Trump Takes His Bubble Economy Into Uncharted Waters
"No one has ever bothered to even contemplate something as whacky as what the Donald has now unleashed upon the world"
The Donald has launched a $140 billion unguided missile (25% tariff on $563 billion of Chinese imports) at the domestic economy. But it will slam the entire the China based global supply chain and world trading system which delivers $2.7 trillion of goods to US ports annually.
Yet even that humungous figure is only the visible part of the story. It reflects mainly finished merchandise which flows from a much larger pipeline of processing, production and distribution wherein goods gets handled and processed in multiple stages before they finally arrives on these shores.
What that means is that we are in utterly uncharted waters. Forget Smoot-Hawley redux. That happened in ancient times (1930) when the US was still a large international creditor and exporter.
By contrast, there have never been technologically enabled, just-in-time global supply chains like the infinitely complex production and trading arrangements of today. That means there are no models to track the cascading effects because no one has ever bothered to even contemplate something as whacky as what the Donald has now unleashed upon the world.
Indeed, he seems to think he is negotiating with the pipefitters union and the New York City Department of City Planning, and has the upper hand because he’s backstopped by a booming stock market and “the best economy & employment numbers in US history” .
Nothing could be more delusional. The stock market is an epic bubble now visibly cracking and the US economy is limping into cyclical old age just as the Donald’s Trade Wars and massive Fiscal Debauch are about to hit it with malice aforethought.
Moreover, the central banks do not have the slightest idea of how to counter the effects of the economic mayhem coming down the pike.
That’s because as we will treat with in Part 2, the consequences of the Donald’s $140 billion tariff (and multi-trillion Federal borrowing binge on top) all depends on price elasticities and second and third order effects that are impossible to anticipate. In turn, that means the Eccles Building has no clue at this moment whether it is facing a wave of inflation that implies a policy of tightening or hits to production and deflationary dynamics which militate toward stimulus.
In the real world, it is likely to be a complex mix of both – a condition that will finally expose our Keynesian central bankers for the mountebanks they actually are. The fact is, the Donald is single-handedly pushing the global economy into a stagflationary trap – one which debt-ridden economies have no capacity to absorb and central banks have no tools to ameliorate.
To be sure, reality and Wall Street’s bullish narrative have been completely decoupled for years. But that has been especially so since a flukish turn of 90k votes in three states – Michigan, Pennsylvania and Wisconsin – out of 136.5 million caste threw 46 electoral votes and the election to Donald Trump .
And that’s what Wall Street still doesn’t get. The Donald is destined to paralyze the state for the first time since monetary central planning was launched in October 1987, but there is not the slightest recognition that both the fiscal authorities and the central bank are out of dry powder.
Moreover, the comforting view being bandied about Wall Street that when push-comes-to-shove the Donald will back off and either compromise or capitulate couldn’t be more misleading.
What is now in play is not a matter of what Trump calculates he needs to win the election – as if he is some kind of savvy latter day Lyndon Johnson. What’s in play is the fact the he does not know the point of no return in the Trade War with the Red Ponzi – nor does he have a clue about how rapidly the unraveling could accelerate.
But this tweet from Beijing’s favorite mouthpiece, Hu Xijin, gives a foretaste of how quickly this could unravel:
China may stop purchasing US agricultural products and energy, reduce Boeing orders and restrict US service trade with China. Many Chinese scholars are discussing the possibility of dumping US Treasuries and how to do it specifically.
Indeed, the fact that the talking heads are giving him credit for having a strategy and even a semi-coherent game plan is merely testimony to the fact that the casino is still besotted with insouciance on steroids. In truth, however, the Donald has no clue about what comes next – he’s literally making it up by the hour and the tweet.
In a post this morning, Bloomberg’s Richard Breslow got it right. Wall Street still thinks there is a fire brigade around to perform a bailout of last resort if the Donald’s Trade War actually goes awry.
Not so. Not even close.
Today is worse. We should know better, but there has been a full capitulation to the belief that governments will be able to indefinitely clean up their messes with a quickie liquidity injection. It isn’t even controversial anymore. Apply this lotion as needed.
And we continue to not wonder why there is so much talk about even more extreme ways to implement monetary policy… as needed!
So, here were are on the south side of a triple top. And the only way back depends upon an outbreak of calm, rationality and constancy on the part of the Donald.
For anyone left in the casino counting on that, good luck to you!
But wait until the Donald gets the bad numbers that are implicit in his talking points boom. Then he will really go over the bend.
The fact is, real final sales to domestic purchasers tell the real story of the Fake Trumpian Boom by removing the inventory and trade perturbations in the short-term GDP numbers. During the first nine quarters on the Donald’s watch, the average growth rate has been 2.55%.
That compares to Obama’s 2.89% during the nine quarters before no man’s land in Q4 2016.
So what is happening is that the cycle is running out of steam – just as the Donald’s insane Trade War is fixing to body-slam what remains. Peak Trump has surely arrived.
Source: Contra Corner