases to fund this bullshit. Same with the Federal Government employees. 

Your analysis is nonsense...You blame cutting tax revenue. Why don't you blame government for over spending. It should be the goal of government to first cut spending. There is going to be a day when governments will have to eliminate depts, agencies, jobs, pensions, benefits, entitlements,  and waste is comong. Many studies have shown thst we could eliminate 5p% of government and the tax payer would never be affected or see any repercussions. 

Eliminate gov't were and you solve to main problem.

 

Darth Rayne's picture

Agreed. You read what I wrote hours ago about not blaming Reagan for anything? I said he was well intentioned and a great human being. He has my deepest respect but as you say govt, society and the economy is extremely complex.

Why are people I generally agree with attempting to argue with me? (Rhetorical question. I know but do you? Which is also rhetorical.)

Rhetorical means i am not asking for a response.

Are we done? I only get two days off a week and this was one of them, thanks for reading AND replying. You take care