The Goldman Sachs Regency

We aren’t shedding many tears over Steve Bannon’s departure. His ethno-nationalist and protectionist worldview are anathema to true notions of liberty, free markets and a minimalist state.

While Bannonism presented itself as a coherent alternative ideology to mainstream Big Government and globalism, it actually boiled down to a superficial and incoherent potpourri of cultural resentments and prejudices, economic shibboleths and amateur historical theorizing. Indeed, it appealed to the lumpen-intelligentsia of the alt-Right precisely because it proposed to replace the oppressive statism of the liberal status quo with a more virulent right-wing statism rooted in protectionism and nativism.

Notwithstanding the rotten essence of Bannonism, however, the firebrand self-promoter who was Donald’s chief strategist got it right in his parting shots at his internal White House enemies. In so many words, he correctly asserted that the nation will now be ruled by a Goldman Sachs Regency and a team of three generals—Kelly, McMasters and Mattis—–who embody the essence of Albert Einstein’s famous definition of insanity: Doing the same thing over and over and expecting a different result.

Time to buy old US gold coins

“The Trump presidency that we fought for, and won, is over,” Bannon told the conservative Weekly Standard on Friday after his White House departure. “We will make something of this Trump presidency. But that presidency is over.”

So in the interim, the Donald will function, as Robert Wenzel aptly described it, as “something of a tweet master frontman” with the Vampire Squid seemingly riding higher than ever before—-even higher than in September 2008 when the clueless George W. Bush handed a blank check to the Wall Street bailout brigade at the Treasury led by former Goldman CEO (and Big Government liberal), Hank Paulson.

But that’s actually an illusion: Goldman’s plenipotentiaries in the current White House—Gary Cohn, Steve Mnuchin, Dina Powell (#2 at the NSC) and Jared Kushner—-are likely to bring about the final destruction of the Trump presidency, thereby triggering a thundering collapse in the financial markets which will finally crush Goldman Sachs and its posse of gamblers and crony capitalist racketeers.

What we mean is that during the upcoming battles over the crucial economic issues of the debt ceiling increase, tax reform and the ObamaCare coverage/premium crisis, Trump will be getting the worst advice imaginable. That is, these lifelong Democrats will push the Donald into attempting to make “bipartisan” deals with the Chuckles Schumer and Nancy Pelosi that will blow the tenuous GOP majorities to smitherns, and do so in the name of status quo statism.

Right out of the Box after Labor Day the destructive game plan of the Goldman Regency will show up in thundering battles over a “clean” debt ceiling. The mainstream pundits make this sound easy-pezee with the notion that Ryan and McConnell need only line up a modest number of Democrats to supplement their own rank and file GOP votes to enact a debt ceiling increase. Such purported fiscal virtue would permit Uncle Sam to borrow all the money he needs to pay his bills and protect the sacred credit rating of the US Treasury.

Except it doesn’t work that way. If the Dems cooperate at all, it will be only on the basis of an onerous quid pro quo that requires Trump to give up the Mexican Wall, tax cuts for the wealthy, his proposed deep domestic spending cuts and also to fund the insurance company bailouts that are needed to forestall drastic premium increases and coverage cancellations during the 2018 insurance (and election) year.

To be sure, the Democrats are clever enough to demand this kind of quid pro quo as a side deal rather than as an explicit rider to the debt ceiling bill, but it would have the same effect if attempted. Namely, the Freedom Caucus and the vast majority of conservative leaning congressional Republicans would jump ship, thereby setting up a replay of the Boehner Betrayal: To wit, passage of a debt ceiling bill with an overwhelming Dem majority and only a corporal’s guard of Republicans.

As we have said repeatedly, we do not think Ryan is ready for early retirement; nor after essentially a 54-year lifetime in the Imperial City is McConnell looking to be drummed out of the Majority Leader’s job—especially given his humiliating failure on ObamaCare repeal and replace. So Washington is heading for weeks of fraught indecision, backroom maneuver and contentious political in-fighting that will scare the bejesus out of a casino that it is nearly catatonic with complacency.

That, and the fact that the market is breaking down beneath the shrinking number of Big Cap stocks and momo names that are levitating the averages, amounts to a set-up for a severe downside shock within the coming weeks.

As to the market’s rapidly weakening internals, consider that there are 2,800 stocks on the New York Stock Exchange. Back in early 2013 when the bull market was still being super-charged with massive QE purchases by the Fed, 85% or 2,380 of them were above their 200-DMA. By contrast, currently only 1,050 of them (37.5%) are above that level, meaning that the bull is getting very tired.

That vulnerability is also evident in other cyclically sensitive indices, but especially the Russell 2000 (RUT). Again, the index is a huge cross section of primarily domestic companies with an average market cap of just $2 billion. But the RUT is now 6.5% below its July 25 high of 1450, and, more importantly, has now plunged below its 200-DMA after the huge phony bounce from that level during the Trump Reflation euphoria.

Nevertheless, the RUT is still trading at an absurd 88X the reported net income of its constituent companies. This means that there is a veritable air pocket below in the event that the frail reed of the Trump Reflation story which underpins the RUT is decisively demolished. For instance, when the market plunged into its mini-swoon of January-February 2016, the RUT dropped more than 200 points or 21% below its 200-DMA. That would be 1090 today—–with much lower levels beckoning once the selling momentum accelerates.

And it will do just that because the RUT is being fueled by huge inflows from several ETFs (iShares, Vanguard and SPDR all have a tracking ETF) and various other forms of passive indexing. Stated differently, the robo-machines and day-traders have not simply been voting for Trump and an incipient economic and profits boom; what they have mainly been doing is chasing the index up the nearly 30% incline between early November 2016 and the July 25th peak shown in the chart below. Consequently, they are now stranded in the nosebleed section of the outfield bleachers.

The same pattern is evident in the Dow Transports, as well. After peaking at 9,742 on July 14th, the index is down by 6.4% and also has dropped well below its 200-DMA. Moreover, there is no reason it should be even remotely at current levels based on real activity in the main street economy.

For instance, rail car loadings are still 12% below their December 2014 levels; and trucking tonnage has been essentially flat for the past year.

Moreover, nearly all measures of domestic activity are flat-lining and threatening to roll-over. That is clearly the case with car sales, bricks and mortar retail, housing starts, restaurant traffic ( July was down 4.5%) and much more.

So the idea that corporate profits are about to rebound sharply is getting steadily debunked by the so-called “in-coming data”. At $104 per share, the June LTM earnings of the S&P 500 were still 2% below their September 2014 level. Likewise, current earnings of the Russell 2000 at $15.50 per share are actually 7.2% below their July 2105 level of $16.70.

It is only a matter of time, therefore, before the casino gamblers discover they are home alone on the earnings front—–even as the Gong Show in Washington intensifies suddenly and dramatically. Indeed, as of last Thursday, the Treasury’s cash balance was down to $82 billion, and at its current $2 billion burn rate per calendar day it will be gone by the end of September.

Not surprisingly, the Goldman Regency’s spokesman on this matter, Treasury Secy Mnuchin, was out this morning once again insisting on a “clean” debt ceiling bill.

Treasury Secretary Steven Mnuchin, speaking at an event in Louisville, said that “we need to raise the debt limit and it’s my strong preference is that there’s a clean raise of the debt limit.”

While Mnuchin conceded that he is “all for spending controls” and Congress has the “absolute right and the absolute obligation” to oversee spending, the Treasury secretary issued another stark warning that “he’ll run out of authority by end-Sept. to stay under the debt ceiling.”

Stated differently, Congress will have just days to reach a compromise on the debt ceiling when it returns from recess. But this will not be the cowered Congress of September 2008 that rolled-over to pass the TARP bill at the insistence of Secretary Paulson. This time Goldman’s bag-man will be told “no dice”.

After all, the Dems now have a President to hound from office and the Freedom Caucus will not again be intimidated by Wall Street into obeisance; it’s at full throated war with the Washington/Wall Street/media establishment that is attempting to overturn the 2016 election.

Indeed, Bannon on the outside will likely prove to be the Goldman Regency’s worst nightmare. There is not a chance that the bomb-thrower re-ensconced at Breitbart will tolerate a “capitulation to the left” deal with Chuckles Schumer and Nancy Pelosi for even a New York minute.

And as to the betrayal of the three generals, we will get to their nefarious doings tomorrow. But it is worth recalling that a principal architect of tonight’s giant Trumpian error of doubling down in Afghanistan is none other than General H.R. McMasters—-the one and same who wrote an entire book saying LBJ would have won the Vietnam War if he had only listened to his generals!

Reprinted with permission from David Stockman’s Contra Corner.

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