Denialation: The Problem That Fixes Itself

We were told that the first half of this year would be painful but that the "goodies" will come in the second half via the tax cut. However, it appears that the tax cut will be the locus of maximum pain. The Trump economic program is imploding in real-time while bullish pundits constantly recommend buying stocks. From an historical standpoint, it won't be a good look for Wall Street.

Late last week after the Friday close, Moody's downgraded the U.S. debt. Bullish pundits were quick to point out that Moody's was merely joining the other major ratings agencies in downgrading the debt one notch below AAA. The Monday market dip got bought with both hands. But it's not just the fact of the downgrade that matters, it's what Moody's had to say about the U.S. deficit that was an indictment of the Trump economic program:

"The U.S. government is spending far more than it takes in as revenue, causing ever-rising debt — and there is no sign that will change anytime soon."

It is one more sign that an era in which the U.S. government could borrow seemingly limitless amounts, without experiencing the cost of higher interest rates and inflation, may have come to an end."

Recall that Trump ran on the promise that he alone could cut taxes AND balance the budget. A miraculous event that has never happened before in U.S. history. Shockingly, we are now learning that it was a total fabrication. Exiting the first half, we now know that BOTH the Elon Musk driven DOGE government cuts combined with tariff revenue, will be wholly inadequate to pay for the tax cut. A message that was just confirmed by Moody's. Here we see that Trump is following the pattern of the past 35 years of ever-increasing U.S. deficits due to GOP tax cuts.

Recall that the first part of Trump's program which was to reshore manufacturing by raising tariffs, is now leading to 20 year high inflation expectations. The second part which is the self-funded tax cut is now also pressuring the bond market. The combination of which are sending bond yields higher and the dollar lower. As we see below, the deflationary economic backdrop which allowed Trump's tax cut to pass in 2018 is the polar opposite of the inflationary economic conditions that abide currently. Which means that the impending tax cut is going to lead to EVEN higher inflation expectations.

Therefore the bond market is now repudiating the entire Trump economic program:

Unfortunately, bullish pundits have been telling us for the past 45 years that "deficits don't matter". Well all of a sudden deficits do matter, because after all it was only a matter of time. For every other country in the world, deficits have ALWAYS mattered, therefore it was only the munificence of the dollar exorbitant privilege that kept the U.S. from collapsing into Third World status. Unfortunately, the MAGA program is putting the U.S. on the same trajectory as every other country that ignores its burgeoning debt. Third World status.

Fortunately, from a markets point of view I remain optimistic that this divergence between fantasy and reality will continue only until markets collapse, thus sending the economy back into a deflationary state, and allowing for another Fed economic bailout. Sadly, the stock market will have to implode in order for the economic bailout to begin.

In summary, everyone makes their own choice as to what they believe, and then deserves the consequences.