Coming up the tracks from Washington…and getting up steam after the news of the last couple of days…is the ol’ Deep State Cannonball.

Headed in the opposite direction is the most over-aged, overpriced, and overhyped gravy train the world has ever seen…the 9:07 am from New York’s financial district.

In the following few words, we watch…and wonder what will happen when the two crash into each other.

 

Sprouting wings

Yes, Dear Reader, both locomotives are in motion. But reporters have their eyes only on the ol’ Cannonball.

They tell us that Trump and his closest associates are crooks. His personal lawyer admitted wrongdoing; his campaign manager was found guilty by a jury.

But now…a miracle — his former fixer lawyer has suddenly sprouted wings!

The metamorphosis began, we are told, when Michael Cohen saw President Trump cosying up to Russian president Vladimir Putin. Filled with patriotic gas, Cohen couldn’t help himself. He turned bright white like the Archangel Gabriel.

And rising up out of a lifetime in the sewers of the Greater New York metropolitan area…finally, and apparently for the first time in his life…he decided to tell the truth.

The Donald did direct him to pay off Playboy models and porn stars to keep quiet, and, in doing so, break federal campaign finance law.

Coinciding with Cohen’s discovery of truth, it was also the first time in his life the putz faced a federal prosecutor with eight criminal violations in his back pocket.

But now, he’s seen the light; he’s been saved…Alleluia!…He’s also teamed up with the Clintons’ sleazeball fixer, Lanny Davis, who intends to use the tricks he learned defending Bill Clinton from impeachment charges to drive Donald J Trump from office.

And now you can go to a website — MichaelCohenTruthFund.com — where you can donate money to encourage Cohen to remain in the angel band…and keep singing to the G-men.

 

Sordid and greasy

Yes, the press is turning Michael Cohen into a hero, hoping he has some as-yet-unrevealed, unsavoury information that can be used to run Donald Trump out of town.

The whole show would be simply sordid and greasy, but the odds of something going wrong are increasing.

The nation is deeply divided. A recent study from Pew Research tells us that politics is now more divisive than race, gender, or religion. The two sides face off…each convinced that God Himself is on their team.

It is a bit like the run-up to the War Between the States.

On both sides, politicians roused the rabble with extreme positions. Some ranted against slavery. Others railed for it. There was no way to reconcile them. No middle ground. The ‘moderates’ were shouted down and sent home.

In order to win in the primaries — where a small, determined group can have influence far beyond its numbers — candidates on both sides had to move further apart.

The result was the worst debacle in American history…with as many as one million dead.

 

Longest bull ever

While this political catastrophe heads north at a breakneck speed…a financial catastrophe comes barrelling down the tracks from the other direction.

The S&P is in record territory; it’s the longest bull run ever, according to some analysts. That alone should be reason enough to sell out.

Trees do not grow to the sky. And bull markets do not last forever. Something always stops them.

Sooner or later, investors are bound to notice that the trade war, for example, could topple China’s proud tower of debt and delusion.

China has been the ‘engine of growth’ for much of the world economy for the last 30 years. What happens when this engine coughs and sputters…and then stops dead on the tracks?

No one knows…but a worldwide depression and a stock market crash in the US are likely consequences.

At home, the federal deficit is a time bomb. It’s expected to be over $1 trillion per year starting in 2019…and it will explode if anything goes wrong. This puts the Fed in a jam.

The Fed is currently committed to Mistake #2. It is raising rates to offset the damage it did with Mistake #1 (leaving them too low for too long).

Typically, Mistake #2 leads to a crash/recession…and brings on Mistake #3 — cutting rates in a panic to try to rescue the stock market. But it usually manages these mistakes to correspond with the election cycle and help get presidents re-elected.

This is where we left you yesterday.

 

Mistake #4

The Fed can only cut rates if it has rates to cut. So it needs to bring them up off the ground now. (Mistake #2).

But in a crisis, it will want to cut rates to revive the economy, help the feds unload their bonds, and rehabilitate the stock market (Mistake #3).

Occasionally, however, inflation gets ahead of it and it needs to revise the program. That is what happened when Paul Volcker took the Fed chief job in 1979.

Ignoring the politicians, and backed by Reagan, Volcker made no mistake. Pushing up the federal funds rate to 20% in December 1980, he got in front of inflation and beat it.

Today, there is no ‘Tall Paul’ Volcker at the Fed and no Ronald Reagan in the White House. Instead, today’s Fed faces a brawling Deep State, with a chief executive — a ‘low-interest’ guy — who is already ‘not thrilled’ by rate hikes. What will it do?

Mistake #4!

Yes, Dear Reader, here is where the trains collide. Degenerated politics and late-cycle bubble finance. The Fed will not fight the fires of inflation; it will throw on more gasoline.

The Donald — always a disrupter — will break with the conventions that have ruled Fed policies for the last 100 years.

Rather than take the pain of an economic correction early — in 2017 — he left it for the future. And now, there it is…right in front of him.

When the future comes — with stocks collapsing…the economy in recession…a full-scale trade war…and Cohen, Davis, Mueller, Pelosi, et alia leading a lynch mob towards the White House — Trump will not accept higher rates, even if they are desperately needed.

Instead, he will use his bully power to get lower, negative rates…and much bigger deficits…

…along with a cheaper dollar…stagflation…and a wipeout in the bond markets.

Stay tuned.

 

Regards,
Bill Bonner