October 2017—The Quadruple Witching Begins

By David Stockman

It all makes sense. Not!

Since the Donald’s very improbable election victory the S&P 500 index has risen by 19%, the Dow by25%, the Russell 2000 by 26% and the Nasdaq index has returned 27%.  On top of that, the Nasdaq has posted 54 record closes this year and is well in its way to exceeding the 61 records closes of 1999, which occurred, as it happened, on the eve of the great dotcom bust.

Yet the above graph is a pure flight of fantasy because the visage embedded in the graph is actually Wall Street’s worst nightmare. The Donald’s historic mission was to be the Great Disrupter and bring down the baleful Wall Street/Washington regime that is ruining capitalist prosperity and American democracy. He is now almost there.

But the financial markets have been so impaired by 30 years of central bank fostered Bubble Finance that the boys and girls and robo-machines left in the casino have no clue about the global implosion lurking just around the corner. The are still making merry on the dance floor—-even as the world’s financial Titanic comes hard upon its denouement.

Indeed, what is now upon us is the quadruple witching month of October, 2017. We are not talking about standard options expiration dates, of course, but instead refer to four matters that are enormously more consequential. To wit, the fundamental forces in the world economy are now turning dramatically against the 30-year financial bubble that rages in its final days.

These October events include the beginning of global QT (quantitative tightening) led by the Fed’s $10 billion shrinkage of its balance sheet this month.That’s the first such contraction in decades and the beginning of an unprecedented central bank demonetization campaign which will drain trillions from the maniacally swollen financial markets.

The second force is the completion of the China’s 19th party congress, which paves the way for China’s newly coronated dictator—-the most powerful since Mao—to break the back of China’s runaway Red Ponzi. So doing, Beijing will extinguish the giant credit impulse of the last several quarters which has created the illusion of a global growth via short-term but unsustainable demands for raw materials, intermediate goods and CapEx.

The third force is the unprecedented, politically-fraught removal of a sitting President on “fitness” grounds. It will embroil the Imperial City in a deeply divisive power struggle that will bring governance to a virtual halt, and may end up destroying the Republican party as we know it. (Good riddance!)

And the fourth is the beginning of a thundering fiscal crisis in the Imperial City which will last for a decade or more. It will perforce cascade throughout the world economy, snuffing out the faux prosperity of recent decades that was an artifact of unsustainable debt and central bank fostered financial asset inflation.

We will have more to say about all of these quadruple witching forces in the days ahead. But as to the Donald’s impending demise, there is an extremely succinct answer.

We are quite sure that he has now crossed the line, and has picked the wrong target in taking on”Liddle Bob Corker”. The latter abides in the citadel of the Washington GOP establishment—he’s no Little Marco or Lyin’ Ted. In essence, the Donald has opened up a rip-roaring Republican civil war that he cannot win.

We think it comes about this way. Trump’s attack on McConnell and Corker—-who fully deserve it—-has unleashed the populist right to mount a purge campaign unlike any since the Goldwater era.

The commander-in-chief of this campaign is the newly liberated Steve Bannon—and the man’s thirst for bloody confrontation with the GOP establishment should not be under-estimated.

This is what he told his wingman in the mainstream media, Sean Hannity, last night about what is coming down the pike in 2018. In a word, he intends to mobilize the “base” against every Senate GOP incumbent except for Ted Cruz!

….. there’s only two or three Senators on Capitol Hill that have President Trump’s back. When you want to talk about why there’s no repeal and replace, why there’s no tax cut, why there’s no tax reform, why there’s no infrastructure bill, you saw it right there. Corker, McConnell that entire clique of — establishment globalist clique on Capitol Hill have to go. If we need any more proof about what they think, you heard it tonight. It’s an absolute disgrace…

They have total contempt for the forgotten man. They have total contempt for the base. That’s what you saw in Alabama. In Alabama when they came in with Luther Strange, with $32 million to destroy Judge Roy Moore you saw what the base thought of them. The base totally rejected him. These people have no respect for the working men and women in the United States.

And I tell you what, Senator Corker is an absolute disgrace…..if he has any honor, any decency, he should resign immediately. He should not let those words stand, what he said about the president of the United States… By the way, Corker got out because he saw what happened in Alabama. If he wants to — by the way, he should get back in because he’s going to get crushed in a primary. He doesn’t have the guts to get in — he doesn’t have the guts to get back in the race. He should resign immediately.

You might say thems is fighting words. And notwithstanding the obvious bluster and megalomania, Bannon does have a very serious angle that’s being thoroughly overlooked.

To wit, the GOP’s bigger hitter financial base is no longer Wall Street or the Fortune 500. Most of the leadership in those precincts went globalist and pro-establishment long ago.

By contrast, today’s GOP money bags come from Flyover America’s big winners in the energy patch, real estate, communications and technology. The latter have been taken for granted by the Washington GOP, but they are overwhelmingly hard-core conservatives and seriously doubt that they have gotten much at all for the hundreds of millions they have pumped into the RNC, the Republican congressional campaign committees and the high profile personal PACs of the likes of Karl Rove.

We have no doubt that Bannon is on to exactly that fissure and will be dramatically more successful in raising big dollars for GOP primary challengers than is now understood. In fact, his plan is to hit the GOP establishment where it really hurts—by raiding its campaign money machine:

 We are declaring war on the Republican establishment that does not back the agenda that Donald Trump ran on and the president of the United States, and that’s the agenda we know that backs the working men and women…

Karl Rove, Steven Law, these guys should get the joke. Their donors are coming to us because they are tired of having their money burned up by trying to destroy people like Judge Moore. It’s a new game in town. We are going to cut off the oxygen to Mitch McConnell. Mitch McConnell’s biggest asset is the money. We’re going to make it the biggest liability. We’re going after these guys tooth and nail.

Needless to say, Bannon is not going to get there. We believe that before the first thaw of spring the GOP establishment will move to terminate Trump’s Presidency in order to stop the primary bloodletting before it starts.

That is to say, the Donald has several dozen weekend tweet-storms left, and we have little doubt that he will use one of them to plunge into their trap. The irony is that Trump keeps talking about going “bipartisan”, but at the end of the day it will be the GOP establishment which goes bipartisan with the Senate Dems in finding the reasons and the votes for his removal.

We will say it again. The Donald may bring them to their feet during rallies in Flyover America, but that really doesn’t count for much in a system which is run by the permanent political class and their collaborators in the Deep State and the mainstream media.

The truth is, Trump started with almost no friends in Washington and now he is making enemies by the week. He will be shocked when they  show him the way to the Richard Nixon Memorial Helicopter Ride to Gonesville and almost no one comes to his defense.

He will also be even more shocked when the giant Trump Bubble collapses during his final days in the Oval Office, and the $5 trillion stock market gain he has taken to bragging about vanishes into thin air. Indeed, the Donald is so delusional about why the market is going up that he is digging his own political grave with mindless bravado:

Stock Market has increased by 5.2 Trillion dollars since the election on November 8th, a 25% increase. Lowest unemployment in 16 years and…….if Congress gives us the massive tax cuts (and reform) I am asking for, those numbers will grow by leaps and bounds. 

At the end of the day, however, the post-election stock surge was never mainly about Trump’s alleged pro-growth and huuge fiscal stimulus anyway.

That was, is and will remain just a pretext. The market is going up because its internal mechanisms of balance and discipline have been destroyed by decades of central bank pegging, propping and liquidity stimulus. There are no short-sellers or even real investors left—-just day traders, ETF machines and fund managers manacled to their benchmarks.

More importantly, after 30 years of being coddled by the Fed the casino does not believe the central bank is out of dry powder and is embarking on a historic and monumental  demonetization campaign that will drain liquidity from the casino like never before.

At some point soon, however, the accelerating cash drain, rising yields and broken vessels stuffed with excessive leverage will be impossible to deny. So will the Donald’s impending demise.

Then, the market will break in the classic Ernest Hemmingway fashion: Slowly at first, and then of a sudden. And overnight, the nation’s fiscal nightmare will come into full view.

To wit, recessionary deficits which soar toward the $2 trillion per year range. Yet there will be no way out—-as we will amplify tomorrow.