International Man: We seem to be near the top of the “everything bubble.” Almost nothing is cheap… anywhere. What are your thoughts on where people should put their money for prudence and for profit?
David Stockman: I would recommend recognizing that the “everything bubble” is the most extreme, exaggerated, severe financial bubble in world history. It will inevitably collapse, and there will be massive losses, even greater than occurred in 2008 and 2001.
So, the first thing is to stay out of the casino. By that, I mean the financial-market stocks, bonds, and everything else.
These markets are so artificial. They’re just chasing what the central banks are doing. There’s no honest price discoveries or supply and demand; nobody’s discounting the future of economic growth, productivity, and investment. You’ve got the chart monkeys, 29-year-old day traders who are in charge of the market.
When the big correction comes, there are going to be massive losses, and the panic will be great. All correlations will go to 1—which means everything will fall: the good, the bad, and the indifferent.
There’s this old saying among traders that when the cops raid the house of ill repute, they carry out the good girls, the bad girls, and the piano player too. That’s essentially what’s going to happen.
You can’t be saved by picking high-yielding stocks or conservative blue chips or stocks that provide daily necessities like food—it doesn’t matter. Everything’s overpriced right now because of this huge financial distortion.
When the real correction comes and the central banks are revealed to be impotent and powerless, then everything is going to collapse. You’ll be in harm’s way no matter how clever you’ve been in trying to pick and choose. And stay away from the bubble stocks like Amazon or Beyond Meat or any of those.
The time for speculation is over. We’ve had 30 years of central bank subsidized speculation. We’re going to go into the time and era for capital preservation, and that means the highest priority is to not lose money. It’s to keep your capital safe.
I think the only way to do that is in very short-term, liquid instruments.
I don’t think the U.S. government is going to disappear. I don’t think we’re going to have a national bankruptcy or anything like that. There’s going to be a tremendous fiscal disaster coming. But 90-day Treasury bills will continue to pay you their meager interest, and they will be a safe place to put your money.
We have to recognize that the 30-year experiment in what I call “Keynesian Central Banking”—which is almost like central planning—is over.
Therefore, the central banks of the world are going to be in enormous disrepute. They’re not going to be your friends or your savior.
Remember the Time magazine cover from the late ’90s, “The Committee to Save the World”? It had Robert Rubin, Alan Greenspan, and Larry Summers on the cover. They’re now going to be the ogres who destroyed the world.
The one thing that Donald Trump is going to accomplish in his misbegotten tenure is that his ferocious attack against the Federal Reserve will tear away the veil that it’s a beyond-politics cabal of geniuses who are safeguarding your livelihood.
He’s going to tear it apart. He’s going to totally besmirch and destroy the credibility of the Fed, at least in the eyes of his base. It’s going to create an enormous political debate about central banking.
Now, he’s coming at it from left field. He’s totally wrong. But Trump is unlike other presidents who were totally choreographed and scripted and moved their lips in the way that their advisors told them to.
And he’s going to go after the Fed. We haven’t seen anything yet. And I relish the prospect. They need to be beat to smithereens with a strong, lethal political club, and that’s Trump. And after the fragments end up all over the cutting room floor, we can figure out what to do next. But you must take down this institution.
The Fed is the number one, the number two, and the number three enemy of prosperity, capitalism, free markets, individual liberty, and the wealth of people in the world today.
Central banks have to be totally discredited and taken down.
The one thing that Trump is going to accomplish—as he desperately struggles for re-election—is he’s going to finally rip off the Band-Aid. We’re going to have a real debate about this awful curse of Keynesian central banking.
International Man: I think that’s the silver lining. For the first time, we have a president who is regularly tweeting about the Fed and bringing it to the attention of average Americans, many of whom have no idea what the Fed is or does.
Will Trump be able to pin the blame for the next recession on the Fed? What do you think the implications are for that?
David Stockman: It’s very difficult to know. It is not inconceivable that the Fed and other central banks could pull a couple more rabbits out of their hats.
Also, Trump could take the trade war to the edge and then pull back like he constantly does. He flinches constantly. He could do so again if he sees the market moving lower too fast. But if you look at the charts, there are massive air pockets down below, let’s say, the 2700, 2800 level on the S&P 500.
If there’s an event—like some tankers blow up in the Persian Gulf or something really bad happens in the Taiwan Straits or the Chinese pull some real retaliatory stunt like dumping a couple billion bonds in one hour—it could tank the market.
And remember 80% of daily volume in the stock market is essentially either index-driven ETFs or various kinds of quantitative, machine-driven investment strategies. If that ever breaks loose, the market will go through an air pocket, and then it’s all over except for the shouting.
Because if the S&P 500 drops 400, 500, 600 points, you will trigger another go-round in the corporate C-suites. They’ll suddenly wake up like they did in October 2008 and say, “Oh my God, we’ve got too much inventory, we’ve horded too much labor, we’ve got a lot of assets that aren’t producing returns.” And then they go into these big restructuring programs where they lay off workers by the tens of thousands and take huge write-downs, close facilities, and so forth. The next thing you know, you have a C-suite–triggered recession. That’s how it happens these days.
Recessions don’t happen because the Fed is tightening credit costs for Main Street. That’s the old days. That’s your grandfather’s economy and your grandfather’s Fed. But we’re now in the era of bubble finance. The Fed basically inflates the financial system until it collapses, and then it spills over into the mainstream economy through corporate C-suite panics.
If the stock market cuts through these air pockets down below, the recession will happen instantly, and no one will see it coming—just like in 2008.
I remember in the spring of 2008 they were still talking about the Goldilocks economy. And in November 2008, they were talking about the end of the world.
This is exactly what I think will happen if the stock market breaks loose.
We don’t know when it will happen. It could happen before November 2020 or after it. No one can really predict.
I think the odds are that it will happen before then, and if it does, Trump is toast. Elizabeth Warren will be the next president of the United States, and as that prospect becomes even more probable, the panic in the stock market will be something to behold. It will be worse than anything we’ve seen since October 1987.
If you talk about volatility, you haven’t seen nothing yet. Wait until the election gets really in full heat next year.
I think Elizabeth Warren will come to the top. Joe Biden is quasi senile, and he’s going to fall by the wayside. Bernie just isn’t going to cut it with the mainstream Democrats. So, Warren is going to pull ahead.
And if the stock market is faltering or it has crashed and the economy’s in trouble, you’ll have a populist, redistributionist, big government statist president and Congress.
That’s a totally different world from this dance fantasy that we’ve been living for the last 10 or 15 years.
International Man: With Trump’s recent budget deal with the Democrats, the last semblance of financial responsibility in US politics—which was a charade anyway—is explicitly dead. The US is headed for record deficits under Trump. The Democrats would of course be orders of magnitude even worse.
There is no meaningful force in US politics that could reign in the out-of-control spending. What do you think the implications of these political trends are for the future of the country?
David Stockman: The short answer is that, objectively, we are already fiscally bankrupt. And by that, I mean the $22 trillion of debt we have today, that’s the rear-view mirror.
That’s what the first 44 presidents in American history have managed to accomplish—including the last two before Trump, who took it from about $4 trillion to $19 trillion.
But Donald Trump is the most reckless, irresponsible president we’ve had since Lyndon Johnson, in terms of fiscal policy.
This guns-and-butter deal for two years that he just signed with the Democrats and the Congress was an abomination. It added $1.7 trillion more to the debt over the next 10 years. It eliminated entirely these spending or sequester caps that we’ve had since 2011.
But the more important point is that all deficits are not created equal. Deficits of a large magnitude at the top of the longest business expansion in history are an absolute abomination.
Even the original Keynesians in the 1960s and ’70s said you’ve got to manage fiscal policy over the cycle. When you get to a very strong economy or at the top of a business cycle, you have to reduce the deficit and even run surpluses.
Well, Trump has taken policy the other way. At the time when you’re supposed to be reigning things in, he’s actually pushed the deficit over the trillion-dollar mark.
Trump has created a monster defense budget for no reason except that he’s stupid and has been totally bamboozled by the military and the defense contractors. After all, we’ve got defense contractors running the Department of Defense. First, it was Boeing, now you have another guy in there who spent his whole life in the defense contract business.
Let’s just consider what Trump has already done at the worst time in the cycle. In the four budgets that he’s now signed up for, including this last deal, he’s increased spending by $140 billion per year.
How does that compare to Bill Clinton?
In 2019-dollars purchasing-power terms, Clinton’s budgets went up $40 billion a year.
Obama—the big spender, the terrible Democrat Socialist that Trump is always ranting about—his nine budgets went up $75 billion per year. And that’s including the huge deficit spending breakout of 2009 during the recession.
So, at the very worst time in the business cycle, Trump is massively increasing the structural deficit.
When I say the very worst time, it is both in calendar time and in cycle time. Because in calendar time, we’re entering the 2020s when all 80 million baby boomers are going to retire.
We’re going to be having 10–11,000 retirements a day for most of the decade. And by the end of the decade, there will be 80 million more people on Social Security, Medicare, and Medicaid.
The cost of the welfare state is going to soar even as the political environment will become totally nonfunctional, because no one wants to pay more taxes.
The military-industrial complex is running with a trillion-dollar budget. There’s just no give anywhere, not on taxes, not on defense spending, not on entitlements, not on the entire welfare state.
So, the fiscal situation is going to completely unravel in the decade ahead.
The real debt of the country today is not the $22 trillion that’s on the books. That’s backward looking. It’s really $42 trillion. That’s because we have $20 trillion more baked into the cake under almost any scenario you can look at over the next decade, based on these factors I’ve just enumerated.
Now, $42 trillion of debt on a GDP that might get to be, in nominal terms, $27, $28 trillion by then (but probably less), that’s a 150% debt-to-GDP ratio. I just don’t see how you get out of that box.
We’re in a demographic and fiscal dead end. It’s a very dangerous prospect and one with no obvious answer on how to escape.