Picture injecting $1 trillion of borrowed money straight into the stock market. Because that's exactly what Trump's tax cut did. Two years ago he warned about the big, fat, ugly bubble and then he "fixed" it by injecting a trillion dollars of nitrous oxide into it. The Reagan tax cut of 1986 caused a massive market crash within a year. The Bush tax cut came near the beginning of the cycle so the eventual crash was delayed by several years. The last time a tax cut came this late in the cycle was 1929...
What we are witnessing is human history's biggest sugar high, which will cost "true believers" far more than they can afford:
Many Republicans would like us to believe that tax cuts are "justified" because they are giving people back their own money. However, tax cuts funded with deficit spending are merely starving the government budget and the rest of the economy to the benefit of the ultra-wealthy. 83% of the Trump tax cut benefit goes to 1% of Americans. The remainder of Americans face higher inflation, higher interest rates, and a massive increase in the Federal debt, which they are on the hook for - because you know, it's "free money". There are several major reasons why deficit-funded tax cuts cause market crashes:
First off, they cause a massive misallocation of capital. The closer to the end of the cycle the larger the misallocation. This malinvestment feeds back into the economy temporarily as "GDP" giving the illusion that the economy is growing.
Secondly, they pull forward GDP. Contrary to popular belief, increased debt is not "free money" and will require higher debt service cost in the future. What we are seeing right now is merely a GDP sugar high, which is rapidly wearing off.
Third, the vast majority of the tax cut was spent on stock buybacks which is what caused the big, fat, ugly bubble Trump warned about two years ago to grow far larger:
"U.S. companies are buying back their own stocks at unprecedented levels, thanks in large part to president Trump’s $1.5-trillion tax bonanza"
Meanwhile, insiders know this is their last chance to get out
With September not yet over, stock sales by company executives reached $5.7 billion, according to data from TrimTabs Investment Research -- the highest September in a decade. August's $10.3 billion in insider sales also reached a 10-year record.
"Insiders are doing one thing with their own money, and another thing with shareholders' money."
Peak buybacks are a function of peak earnings. In this case artificially inflated by the tax cut.
Fourth, deficit funded tax cuts crowd out borrowers via higher interest rates. They accelerate Fed tightening which is what the Fed signaled last week on the short-end and what is set to take place automatically on the long end. Liquidity is being removed from global risk markets at the fastest pace in the past decade.
Sixth, due to higher interest rates and a rising dollar, U.S. tax cuts tighten monetary policy for the entire rest of the world. Global central banks are forced to keep pace with the Fed to defend local currencies, which is starving local markets of liquidity.
U.S. gamblers are too oblivious to see what's taking place in the rest of the world.
Small caps have left the party:
