Wall Street

What’s Your Appetite for Destruction?

By David Stockman  |  June 15, 2018

“Poverty is the parent of revolution and crime.” – Aristotle, Politics (350 B.C.E.)

Central planners destroyed honest price discovery. And they’ve set the seeds to do the same to their whole system.

Wall Street doesn’t remember the recent past. Nor is it discounting a rational future. It’s a hot mess of headline-reading algos and chart-point-chasing day-traders.

Any rational investor would avoid it at all hazards.

We can – and should – opt out of stocks when they’re priced at 25 times earnings on the broad-based S&P 500 Index and 90 times earnings on the small-cap Russell 2000 Index.

Those multiples can’t possibly reflect the recent past.

Events of the last two decades (including the Global Financial Crisis/Great Recession and the dot-com bust) have left a broken, debt-burdened Main Street economy.

The recovery is weakening rapidly. And it’s already really old.

There’s no way a subpar economy should support super-normal price-to-earnings ratios.

That’s true even with an eye toward the future. In fact, it’s especially true if you look forward from where we stand.

Here’s one stark piece of evidence.

A “breadwinner” job is a full-time, full-pay position paying $50,000 or better a year.

We’ve created virtually none of those jobs in the last 17 years.

This is the third time we’ve approached the 74 million mark since the turn of the century.

But – at 108 months of age – this cycle’s potential to carry the figure much higher, much longer is somewhere between “slim” and “none” on a calendar basis alone.

The next recession – in, say, 2019 or 2020 – is likely to see the breadwinner job count drop back toward 69 million… or even lower.

The U.S. economy has added 68,000 jobs a month since the June 2009 bottom. At that “awesome” rate, it would take five years to get back to 73.5 million.

There’s a good chance the number of breadwinner jobs by 2025 won’t be much higher than it was when Bill Clinton shuffled out of the White House in January 2001.

Let’s go even deeper.

Employment in the goods-producing sector has been shrinking non-stop.

There were 24.7 million good, full-time jobs in mid-2000. That shriveled to just 22.0 million on the eve of the Great Recession.

Now – after nine years of the most fantastic dose of “stimulus” ever imagined – the count is just 20.6 million.

And there are 95 million working-age adults not in the labor force. That figure’s grown by 20 million since 2005 and 33 million since 1990. It’s at all-time highs.

You can’t have healthy growth and rising standards of living based on a proliferation of Pilates studios, baristas, and nursing-home beds alone.

You need high-value-added jobs that come from the goods-producing sectors. That’s how you generate sustainable increases in societal wealth.

The Welfare State can’t support a rapidly growing dependent population by taxing waitresses and bedpan changers.

Here’s where it goes from “bad” to “ugly.”

When the next big “correction” happens, Corporate America will plunge into another frenzy of “restructuring.”

That means inventory and capital expenditure cuts. And it means job cuts.

And it’s “Mean Streets” again in Middle America…

We don’t much believe in financial market reflation. State money-printing and state borrowing: That’s just not sound policy over the long term.

“Reflate,” though, is what the Federal Reserve, the U.S. Treasury, and Congress have done with alacrity and aggression in the past.

But it’ll be impossible this time around. Our central planners have backed into a policy prison of their own making.

Another of these Bubble Finance-style recessions will trigger another fiscal crisis.

But – this time – it’s a recipe not just for financial destruction. Wall Street’s imploded before, and there it is…

Main Street, though, is starting to catch the grift. Another, greater downturn will create “critical mass” among the people.

Imperial Washington must worry.

And maybe that’s good.

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