Investments

Among the Idiot Brave

By David Stockman  |  June 20, 2018

“I’m fairly certain YOLO is just ‘carpe diem’ for stupid people.” – Jack Black, actor/comedian/musician

During a CNBC appearance in early June, I referred to Wall Street as the “daredevil market.”

That’s because we the sensible appreciate the pure “balls” of the day-traders and robo-machines – equally mindless – that make the ticks go up and down.

It’s the 11th hour of a failed recovery. And they’re being given every chance to get out of harm’s way.

But they keep buying the dip because “that’s what’s working.”

“Balls” plus “buying what’s working” is not an investment strategy.

It’s the tippy top of the greatest financial bubble in modern history. Right now, it’s a dumb gamble.

Also, it’s behavioral evidence that monetary central planning, on a massive scale, destroyed honest price discovery.

Wall Street – as I explained to the Bubble Vision audience – is no longer connected to reality…

…to history…

…to traditional notions of sound finance…

…to prevailing economic conditions…

…to the business cycle…

…to a plethora of domestic and global fundamentals…

Instead, it’s “pricing in” imaginary “green shoots” on the other side of the next plunge.

We the sensible see that, right now, the risk-reward equation is prohibitive.

On the one hand, retaking the January 26 all-time high on the S&P 500 Index would represent just a 4% uplift from here.

Even the magical 3,000 mark would amount to only a 9% gain.

A lapse into a long-overdue recession, on the other hand, could easily reduce the total earnings for S&P 500 companies by 35%. The plunge was far worse in 2008-09 – more than 80%.

As the earnings meltdown continues into the recession ahead, Wall Street will quickly discover a reality that’s completely off its radar at the moment.

Its generals, in other words, are ready to fight… the last war.

That’s the kind of setup, by the way, that’s led to other Deep State-driven events like the Bay of Pigs, Vietnam, and Afghanistan/Iraq II.

During the next cycle, financial markets are destined for L-shaped paths.

Keynesian central bankers/planners just don’t have the firepower to stoke the “V” we saw after the 2008-09 bottom.

When Wall Street gets the picture, it’ll go from “buy the dip” to “sell the rip.”

So, why would you pay a multiple of 25 times – the most recent price-to-earnings ratio for the S&P 500 Index – for earnings that are virtually guaranteed to tumble?

Why would you risk a 40% loss – from here to 1,600 – for what looks, like, maybe, 4% upside, 9% if you squint into the rainbow?

During the last two months before the early April 2000 top, the index did gain slightly more than 10%.

Then again, it was curtains time from there. Eight months later, the index was down by 40%. It hit bottom at an 80% loss.

Back then, the Federal Reserve’s balance sheet was $600 billion. Today, it’s $4 trillion.

So here’s the thing.

This time, Washington has shot its entire wad – and then some – before the recession has even started.

There will be no meaningful “stimulus.”

We the sensible are pricing in an L-shaped selloff/recession/recovery cycle.

Wall Street is pricing in perpetual full employment, 2% inflation, and “moderate” growth.

We’re now just 11 months away from the all-time-record for uninterrupted economic growth.

We got to 119 months during the far more propitious circumstances of the 1990s.

So, even on a calendar basis alone, the Fed’s “Goldilocks” view of the immediate future is just plain bonkers.

This children’s tale of the Bubble Finance saga has induced a staggering level of intellectual corruption and a soporific group-think on Wall Street.

We the sensible?

We’re awake to the Acela Corridor’s horror.

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.MORE FROM AUTHOR