The Undrainable Swamp: How The Donald Got Dunked In The Deep End, Part 2

Just as the mainstream media moved in for the kill on the Donald's family-based right hand (Jared Kushner), the robo machines tagged $1,000 per share on Amazon's stock price. Needless to say, that crossing planted a scarlet "B" on the ticker, signifying the top of the big fat, ugly BUBBLE that the Donald warned about during the campaign, and then promptly forgot about after his improbable victory.

He shouldn't have. There is no doubt as to how a company that is marginally profitable ended up being worth the staggering sum of $478 billion when the bots painted the tape on yesterday's market open. That is, a 23 year-old company with $143 billion in LTM sales never, ever trades at 185X net income on the free market.

That only happens in the unstable and unsustainable alternative financial universe created by the Fed and its fellow-traveling central bank counterparts around the world. And the impending collapse of that incendiary artifice is what will eventually take the Donald down.

But there is no straight line from here to there. The casino is still buoyed by hopes for a Trump Stimulus and remains blind to the coming Mother of all Debt Ceiling Crises.

Likewise, the punters are still mentally addled by the delusional belief that the business cycle has been abolished---even as they fail to understand that when the next recession makes it inexorable appearance, they will be home alone in the casino.

That's because the Fed and other central banks are more or less out of business. The central bank "put" is surely gone.

Beyond those factors, the buy-the-dips impulse seemingly remains alive and well. After all, during the last 98 months (since the March 2009 bottom) there have been more than 50 occasions to profitably buy the dips---both small and smaller ones. Even Pavlov's dumbest dogs would have been salivating after that kind of training.

But we say---don't be so sure. What the Donald's great adventure in disruption and dysfunctional malgovernance is really all about is delivering blow after blow to confidence in the casino until at length the impulse to buy-the-dips is finally stilled.

And then there will be nothing below. Value investors have gone out of business and most short-sellers long ago were carried out on their shields. With VIX dwelling in the netherworld of 10, downside insurance has gotten so cheap that the gamblers have essentially stopped bothering with it.

Instead, they are all selling "vol" through one mechanism or another. The "risk parity" funds are the most elegant practitioners, but there are limitless ways to make the trade.

Accordingly, the stock market has not been so heavily packed into the same side of the boat since the days of the "portfolio insurance" scam back in the summer of 1987. And perhaps never have so many nickels been harvested in front of the on-coming steamroller.

Yet it is coming hard down the tracks, and none other than the Donald is driving it, or not driving it.

We think the latter description is the more apt because the Donald has no clue about the tumultuous path ahead. In the words of one of the more astute CNN commentators, he is so lacking in experience and focus that he cannot see around any of Washington's endless corners---including probably the corners of his own Oval Office desk.

Anyone who has been around for a while recognizes that the GOP is not---and has not been for decades---a coherent political party with a common agenda. To the contrary, it is a gang of discordant factions---right-to-lifers, 2nd amendment fanatics, anti-secularist cultural warriors, neocon warmongers, anti-immigrant nativists, free traders, protectionists, fiscal conservatives, small government libertarians and more.

Accordingly, they would not be making the following assertion by Tweet or otherwise:

"The U.S. Senate should switch to 51 votes, immediately, and get Healthcare and TAX CUTS approved, fast and easy," Trump tweeted. "Dems would do it, no doubt!"

The fact is, there is virtually nothing that the 51-vote Senate GOP can agree upon at all---let alone "fast and easy" on the intractable topics of healthcare or tax cuts. Indeed, whatever emerges from a six-month or longer process on the former will end up so close to Obamacare Lite that it will be indistinguishable from the real thing.

By the time the GOP moderates like Susan Collins and Lisa Murkowski are satisfied with new or restored giveaways, it will also contribute virtually zero to the 10-years "savings" needed to fund tax reform. In any event, any bill that makes it through the Senate with Mike Pence's tie-breaker, will be voted down in the House by the Freedom Caucus.

And Speaker Ryan apparently likes the job and the title---so he will not pull a Boehner and bargain with Nancy Pelosi on his way to early retirement.

Likewise, both the process and substance of tax reform would be dead in the water---even if the filibuster rule were shelved in the Senate.

The fact is, a goodly portion of the GOP is not about to embrace tax cuts unless they are revenue-neutral, as Leader McConnell has repeatedly insisted.

But there is no way to accomplish that when all the major loopholes have already been taken off the table by the White House, K-Street or GOP geography. That includes the home mortgage deduction, charitable contributions and deductibility of local and state taxes, which are modest in revenue cost; and the big monsters of the midway---the health care exclusion, retirement and 401(k) preferences and the preferences for dividends and capital gains---which cost upwards of $500 billion per year in foregone revenue among them.

On the other hand, another considerable GOP faction would not even remotely consider paying for big tax reductions with budget director Mulvaney's scorched earth cuts in means-tested entitlements (Medicaid, food stamps, etc.) and 21% evisceration of domestic discretionary agency budgets---as justified as all of these measures are in substance.

We dare say, if the Donald were given a blindfolded test on his own budget---he would reject most of it, thereby confirming what the GOP rank and file on Capitol Hill has already decided.

Finally, as a matter of history, the Dems invented the filibuster, and have never used their periodic large majorities during the past half century to rescind it for legislative policy votes. For all practical purposes, McConnell and the GOP elders think in exactly the same institutionalist terms.

In other words, the odds of a tax bill before the summer of 2018 are slim; and the odds that the splintered GOP "majorities" could come up with enough offsets and compromises to even lower the corporate tax rate to 27% are virtually none.

Needless to say, none of this dismal scenario is "ahead of schedule"!

"The massive TAX CUTS/REFORM that I have submitted is moving along in the process very well, actually ahead of schedule. Big benefits to all!"

No, buying the dips on the prospect of a major tax cut and fiscal stimulus is one of the most foolish propositions ever served up by Wall Street.

Yet whence cometh the 33% growth of corporate profits now priced-in (S&P 500 "operating earnings" are projected to grow from $111 per share for the March 2107 LTM period to $147 per share by December 2108 LTM) if the central banks are out of business and the Trump Stimulus is sinking toward the bottom of the Imperial City Swamp?
^SPX Chart

^SPX data by YCharts

In fact, the outlook is far worse because the Treasury will be out of cash within the next 90 days and there is not remotely available a legislative majority to raise the now frozen debt ceiling of $19.809 trillion.

As of May 26, the Treasury's cash balance was down to $167 billion from the $273 billion hoard that had been gathered by April 30 during the tax collection season. Indeed, the cash shortfall has reliably averaged $60 billion per month since May 2016---meaning that the till will be nearly empty by the August recess.

Yet the reason there is no chance of avoiding a calamitous government shutdown crisis in August is that the Donald has made himself hostage to both the Warfare State and the Welfare State owing to superficial, ill-advised and impossible fiscal commitments on both fronts.

These commitments, in turn, close the door to almost any imaginable deficit reduction package which could be attached to a debt ceiling bill in order to assemble the necessary votes during the upcoming crisis.

The $1.8 trillion ring fence around Social Security and Medicare speaks for itself. It is the heart of the budget---and an arena in which $100-$200 billion per year could be readily saved via a thorough-going means-test on the benefits of affluent retirees. What can be scraped from the $800 billion means-tested programs for the poor is comparatively meager---meaning that the Trump Administration will be able to salvage almost nothing at all from the Welfare State to attract votes for a debt ceiling increase.

But the Donald will get dunked good and hard in the $1.1 trillion Warfare State budgetary swamp that he has embraced with gusto and has proposed to dramatically expand after virtually zero analysis or study. The Donald's big increases were merely based on the superficial notion that pumping more money into the Deep End of the Swamp on the Pentagon side of the Potomac will make America strong and safe.

In fact, it is utterly unnecessary and will only hasten the fiscal crisis that is the real threat to the nation's future. Just consider that past wars alone now cost about $300 billion per year when you add $180 billion for Veterans benefits to the $120 billion cost of servicing the portion of the national debt attributable to foreign wars and defense.

And that is not from "good wars" like WWII---because most of the debt incurred during that struggle was paid back by Truman and the GOP Congresses of the post war era, and what remained is a rounding error in the current national debt totals.

To the contrary, today's $300 billion annual tab for Veterans and war bonds is attributable to wars America should never have been in---from Korea through Vietnam and the insanity of Washington's subsequent interventions in the Middle East.

To be sure, none of this is the Donald's fault, but he might at least have considered this. The $300 billion tab for old wars represents 50% more than China spends on its current national security budget and 600% more than Russia spends.

Yet the former's Red Ponzi would collapse in six months if China even threatened America militarily, and Russia has no military means to invade the New Jersey coast at all except for one ancient smoke-belching aircraft carrier and a fleet of row boats. Indeed, under the Donald's proposed budget the U.S. will spend more on Veterans hospitals and health care ($48 billion) than Russia's entire defense budget ($47 billion)!

Still, the Trump Administration proposes to spend $700 billion for DOD and international affairs and security assistance, and another $100 billion on Homeland Security and the DOJ. We will address the sheer folly of these massive expenditures in up-coming posts, but our point today is quite simple.

There is a considerable faction among the GOP's permanent Washington officialdom that believes every dime of the $1.1 trillion which Trump has budgeted for the Warfare State is urgently needed, and would even add more if they could. Certainly Senator McWar (R-Ariz) would do just that---along with his considerable faction of Senate neocons and hawks:

Speaking today in an interview while visiting Australia, Sen. John McCain loudly declared Russian President Vladimir Putin to the “the premier and most important threat” in the world, saying he was a bigger threat than ISIS, and vowing to push new sanctions against Russia as a result.

In a word, there is no way out of the Swamp when you are furiously bailing water into the Deep End.

The Donald will presently discover just that when Washington succumbs to the Mother of All Debt Ceiling Crises exactly six years after Obama and Boehner pulled a kick-the-can stick-save in August 2011.

David Stockman's Contra Corner is 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. Subscribe now to receive David Stockman’s latest posts by email each day as well as his model portfolio, Lee Adler’s Daily Data Dive and David’s personally curated insights and analysis from leading contrarian thinkers.

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