Trump Inflation Trade Revives

I was wrong. The Trump inflation trade is back with a vengeance. Stocks and the dollar are up, bonds and gold are down (not a lot). Speculation over the Trump tax proposals (Trump called them ‘phenomenal’ last Thursday with no details) got the mania going again. Sentiment is now at all-time record highs for stocks and the main indices are making new highs every day.

How many times can the same non-news make stocks go up? More times than I thought. This makes equities more vulnerable and gold even more desirably priced.

So, can the Trump tax reduction package possibly meet the enormous expectations the market has adopted? In my opinion, not a chance. The market expects that tax cuts are coming soon and this timing has been priced in. According to Speaker Ryan, they are not going to even take up tax reform until they dispose of the GOP’s Obamacare “repeal and replace” pledge, but even Trump now says that may take until next year. It’s turned out to be far more complicated than they thought.

Any day now, the traders will realize that the Trump Stimulus is, and always was, a delusion. The big earnings-boosting corporate tax cut and the trillion dollar infrastructure program are not going to happen. A nation with $20 trillion of debt and $10 trillion more in built-in deficits over the next decade under current spending programs can’t afford more stimulus. There is no way that Trump’s plans do not swell the annual deficit to more than $1 trillion per year, shattering what remains of the GOP’s fragile cohesion.

Instead, we are going to see the mother of all debt ceiling battles. The debt ceiling holiday ends on March 15. The free-spending no-ceiling authority Obama had will be gone. The federal government’s cash balance has run down from a peak of about $450 billion in November to just $304 billion as of last Friday. This means that the Treasury will run out of cash by around July 4th. After that, all hell will break loose. In short, the Trump Administration is only weeks away from descending into a fiscal nightmare. That will include a debt ceiling crisis by mid-summer and government shutdowns. For good measure, you can also throw in a bitter Congressional battle over lifting the defense caps, as demanded by the Trump cabinet’s posse of generals and military hawks, while keeping the caps on domestic appropriations in place.

The Democrats are going to have a splendid set of opportunities to stop the Trump program in its tracks. But many Republican Congressmen who got elected on a mandate to cut spending and reduce the deficit will be just as much trouble to the administration.

I may have been wrong last week but I am more than confident that I will be right in the end. In my opinion, the Trump inflation trade is going to collapse and we don’t have long to wait.