That Was One Helluva Long Year…

By David Stockman  |  December 31, 2018

Don’t look back. Something might be gaining on you.

– Satchel Paige

Wall Street is enjoying a New Year’s Eve rally today, with the Dow Jones Industrial Average up about 200 points a couple hours shy of the finish line for the session.

As for the year, well… that’s a different story. The Dow’s sitting on a 6% decline for 2018, and it’s down 14% from its September 21 all-time high.

The reality of a historically old but pathetically weak economic recovery coming to an end is setting in. So are the consequences of the Federal Reserve’s “normalization” march.

The Donald, of course, has been predictably unpredictable. And, with his work on the current shutdown of the federal government, he is rapidly fulfilling, again, his destiny…

If Reagan was the “Great Communicator,” it’s Trump’s path to be the “Great Disruptor”…

He’s going to need every ounce of whatever it is that got him elected in November 2016, because, come Thursday, January 3, 2019, he’s facing off against vengeance-minded Democrats led by Nancy Pelosi in the House of Representatives.

We’ll pick up right there – and with the “Schumer Shutdown” – in the January issue of The Stockman Letter, which will be published on Friday, January 4.

Now, I’d like to turn it over to my friend Dave Collum, not just because he quotes me but because he also offers a look back on 2018 that will help us in 2019 in the following excerpt from Part 1 of his “2018 Year in Review”…

This time last year I was writing about downturns in housing and autos, and now I’m hearing about downturns in housing, autos, lumber, retail, trucking, energy, and semiconductors (chips ’n’ dips). Did we have a boom I missed? Yes and no. Assuming inflation corrections using “substitution” and “hedonic improvements” are accurate – I don’t – and assuming GDP corrections using these inflation numbers are accurate – I don’t – then the GDP grew a paltry 2% off the ’09 bottom, quite literally tracking the Great Depression from 1931 to 1939. BLS employment numbers are generated by a trend-cycle statistical model (read: making shit up). Nonetheless, even Helen Keller could’ve seen the help wanted signs on the lowest economic rung (retail). Personal consumption expenditures (PCEs) are said to be soaring relative to GDP despite stagnant wages and no personal savings.

“It doesn’t take even 10 minutes’ worth of investigation to show that the BLS tightness gauge –the U-3 unemployment rate – is not worth the paper it’s printed on.

– David Stockman (@DA_Stockman), former Reagan economic advisor and former Blackstone group partner

In 2018 we somehow witnessed a couple quarters of 3–4% GDP growth. I am so dark that I wonder whether the numbers have been jiggered explicitly to provide cover for the Fed to raise rates. Even so, more balanced individuals than I wonder whether we are creating real wealth or witnessing economic activity stimulated by yet another credit bubble. Luke Gromen (FFTT, LLC) notes that the 4% GDP print was suspicious in light of a 6.5% year-over-year drop in tax receipts and a 1.8% drop in gasoline demand. (Fuel consumption and economic activity go together like Starsky and Hutch.) Something is amiss. David Stockman says that “these goal-seeked numbers are notoriously unreliable at cyclical turning points like late 2007 and early 2018.”

He also notes that S&P profits haven’t grown for over three years. In a really engaging interview, economist Mariana Mazzucato seems to contradict Stockman, noting that “this is the sharpest post-recession rise in reported EPS in history.” She goes on to say that the “sharp increase in earnings did not come from revenue.” Stephen Roach, former executive director at Morgan Stanley asks, “Are the fundamentals really that sound? For a U.S. economy that has a razor-thin cushion of saving, nothing could be further from the truth.” He notes the anemic personal savings rate of 2.4% – the lowest in a dozen years and one-fourth of the historical norm – cannot support a strong economy. The scholarly market historian and market maven Lacy Hunt calls the economy “very weak.” Let us not forget the obvious: The views are always the best from the summit.

“Today’s economic boom is driven not by any great burst of innovation or growth in productivity. . . . The global economy is now awash in debt.”

– Steven Pearlstein, The Washington Post

“If it’s debt financed, you cannot increase GDP. You can only increase components of GDP.”

– Lacy Hunt, economist

The main problem is that growth, whether tepid or strong, was driven largely by a doubling of global debt over the decade, which I am tempted to call 7% annualized inflation. The debt-to-GDP ratio in the third world – called “emerging markets” on Wall Street and “shitholes” inside the Oval Office – created a mania of mergers and share buybacks while the real economy sputtered. Debt is consumption pulled forward. The bill for that hamburger you eat today is coming due on Tuesday, Wimpy.

A Model for a New Year

Desperate times call for… “common sense” measures.

These are desperate times… how else to explain an 800-point rally over the last two hours of trading to turn a huge loss into big gain… the day after the biggest single-day point-gain in the Dow Jones Industrial Average’s history?

This is not “normal.”

Markets are corrupted by monetary central planning. They’re confused. And the road back is going to be treacherous.

We’re looking at a major re-pricing for all financial assets. And thousand-point intraday or day-to-day swings are part of that equation. Those can be frightening… for “buy and hold” investors.

I have a different approach, one that combines strategy and tactics into a plan flexible enough for you to survive and thrive amid the coming chaos. It’s called “The Stockman Model.”

All we’re after is a little stability, perhaps a chance to pocket a windfall when opportunity presents…


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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