David Stockman, who served as the late US President Ronald Reaganâs top economic adviser, says a day of reckoning has arrived for the stock market. Stockman believes a recession is imminent and that a âbad situationâ waits on Wall Streetâs horizon.
He warns investors to exit the stock and bond markets in a recent interview with Neil Cavuto on Fox Business with a stark metaphor:
âWe need to wake up and smell the roses here.â
Stockman says the US economy is in the tenth year of the longest business expansion in history. An increasing budget deficit comes at the âvery wrong time,â coupled with the US Federal Reserve reducing its balance sheet. The Fed is doing this by allowing bonds to expire without replacing them. These factors are âcatching upâ with the US economy, he argues.
US Economy and Stock Market Will Live with the Consequences of a âFreeâ Fiscal Lunch
Stockman describes the Fedâs actions of âmonetizingâ debt by buying bonds as delivering what appears to be a âfree fiscal lunch.â Now, he says, the US will have to live with the consequences.
US debt hit $22 trillion for the first time in recent weeks, but, Stockman says the problem is even worse than it appears.
âThere is $40 trillion baked into the cake over the next ten yearsâŚIf you take what Trump has done on top of the bad debt he already inherited youâre going to be in multi-trillion dollar deficits year after year and weâre going to have a recession.â
He believes itâs impossible for the US economy to sustain 138 months of economic growth, a period beginning at the start of the stock market recovery a decade ago and coinciding with the remainder of Trumpâs presidency.
US Economic Growth is Now Untenable
The longest period of US growth in history was 119 months in the 1990s in what Stockman calls a âmuch better time.â Then, there were âtailwinds everywhereâ â as well as surpluses and a balance sheet of $0.5 trillion. Chinaâs economy was just beginning to boom, and Europe moved to the single currency and began to âborrow and spend like no tomorrow.â
Todayâs situation is very different, the economist says:
âWhen you look at how much debt we have on the economy, when you look at all the headwinds coming around the world, you look at finally delayed normalization by the Fed.â
The Day of Reckoning Has Arrived â Get Out of the Stock Market
The US stock marketâs day of reckoning has arrived. Investors have limited time to get out, Stockman says. | Source: Shutterstock
Stockman says that for the first time in 30 years interest rates are going to be going up â at some point within the next several years anyway. Now that âmaniacalâ bond buying by the Federal Reserve has ceased, a recession will happen. That bond buying:
âMade a worse fire, it deferred the day of reckoning, clearly.â
Stockman thinks the day of reckoning has now arrived:
âI think you get out of the stock market, the bond market, put your money in cash, in treasury bills, wait for the collapse to come because itâs going to happen.â
Despite previous warnings of collapses that didnât happen, Stockman is certain that the combination of headwinds, debt, normalization, trade wars, the Trump presidency, and global uncertainty stacks up to make 138 months of growth highly unlikely.
Increased Taxation is Likely
Stockman also believes if the Democrats take power in the 2020 elections amidst a recession, they will hike taxes on higher-income earners.
All this, he says, because the Federal Reserve was allowed to create an imbalance of wealth. It did so through its policies to prevent economic decline over the past three decades.
Stockmanâs warnings of a recession are echoed by George Maris of asset manager Janus Henderson.
But, thatâs far from a consensus view on Wall Street. A few short weeks ago, Oppenheimerâs Krishna Memani said fears of a recession were overblown. JPMorgan CEO Jamie Dimon, speaking in early January, also said a global recession is not coming and that everyone needs to âtake a deep breath.â
Featured Image from Shutterstock
