BALTMORE – “Fight Trump! Fight Trump! Fight Trump!”
There must be rejoicing in “flyover country” where “The Donald” is regarded as an American hero.
But long faces dominate on the two coasts, where he is considered a sort of biblical curse visited on the Establishment by vengeful gods.
Last night, we heard chanting out on the street near our Baltimore headquarters. A small crowd of protesters stopped traffic, briefly, on Charles Street.
So far, up in our office, we’re enjoying a jolly revolution. Hillary supporters are whining and kvetching. They would be “soul-searching” if they had souls to search. Instead, they are figuring out how to hold on to their zombie incomes, crony deals, and claptrap theories.
We got a report from the Soho House private members’ club in Los Angeles:
Oh Dad, you wouldn’t believe it. Hollywood is so liberal… so politically correct. Many of the people in the club were shrieking when the state-by-state results came in. They were in a panic. I was afraid they were going to jump off the roof.
But we will neither celebrate nor look for a sharp object. Instead, we’ll put on our thinking caps. What will a Trump presidency really mean?
To many, including many of our own dear readers, a Trump in the White House means a victory over the Insiders. He is supposed to bring “a new political order,” says The Wall Street Journal.
Didn’t he promise to “drain the swamp”? Didn’t he stand up to the Deep State? Won’t he do to Washington and Wall Street roughly what Sherman did to Atlanta?
“See,” they say triumphantly, “voting does matter. With our man in the White House, no dream is too big. Now, we’ll make America great again. Won’t we?”
But you don’t pay us to cheer with the winners or chant with the losers. In fact, you don’t pay us at all, which makes our comments worth at least what you pay for them.
Sometimes right… sometimes wrong… and always in doubt… we just try to connect the dots.
So let’s take a look…
Trumpism hit the markets on Tuesday night like a fox entering a henhouse.
Panic broke out. Feathers flew. At one point, the futures on the Dow were down and seemed to be heading to an 800-point loss.
But when the sun came up, the hens were still alive and a Trump presidency didn’t seem so bad.
Mr. Trump never suggested that he would root out the real problem behind low growth and high inequality: the Fed’s fantasyland credit system. Nor did he ever claim to be an austere conservative. He will not cut spending. He will increase it.
“Stocks surge as investors put money on stimulus,” reports The Wall Street Journal.
Banks and jail operators soared. Apparently, the markets don’t think Trump will be bad for Wall Street or the prison industry. Pharmaceutical stocks rose, too. What does that mean?
Investors must not expect Trump to shake up the medical cronies or lower the cost of drugs.
Other big winners include defense and infrastructure stocks. What? Wasn’t Trump supposed to stop these dumbbell wars and bring the Pentagon to heel?
And as for infrastructure… we could almost see smiles on two of our favorite claptrap economists – Larry Summers and Paul Krugman.
Both have urged the feds to do precisely what Trump now proposes to do: Pour more concrete.
The drumbeat for a massive infrastructure spending program will be more apparent later when the next crisis appears. But you could have seen it coming for months.
The insiders are desperate to keep the feds’ credit money system alive. But monetary stimulus measures have flopped. All that is left is fiscal stimulus – old-fashioned Keynesian deficit spending.
The president-elect promised it on election night. And markets have – rightly or wrongly – believed him.
They are betting that Donald J. Trump will come into the White House not with a stiff broom, but with more dirt… that he will come not to bury the Deep State, but to save it.
They are probably right.
Further Reading: Below, we are continuing an important series of essays from Bill’s longtime friend and founder of Stansberry Research Porter Stansberry. Today, Porter explains that no matter who is president, no matter which party is in power… the only thing our government can do about a credit cycle is make it worse. That’s exactly why he wants to help you prepare now.
THIS ESSAY WAS ORIGINALLY
PUBLISHED NOVEMBER 9, 2016, IN STANSBERRY DIGEST
by Porter Stansberry
Trump won… Some people are happy. Some people are acting like someone shot their dog. But nobody likes my answer about what Trump means for the markets. So what do I (Porter) believe will happen now?
Well, my answer flies in the face of virtually every modern economist and pundit on CNBC. Virtually everyone believes that government spending and/or tax cuts will have a powerfully positive effect on our economy.
The Republicans believe tax cuts and military spending are the basic formula for economic prosperity. The people cheering today believe that Trump’s wall (his announced infrastructure spending), his tax cuts, and his estimated $6 trillion budget deficit over four years will create winners in the stock market and wealth for our nation.
In some limited ways, that will prove to be true. The Pentagon, for example, is the world’s largest consumer. It buys more oil than any other entity. And if Trump builds a wall across our southern border, he’s going to buy a lot of steel. But in other, far more important, ways, the idea that government spending and government debt is a positive force in the economy is completely wrong. Fatally wrong.
We’re in the midst of a weeklong series of Digests that I’m writing in order to explain what I believe will be the best and most important series of trades of my entire career. As you surely know by now, it’s the idea behind our brand-new service, Stansberry’s Big Trade.
I believe we’re approaching an important new credit-default cycle, which will create the largest legal exchange of wealth in history. Investors in highly leveraged equities will be wiped out. Investors who can anticipate this massive wave of coming corporate default will make a fortune. And that’s my goal – to help you understand why this cycle is inevitable so you can position yourself to profit from these events.
It was a superb example of the far-reaching and poorly understood influence of the credit markets.
Today, given Trump’s unexpected victory, I’d like to focus on the role government is likely to play in the coming debt crisis.
I want to make sure you understand… no matter who is president, no matter which party is in power… the only thing our government can do about a credit cycle is make it worse.
You only need to understand two economic ideas to see through the media news and know what’s really going to happen next. The economic forces I describe below are far more powerful than any particular candidate or political party.
The first economic concept is easy: It’s the declining marginal utility of debt.
This won’t surprise any subscriber who has ever owned a business or used a credit card. At first, small amounts of debt create large percentage changes in spending and investment. But, as debts add assets and matching liabilities to your balance sheet, additional debts make a smaller and smaller percentage change in growth.
Say you’re a college student. Your income may be $10,000 a year, working a part-time job. If you take out a $5,000 loan, you can increase your spending dramatically – a 50% increase. But after your fourth year of college, you will have compiled $20,000 in loans on your balance sheet. This plus your income for the year means an additional $5,000 in debt will only increase your asset base by 16%. And as your debts grow, the marginal increase in utility provided by each additional dollar in debt will decrease.
As your debts (like our government’s) tally toward $20 trillion (or more than 100% of GDP), the marginal utility of additional debt can actually become negative.
Before we move into the negative implications, let us first prove our contention that, like every other economic variable, debt suffers from declining marginal utility.
Just look at the following chart. We’ve taken actual U.S. GDP (the total production of our economy each year) and divided it by total public debt. In the 1960s (at the very top of the chart), each additional dollar in government debt produced at least an additional dollar in GDP growth because government spending was a smaller part of the economy and government debts remained small.
Of course, as spending and debts grew, we began to see the effect that the marginal utility of deficit spending started to have. Compared with debt, GDP began to shrink as each dollar of additional debt led to less and less growth in GDP…
Mainstream economists tend to ignore the marginal utility of debt… But they don’t deny the concept. What follows, however, is extremely controversial. Dr. Lacy Hunt and a growing number of academic economists have found, using empirical data, that contrary to all conventional Keynesian economic theory, government spending actually hurts the economy over time.
Here’s Hunt summarizing the most recent academic data…
Based on academic research, the best evidence suggests the [government expenditure] multiplier is -0.01, which means that an additional dollar of deficit spending will reduce private GDP by $1.01, resulting in a one-cent decline in real GDP.
The deficit spending provides a transitory boost to economic activity, but the initial effect is more than reversed in time. Within no more than three years the economy is worse off on a net basis, with the lagged effects outweighing the initial positive benefit.
While Trump’s wall-building and tax cuts can temporarily boost GDP, within three years, his spending will cut into GDP at a rate roughly equal to 1% of total government spending.
This is completely counterintuitive. Despite the large number of different academic studies that prove a negative government-spending multiplier exists across multiple countries and time periods, many people can’t accept the idea.
Hunt believes it can be explained by looking at how government spending has changed over time. He points out that since the early 1970s, "mandatory" government spending (on social programs like Medicare and Social Security) has grown from being roughly 50/50 with discretionary government spending (like the Pentagon) to being almost 70% of government spending. These kinds of transfer payments can’t produce any wealth. They’re simply a redistribution of income that’s being produced elsewhere in our economy.
Research shows that a negative multiplier only exists when we have a large public debt burden – more than 70% of GDP, according to most studies.
Studies also suggest that the magnitude of the negative multiplier increases with debt load, but in a non-linear way. This can only be explained by the Austrian School of Economics’ ideas about game theory (as we discussed in yesterday’s Digest): As individuals in an economy begin to fear a monetary collapse, they cause additional economic disruption – like buying gold, fleeing a currency, or simply withdrawing from the legal economy.
When you put these ideas together – the declining marginal utility of additional government debt, the negative multiplier of government spending, and the non-linear impact of massive government debt burdens – it’s hard to believe that the president can do anything to alter the course of our ongoing credit-default cycle. The only prediction that’s consistent with sound economic theory is that the government is going to make this default cycle a lot worse.
Editor’s Note: By finding companies and industries that have been completely corrupted by unsustainable debt loads, Porter and his team are teaching readers how to hedge their portfolios from the risks of the coming default cycle. They believe that making 20 or 30 times your money in some of these names is likely.
As Porter says: “When you know that a company cannot ever afford to repay its debts, it’s only a matter of time until it defaults. You can either be a winner or a victim when that happens. It’s up to you.”
If you haven’t signed up for the free webinar Porter is hosting next Wednesday, November 16, at 8 p.m. ET, this is one you don’t want to miss. He’ll show you exactly how to make the life-changing gains he sees coming. You can click here to reserve your spot.
Porter recently sat down with Bill to discuss his Big Trade. You can watch it here.