A Midsummer Night’s ‘Mare

By David Stockman  |  July 31, 2018

To sleep – perchance to dream: ay, there’s the rub…

– William Shakespeare, Hamlet (circa. 1599 – 1602)

Let’s just concede “It’s absurd.”

After that, you say anything you want about the Russell 2000 Index trading at 81 times earnings.

…and the Nasdaq Composite trading at 27 times earnings.

…and the S&P 500 trading at 24 times earnings.

Imperial Washington made it so.

Congress bailed out Wall Street. The Federal Reserve’s “extraordinary” monetary policy made money cheap.

All Main Street got was some really crummy layoffs and firings.

And the fragile system that so need saving a short decade ago is now caked in more debt.

It was bad enough before 2008.

From August 1987 through the fourth quarter of 2007, total U.S. debt surged by five times.

Meanwhile, gross domestic product (GDP) expanded by only three times.

Nine years of “operation twist,” “zero interest rate policy,” and “quantitative easing” have given us $16 trillion in new debt.

Meanwhile, GDP has grown by just $5 trillion.

Wall Street’s rampant speculation in the aftermath of the Global Financial Crisis/Great Recession is, indeed, absurd.

There’s no way the Russell 2000 rises 250% from the bottom were ours an honest free market.

Nothing fundamental supports a 360% rally for the Nasdaq Composite, nor a 220% run for the S&P 500.

Here it is, in a midsummer MarketWatch piece: Extreme Fear will actually keep the U.S. stock market grinding higher.

The gist of this one is “now’s a good time to buy the dip.” Another mini-pullback had ventilated Mr. Market’s worry.

Averages bounced off key chart points. And thus was confirmed the upward trend.


When the market starts to pull back, many sentiment measures move to bearish extremes. This is important because the market tends to fool the majority, and when everyone gets scared, it is usually a good time to buy.

During the second half of June, the U.S. market, as represented by the S&P 500 Index started to decline, and many momentum leaders suffered from profit taking. In my view, this was a normal pullback to the 50-day moving average for all the major indexes.

The 50-day moving average and all the other chart points may well be the speculator’s best friend – until the bubble reaches its apogee.

And now, like never before, the stock market is detached from reality.

We’re a couple good trading days away from new all-time highs, maybe 2.5%. Let’s push the rally to 3,000 on the S&P 500. That’s a little more than 4%.

Consider that our historically weak recovery is now old, too. Let’s just say we break the record and get to 129 months.

That puts the next recession in the spring of 2020.

Well… it doesn’t really matter.

The real issue is not the exact month the next recession officially begins. It’s usually a ridiculous academic argument that gets dumbed down even by CNBC standards.

The thing is how long economic growth and stock market averages dwell at lower levels.

Things are a lot tougher all over than they were back in 2000, when what’s still the all-time-longest uninterrupted period of economic growth was finally undone.

And we’re not looking at the kind of V-shaped bounce-back we saw in 2009 and 2010.

We’re getting ready to take an “L.”

An honest market would price in earnings likely along the bottom of an extended recession.

Imperial Washington’s stimulus machine is paralyzed on the fiscal front.

Meanwhile, monetary central planners are reloading dry powder.

This elongated bottom means we’re all fixed to lose a little in the short term.

That’s the cost of exposing the ugly truth about the Era of Bubble Finance and setting us back on a course of sound money and solid growth.

To dream, indeed…

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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