Saturday, April 6, 2019

Beware the Orange Swan

By David Stockman

It's pretty obvious that the Donald has not been reined in by his minders on the Mexican Border closure. He's actually tweeting about it like he's gone bat-shit crazy, and that's an understatement!

Folks, in view of the actual facts of the matter, no one in charge of his faculties would say the following--- let alone tweet it out to 65 million followers from the Oval Office:
"Security is more important to me than trade. So we're going to have a slower border or a closed border." 
Now the crazy part is not merely that a closed border would mean economic Armageddon in a matter of days. No, the completely disturbed state of the Donald's mind lies in the fact that there is no "Security" threat whatsoever----given that ZERO terrorists have crossed the Mexican border illegally as adults since 1975.

That's right. During the 40 years after 1975 no one on US soil was murdered or injured in a terror attack by an illegal border crosser.

In fact, of the 154 foreign-born terrorists in the US since 1975, just ten entered the country illegally. And among the latter, only three crossed the US-Mexico border, and even then they originally came as children. By contrast, 54 were lawful permanent residents, and the rest entered through other legal means such as tourist and student visas.

Yes, we suppose the Donald is also referring to potential criminals under the "security" heading, but that doesn't wash, either.

As shown below, less than 1% of persons (yellow line) arrested by the Border Patrol on the Southwest Border during the first five months of FY 2019 had criminal records--- and the overwhelming share of these were so designated because they had previously been arrested for crossing the border illegally (a misdemeanor) or had committed other non-violent crimes such as DUI convictions.

Moreover, that figure is an all-time low and has declined from about an 5.8% rate back in 2015. So if the number of criminal aliens apprehended continues at the current pace for FY 2019, the absolute number of "criminal" apprehensions will be 75 percent below the already de minimis 2015 figure (gray bars).
The fact is, the overwhelming share of the so-called surge of apprehensions at the Southwest Border consists of desperately poor people fleeing the failed states of central America and attempting illegal entry at the border as asylum seekers. And even then, there is a pure catch-22 in the surging numbers being ballyhooed by the Donald and his minions.

To wit, the processing rate for asylum seekers at the official ports of entry has been deliberately slowed to a trickle. It appears that this deliberate "metering" maneuver means that less than a dozen applicants per day are being processed at Brownsville and Laredo, only slightly more at El Paso and just 100 per day at all two dozen ports of entry on the entire 2000-mile Mexican border.

Consequently, asylum seekers have resorted to attempting illegal entry in the desert and then voluntarily turning themselves in to the Border Patrol who find them, thereby becoming part of the surging arrest statistics.

For example, of the 93,000 persons who made asylum claims on the Southwest Border in FY 2018, 55,000 crossed illegally and were apprehended by Border Patrol (and counted in the arrest stats) compared to just 38,000 who presented themselves at the ports of entry (and were not counted).

In short, there is no terrorist problem, no crime problem and no dangerous hordes at the Mexican border. What we have is a statistical aberration in the number of Border Patrol "apprehensions", largely owing to the Administration's metering policy; and a genuine flood of destitute refugees principally from Guatemala and Honduras.

The latter are not a security threat, even if they would present a fiscal inconvenience ($80k/year) were they to be granted asylum and resettled in the US (most won't be because the Donald lowered the annual refugee ceiling from 75,000 to 45,000). But to shutdown the border to prevent a few billions of budget costs is the equivalent of aiming a howitzer at a mosquito.

Our purpose here, however, is not to quibble with the Donald's egregious exaggerations and manipulation of the data to support a Fake Border Emergency narrative. By now it should be obvious that Trump doesn't give a whit about facts or policy analysis anyway.

Instead, he is flailing about erratically because he is getting nowhere on his beloved Mexican Wall and for good reason: It was a crock from the day he lobbed out the crime- on-the-border meme during his announcement way back in 2015; and like a moth drawn to a light bulb, he keeps coming back to it to bask in the warmth of his "base" which congregates there.

But perhaps the day traders and robo-machines who dared the fates modestly again today, should consider this: The possibility that the Donald goes from tweet-storms to a live grenade action on the Mexican border is growing by the day because there are really very few adults left in the White House to stop him.
Congress must get together and immediately eliminate the loopholes at the Border! If no action, Border, or large sections of Border, will close. This is a National Emergency! — Donald J. Trump (@realDonaldTrump) April 3, 2019 
Indeed, live grenade action by the Donald is exactly the Orange Swan risk that is baked into the current environment, and it's not limited to the Mexican border.

We'd put an unprecedented guns blaring attack on the Fed in the same category.

As the Wall Street Journal revealed this morning, the Donald has worked himself into a tizzy about Powell's belated and tepid rate increases; and is cuing-up a broadside attack on the Fed when the inevitable becomes empirically undeniable.

That is, the ballyhooed Trump Boom is proven to be the short-lived sugar high it actually was; and the business cycle's octogenarian phase, instead, slides toward its next date with recession, unleashing an even greater flood of red ink from the US budget:
The president blasted the Fed and Chairman Jerome Powell at three meetings in the past week alone, telling Republican senators, supporters and staffers that if it wasn’t for the central bank’s past rate increases, economic output and stocks would be higher and the U.S. budget deficit would be rising less. 
“He was pretty rough,” said one person who directly heard the comments at one of the meetings. Mr. Trump also blamed Treasury Secretary Steven Mnuchin for  ecommending Mr. Powell for the top Fed job. “Mnuchin gave me this guy,” Mr. Trump said. 
Mr. Trump recalled a recent phone conversation he had with Mr. Powell, this person said. “I guess I’m stuck with you,” the president recalled telling Mr. Powell. 
To be sure, we are not defending the Pusillanimous Powell. He probably deserves the public beating he's headed for at the business end of the Donald's Twitter account.

After all, he's been a dyed-in-the-wool Keynesian monetary central planner since 2012, and is complicit in the "big, fat ugly bubble" which the Donald inherited; and the implosion of which will trigger a vicious recrimination campaign by Trump like no other previously seen in American public life.

Just last month Powell underscored his cluelessness about the dangers of severe interest rate repression and the falsification of financial asset prices that Fed policy has unleashed on Wall Street, declaring that low inflation was “one of the major challenges of our time.’’


After massive monetary expansion, industrial production is only 4% higher than it was 11 years ago at the pre-crisis peak in November 2007; and real median household incomes have not risen at all, while the inflation-adjusted NASDAQ 100 is up by 200% during the same period.

And this cat thinks we don't have enough inflation?

The fact is, more inflation is a fetish of present day central bankers. They use it to justify keeping rates at essentially zero or lower in real terms and their balance sheets egregiously bloated in order to placate Wall Street.

But there is no evidence anywhere in history that 2.00% inflation generates more growth and prosperity than the 1.90% average during the past two years of the Fed's favorite sawed-off inflation measuring stick---the PCE deflator--or the 1.99% average of the CPI less food and energy.

What we are saying, of course, is that the money-pumpers at the Fed have set up the abysmally ignorant Donald Trump for a great big fall. In the spurious pursuit of irrelevant fractional decimal points on the inflation rate for goods and services they have inflated the third and most hideous financial bubble on Wall Street during this century.

The Donald foolishly embraced that bubble once in office, but when it finally implodes, he may yet get the last laugh.

That is, he may go down swinging wildly at the Fed, blaming it squarely for the next financial crisis and the next recession in a manner the very opposite of the Hank Paulson/Ben Bernanke/George Bush/Nancy Pelosi bailout love-in last time around.

If so, the Great Disrupter will have well and truly done god's work---for without a political war on the Fed there is no escaping from the baleful regime of Keynesian monetary central planning that is now dragging main street prosperity towards the drink.

In fact, the combination of the Fed's deep subsidization of the carry trades and incentives for massive financial engineering in the corporate C-suites and the Donald's credit-card financed corporate rate cut, are leaving nothing to the imagination.

That is, everything which was borrowed from future taxpayers and passed through to American corporations at the new 21% tax rate is now ending up in monumental increases in stock buy-backs, M&A deals and increased dividends and recaps.

Meanwhile, orders for business CapEx have rolled over completely, and now stand well below their level of mid-2014.

Needless to say, when the stock market crash comes and the US economy heads for the tank again, it will be pitchfork and torches time in Flyover America.

At the same time, the foolishness of the Trumpite/GOP fiscal debauch will be evident for all to see. The US treasury borrowed $180 billion to fund the business tax cuts this year alone, and we doubt that even a $25 billion increase in business CapEx will happen to show for it.

Overall, the net debt of the United States stood at $21.7 trillion on April 1---a figure that was $2.17 trillion higher than the $19.57 trillion in place on January 20, 2017.

So during months #90 to #116 of the second longest business expansion in American history---and at a time when all traditional principles said the deficit should be drastically shrinking, if not becoming a surplus----that Donald led a borrowing spree that was literally off-the-charts for the current late stage of the business cycle.

But now that his foolish tax cuts are in place and the Congress is utterly paralyzed legislatively, the true magnitude of the Trumpian Fiscal Debauch has become blatantly evident.

To wit, during the first five months of FY 2019, individual income tax collections were down by 3.0%, corporate collections were down by 19.2% and overall revenues fell by o.3%.

At the same time, Social Security/Medicare spending was up by 5.0%, defense spending by 9.5%, veterans outlays by 10.0% and interest expense by 15.0%.
In sum, the Federal budget is being drawn and quartered---yet the recessionary impact of falling revenues and rising unemployment/safety net outlays have not yet even hit the numbers.

When they do, the Federal deficit will soaring toward $2 trillion per year or higher, and the Donald--if he's still around---will blame it on the Fed, the Dems and probably illegal immigrants, too!

So next time you are tempted to buy-the-dip, remember this: The Orange Swan is coming and soon there will be blood in the casino like never before.

David Stockman was Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.

The above originally appeared at David Stockman's Contra Corner.


  1. Mr. Stockman misses THE mother of all colored swans: US demographics is more and more shifting from people who have strongly individualist ethics to the collectivist culture by the virtue of massive immigration and very different birth rates among locals and newcomers (look at the democratic socialists -- AOC handlers are an Indian and a Turk). This means that US is poised to turn socialist, with marked nationalist/imperialist slant. Which, in turn, will result in a full-out civil war. In a country with nukes - meaning that it has potential to go nuclear in the ensuing chaos. With extinction of humanity a very real possible outcome.

    Compared to that market crash looks like the best-case scenario. Trump may be an ignorant and easily distracted bumpkin, but compared to people who are totally blind to the fact that society is defined by its culture and that massive uncontrolled immigration does change the culture (usually to the worst, simply because people don't migrate from successful cultures to unsuccessful - but the migrants also tend to bring their cultural mores with them) he's positively a genius.

    1. Re: Averros,

      What little trust you harbor for this culture, as you fancy it so fragile and measly it needs government protection from brown people who just want to improve their lot through peaceful trade and production. You don't even consider the fact that better ideas always flow to fill a vacumm, you think the vacuum "fills" the whole! Can people forget how to make a wheel, just because of immigration?


      Trumpistas are ignorant white supremacist bufoons who worship an eve bigger bufoon, but you're worse: you hide behind a false veneer of insight when instead your logic fails you so spectacularly, even if your intention is not to defend "whiteness" but just some idea of a culture which itself enjoys a level of success that don't even understand. You're pathetic.

  2. Stockman is an idiot when it comes to the border. So RW, when are you publishing articles about the destruction of private property by illegals? Or do you not care since you are no better than the leftist you criticize when it comes to truth?

  3. "During the 40 years after 1975 no one on US soil was murdered or injured in a terror attack by an illegal border crosser"

    I greatly appreciate and admire David Stockman, but here he is just being disingenuous. Many murders are committed by illegal aliens, even though they are not formally categorized as "terrorism".