Trump will take the market to a fiscal bloodbath

04 March 2017 3:17 pm

After Trump’s address to Congress, which said nothing new, the Dow Jones surged to its all time high of 21,000.

Trump’s speech was widely praised for its positive tone.

But the problem is it lacked specifics about tax reform and deregulation, two key components of the market's postelection rally.

So for now, investors are trusting Trump to deliver. The question is how long for?

One analyst at Bank of America, has forecast a great fall in the second half of 2017. Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, dubs the present market euphoria the "Icarus Trade”. He says the US share market is headed for a "great fall" in the second half of the year, when the cycle shifts moves into the next phase, and investors are confronted with a hawkish Fed at a time when corporate earnings per share are weakening. At that point, he argues, the "Icarus Trade" will turn into the "Humpty-Dumpty Trade".

The problem is US stocks are extremely overvalued. The Fed’s chair Janet Yellen jawboned the Fed into a March rate increase.

At the same time, however, US GDP, as reported for the fourth quarter 2016, slouches along at just 1.9 percent.

Add to that Trump’s policy of increasing military spending by $54 billion without increasing the deficit. How so?

Well, the $54 billion increase would be offset by cuts to other government departments and agencies. While this proposal doesn’t increase the $500 billion deficit, it doesn’t decrease it either. The bottom line is that $54 billion dollars will still be added to the US debt.

Then there is the prospect of the US government hitting the debt ceiling on March 16.

This is why former Reagan Administration White House Budget Director David Stockman is warning that Trump will take the market to a “fiscal bloodbath.”

“I don’t think there is a snowball’s chance in the hot place that’s going to happen,” Stockman said. “This is delusional. This is the greatest suckers’ rally of all time. It is based on pure hopium and not any analysis at all as what it will take to push through a big tax cut. Donald Trump is in a trap. Today the debt is $20 trillion. It’s 106% of GDP.Trump is inheriting a built-in deficit of $10 trillion over the next decade under current policies that are built in. Yet, he wants more defense spending, not less. He wants drastic sweeping tax cuts for corporations and individuals. He wants to spend more money on border security and law enforcement. He’s going to do more for the veterans. He wants this big trillion dollar infrastructure program. You put all that together and it’s madness. It doesn’t even begin to add up, and it won’t happen when you are struggling with the $10 trillion of debt that’s coming down the pike and the $20 trillion that’s already on the books.”

When that happens, there could well be a new global financial crisis.