What we have is the government criminals shutting down the economy, causing financial assets to collapse. Politicians are bailing out the criminals in the financial system who have been riding the bubble for all these years. Add to that the decades of money printing that have created enormous distortions in the market, and it’s a pretty sad state of affairs.
By David Stockman for International Man
International Man: Decades of money printing have created enormous distortions in the market. It seems that the coronavirus popped the Everything Bubble. Where do you see the stock market going?
David Stockman: I’d say it’s going in a new direction, and it’s not up year after year, month after month, day after day.
It’s not going to be a world where buying the dip is a no-brainer thing to do.
I think the stock market was insanely valued when the S&P 500 peaked at 3,380 on February 19th.
It has got a long way yet to correct.
Who knows what earnings are going to be?
No one knows how long these lockdowns will last.
You look at the news flow every day, and it’s like a massive political arm-wrestling match between the White House and the Democratic governors and mayors.
I’m sure in their minds, these local and state politicians, think they’re serving the public good and protecting the safety and lives of their citizens. But, the fact is, back in the unstated regions of their brains, they’re focused on taking down the US economy, which was Trump’s only claim to reelection.
I think when push comes to shove in the great human struggle of things in our political system, this lockdown lunacy is going to be prolonged far longer than you can imagine, and the economic loss is going to be staggering.
Even the Wall Street brokers now—Goldman Sachs and the rest of them—are projecting a 25 to 30% GDP collapse on an annualized basis in Q2.
Just a few days ago, they were all expecting this to be one and done, and that in the next quarter it’ll level out—but that view is fading very fast.
We have a hand-to-mouth economy. By that, I mean no business could afford cashflow interruption because they had levered their balance sheet to the hilt or had spent most of their cashflow available to buy back their stock.
So, once you start these chain reactions, you have incredibly vulnerable business balance sheets in America that collectively have $16 trillion of debt.
I’m not talking about banks or financial institutions now—just operating businesses.
That’s not to mention American households—half them don’t even have $300 to last a week or two.
Overwhelmingly, 90% of the households in America have been told that they’re the Energizer spending bunny of American economics, and if you don’t have enough wages this week, borrow some money on your credit card and just keep on spending.
This has created a hand-to-mouth economy that has no immunities—if you want to use that metaphor in an economic sense. It cannot cope, and it has no antibodies to fight back against the interruption of paychecks and cash flow.
There is going to be broken furniture everywhere as it filters through an economy that is sitting with $74 trillion of public and private debt on its back. That’s how much we have today.
People need to focus on this fact, that we thought we had a warning back when the great financial crisis occurred in 2008 when Lehman Brothers went bankrupt, the Great Recession, all that.
At the time, there was $52 trillion of debt in the economy, and people said that we’re living beyond our means—we need to learn some lessons here and repair the excesses.
Well, that never happened. We’ve added $22–23 trillion of debt since then. Therefore, the economy is now even more fragile, even more vulnerable to any kind of dislocation.
Now, what we’re getting is the mother of all dislocations. It’s happening so fast and severely that it’s off the charts.
You can look at any of the so-called incoming indicators that everybody constantly jaws about on bubble vision on CNBC, and you will see that the last two data points are literally off the charts. The Empire State Index was out recently, and it’s down to -70, against a base of zero, and it usually says +20, 30, or 40.
Never has anything like this been recorded. We have an economy that’s going to implode in the next four or five months. Earnings are going to drop tremendously.
It’s going to be a question of whether the markets can convince themselves to “do the Rip Van Winkle thing, go to sleep on earnings for the next year, and start discounting 2022 earnings,” or something.
I don’t think that’s going to work this time. I believe there is going to be a real loss of confidence because the Fed has no dry powder.
The market will likely work its way down in irregular, violent, volatile moves. It will go up for a few days and then experience a big correction, and up for a few more days, another big correction.
The S&P 500 ought to be valued at 1,500 or 1,600, which is way the hell below where it is today—and far below where it was at the peak of almost 3,400.
What I’m saying is, the market that never stops rising has finally met its match.
The patented “buy the dip” mantra is going to keep the thing alive for a few more months until the last robo-machine and day trader has his brains blown out after they bought the dip one more time and then got monkey-hammered by another reversal.
That’s where I think we’re heading.
International Man: The Federal Reserve’s unprecedented bailout of everyone and everything seems to have no end. What do you think the consequences of this will be?
David Stockman: I think what people must get their minds around is that this is happening with such warp speed: job losses, cash flow, GDP, the federal budget.
What the Fed has done is more off the charts than anything we’ve seen yet.
In early March, the balance sheet of the Fed was at $4.2 trillion—after they gave up on quantitative tightening (QT) and normalizing the balance sheet—which they promised to do when Ben Bernanke took it to these high levels after the great recession.
Recently, that number was $6.2 trillion.
In merely 30 days, they printed $2 trillion of additional balance sheet or doubled the first trillion. That’s the level first achieved in September 2008—and had taken the Fed 94 years to create from the days that it opened its doors.
I calculated it: that’s about 35,000 days it took the Fed to get the first $1 trillion of balance sheet.
These madmen and women in the Eccles Building, it took them 30 days to create twice the amount of balance sheet that it took during those first 95 years of the Fed.
What does this mean?
It means that they’re destroying the financial markets as we know them.
There’s no interest rate left. They’re pushing everything close to zero through this massive intervention and buying everything in sight directly or indirectly. That includes commercial paper, municipal bonds, investment-grade corporates, fallen angels, so to speak—that’s just a backdoor way into junk. They’re buying ETFs—the bond ETFs.
It’s only a matter of time before they’re going to be in there, hand over fist, buying stocks.
Janet Yellen and all the rest of them are saying, “Well, maybe they need that additional power.”
How can you have capitalism when you have no capital markets?
It’s that simple. The Fed destroyed it.
The consequence will be massive speculation, malinvestment, and keeping all the zombies alive.
For instance, the high yield market had a significant dislocation recently—where yields soared from 5% to 10% or more—which was an effort by Mr. Market to say that there are a lot of borrowers out there that aren’t solvent. They’re going to have to meet their maker in Chapter 11.
So, what is the Fed trying to do?
It’s trying to prevent any of that from happening. The Fed wants to keep everybody that has borrowed up to their eyeballs alive.
Therefore, it means that the economy will become weaker, more stagnant, and more inefficiency-ridden with time.
If you don’t have the cleansing process of creative disruption, if you don’t allow the price of capital to reflect risk and reward, if you don’t permit failures to be eliminated and liquidated, you’re going to have either a sclerotic economy like Italy or England or even worse, a Soviet economy, if you carry this far enough.
Frankly, I think the right phrase for the Eccles Building and the twelve people on the FOMC is the “Monetary Politburo.” They’re trying to control every movement in the entire economic system through the domination of financial asset prices and pegging of interest rates across the whole yield curve.
It is madness.
Where it will lead is very hard to say. Obviously, not to anything good.
It is so off the charts, and ludicrous relative to anything anybody thought even ten years ago, certainly twenty or thirty years ago. It’s difficult to imagine how bad it is going to get, but it’s going to get pretty bad.
International Man: Those are some great points. Where do you see the future of the US dollar?
David Stockman: To paraphrase Winston Churchill about democracy, the US dollar is the worst currency imaginable—except for all the other currencies in the world.
In other words, all the central banks are doing the same thing the Fed is doing, only worse. It’s a race to the bottom.
The European Central Bank cut its policy rate to even deeper subzero, which is just crazy.
The Bank of Japan might as well just buy a paper mill and print paper until there are no trees left in Japan.
In the case of the US dollar, the traditional idea is that we’re going to destroy the currency. That’s true if the rest of the world is prudent.
We don’t have a Weimar Republic 1923 situation where they were trying, in the UK and certainly in New York, and the Bank of France, to restore sound money—prewar money. They failed, but they were attempting to restore sound money and a gold standard currency.
Germany was a basket case economically; they were paying reparations and started up their printing press. There was massive capital outflow, they imported inflation, which then fed upon itself, and the whole wheelbarrow full of money thing happened.
That was inflation in one country when the rest of the world was trying to pursue relatively sound money.
By contrast, today, we have monetary inflation in all countries. So you look at the dollar, and you look at what the other central banks are doing, the dollar is the cleanest dirty shirt in the laundry. It’s probably going to get stronger, not weaker in the FX markets.
But that doesn’t mean that we’re out of the woods.
It only means that the central banks of the world collectively—which have already taken their balance sheets from $2 trillion in the late 1990s to over $25 trillion—are printing money at such a rate that they’re likely to bring down the entire world monetary system. Not simply the US dollar.
International Man: How will the Fed’s actions affect savers and retirees?
David Stockman: The essence of it is that the Fed policy is criminal—just flat out criminal—in terms of its impact on savers and retirees on a fixed income.
There is no interest rate left unless you want to speculate in junk bonds. Why should a 78-year-old be speculating in junk bonds to pay for rent or put food on the table?
It is criminal.
That’s what this whole financial repression, zero interest rate, or subzero interest rate policy is doing. It’s hurting tens of millions of people who’ve tried to save and be prudent and not live hand to mouth.
If something like COVID-19 comes along, or an earthquake depending on where you live, or just a bad spell of health affecting your family, you need something to fall back on.
How can people save today when you get nothing?
Take somebody who worked in the steel mill 40 years, who was able to scratch and save and defer gratification. Let’s just say he came up with $300,000 of lifetime savings. He’s now retired. He needs to keep it liquid, but he’s earning less interest income per week than one cappuccino at Starbucks on a lifetime worth of savings.
That’s so evil.
You may ask these central bankers, “Well, what about the savers?” These idiots say that there is too much in savings.
Well, let’s look around right now.
Why do we have a $2.3 trillion bailout? Why are we giving helicopter money to upwards of 180 million people—who are going to get that $1,200 check?
Why are we bailing out small businesses left and right to have them preserve jobs?
Why are we doing all of that if there’s an excess of savings in the world?
In reality, there is no excess. It’s complete nonsense.
The idea that the central bank is there to subsidize, coddle, and bail out the borrower and savage the saver is just fundamentally wrong and goes right to the heart of why we’re in such big trouble.
International Man: Do you think there will be retail inflation in the months ahead?
David Stockman: I think it’s hard to say because there are opposite forces at work.
On the one hand, if you look at something like oil and commodities, generally, we’re in a territory we’ve never been in before. The current demand for oil dropped by 30 million barrels a day, where they used to focus on blips of 400,000 a day, plus or minus.
This last effort to prop up the OPEC cartel is failing very fast. That side of the price index of the market basket is likely to head south very strongly.
On the other hand, supply chains are being disrupted with increasing intensity.
We’re looking at these meat processing plants that are being shut down. We’re looking at farmers who can’t get their products to market, and we’ll see more of that as we get into the production season this year. That’s just in the food area.
If we look at manufactured goods, China seems to be coming back to life a little bit, but the supply chains between here and there have been disrupted. There are big questions about what—in terms of both necessities and discretionary goods—will be available.
I think you’re going to have some prices skyrocketing for things that suddenly become scarce due to supply chain breakdowns.
In contrast, you’re going to have other things falling—especially the commodities that are collapsing owing to the drastic, unprecedented collapse in demand.
How that balances out, I think, is hard to tell at this point.
I think the problem with money printing is not the CPI—the problem with money printing is the massive inflation of financial assets—the bubbles that they create, and then the consequence of collapsing bubbles for the overall economy.
It won’t be long before all the C-suites of America see their stock options melting before their eyes and the stock price for the average company down 30%, 40%, or 50%.
They’re going to start throwing stuff overboard in hopes that with enough restructuring, layoffs, plant closures, and asset write-offs, they can convince the market to buy their stock again.
On top of the economic damage caused by mayors, governors, and the public health authorities ordering shutdowns, we’re going to have another C-suite-caused layer to this recession. As that runs its course, the C-suites are going to be laying even more damage on top of it. That’s the outlook that I see.
International Man: What can the average person do in this volatile environment to protect themselves?
David Stockman: One, there is no point whatsoever in being in the securities market—the stock market, bond market, ETFs, or trying to pick out companies that are winning from the shutdown like Amazon or Netflix.
When you have the Dow moving a thousand points up and a thousand points down from one day of the week to the next, it is clearly not a safe place for anybody who’s not a day trader. It’s not even a safe place for day traders, as we’ve learned recently.
I think you must get out of these markets. There’s no point in holding onto stocks or at least buying more.
What people need to do is get liquid.
I think people need to own gold because the central banking regime—I call it Keynesian central banking—is finally being utterly discredited.
They’ve pumped all this money we’ve talked about and have done nothing to stop the economy’s collapse or even the financial markets.
The thing to do will be to stay liquid, accumulate gold, and to minimize spending. We don’t know how or when we’re going to come out of this.
No one has ever taken this kind of jackhammer to the economy in such a brief time and shut it down. We just don’t understand whether this is going to take a year or ten years to work out of.
Therefore, the prudent thing right now is to hunker down, minimize discretionary spending, build up liquidity, get into cash, and buy gold.
There’s no playbook that will tell you where we’re going. We’ve violated all the rules of economic life and monetary rationality that have ever been created over the last centuries.
International Man: What are your thoughts on gold and its role in the future?
David Stockman: You must look at it in terms of the individual portfolio versus what public policy might do.
From an individual portfolio, holding gold is now more critical than ever, even as just a matter of insurance and wealth preservation.
You need to own increasing amounts of gold as we enter this unchartered territory. Beyond that, I think it’s very likely that if things unwind not that much more, gold can break through that old 2011 price of $1911.
Once it breaks through that, we’re off to the races.
So there is also an excellent speculative upside possibility in holding gold.
I wouldn’t buy gold for that, but there is a good speculative upside possibility that it could double, triple, and quadruple value.
Gold is important as a base of insurance and capital preservation of the wealth that you’ve been able to accumulate.
That’s the individual side—for the investor and the household portfolio.
When it comes to public policy, I have no idea. You would like to see some sense of going back to money that’s linked to something tangible, solid, and can’t be manipulated by the central banks.
If things get desperate enough, maybe there’s a de-facto way to back into that as central banks begin to accumulate more gold, as some of them are doing—like the Russians, the Chinese, and others.
I think it’s tough to predict where that’s going because the Keynesian mindset and groupthink is so deeply embedded among monetary economists—most of whom work for the Fed or Wall Street, as well as the apparatchiks who operate the eight or ten major central banks of the world.
Their mindset is antithetical to any notion of sound money. That’s because they believe that their job is to micro and macromanage the entire GDP of the world—the $80 trillion of GDP in the world and the $22 trillion or so here in the US.
If you have that mentality, sound money is about the last thing you’re going to have until they create a total shipwreck.
I don’t see that happening anytime soon, but it’s worth talking about.
If you understand sound money and how the gold standard—the pre-1914 gold standard—worked (it brought enormous prosperity to the country and the world), then you know the folly of what they’re doing today.
International Man: Amid the COVID-19 fear and hysteria, governments have granted themselves all sorts of new powers. What does this mean for the future of personal freedom?
David Stockman: I think it’s a very grave threat.
When you look at this objectively, this is only a severe winter flu or virus of a type that mankind has been coping with, not only for decades and centuries but probably millennia.
It has been turned into an existential crisis and 24/7 media hysteria that has opened the door to an expansion of government intrusion and power.
I can’t think of any precedent for it, including even what we did in wartime during World War II or, indeed, what happened after 9/11.
Among other things, this is a taking of property, the likes of which have never before been imagined.
Trillions of dollars are going to be lost by businesses that have been ordered to close their doors without a hearing, without the opportunity to present any alternative approaches that would permit them to remain open while also minimizing any threat to public health.
I think there’s going to be an enormous amount of litigation after the fact.
There’s always that plaintiffs’ bar out there looking for business. They’re going to start suing every mayor and governor in sight. I hope they do because this was just done by decree—almost without any analysis or impact statement analysis, and on the thinnest of public statutory powers relative to public health protection that mayors and governors actually have.
It will be necessary for people who believe in liberty and personal freedom to support efforts that I’m sure are going to be made to make the government officials who imposed these lockdowns pay the price for their reckless imprudence.
International Man: Exactly. It is unprecedented.
There should be attention to the fact that there’s something wrong with how government power is changing, especially in the US, because it has a history and tradition of liberty and individual freedom.
David Stockman: I agree. It gives capriciousness an altogether new definition.
To come in and order every business to close its doors and turn off the lights.
I happen to be in Greenwich, Connecticut, at the moment. That’s where we’re sheltering out this storm.
I was walking down the street yesterday, and store after store is closed, and I noticed the little small premise where the shoe repairman runs his business, and it’s pitch dark.
Now, why in the hell can’t the shoe repairman run his business? He can put a table out in front of the door on the sidewalk and say if you want your shoes repaired, set them here, I’ll have them done, and you can pick them up tomorrow.
The untargeted and unfocused nature of these shutdown orders has got to be vulnerable in the courts. They’re a clear and present danger to any notion of free enterprise and personal liberty that we have. Under existing law, there has to be hell to pay for the people who did this.
What we have is the government criminals shutting down the economy, causing financial assets to collapse. Politicians are bailing out the criminals in the financial system who have been riding the bubble for all these years.
It’s a pretty sad state of affairs.