“Perfection For All Of Eternity”
by David Stockman
"The stock market has now priced in a nirvana of permanent full-employment and economic growth, world without end. The business cycle has been deleted from the annals of history. Of course, the harsh reality is that our monetary central planners at the Fed have not abolished the business cycle at all. And this one is getting dangerously long in the tooth. It is already 96 months old, and by the end of December 2018, it would be 115 months - or just shy of the great 1990s tech boom that occurred before millions of breadwinner jobs had been offshored to China and elsewhere. And also before the household sector had buried itself in Peak Debt during the 15-year run-up to the housing crash of 2008–09.
Meanwhile, The Donald is fixing to incite a blizzard of economic growth with a massive fiscal stimulus that will leave all of recorded history behind. According to Treasury Secretary Steven Mnuchin, the outcome will be an extra point or two of growth on top of the sub-2% growth the Congressional Budget Office (CBO) projects for the next decade. But the CBO’s forecast doesn’t even include a recession, which stretches the limits of credulity. But in reality, Mnuchin's blithering idiocy will never be put to the test, because there is not a snowball’s chance in the hot place that Trump's $7.5 trillion tax cut can pass. It would explode the deficit.
That massive revenue loss would come on top of the $10 trillion of new red ink already built into current policy over the next decade. And beyond that, there would be a further $2.5 trillion, at minimum, to fund the added interest expense and the cost of The Donald's spending priorities for defense, veterans, the border wall (wait till September!), law enforcement and the infrastructure plan. The casino’s ignoring all this.
What the casino hasn't reckoned with, of course, is that Congress must first pass a fiscal-year (FY) 2018 budget resolution to accommodate what I estimate could be $20 trillion of new red ink and a $40 trillion public debt by the end of the 10-year budget period. Good luck getting a majority in both houses to vote for a budget resolution that projects $40 trillion, or even $30 trillion, of public debt over the next decade. It will never happen.
And there are strong head winds blowing in from the global economy, led by the tottering Red Ponzi scheme ready to explode in China. Add that to domestic weakness, with the recovery-leading auto sector clearly rolling over and the retail sector preparing to implode. GDP’s already just about at stall speed.
Yet Wall Street is priced for perfection, mindlessly adrift on a sea of hopium. Much of Bubble Vision denies that the market’s even in a bubble. But answer this: Back in 2007, did it see the mortgage and housing bubble that was cracking all around it? Meanwhile, stock market volatility is flirting with lows not seen since 2007. You remember what followed 2007, right?
Below, I show you why the market’s not just priced for perfection right now - but for all of eternity. Read on.
There’s just no other way to say it: the market is insanely overvalued right now. The so-called recovery has already lasted 96 months. It’s the longest recovery in history. It’s also the weakest. But you’d never know it from the stock market. Right now the S&P is trading at something like 24 times trailing earnings. That is what I would call the nosebleed section of history. And it’s absolutely not justified by fundamental economics.
What the market is saying is we have reached the point of full employment forever. There will never be another recession or any kind of economic surprise or dislocation. There is no reason why the market should be even near today’s levels if markets were allowed to function normally. The market is pricing itself for perfection for all of eternity. Nonsense!
The fact is, the real economy apart from the canyons of Wall Street is in very poor shape. The Commerce Department recently reported that first quarter GDP growth came in at just 0.7%. The report also revealed the slowest first quarter for household spending since 2009. Some economists call that “stall speed.” After 94 months of the weakest recovery in modern history, there is no other way to describe it. Not exactly perfection.
We are at the end of a 20-year credit bubble that has basically inflated the world economy beyond any sustainable level. We're now facing the day of reckoning in which we're going to suffer from a huge deflation for years to come. The global economy is in a place we've never been before. We have never experienced eight years of effectively zero money market rates, even during the lowest point of the Depression in the 1930s. And we've never had a credit bubble in the world economy anything close to what we have now.
In 20 years, central banks have taken their balance sheets from about $2 trillion in 1995 to $21 trillion today. And the global economy is now buried under a $225 trillion mountain of debt, if you can imagine a number that large. (We'd be remiss to ignore the $1.5 QUADRILLION in derivatives associated with all this. - CP) I recently came back from a 10-day trip to China and I can tell you that is the world's greatest Ponzi scheme. It is going to collapse. So put all of those things together and you have a market that's waiting to roll over. Bubbles are popping up in real estate again. We’re also seeing high levels of defaults in student loans and the auto industry.
And one subject I’ve been following lately is the collapse of the retail industry. I call it the “Retail Apocalypse.” Even the Bureau of Labor Statistics (BLS) seems to have gotten the word about the horrific condition of the malls. During the last few months, it has reported a 60,000 decline in the seasonally maladjusted job count. And a 758,000 drop in the actual count since the December holiday peak. By the way, that compares to only a 644,000 drop over December-March during the prior year.
Even the Wall Street propaganda machine admits: “… retailers continue to struggle and dead malls pile up in characterless suburbs across America.” The plunge in department store sales - which comprise the anchor and driver of 70% of mall traffic - have not lessened in the slightest. As of the most recent reading, the monthly sales rate was down 30% from the pre-crisis peak. That’s in nominal dollars. In real terms, department store sales have fallen more than 50% since the early years of this century.
Moreover, what is happening is not merely cyclical in the traditional sense. Debt-encumbered American consumers are tapped-out. They are dropping, not shopping, because this entire “recovery” has been wasted. That is, consumers can’t spend energetically because there has been no significant deleveraging since the 2008 crisis. That in turn means the Keynesian assumption of Washington’s economic policy has again been refuted. That is the belief that consumer spending is the engine of prosperity.
In fact, notwithstanding a 5X gain in the Fed’s balance sheet - from $900 billion on the eve of the Lehman meltdown to $4.5 trillion today - our Keynesian central bankers simply could not cause consumers to borrow and spend their way to prosperity. That’s because, as I’ve pointed out many times, they are impaled on Peak Debt.
The only significant retail spending growth since the crisis has occurred among the top 20% of households. But history proves beyond a shadow of doubt that when the stock market collapses, the credit cards will go back into the wallet. In fact, there is some pretty stunning evidence that this is already happening - the tail end of the Trump-O-Mania rally notwithstanding. The best data on what consumers are actually doing is provided not by the government statistical mills, but by Bank of America from its massive base of credit and debit cards. In February, sales at department stores plunged 15% versus the prior year. That’s the largest decline ever recorded.
In a word, the retail mall sector is facing harsh headwinds and the worst of both worlds. That is, flagging demand and immense over-capacity. It now appears that nearly 150 million of retail square footage could close during 2017 - an all-time record. So in a desperate effort to cope, retailers everywhere are slashing prices, increasing merchandising and promotion expenses in an attempt to fill empty stores with service and entertainment venues. This is an unfolding disaster that hasn’t gotten anywhere near the attention it deserves.
On a broader scale, markets are about to collide with reality. The S&P could easily drop 40% or more to 1,600 or 1,300 once the fantasy ends. When this crazy notion that there is going to be some Trump fiscal stimulus ends, it will it will put the illusion to rest once and for all. The stimulus is not going to happen. Congress can’t pass a tax cut that large without a budget resolution that incorporates $10 trillion or $15 trillion in debt over the next decade. It’s just not going to pass Congress.
And I think the post-election “reflation trade” is the greatest sucker’s rally we have ever seen. There will be no bid for stocks once the panic sets in. They’re going to hit an air pocket. The S&P 500 is going to drop by hundreds and hundreds of points as we drift into this unexpected crisis.
The main thing is get out of the markets. They’re unstable. I don’t believe there’s any credible reason to own stock at this point in the game. The entire market is simply way overvalued. They may squeak out another two or three percent on the upside. But stocks are facing a 30% or 40% down. In other words, the risk/reward quotient is horrible. The bottom line is that all this is coming to a halt.
The Fed has finally run out of dry powder. It’s getting out of the bond buying business. It’s even talking about initiating the shrinkage of its balance sheet. The central banks are finally getting to the end of the road. There isn’t going to be any more money printing, and that is the harsh reality the markets must face. Head for the exits now, while you still can!”