Stock Market

Goldilocks Is Gone

By David Stockman  |  July 26, 2018

Look Out Below

– 1919 silent comedy short directed by Hal Roach and starring Harold Lloyd and Bebe Daniels

From here, it looks like this bull market has, maybe, 5% upside. It also looks like there’s at least 50% downside.

We’ve reached the point where risk-reward metrics have absolutely nothing to do with the daily bumps and grinds of the stock averages.

The flickers on the tickers discount nothing. Everything real points to crunch time, dead ahead.

And that starts right at the top.

We don’t fondly refer to the Donald as the Great Disruptor for nothing.

And it ought to scare the bejeezus out of Wall Street that the Donald is finding his stride. He’s taking on anything in his way: the good, the bad, the ugly, the indifferent…

There’s no one left in the White House who will stand up to him.

And the Congressional GOP has been completely euthanized by the current phony economic boomlet and the mindless last rips and snorts of a dying bull market.

So, big time accidents surely will happen.

For example, in his new bull-in-a-china-shop modality, the Donald could easily trigger an unexpected government shutdown on September 30.

All he has to do is make on good on his bluster and veto a continuing resolution that – once again – doesn’t fund his beloved Mexican Wall.

The trade war on China is no longer in the phony stage: $200 billion of new tariffs is real, on top of the first $50 billion.

A bureaucratic process is underway that could vaporize a quarter-trillion dollars of imports from China by Halloween.

In the short term, prices are going much higher.

It’ll take time for U.S. buyers to re-source to non-tariffed foreign suppliers. That’s what they’ll have to do to avoid an inflationary hit to price tags in the Wal-Mart shopping aisles.

Even then, the resulting global supply-chain disruptions will push global prices higher. And that’s to say nothing of what will be the surging selling prices of domestic suppliers.

They’ve got the other side of the market. And they’ll benefit from a massive tariff umbrella.

The math is daunting.

The total impacted domestic market from the two China rounds is $650 billion.

And the weighted average tariff is 13.5%.

This tariff bump will drive all prices, not just imported volumes.

The potential $90 billion hit to wholesale prices won’t be a mere rounding error. And it’ll generate secondary waves of inflationary pressures.

This couldn’t come at a worse time, of course.

It’s beginning to appear that the “low-flation” fairy has finally flown.

Since May 2017, the producer price index has been rising by 3% to 5% on a year-over-year basis. It came in at a red-hot 5.5% in June.

At the same time, the June consumer price index (CPI) printed at 2.8%.

Excluding “volatile” food and energy prices, it was 2.2%. And that’s the fourth straight month this “low-flation index of last resort” has been above the Federal Reserve’s magic 2% target.

We were already staring at a perfect storm.

“Normalization” by the Fed will wreak havoc in the global bond market. That’ll be made worse by a $1.2 trillion explosion of new U.S. Treasury borrowing.

And it’s all happening in the 10th year of what’s now a weak and old recovery.

All it takes is a little inflation to go from “Goldilocks” to “Stagflation.”

That could throw Wall Street off its game.

And it might finally cancel the Greenspan-Bernanke-Yellen Put.

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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