Stock Market

Comfortably Dumb

By David Stockman  |  October 18, 2018

Today’s the 11th trading session since the Dow Jones Industrial Average made its latest all-time high.

That’s a little more than two weeks. But, already, it seems like months.

That’s what back-to-back 800- and 700- point declines, plus a couple more low-triple-digit swings in their aftermath, will do with a market.

Of course, it’s prologue.

This is what happens when Wall Street finally realizes the end of this moment in easy money is actually happening.

And it isn’t even the Mother of All Yield Shocks.

The clueless boys and girls, the robo-traders and their algorithms, too: They haven’t seen anything, yet.

Alas, not even our monetary central planners can keep a bubble suspended forever.

That’s something they realize, of course. That’s exactly why the Federal Reserve is raising the federal funds rate and trimming its balance sheet…

It bears repeating: The Fed is creating “dry powder” for the next crisis of its own creation.

The Donald will certainly use his particular bully pulpit to try to knock it off course. But the Fed is determined to “normalize.”

At the same time, the massive GOP Fiscal Debauch is baked into the cake.

The global bond market will soon be awash in $1.8 trillion of new U.S. government debt, a combination of $1.2 trillion in new borrowing plus the $600 billion impact of “quantitative tightening.”

Bubblevision usually puts up a brave face – at the very least, it’s dramatic.

Often, it’s preposterous. Take the recent buzz-meme that this recent yield surge is all about a booming economy.

Look, it’s about lost Keynesians struggling to serve masters. It’s about a fiscally incontinent federal government.

It’s about a bubble.

So, here are 10 points to ponder, adapted from my friend Gary Kaltbaum, as we teeter between more senseless market-cap expansion and… something else.

We’re two weeks out from Gary’s initial post on the topic. But this is still a useful primer for people who want to preserve as much portfolio value as possible…

  • While the Dow was making new highs, nothing else was.
  • Advance-decline ratios have made relative lows.
  • The Russell 2000 and the mid-caps have broken initial support and are woefully underperforming.
  • New 52-week lows have expanded markedly, while new 52-week highs have contracted. (Note that muni-bond funds are all over these lists. They’re not operating companies. But it says something about the impact of rising interest rates.)
  • A slew of leading growth names have topped, with a decent number breaking down.
  • Oil prices have come back on the news out of Saudi, but West Texas Intermediate is still up 35% from a year ago.
  • Long bond yields have broken out to new 52-week highs.
  • Financials continue to meaningfully underperform.
  • Foreign markets continue to meaningfully underperform.
  • Tons of froth and speculation pervades the market, as “no sales” marijuana stocks get market caps in the tens of billions and 80% of this year’s IPOs lose money.

Rising interest rates mean higher costs. So do rising gas prices, for consumers and producers, and they’re up 50% to 60% over the past year.

Rising interest rates also mean it’s harder to buy a house. Folks who carry revolving debt are gonna start to feel the change. And our economy is all about “consumers.”

That used to mean Main Street.

Now, on Wall Street and in Imperial Washington, it’s just data.

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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