We Talked About This. We Never Thought It Would Happen.

So, here's what I've been thinking about:  What have we always said?  

We've always said:  

"No one will ever fix the problems in the system -- the overspending, the waste, the ever-increasing debt, the free money, the corruption, etc. -- because it will cause too much short-term pain to fix those problems.  Consequently, politicians will always kick the can down the road, and nothing will ever change.  At least, not until it all collapses in on itself."

I bet that already got you thinking in the direction I'm going here.

Okay, so now we have this guy coming into office vowing to fix those problems.  Given a mandate to fix those problems.  We have the "Department of Government Efficiency" ("DOGE") being created, specifically to fix some of those problems.  We're being told there may be mass downsizing and/or elimination of redundant and/or underperforming government agencies.  

We're being told that waste will no longer be funded, money will no longer be free, corruption will no longer be rewarded.

We're being told, in short, that the government firehose of loose cash that's been spraying all over the place for decades is going to be shut off.  Or at the very least, reduced.  Yes, the money that hose is spraying may be "fake money" (in the sense that it's not being generated by production, but by debt and the printing press), but it's still liquidity that's no longer going to be added to the pond.  

Historically, almost a quarter of the USA's annual GDP each year is government spending.  

Charts like the one below (from Zerohedge) suggest that it's been even higher recently:

We all know that the current pace of spending and debt (and the corresponding inflation) is unsustainable, so we all know that something needs to be done.  We've known this forever.  But this is the first time in my life that an incoming President seems to be aiming to actually do the dirty work required to downsize our behemoth bureaucracy, possibly in a revolutionary way.

This is the first time it's ever looked like something might get done.  What the market seems to not be taking seriously yet is: What happens if that "something" actually does get done?

What's that going to do to the market?

Well, let's try to hash this out a bit.  One option, of course, is for nothing much to change and the government plows on with business as usual.  That's always possible.  But for a moment, let's entertain the idea that Trump's administration follows through on its apparent intentions and actually starts slashing government spending.  As that happens, will numerous bubbles start popping?  If spending were to be slashed, I suspect we'd learn (from the fallout) that our government has been funding (intentionally or not) multiple "bubble microeconomies."  Those will pop.

As those pop, how much of all this will spill over into the broader economy?  Certainly some of it will.  Will that cascade into even larger bubbles popping?  Very possibly.  And if it does, we know that when large bubbles pop, there is a lot of collateral damage even to otherwise healthy markets (see: 2008).

Okay.  Now:  What about that short-term pain we always speculated would result from something like this?  Is there a way to avoid it?  Or were our past musings (i.e.- "no way to fix this without a lot of pain") correct all along?  Will the U.S. enter a period of deflation?  That seems likely.  Just as inflation results from adding "cash" (in our government's case, usually that takes the form of debt) without increasing production, deflation can result from reversing the flow of that cash.

The next question is:  In light of the goal, which seems to be "revamping the largest bureaucratic system in the world," what exactly is "short-term" pain?  Is it years?  Because one would think it's probably years.  It's certainly not "weeks."

So, these are a few of the things that have been kicking around in my head for the past week.  If Trump follows through on his apparent plans, it could cause a lot of pain for markets.  And even, potentially, for the economy at large.  One can argue that it's a necessary pain; in fact, many of us have argued that for years; i.e.- "The sooner we take this bitter pill, the better.  The longer we wait, the worse the pain will be."

But, thing is, we've waited a long time.  We've kicked a lot of cans down the road.  We seem to be nearing the time when the piper finally gets paid -- maybe not in full, but at least in part.  How much blood will be required to start squaring the debts of our generational hubris?

And will it be so much that it triggers a significant bear market?

Here, I want to refer back to something I wrote in March of 2020 (when I projected the Covid crash and the recovery from that crash).  Because this was one of the few times I talked about this specific date publicly:

Anyway, I got to thinking about all this because my long-term count has us approaching the end of Cycle Wave 5 -- and the end of Cycle 5 marks the end of a higher degree Supercycle Wave. And the end of Supercycle rallies is a huge deal. It's world changing. By my count, even the Great Depression was only at Cycle degree. Imagine something an order of magnitude worse, and you have Supercycle degree. I don't think we're there yet (I actually have the year 2025+/- as the window).

The year 2025.  Next year.  When, as we now know, the first-ever genuine attempt to correct our past excesses seems set to begin.  

If we make some assumptions, such as the assumption that a sizeable portion of the liquidity and "economic activity" supporting the current market is BS and the assumption that this will be eliminated:  What happens if that goes away forever?  How long might it take to get back to current levels in the market without all the BS driving it and/or bailing it out if it collapsed?  Would it take long enough to call the peak of that hubris a Supercycle Top?

The final question is:  Do VOTERS have the will to ride this out?  Everyone's very excited now, of course, but how excited will they be if the elimination of The Government Department of Departmenting for the Government causes the National Highway System not to pave a road leading to nowhere, which causes the paving company not to need a large order of widgets, which causes Widget Wonderland not to generate the sales it had grown accustomed to (under the old wasteful system) and causes it to go under, which causes them (the ma and pop voters) to not get the job painting all the local Widget Wonderlands fluorescent pink, which causes their paint company to go under, drowning in 1,198 gallons of hot pink paint?

What happens in midterm elections if that's the state of the Union in 2026 and the economy is in recession?  In that case, do midterm elections upset the power dynamic, leaving the job of fixing our excesses halfway done and permanently stuck in some weird state where things are both wasteful and useless?

Who knows?  Point is: There are a lot of unknown variables here.  Things could turn out spectacularly -- or not.  Or, things could turn out spectacularly in the end, with a lot of pain in the middle (this seems like the most likely outcome).  Or I guess (though it seems less likely) we could just sail through major changes with minor bumps along the way and the market could rally to a million.  Or -- and this is probably the final possibility, though again, seems less likely given the rhetoric -- nothing much happens and it's just business as usual.  

All of which means: This is a high variance situation with potential for high kurtosis, and the market doesn't seem to have given enough thought to any of it so far.  Maybe it will soon.  Trade safe.