Wall Street

Wall Street’s Nursery Rhyme Is Main Street’s Horror Show

By David Stockman  |  May 24, 2018

‘But the plans were on display…’
‘On display? I eventually had to go down to the cellar to find them.’
‘That’s the display department.’
‘With a flashlight.’
‘Ah, well the lights had probably gone.’
‘So had the stairs.’
‘But look, you found the notice didn’t you?’
‘Yes,’ said Arthur, ‘yes I did. It was on display in the bottom of a locked filing cabinet stuck in a disused lavatory with a sign on the door saying ‘Beware of the Leopard.’”

– Douglas Adams, The Hitchhiker’s Guide to the Galaxy

Treasury Secretary Steve Mnuchin apparently didn’t get the memo about the Federal Reserve’s unfolding “quantitative tightening” campaign.

That’s the only way to explain why he thinks the bond market can “easily handle” nearly $2 trillion of homeless U.S. Treasurys in fiscal 2019.

Meanwhile, Wall Street is trading under its own delusion – that when push comes to shove, the Fed will set aside “normalization” of monetary policy and ride to the rescue.

So, it’s still safe to buy the dips… to go ahead and play the swing trade between the 50-day and the 200-day moving averages…

But – when the Fed doesn’t exercise the “Powell Put” – Wall Street will have its Wile E. Coyote moment.

Everything – stocks, mutual funds, ETFs, exotic strategies, combustible gambles – will plunge from the high cliffs of Bubble Finance.

Simple Steve and the Donald are completely clueless about the fiscal monster they’ve unleashed.

Meanwhile, our central bank overlords believe they’ve infused the Main Street economy with ox-like strength and self-fueling forward momentum.So the Fed has turned its attention to preserving its unparalleled power base.

Right now, that requires preparing for the next crisis.

Come June 2019 the current expansion will have surpassed even the freakishly long expansion of the 1990s (119 months) in the rearview mirror.

Even Keynesians can see the handwriting on the wall.

Those ensconced at the Fed dare not risk a recession… without a prompt Fed-bestowed stimulus cure.

The traditional metaphor is “dry powder.” That means the Fed has to create room to re-expand its balance sheet…

A better metaphor is that they’re knitting a new suit of clothes, least they end up revealed like the proverbial Naked Emperor.

Keep this in mind when you read or hear about brave talk from Fed officials like John Williams.

Williams has spent a lifetime at the San Francisco Fed. Next month, he’ll take the top job at the New York Fed.

It’s the branch that actually executes the Fed’s day-to-day intrusions in financial markets.

He’s basically the second-most powerful central banker in the world. And he embodies Federal Open Market Committee/Keynesian groupthink.

Maybe he’s just forgotten the similarly delusional talk in the summer of 2007. But Williams recently said there’s no reason to hesitate on the Fed’s normalization campaign.

“This is pretty much a ‘Goldilocks’ economy.”

“Goldilocks”… as in “not too hot, not too cold.”

Folks, if that doesn’t scare the bejesus out of you, nothing will.

“Industrial production” still means something, even in today’s “digital” world. It’s up 1.2% from the pre-crisis peak 10 years ago. Consumption of goods, meanwhile, is up 53%.

We’re pretty sure that’s not sustainable. And it’s just about the polar opposite of “Goldilocks.”

There is no reasonable basis for the Fed to declare “Mission Accomplished.”

So, for the first time in history, the combined financial arms of the state – the Treasury and the Fed – will be selling government debt, existing and new, with malice aforethought.

It’s not just the bloated size of the borrowing nut. We’re well beyond the point where record issuance of $488 billion during the first quarter would wake us up.

The horror is in the timing.

We’re now in month 107 of the current so-called business expansion.

Washington’s combined financial arms propose to dump $1.8 trillion, or nearly 9% of gross domestic product, into the bond pits.

We’re in truly uncharted waters. The sheer math of the thing promises carnage at both ends of the Acela Corridor.

Cursed forever will be “Goldilocks” in the halls of the Eccles Building.

The real horror will play out on Main Street.

David Stockman

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR