“The Dumbest Duopolists: Why This Market Will Fall”
- David Stockman
“Sometimes I wonder whether the world is being run by smart
people who are putting us on or by imbeciles who really mean it.”
– Laurence J. Peter, “The Peter Principle” (1969)
“We have dunces sitting atop the global financial and economic system. So, it’s worth considering the probability something will go very wrong. By the time it was all over, the Dow Jones Industrial Average had shed 767 points during the regular trading session. That’s 2.89%. The S&P 500 Index lost 2.98%. The small-cap Russell 2000 was down 3.01%. The tech-heavy Nasdaq Composite took the steepest dive, 3.47%. Red numbers all around…
And it’s hard to shake the feeling that Monday was just a sign of things to come. That’s because the Donald is agitating for a Currency War to go with his Trade War. Indeed, a little more than four hours after the closing bell rang on the New York Stock Exchange, the Vampire Squid issued an update on its macro outlook. The economics research unit over at Goldman Sachs, that is, had this, among other things, to say last night: “We no longer expect a trade deal before the 2020 election.”
China is proving to be a more formidable negotiating partner than the author of “The Art of the Deal” anticipated. That the Middle Kingdom’s negotiators are “taking a harder line” the upset here; the Donald’s stupidities, including the final round of tariffs on that remaining $300 billion of Chinese imports, are well priced in.
Of course, the federal funds rate futures market is now pricing in more than 100 basis points of cuts by the end of 2020. That’s up from 70 basis points right after the July meeting of the Federal Open Market Committee (FOMC) two weeks ago. The answer is always easy money. And it’s setting us up for an increasingly epic fall.
Relentless financial asset inflation over the past 30 years is not the natural product of healthy markets. Nor could it sustain much longer, even if stable geniuses were in charge.
Here, now, we have the Orange Swan, a few days before the FOMC announced its first rate cut since 2008: “Because of the faulty thought process we have going for us at the Federal Reserve, we pay much higher interest rates than countries that are no match for us economically. In other words, our interest costs are much higher than other countries, when they should be lower. Correct!”
This is a no-holds-barred call for a currency race to the bottom. But it betrays a bigger problem: The president believes that interest rates reflect some kind of “Attaboy!” reward, whereby stronger growth is meted out lower rates… Yeah, it makes zero sense. And it gets worse still.
Donald J. Trump apparently thinks interest rates – the most important and sensitive prices in all of capitalism – are just another presidential bargaining chip. That’s how it goes in his whacky world of winning so much you can’t stand it. It’s the stupidest thing that’s ever been interjected into the policy arena.
Let’s recall that statist central bankers appointed by the last Republican administration blew the Federal Reserve’s balance sheet sky high. “Conservatives” monetized trillions of dollars of public debt with credit created from thin air. Benjamin Bernanke quintupled the Fed’s balance sheet in barely five years. And he promised that, as soon as the “emergency” was over, it would “normalized.” Alas, the next economic yokel served up by the “conservative” GOP denounces even the baby steps taken belatedly in that direction by his own man Jerome Powell.
So, yes, the Donald is a dunce. He has no clue about the historic track of the Fed’s balance sheet. He does not understand that the purple area of the chart tracks the injection of monetary kerosene that’s inflated the S&P 500 up near 3,000.
We’re talking about a bubble that’s exponentially bigger, fatter, and uglier than the one the Donald called out at way back when he was on the campaign trail in 2016 and the index was at 2,100. Let’s run some numbers. S&P 500 earnings adjusted for the corporate rate cut will likely post at about $120 per share for the trailing 12 months ended June 30, 2019. It’ll be about $135 as reported. So, that’s 25 times earnings absent Uncle Sam’s credit card-financed tax cut, 22 times what’s reported.
Now, here’s the “bubble” thing. Back in June 2014, S&P 500 earnings posted at $106 per share. The S&P 500, then at 1,960, was priced at 18.5 times earnings. So, earnings have grown by 4.9% and 2.5% per year with and without the corporate rate cut, respectively. Yet the price-to-earnings multiple has expanded substantially. That’s even as this “recovery” has reached record old age. Things are getting both more curious and more precarious.”
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