Washington DC

A Tragicomedy of Acela Corridor Proportions

By David Stockman  |  September 25, 2018

Nite Owl II: But the country’s disintegrating. What’s happened to America? What’s happened to the American dream?

The Comedian: It came true. You’re lookin’ at it.

– Alan Moore, Watchmen (1987)

Markets wobbled yesterday amid the latest episode in the Rosenstein imbroglio, a new accusation to color the Kavanaugh confirmation, and more signs a Blue Wave is gathering.

Today, stocks are back and forth from green to red but basically flat. The yield on the 10-year U.S. Treasury note is above 3%, but it’s steady. And the “fear gauge” – the VIX – is hovering near all-time lows.

And that’s as Donald the Disruptor brings his game to the United Nations.

Of course, truth and reality being way too hard for daytime TV to handle, it’s the kind of programming that drives ratings and makes Mainstream Media titans giddy.

But we’re in the 111th month of the weakest economic recovery in modern history. By next June, we’ll have broken the all-time record, set from 1991 to 2001.

That’s if we make it.

Forget about the rear-view mirror. Ahead, through the windshield, there’s not much runway left.

Consider the speed-bumps, too.

The Federal Reserve’s unprecedented pivot to “quantitative tightening” will shrink its balance sheet by $600 billion per year.

That’s a massive dump of existing debt into the bond market – more than the Fed’s entire balance sheet was worth as recently as 2002.

The GOP’s Fiscal Debauch means out-of-this world budget deficits of $1.2 trillion. That’s 6% of gross domestic product.

That’s happening as of October 1, the first day of the federal government’s fiscal 2019.

More consequentially, it’s occurring just as we get ready to round into the second decade of this expansion. And history’s telling us these things don’t last this long.

The Donald’s Trade War is foisting a tariff-hiking cycle on the global economy no one imagined possible in the postwar era. It’ll add to inflation and batter American consumers.

But “normalization” means the Fed will continue to hike rates – and batter American consumers.

China has long been known as the “Middle Kingdom.”

A few decades after “opening up” to a Western system defined by Bubble Finance, the Red Ponzi is on the verge of causing a major global downturn.

And that would bring the recent pick-up in U.S. exports and capital expenditures to an abrupt halt.

The confluence of soaring federal debt and deficits, accelerating inflation, and central-bank tightening will monkey-hammer earnings. And it’s not remotely priced in.

None of it is – including the high-school-level melodrama playing out via these intra-elite squabbles.

When an economic cycle is old and weak, the absolute worst economic program imaginable is to increase spending and cut taxes. It goes against every principle of sound money and fiscal rectitude – and free markets, to boot.

You certainly don’t fix a system encumbered with massive debt, malinvestment, and egregious financial asset inflation with still more of all three.

The very last thing Imperial Washington should be doing is attacking Main Street’s cost of living.

But that’s what’s happening.

The Donald’s tariffs and the Fed’s inevitable response will do nothing to help working Americans.

Nor will massive new federal borrowing requirements at the same time monetary central planners are draining the excess liquidity they injected into the financial system.

Those crisis moves priced in perpetual cheap debt. And it created a forever “central bank put” in the minds of big traders and other “too big to fail”-type institutions.

It also gave Corporate America cover to invest in share buybacks rather than productive assets.

After all these years, there’s no headroom in the system for orderly interest-rate normalization and restoration of honest price discovery.

Wall Street surely doesn’t know it. But we are starting to see cracks in Imperial Washington.

Beware, folks.

The system is primed for a thundering shock.

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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