“Now it Begins” – David Stockman Warns That America’s ‘State Wreck’ Is Gathering Steam

Authored by David Stockman via Contra Corner blog,

Now it begins. They bought the February 8th dip just like the previous 40 odd plungelets in the stock averages since the March 2009 bottom, expecting another ka-ching in the easy money lane of the casino.

But this time it didn’t work. The market had been retreating for days and then tumbled 724 Dow points yesterday allegedly on the Donald’s $50 billion tariff assault on the China trade. 

Not surprisingly, the overnight follow-through in Asia was downright bloody with Shanghai down 3.4%, the Nikkei lower by 4.5% and China’s NASDAQ equivalent off by more than 5%.

But this isn’t just a case of nerves in the trading pits about a potential trade war, nor is it one of those pauses that refresh from the Wall Street bromide cabinet. And it’s most definitely not the shaking out of “weak hands” that the talking heads of bubblevision trot out when all else fails to explain a swoon in the averages.

Instead, we’d say it marks the rise of the Trembling Hands. And notwithstanding another dead cat bounce or two, they will soon populate the remnant still in the casino.

That’s because there is a lot more bad stuff going on than the Donald’s reality show version of a trade war. In fact, the better word for the latter would be a “Trade Bazar” based on yesterday’s announcements of extensive interim exemptions from the steel tariffs.

After you set aside all of the Western hemisphere producers, the entire EU, South Korea, Australia and sundry others, you have exempted upwards of 28 million tons of the 36 million tons of US steel imports. Except that each and every one of these steel suppliers have been invited to hire the beltway’s best lobbyists, lawyers and influence peddlers to bargain with the Donald’s henchman for the next 60 days on trade concessions in lieu of the 25% tariff.

Oh, and then there will be extensions and extensions of the extensions whenever the bargainers appear to be making “progress”.

Needless to say, this emerging “art of the deal” version of protectionism will make the existing Swamp look tame by comparison.

That’s because steel is just for starters. There are apparently more than 1,000 products on the list to be hit by the $50 billion China tariff, and the importers of each item will be hiring-up their own beltway bargaining squads. And we are talking about big hitters like Wal-Mart and Apple with virtual armies of beltway bandits at their beck and call.

And the same goes for the US exporters who are about to get slammed by targeted foreign retaliation such as the wine, fruits, nuts and seamless steel pipe exporters already named by China—to say nothing of the aircraft parts/module suppliers and the soybean farmers, among numerous beefier others, next in the line of fire.

It would seem that at a minimum, Barnum & Bailey retired their 3-ring circus a tad too soon. But there is surely no doubt that the 15,000 or so Washington hands working the foreign representation circuit, whether registered as lobbyists or not, will soon be thinking they died and went to racketeers heaven. It will be a war fought in the trenches of K-street based on bullets bulging with green stuff.

We mention the emergence of the Donald’s Trade Bazaar because the usual suspects are already sounding the “all clear” down on Wall Street. It will be a “pleasant little war” of no special moment—so its time to buy the dips yet again.

Or as veteran Wall Street hand, Marc Chandler of Brown Brothers Harriman, noted:

“People are presenting this as it’s a trade war. I don’t think this is a trade war…..We have been to this dance before.”

“Countries will respond with some symbolic retaliation on a small number of goods that make a little more than a rounding error in bilateral trade, take some measures to ensure that the defection of the U.S. does not lead to an import surge, and appeal to the conflict resolution mechanism at the WTO.”

Next?

Well, yes, next is exactly our point. The Imperial City is becoming swamped in conflict, dysfunction, distraction, distemper and massive decision circuit overload.

We call it State-Wreck and its been heading this way for a long-time. But the Donald is the coup d’ grace in flesh and blood. He will soon have the Imperial City tied in knots, and that’s even if he doesn’t fire Robert Mueller, which most surely he should and might.

Either way, there is a massive partisan blood-letting coming and the ordinarily trans-partisan Deep State will be right in the middle of the brawl. That’s because partisan Democratic hacks—-led by the detestable former CIA director John Brennan—- got way beyond their skis, and baldly high-jacked the tools of the Deep State in a desperate effort to prevent the election and inauguration of Donald Trump.

But the unveiling of what lies in its vasty deep is now beyond recall. The very real attempt by the Obama/Clinton leadership of the CIA/FBI/NSC/NSA/DNI/State/Homeland Security complex to meddle in the 2016 election against the Donald will all come out—-even as the Dems and their legal trolls on Mueller’s witch-hunting squad become ever more shrill in their McCarthyite hysteria about the Russians.

Moreover, the coming quasi-civil war will potentially bring both indictments of Obama’s election meddlers and a counter-reaction from a Mueller based campaign to oust the Donald. Indeed, what portends in the months ahead is more incendiary than anything to rock the Imperial City during the last century, at least.

But here’s the thing. This is not happening in a splendid vacuum with no import for the other end of the Acela Corridor. In fact, the entire state-driven economic and financial fantasy that has been building for more than 30 years is now squarely in harm’s way.

The former always depended upon Washington based stimulus, subventions, bailouts and booty. But now having attained an asymptotic high, the Great Bubble is stranded with no Washington fixers to keep it going; instead, it is fixing to slide into a long night of deflation, disorder and decay.

That is to say, we printed  2870 on the S&P 500, $19.7 trillion of GDP and $97 trillion of household net worth, but those stats weren’t the embodiment of sustainable capitalist prosperity; they were the fruit of a $68 trillion national LBO, a central bank-driven financial asset bubble that has no historical antecedent and the rise of an Imperial Deep State in Washington that is a mortal threat to both democracy and national solvency.

We ruminate on these large matters because in the last day or two signs of a new phase of crisis have proliferated.

Not the least of these is last night’s unseemly passage of a $1.3 trillion omnibus appropriations bill which encompassed 2,232 pages of fiscal largesse. While it funded every single agency of government at startlingly higher levels, not a single member of Congress had actually read it during the 24 hours between when it was printed and when it was enacted.

More on the measure’s mountains of domestic pork in next weeks postings—except to note that the Tea Party fiscal opposition has now been crushed once and for all. In fact, the action last night elevated the entire appropriated side of the Federal budget to a level that will add $4.2 trillion to the national debt over the next decade.

Still, the heart of the bill—a $695 billion defense appropriation for the current fiscal year—is the real tell. That represents a staggering $80 billion annual increase over the previous DOD spending caps—meaning that the Warfare State has busted loose from any vestige of restraint and rationality.

And it comes at the very moment that Imperial Washington has descended into outright bellicosity on all points of the political spectrum. Trump has taken himself hostage to the neocon interventionist establishment he campaigned against, while the Dems and progressive left have descended so deep into anti-Russian hysteria that they have become nothing less than handmaidens of the Warfare State.

Indeed, whatever impulse the Donald may have had toward curtailment of the America’s imperial interventions was obliterated on Thursday when he announced that his war-hawk general at the national security advisor post, H.R. McMaster, would be replaced by a downright horror show.

We refer to former UN Ambassador John Bolton. You really can’t say anything bad enough about him except that he is one war-loving sicko, who has rarely meet an unfriendly country he didn’t want to bomb or a un-compliant regime he didn’t want to change. That includes North Korea, Iran, Syria and Russia for starters.

But it’s worse. Now that he has installed Mike Pompeo at the State Department, Bloody Gina Haspel at the CIA and Bolton next door to the Oval Office, the Donald has surrounded himself with the neocon war department. It would literally be impossible to find a worse trio of militaristic interventionists, nor is it possible to ignore the immediate implications of their appointments.

As we shall lay out in Part 2, the trio and the Donald will soon be ending the one constructive thing Obama did during his eight years—-the nuke agreement with Iran. And that foolish action, in turn, will bust the middle east and the wider world wide open. It may even lead to military confrontation with Russia.

It also means that the impending fiscal carnage is now beyond recall, and that the mother of all “yield shocks” in the bond pits will soon shake Wall Street to the rafters.

Stay tuned, but also consider the State Wreck introduction we posted in the New York Times exactly 5-years ago at what turns out to be the half-way point to the calamity now at hand.