“Chronicle of a Crash Foretold”
by David Stockman
Man stands face to face with the irrational.
– Albert Camus, “The Myth of Sisyphus” (1942)
“On the day Federal Reserve Chair Jerome Powell testified before Congress about his concerns of approaching recession, the stock market reached new all-time highs. The S&P 500 Index broke the 3,000 barrier shortly after the market opened. Both the Dow Jones Industrial Average and the Nasdaq Composite set records, too. Screens are flashing green because it’s 100% certain we’ll see a rate cut at the end of the month, at least 25 basis points, maybe even 50. That’s Jay’s message, in short. Easy money is here to stay.
Wall Street, of course, is all in for more carry-trade-fueled speculation… as if. I mean, they’d released Powell’s prepared remarks ahead of the open, so equity futures surged from negative to positive before they rang the bell at the New York Stock Exchange. There’s a class of reporter who’ll pitch the “Powell used ‘independence’ two times in his first five sentences” angle, that he’s telling the Donald he reports to the legislative branch, not the executive.
Indeed, after the pleasantries, he said, “I strongly support the goals of maximum employment and price stability that Congress has set for monetary policy.” But it’ll be impossible to avoid the implication that when he cuts rates later this month it’s because the Donald made him do it.
Does it really matter? Coddling titanic egos is the approach that got us in this mess. That was Alan Greenspan’s basic response to Black Monday, October 21, 1987. It’s what monetary central planners around the world have done ever since. It is clear, though, that Powell is worried about a little more than what the Tweeter-in-Chief’s up to on his chosen pulpit.
The problem is the “cure” Powell is talking about will do nothing but wreak havoc on Main Street. Oh, it might prolong the always wobbly and now historically old “recovery.” By weeks, perhaps months… timing, of course, that brings us into the season for the sorts of market events that precipitated the Great Depression and the Great Recession…
This rally today just increases the pressure for what will be the burst to end Bubble Finance.
Here’s what Powell had to say to the House Financial Services Committee, in relevant part: “Since our May meeting, however, these crosscurrents have reemerged, creating greater uncertainty. Apparent progress on trade turned to greater uncertainty, and our contacts in business and agriculture report heightened concerns over trade developments. Growth indicators from around the world have disappointed on net, raising concerns that weakness in the global economy will continue to affect the U.S. economy. These concerns may have contributed to the drop in business confidence in some recent surveys and may have started to show through to incoming data.
In our June meeting statement, we indicated that, in light of increased uncertainties about the economic outlook and muted inflation pressures, we would closely monitor the implications of incoming information for the economic outlook and would act as appropriate to sustain the expansion. Many FOMC participants saw that the case for a somewhat more accommodative monetary policy had strengthened. Since then, based on incoming data and other developments, it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook. Inflation pressures remain muted.”
So, the Fed will “act as appropriate.” Of course, he’s been seeding the “crosscurrents” story for a couple weeks now. Here he is on June 25, courtesy of the Financial Times: “Since then (May), the picture has changed. The cross-currents have re-emerged, with apparent progress on trade turning to greater uncertainty and with incoming data raising renewed concerns about the strength of the global economy.”…
Powell repeated that “an ounce of prevention is worth more than a pound of cure” – a hint that the Fed is moving towards embracing the argument for precautionary “insurance” cuts to interest rates. Well, that “cure” will actually precipitate the very recession it’s ostensibly insuring against. That’s because rate cuts after 10 years of ultra-easy policy do just one thing: They turbo-charge and extend asset-price inflation on Wall Street.
The eventual outcome is as clear today as it was yesterday. Central bank-fueled financial bubbles always – and always – burst under their own irrationally exuberant weight. We’ve seen it happen twice already during this young century. And both times the Main Street economy was thrown into recession. Here’s how that works – and why this rate-cut rally, underway since early June, is so ridiculous.
The C-suites of Corporate American have devolved into nothing more than stock-trading boiler-rooms. Today’s CEOs and CFOs are financial engineers obsessed with boosting their own stock prices and options values, day after day after day…
When the “unexpected” happens, their response – well practiced by now – is to throw employees and assets overboard. They call them “restructuring plans,” like it’s a thoughtful but tough-minded effort to improve operating performance and long-run efficiency, competitiveness, growth, and profitability.
Well, in short, they liquidate Main Street to please Wall Street. And here we go again… again.”
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