A day after President Donald Trump’s 77-minute press conference, the markets continued to rise ahead of the President’s Day weekend.
The Dow Jones industrial average closed at 20,624. And, according to a Bank of America Merrill Lynch report, investors remain bullish — pumping some $500 million into long-only equity funds over the past week, which is a first for the past 12 months.
But, with uncertainty over tax cuts, health care reform and interest rates, some market watchers are saying, “Not so fast.”
According to David Stockman, Office of Management and Budget Director under President Ronald Reagan, a quick change in the markets is coming.
“It is only a matter of when we reach the inflection point, where it becomes obvious to everybody that this is artificial and there is no more [fiscal] stimulus,” Stockman said during an interview on Yahoo Finance’s online show The Final Round.
Looking back to 1999 and the technology heyday, “There had been an eight-year rally, it ended in a thundering crash,” he explained. In 2008, over 40 days, the Russell 2000 “dropped by the equivalent of 60%.”
This is part of a broader pattern, according to Stockman.
“The way this bubble finance works and central bank policy works, it takes nearly seven years on an escalator [up]. It takes about seven weeks on an elevator down,” he stated.
Admittedly, the former congressman says, he has had this view “for years,” but that is because he sees problems in political and financial leadership. “I think what they are doing is wrong,” Stockman said.
“There is going to be a huge correction when the market figures out no Fed [support], no tax stimulus, they’re home alone, and they’ve got the market trading at 26 times trailing earnings and an economy that’s running out of gas, headwinds coming from all over the world, China and so forth,” he explained.
Going even further, Stockman said he sees this happening sooner rather than later, with the Federal Reserve expected to raise interest rates by March 15.
“It’s only a matter of days before this whole thing tips over, because it is basically the machines raging on headlines,” he said.
The author sees an end to the bull run “within days, and certainly by March 15, because that is when the Federal Reserve is going to raise interest rates, finally,” he explained. “They have been dithering for 96 months at the zero bound. By their Keynesian lights they are at full employment. They have no choice.”
The deficit hawk also sees government spending as an issue.
A second factor that will negatively impact equities, he says, when the debt ceiling, “which has been in suspension for the last year, crystalizes, goes back into effect. Suddenly people will realize that there is $200 billion of cash in the U.S Treasury, and it is running out very quickly,” Stockman said.
“There is no tax cut coming. It’s phenomenal, it’s massive, it’s a great hope, probably in some alternative world it would be a good thing to do – but [Trump] is not going to get it through Congress,” he explained.
The U.S. has $20 trillion of debt, with $10 trillion more “built in under current policy over the next decade,” Stockman says.
Congress “can only pass a tax bill if it’s roughly deemed ‘revenue neutral.’ That means they’ll need big revenue sources to pay for the corporate tax, rate cuts – and that says nothing of what he promised yesterday about ‘cuts for all,’ ‘every bracket and every taxpayer.’ Now that’s four or five trillion dollars,” he added.
Where could Trump get that money?
“The only way to get it is the border adjustment tax, the BAT, and he was meeting with the retailers who were sitting around the table saying we are here to kill this thing dead, because “brick and mortar America” can’t stand a 20% increase in their cost of goods,” the ex-OMB chief said.
“Without reconciliation, they’re going to have a filibuster and 60 votes. To get reconciliation you need a 10-year budget resolution, and they can’t pass it,” he added.
The former OMB chief sees distractions as a major factor slowing down the new president’s policy momentum.
“They were going to repeal Obamacare their first week. They’re not going to get that done this year – if ever. They’re going to be, you know, totally bogged down in these battles that he has created over the travel ban and the deportations. Now this whole fight over the intelligence agencies and whether or not people in his campaign were communicating with the Russians,” according to Stockman.
“This is the deep state, you know, getting even… They’re not distractions, they’re the heart of the problem!” he said.
Comparing today’s circumstances to those duringthe Reagan administration, Stockman shook his head.
“This is not the second coming of Ronald Reagan. When Reagan came in, the national debt was only $1 trillion, 30% of GDP. It is now $20 trillion in national debt, 106% of GDP,” he explained.
“Even then, we had stock market crash, bond market disorder [and] 18% interest rates for two years. The bull market did not come until 1983 or 1984, but there was a horrendous downside before. I think we’re in the same scenario today.”
What to Do
When asked if there was an asset class to move into, Stockman didn’t hesitate: “Gold. You should buy all you can,” he said, because “what is going to happen is that central banks around the world are in the process of being discredited. Fiscal policy around the world is out of control. Debt everywhere in the developed world is bogging down governments in dysfunctional crisis.”
When the markets “figure that out and … there’s no stimulus left, there’s nothing more that can be done either fiscally or by the money printers at the central banks,” the budget guru added, “then I think it is game over.”
— Check out ‘Huge, Nasty Morning After’ Coming for Markets: Stockman on ThinkAdvisor.