David Stockman, the so-called “Father of Reaganomics,” hasn’t been shy — or close to right — about his frantically bearish calls in recent years.
Just last summer, he warned of a “horrendous storm” that could take the S&P 500 index SPX, -0.18% all the way down to 1,600. From there, he took it up a notch in September, saying stocks are headed for a retreat of up to 70%.
Well, it’s still up at 2,700.
But the market’s volatile behavior of late has emboldened some bears to refresh and even ramp up their doomsday scenarios. Stockman is one of them.
“There is not a snowball’s chance in the hot place that the mother of all yield shocks can be avoided,” Stockman wrote on his blog this week.
He explains that we’re in a uniquely dangerous position, one that really couldn’t have even happened under previous administrations.
“Had Lyndon Johnson, Tricky Dick, Jimmy Carter or even Ronald Reagan suggested that the Federal Reserve buy government debt at rates which exceeded annual issuance by the U.S. Treasury, as was the case during the peak years of QE, they would have been severely attacked — if not subjected to impeachment — for advocating rank financial fraud,” Stockman claimed.
He said ever since former Federal Reserve Chairman Alan Greenspan “commenced the age of monetary central planning,” Wall Street has used deficits as a tool in Washington’s kit of “whatever it takes,” instead of something to be feared.
“Anything that could fuel even the appearance of short-term economic growth was embraced unthinkingly,” he said, “because ‘growth’ of any shape, form or quality became the predicate for endless increases in the stock market averages.”
That’s a recipe for disaster, says Stockman.
“As the Fed pivots to quantitative tightening for the first time in decades — and at a scale that has never before been imagined because the Fed’s balance sheet had never previously approached anything like a quintupling in just six years — the level of complacency on Wall Street and in Washington is staggering,” he wrote.
Now that the “age of monetization” is over, the Fed’s balance sheet “shrinkage campaign” is on auto-pilot, which, Stockman warns, will ultimately elicit a biblical “road to Damascus experience” on Wall Street.
“Like in the story of Saul of Tarsus, the scales which have accumulated over its eyes during the last decades of massive debt monetization by the Fed and other central banks are about ready to fall away,” he said.
And that’s when he believes his dire outlook for equities will be realized.
“The fact is, a Fiscal Doomsday machine has now enveloped Washington in the form of a resurgent Warfare State, the demographically driven Welfare State, the fiscal madness of the current Trumpite/GOP ruling party and the outbreak of outright political warfare between the hinterlands and the Deep State,” Stockman said.
No Damascus experience yet, however, with stocks in the green on Wednesday. At last check, the Dow DJIA, -0.18% was up triple digits, while the Nasdaq COMP, -0.26% and S&P were also nicely higher.
