Wednesday, April 17, 2024

The coming Stock Market crash of Biblical proportions

(By David Stockman* – Former Congressman David A. Stockman served as Director of Reagan’s OMB,

Interview conducted by international man)

International Man  : Like it or not, the reality is that the Federal Reserve has enormous influence over the dollar and the stock market.

And right now the Fed has an urgent and fateful decision to make.

It can continue to print trillions of dollars, let inflation soar or tighten monetary policy, and watch the stock market crash.

In other words, it can sacrifice the stock market or the dollar.

David, what do you think the Fed is going to do, and what are the implications?

David Stockman  : Well, I think whether they like it or not, the Fed is going to crash the stock market. The Fed has locked itself in a vicious circle because it has made a fetish of its 2% inflation target, especially since January 2012, when it officially adopted this quantitative objective.

In fact, most of the massive money printing, which has taken place since 2012 when the economy was pretty much recovering from the Great Recession anyway, has been justified by an inflation deficit, which was not not true, but that was the justification.

They were trying to raise inflation so they felt they could keep quantitative easing at these huge rates, including $120 billion a month, until recently. And as a result, we are now in a world where inflation is heading into double digits.

I think they will have no choice but to brake a lot harder than the market expects, a lot harder than they would like to, or maybe even than they have the intention to do at the moment, but there is no choice.

Now when you have double-digit inflation, first and second, you are entering what is going to be an unpleasant election season in which Republicans will finally see hope for their salvation in a terrible battle on the front of the inflation by blaming the Democrats and Biden.

This means that the Fed will not be able, over the next 2, 3 or 4 quarters, to retreat on the inflation front. Whether it likes it or not, it will have to raise interest rates far more than what is currently expected.

It will begin quantitative tightening (QT), i.e. depleting its $9 trillion balance sheet, faster than it currently says or the market expects. Indeed, it will not be able to justify or maintain any credibility when inflation reaches the level of the CPI at close to 10%.

So it’s a new ball game.

It’s been a long time since we’ve been in these kind of uncharted waters, not since the 1970s, and even in the 1970s the story was much different than it is today. So the market will struggle with a Fed that turns out not to be its friend. He will again and again think that the worst is over, buy the bottom of the wave and make a lot of money, only to be disappointed.

I offer you a final analogy.

If you go back to March 2000, when the dotcom bubble collapsed, the NASDAQ peaked at 4600, and the market fell 30% in the following 15 days. And after that dizzying fall, people said it was over. The worst has happened, and you should buy the dip. You will earn a lot of money.

And over the next two years they kept buying the drop, but over the next two years the NASDAQ went from 4,600 to 3,300, down to 800. Over 80% decline and all that Buying down resulted in massive losses and pain.

I think we are going to experience the same thing again.

International Man : Assume the Fed raises rates aggressively in the coming months. What are the chances of it capitulating and backtracking as soon as Wall Street starts to shout it?

David Stockman: Well, that’s what people expect, but I think this time they’re not going to give up quickly and easily. In other words, the so-called Fed surplus is much lower on the S&P 500 than people might expect or Wall Street bulls would like to believe. They think it might be 3,500 or something. I think it’s around 2000 because the Fed won’t have the necessary leeway.

Even the official inflation statistics are high. They underestimate real inflation if you take into account all the tricks introduced into the CPI over the past 20 years. But when inflation according to government statistics hits 7-10%, they simply won’t have a chance to re-launch the money printing presses.

International Man  : Given rapidly rising levels of debt – corporate, personal and federal – is it even possible for the Fed to raise interest rates beyond a token amount ?

David Stockman: Well, I think it’s safe to say that would be dangerous, and yes, debt levels are definitely something to see.

If you take public and private debt today, it’s $88 trillion, or 370% of GDP. This is out of the ordinary compared to the historical level of a stable economy. If you go back to 1970, before Nixon unplugged reliable money, the ratio was 150%. In other words, we had about $1.5 trillion in total debt and a GDP of $1 trillion.

So we’ve had two more rounds of debt added to the economy in the last 50 years. These two towers of additional debt represent 50,000 billion dollars today, which weighs on all sectors of the economy, households, non-financial companies, governments in particular, and even financial institutions, more than if we were sticking to this sort of middle ground of 150% debt to GDP. This is the debt ratio of the national economy that prevailed for a century until 1970.

So yes, there is a huge problem with this huge debt burden. When the Fed raises interest rates, it will dramatically increase the cost of the transaction and the cost of servicing, creating all sorts of dislocation in households that will have to pay more for their mortgages and other debts.

With interest rates rising, all the money companies have borrowed to buy back stocks and pay dividends that weren’t earned will result in higher interest expense and lower profits.

So this is all going to be a big mess, but that won’t stop the Fed from using the only tool it has.

She only has one tool. It’s like the craftsman with a hammer, and everything looks like a nail. So if the Fed wants to accomplish something, it will have to hit the nail on the head.

So the Fed is going to have to raise interest rates, not just 2% by the end of the year or 2.5%. It will have to rise in the 4-6% range to slow the economy and break the back of inflation.

I was there when Volcker raised interest rates to 20% overnight to stave off inflation. But, of course, it will cause a lot of damage to the economy. But I don’t think they have a lot of choice.

In short, you are going to have a very hard time controlling inflation, and the consequences of these measures will be breathtaking and historic in terms of negative impact.

International Man  : Given everything we’ve talked about today, what can the average person do? What can he do to protect himself and take advantage of what is to come?

David Stockman: Well, I think the most important thing is to stay out of the casino.

The bond market is vastly, massively overvalued. As a result, bond prices will drop dramatically, and people will be shocked at how much can be lost in supposedly safe sovereign debt.

The stock market is even more dangerous, and it’s all because of these artificially low, ultra-low interest rates. We are therefore beginning to enter the realm of reality, let’s say normality, with the rise in interest rates. And I think they still have a long way to go.

If you want to be in the stock market, be on the short side.

But if you don’t have any discretionary capital or savings, and if you don’t have the guts for what will be a very volatile course, the best thing to do is to stay in cash, even if you lose money. ground relative to inflation. At least the bank accounts won’t lose their principle. Whereas bonds and stocks can lose 30%, 40%, 50%, 60% of their value over the next year or two during this big correction.

(Former Congressman David A. Stockman served as director of Reagan’s OMB, which he wrote about in his best-selling book, The Triumph of Politics. His latest books are The Great Deformation: The Corruption of Capitalism in America and Peak Trump: The Undrainable Swamp And The Fantasy Of MAGA. He is the editor and publisher of David Stockman’s new Contra Corner. He was an early partner of the Blackstone Group and reads LRC every morning.)

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