In his latest Email, Albert Edwards at Society General fires a shot at Trump's tax cut.
Edwards says the "fiscal expansion is probably the most foolhardy escapade in modern economic policy, and the timing of the fiscal stimulus that is utterly ridiculous and will only accelerate the collapse of US financial markets as the Fed hikes rates even more quickly."
I doubt this is the most foolhardy expansion in history, but it is reckless and ill-timed.
Here are a few clips from Edwards.
After some eighteen months of surprising to the downside, US wage and price inflation are rising briskly, putting intense downward pressure on financial markets. Yet another Fed-inspired financial Ponzi scheme now looks set to collapse into the deflationary dust. But the post-mortem will identify President Trump’s ludicrously timed fiscal stimulus as a key trigger for the collapse. A 15% deficit will be his legacy.
Whatever the arguments are in favour of tax reform in the US (and there are many), this is probably the singularly most irresponsible macro-stimulus seen in US history. To say it is ill-timed and ill-judged would be a massive understatement.
The outcome of this front-end loaded stimulus package is patently obvious. It will rapidly accelerate the end of the economic cycle.
Tim Lee of pi Economics opined recently on why the VIX will struggle to regain the very low levels of a couple of weeks back. “We are much further into the cycle of what might be thought of as an underlying tightening of monetary conditions. The Fed is contracting its balance sheet and raising interest rates. On top of that ... US imbalances are worsening with the personal savings rate set to fall to a new low while US government finances deteriorate further. Nominal and real bond yields are rising.”
Notwithstanding the fact that I do occasionally get my forecasts correct, I have another prediction on the US deficit. Because of the starting point of US fiscal policy, I have a very high confidence that in the next, not so distant, US recession, the US general government deficit will soar way beyond the 13% the OECD say was the peak for 2009. A ruinous fiscal deficit in excess of 15% of GDP will be Trump’s legacy.
Name the Crisis
That chart and many similar ones are making the rounds.
But as discussed, futures bets that the 10-year yield is about to break out are at extreme levels.
Inflation Talk Everywhere
All eyes are on inflation. The CPI jumped and Inflationistas Rang Alarm Bells.
One can easily find inflation in home prices, but the Fed does not count that.
Edwards' Email discusses the Phillips curve, a point on which we disagree.
Most believe there is serious wage pressure, but the data are highly suspect. Close analysis shows Acceleration in Wage Growth is a Statistical Mirage
However, Trump's seriously misguided tariffs may temporarily boost inflation, at least temporarily. Then think Smoot-Hawley.
Edwards says the next recession will bring outright deflation, helicopter money, negative Fed Funds and negative 10 year bond yields.
Overall, Edwards' view message closely matches mine.
I think the tax cuts were a huge mistake. For discussion, please see Tax Cut Stimulus Mish vs. Krugman: Libertarians Dead Wrong?
I have written many times that the low in long-term yields is not yet in, but I am not calling for negative rates just yet.
The next recession undoubtedly brings about outright deflation. Price deflation should to be expected when asset bubbles burst, and this is one massive bubble.
MIke "Mish" Shedlock