Broken Promises

POITOU, FRANCE – “We live in a slow-growth world,” summarized a canny friend, “but with high-growth debt and high-growth asset prices.” Today, we turn to a report on Zero Hedge for further precision.

But we’ll get to that in a minute. First, let’s begin with less precision. The promise of the Trump administration was, in a nutshell, that it would look ahead and improve the future before we got there. How?


President Trump: so far the future proves more resistant to MAGA-type improvements than originally expected. That is not necessarily the Donald’s fault, but so far it is definitely a fact. [PT]

Illustration by  Les Lea Ellison


Drain the “swamp”,  cut the regulations, slash corporate tax rates by about 20%, kill O’care,  raise tariffs on imports to reduce the trade deficit – these are all measures that were supposed to increase stagnant economic growth rates. Higher growth would then fill the malls and restaurants and make it possible to pay our debts.

With the exception of the boneheaded proposal for tariff hikes from Trump’s trade czar, Peter Navarro – which would have the opposite effect – these changes might have been successful. Too bad “The Donald” has been able to fulfill so few of his campaign promises.

We predicted as much. We were right. And many Dear Readers will never forgive us. They seem to think that because we saw it coming, we willed failure upon Team Trump. We deny the charge. We have no such power.


“Idiot” Allegation

In yesterday’s mailbag alone, several readers objected. For example:


Mr. Bonner, you have been out of this country too long. You have lost touch with the everyday American – yes, the “idiots,” as the libs say, that put President Trump in office. Read Mr. Gingrich’s book “Understanding Trump”. I’ve always enjoyed a lot you write but you’re way off base on the president. I’m afraid you may fall into Taleb’s IYI group.

– Stanley P.


IYI group? We had to look it up. Black Swan author Nassim Taleb is writing a new book called Skin in the Game. In an excerpt, he argues that many of the elite are “Intellectual-Yet-Idiots.” We don’t contest the “idiot” allegation, but we know Nassim, and we doubt that we are the sort of idiot he has in mind.


Another reader:


“You have it wrong. Trump is not the reason the swamp isn’t draining. It’s because of people like you that blame one man, the president, for decades of abuse from Congress on the American people. Everyone that has their personal agenda is preventing him from draining the swamp. Do you really think one man can do it? If you do, you are more challenged than I thought.

Rather than being like everyone else and piling on, here’s an idea: Why not look at the positive things Trump has done? Because if he hadn’t, you and everyone else would really be running for the hills by now. Or in your case, the failed ranch. I am so sick and tired of you people that claim to be so smart about everything. You are no different than Congress. You are all the same… the swamp that will destroy this country.”

– Michael P.


Uh… that was just our point. One man – especially one as limited as Donald J. Trump – couldn’t beat the Deep State. As to how that makes us a swamp critter, we have no idea.


Quite a few people argue that the swamp draining exercise has gone a lot less well than hoped or advertised. For the moment, we are still prepared to keep an open mind on this point though. Yes, Trump was/is evidently overwhelmed by the combined forces of the DC establishment, the Deep State and the mainstream press (all of these groups overlap), but perhaps he is consequently playing a more subtle game now than is immediately obvious. We are saying this for two reasons: 1. occasionally, small hints emerge in things he says or does that seem to point in this direction. 2. underestimating Trump is what everybody does best – just remember the primaries and the election. He made 99% of US political pundits look like complete fools along the way. That may well be one of the reasons why he continues to be vilified so vigorously by the chattering classes. In a way the IYI idea is not completely off the wall in this context (not when aimed at Bill, more generally speaking). In the run-up to the election Trump often came across as uncouth and dumb… but his opponents in the punditry, the press and the political arena were the ones who ultimately ended up with egg all over their faces (smug NYT headline on the morning of election day, paraphrasing from memory: “Hillary Clinton has a 90% chance to win by a landslide”). It is more difficult to pull off a comparable feat in Washington we imagine, but who knows. The show isn’t over yet. [PT]


“Bring Me Some Tariffs!”

Another comment from the Diary mailbag:


The president won’t be throttled so easily. In my opinion, from 80+ years of voting and observation, Mr. Bonner is leaping to his conclusions and has been swallowing too much swamp water.

– Robert B.



But today, we will leap even further with an even bolder prediction: The only thing the president will achieve is a partial implementation of his least worthy objective: putting up trade barriers.

A major reform of the tax code… O’care… entitlements… even the border wall with Mexico… will require Congress to go along. Mr. Trump won’t get it. He’s a win-lose guy. Not a cooperation guy. That leaves only war making and trade – areas where the chief executive can put up his own walls.

Mr. Trump has already given up his America First foreign policy pledge. Next, he will turn over tax reform and monetary policy to the Goldman Group – led by Cohn and Mnuchin. That will leave him with only one wall left: trade policy.

A report out yesterday by news outlet Axios tells us that Mr. Trump is getting frustrated. In a private meeting, he urged his underlings to get out their trowels. He reportedly said to them, “I want tariffs. Bring me some tariffs!

Tariffs he will probably get. And they will have the result they always have: stifling international win-win deals, slowing trade, and reducing economic growth.


Downtrend in Growth

Which brings us back to the point of departure. U.S. asset prices… and debt… depend on future output. People must pay their debts and buy their products and services with tomorrow’s income.

Keeping it simple, U.S. national debt – at least according to the official tally – doubled over the last eight years. But output and incomes didn’t double. Instead, GDP went from $14 trillion to $18 trillion, an increase of less than 30% (again, based on official figures).


The Wilshire Total Market Index, the broad true US money supply TMS-2, total federal debt and GDP, all indexed to March 2009 = 100 (when the stock market roughly bottomed out after the GFC). The gap between the stock market and in the other data series is so large that is not immediately obvious just how big the gaps between those are – but they are also quite stunning – especially for a period of just eight years. And once again it is quite conspicuous that economic output – which is what must ultimately support the debt and the valuations accorded to income-producing assets – lags everything by a huge margin. [PT] – click to enlarge.


In other words, government debt is increasing more than three times faster than the economy that sustains it. And over the same eight-year period, U.S. stock prices tripled, increasing 10 times faster than the economy they depend on!

As reported previously in this space, in terms of sales – which can’t be fudged – U.S. stock prices haven’t been this high since the heady days of the dot-com bubble.


Actually, the median price-to-sales ratio of S&P 500 component stocks is by now far above the peak seen in the year 2000 (as the market was mainly driven by a handful of big cap stocks in the final phase of the late 1990s tech bubble). Based on this indicator, the stock market is currently at its most overvalued level ever. There are other indicators which remain below their manic year 2000 peaks (most are either at or above their 1929 peaks though), but the important point made by this chart is that there is essentially no sector to rotate into when the bubble bursts, as nearly everything has become egregiously overvalued.  [PT] – click to enlarge.


And a new report on Zero Hedge, by fund manager Francesco Filia, tells us that in terms of anticipated growth, stock prices are higher than ever before:


When measured against potential growth, even on its highest earnings, the S&P has never before been this expensive. It is 60% above its historical average fair value. […] [T]he point we make is that the willingness of investors to pay up for future earnings – even the most generous one as multiples are projected against the highest such earnings in 10 years – must be related to potential GDP growth in the years ahead, as an historically-reliable proxy for earnings potential.

It is one thing to buy 30x earnings if the economy grows furiously; it is quite another to spend that much if the economy slow-walks. […] The thing is that long-run growth has declined for decades now, as it is embroiled in the structural trends of Secular Stagnation: bad demographics (declining labor participation rates and shrinking working population in advanced economies), over-capacity and over-indebtedness, falling productivity of new credit, low productivity of labor and capital, disruption from new technologies. […]

The downtrend in potential growth spans several decades; an inversion is possible but imprudent to factor in.


The S&P price-to-peak earnings growth ratio, adjusted for trend growth. The calculation is based on: S&P quarterly price data, source Bloomberg; corporate profits after-tax, quarterly data, average of the two highest quarters over the previous 10 years, source FED St Louis; US real GDP % change, rolling 10-year average, quarterly data, source IMF. In other words, here is yet another indicator in terms of which the market is more overvalued than ever before due to massive monetary pumping by central banks. The hangover from this will be a real doozy as they say. [PT] – click to enlarge.


Future incomes will support neither stocks nor bonds. Prices of both must come down.


Charts by: St. Louis Fed, John Hussman / Hussman Strategic Advisors, Fasanara Capital Ltd.


Chart and image captions by PT


The above article originally appeared at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.




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