David Stockman dopes out the tax reform bill. His conclusion: humungous deficits for as far as the eye can see. From Stockman at davidstockmanscontracorner.com:
Since last November 8th the Russell 2000 has risen by 30% and the net Federal debt has expanded by an astounding $1.0 trillion dollars.
In a rational world operating with honest financial markets those two results would not be found in even remotely the same zip code; and especially not in month #102 of a tired economic expansion and at the inception of an epochal pivot by the Fed to QT (quantitative tightening) on a scale never before imagined.
And we do mean exactly those words. By next April the Fed will be shrinking its balance sheet at $360 billion annual rate and by $600 billion per year as of next October.
Altogether, the Fed’s balance is scheduled to contract by upwards $2 trillion by the end of 2020. And it’s apparently on a path that is so locked-in—-barring a recession—that Janet Yellen affirmed in her swan song that the Fed’s giant bond dumping program (euphemistically called “portfolio runoff”) would no longer even be mentioned in its post-meeting statements.
So the net of it is this: The Fed will sell more bonds in the next 3-4 years than had been accumulated by all of the central banks of the world in all of recorded history as of 1995!
That prospect alone might give a rational stock market at least some cause to pause. After all, the Fed’s $2 trillion bond selling campaign (likely to be joined by the ECB in 2019 when a German replaces wild-man Draghi) is on automatic pilot unless there is a recession.
So stock prices are either going to be battered by slumping profits if the business cycle hasn’t actually been abolished; or, in the alternative, rising bond yields will sharply inflate the carry cost of $12.5 trillion of US non-financial business debt (e.g. a 200 basis point increase in rates would lower pre-tax business profits by $250 billion or 15%) even as PE multiples shrink and stock buybacks are sharply curtailed.
And that’s not all, as the late night TV man says. There is literally a fiscal red ink eruption heading straight at the Fed’s balance sheet shrinkage campaign that will rattle the rafters in the casino.
As detailed below, Uncle Sam’s borrowing requirements are likely to hit $1.25 trillion or more than 6% of GDP in FY 2019 owing to the fact that the tax bill is so heavily front-loaded and the GOP’s wild spending spree for defense, disasters and much else.
To continue reading: The Coming Fiscal Derailment—Why FY 2019 Will Sink The Casino