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Stall Speed Economics—Why Wall Street Is an Accident Waiting To Happen
Almost daily, David Stockman, my guest on last week’s radio show, provides brilliant market and economic commentary for his paid subscribers. On Thursday he wrote a missive with the above title and concluded the piece with the following summary:
But as the twitter storm and alt-Right agenda reduces the White House to a political trainwreck, know this. There will be no second coming of Ronald Reagan or giant stimulative tax cuts, or any fiscal stimulus at all. What is coming down the pike is a Fiscal Bloodbath and the third stock market crash of
this century. Then the recession hiding in plain sight will be recognized by all.
Let me share some of David’s logic for his bleak outlook for the American economy.
First he explains why the government’s seasonally adjusted annualized rate of real GDP (SAAR) is mostly noise and, as such, useless when attempting to see what true economic growth is. Instead, what he uses to gauge growth are real final sales on a year-over-year basis because that automatically excludes the inventory fluctuations and most of the short-term data aberrations also, that distort the SAAR confusion of GDP.
The chart on your left shows the dramatic systemic decline of GDP when measured through David’s “real Final Sales lenses” that measure real sales on a peak-to-peak basis. And that assumes that you believe the government’s inflation numbers are not understated. Stockman’s “flyover CPI” (the inflation rate for middle class/middle-of-the-country people) was estimated at 2.4% compared to the government’s 1.9% number. And I should remind you that the estimated inflation rate of economist John Williams is nearly 6%.
But even if you take the government’s numbers, the real final sales growth has been declining significantly. Stockman explains why. In bullet points, here are the reasons:
- Manipulation of interest rates by the Keynesians at the Fed have caused money to flow into financial assets and all manner of financial engineering rather than to uses of capital that build productive assets that empower businesses that make things and provide services that create jobs on main street for the middle classes.
- Under pre-Greenspan “lite touch” monetary policy, the Fed tended to stimulate excess credit growth on main street during the expansion phase of the business cycle, which eventually required monetary tightening and a resulting recessionary correction. Under that regime, in turn, the stock market “priced-in” real GDP and profit growth during the expansion—and with some slight prescience tended to anticipate the recession phase with a sharp decline in the market averages on the eve of the actual main street contraction.
- In the post-Greenspan world, we are at Peak Debt, meaning that the Fed’s monetary expansion never really leaves the canyons of Wall Street. Instead, it systematically falsifies the price of financial assets, but especially rates in the money markets, which are now driven to zero.
- Prior to Greenspan, the Fed tended to stimulate excess credit growth on main street during the expansions phase of the business cycle, which eventually required monetary tightening and resulting in recessionary correction.
- Because financial assets’ growth is “fake” and not based on real economic growth, those assets will inevitably be subject to the laws of nature, causing the lies that they tell about price to be revealed, such as was the case with the 2008-09 stock market crash.
- But these equity market crashes do not take place in a vacuum. Stockman explains, Instead, it systematically falsifies the price of financial assets, but especially rates in the money markets, which are now driven to zero. Pinned on the zero-bound for 98 months running this time around, in fact, they have provided massive free finance for carry trade speculators and also cheap options pricing. These have only compounded the speculative intensity; and they have mobilized a massive inflow of capital to Wall Street in search of excess returns in its various gambling arenas— including trillions of OTC “bespoke” structured finance deals.”
- “Needless to say, this kind of high-octane speculative fuel within the canyons of Wall Street only exacerbates the obsessive engagement in financial engineering in the C-suites. That turns the financial casino into a giant economic sump pump which sucks trillions of capital from the main street economy and shunts it into rampant speculation. That is what really accounts for the compression of economic growth closer and closer to the flat line, as depicted above. In fact, real business investment after depreciation and amortization is now 35% lower than it was at the turn of the century.
- With the destruction of price discovery for capital, wealth is diverted into nonproductive areas, most notably in the Wall Street gambling casinos rather than into areas of productivity where they would flow if markets were allowed to determine the price of capital. Washington and Wall Street parasites have, by force, disabled the collective wisdom of markets by a handful of self-proclaimed wise men who, have the correct Harvard, Princeton, and Yale pedigrees. They have in essence proclaimed themselves deity and as such have replaced the notion of a Sovereign God that the founders of our country and advocates of free market capitalism espoused. As a result, according to Stockman’s work, we have seen a 35% annual decline into real net business investment since 2000, as the 1% and even more the 1/10 of 1% class have siphoned off wealth from production to their own hoards of wealth and political control.
- But this cannot go on forever, because as the cessation of capital to productive means is siphoned off to the rich and powerful, the productive sector of the economy will cease to exist, along with the middle class that actually produces the goods and services requisite for a living society. Stockman believes, as do I, that largely because of the massive disruption of price discovery for capital, we are nearing the end of the good life that we Americans have enjoyed for so many years.
David rounded out his missive as follows:
“The truth is, the $850 billion Obama Stimulus and the multiple phases of QE from the Fed had virtually nothing to do with the tepid post-June 2009 rebound that is now entering old age at 92 months. The latter was simply the natural resilience of capitalist expansion recovering its footing—notwithstanding the state’s tax, regulatory and monetary policy barriers to growth.
“What this all means, of course, is that the next recession is not only just around the corner, but that it is hiding in plain sight. The data point is 2300 on the S&P 500.
“At 26X reported earnings, the S&P 500 amounts to a bug searching frenetically for a windshield. And even then, one that is under the delusion that Donald Trump is going to make the US economy greater again with a massive fiscal stimulus and corporate tax cut that will boost earnings by $15 per share.
“But as the twitter storm and alt-Right agenda reduces the White House to a political trainwreck, know this. There will be no second coming of Ronald Reagan or giant stimulative tax cuts, or any fiscal stimulus at all. What is coming down the pike is a Fiscal Bloodbath and the third stock market crash of this century. Then the recession hiding in plain sight will be recognized by all.