Federal Reserve

What Will the Donald Do Next…

By David Stockman  |  January 1, 2019

Be at war with your vices, at peace with your neighbors, and let every new year find you a better man.

– Benjamin Franklin

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 Fed raised the federal funds target rate nine times over the past three years. And we’re still sitting in a historically low 2.25%-to-2.50% range.

That’s just the “headline” story. The real “tightening” is happening in the bond market, where the Fed is no longer sopping up bad supply and the Treasury is dropping another $1.2 trillion of U.S. paper.

That’s the “Mother of All Yield Shocks.”

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.

As for your New Year’s Day reading pleasure, I’m pleased to once again turn some real estate over to my friend Dave Collum.

In the following excerpt from Part 2 of his “2018 Year in Review,” Dave spells out what it means to be at the end of a long and weak “recovery” as we kick off 2019…

End of Cycle. The free market has caught up to a few hooligans. After 100 years, the iconic Sears is now a carcass being picked over by its creditors. Far more shocking, General Electric, the dominant industrial super power is 80% off its 2016 high and 88% off its 2000 all-time high (requiring a 700% gain to return), hitting levels not seen since 1994. It has been removed from the Dow and replaced with Walgreens, which is sitting at its all-time high with the same market cap as GE. For those keeping score, GE bought back its own shares all the way down, which probably explains why its pension fund is the third largest holder of GE shares. The $170 billion dollars of GE debt (depends on how you count) could be one of GE’s toaster ovens being tossed into the pool and may be what spooked Powell into backing away from an overtly hawkish stance – “the birth of the Powell Put” (which, as of December 19th, is said to have died).

“General Electric is the most admired company for the sixth time in the past decade.”

– Forbes, 2006

For the most part, the markets have made conservative investors – what we call Cassandras, Chicken Littles, Grumpy Old Men, and Nouveau impoverished – look like fools. Has the top reared its ugly head this year with the entertainment just beginning? If not, when?

JPM’s Kolanovic says that the next meltdown in stock prices could cause the next financial crisis and has coined the name “Great Liquidity Crisis” to describe the phenomenon. Charles Hugh Smith suggests that 10 years of reckless behavior will “unleash a non-linear avalanche of reversions to the mean and rapid unwinding of extremes.” I think he’s saying it will be fast. Rates are rising, the cycle that was never fundamentally impressive (or even sound) in the first place is getting very long in the tooth, markets seem awfully jumpy, and the algo bus fueled by unprecedentedly easy monetary policy that drove us to the summit may have no brakes for the trip down.

“The bulls don’t seem to acknowledge the artificial nature of this bull market in risk assets in general – no other cycle had such interference from central bank incursions and support by their balance sheet expansion… The tax cuts have helped buy the bulls a little bit of time, but history shows that monetary policy is far more powerful and exerts its influence with lags that are typically long, variable, and insidious.”

– David “Rosie” Rosenberg

They say that nobody rings a bell at the top or bottom, but some would argue that is untrue. If you believe that valuations are ridiculous, the journey could be fast and hair-raising. Please do not blame hiking rates for a rout. The Fed laid the ground work over decades. And, by the way, if you think that you can hide from a washout by staying in the lower deciles of valuation, dream on. Hussman showed that the pain will be severe in all 10 valuation deciles. When valuations plumb the lows, half the equities will be valued even lower. How about emerging markets? They seem cheap. Yes, but they will get cheaper. On the bright side, maybe I’m just wrong.

The 2019 Model

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