Wall Street

How to Ignore the Bubble-Brained

By David Stockman  |  August 29, 2018

History is a vast early warning system.

– Norman Cousins, Saturday Review, April 15, 1978

Here’s what Wall Street “knows” now, courtesy of sell-side quote machine John Lynch of LPL Financial, let loose in mid-August by MarketWatch:

“From tariffs to trade wars to inflation to a flattening yield curve to a global economic slowdown, the headlines continue to cast doubt on the sustainability of this economic cycle and bull market. Although we see several potential stumbling blocks, we continue to believe this economy and stock market rally have plenty of fuel left in the tank,” said Lynch, in a note.

The underlying strength in the market on the back of government spending, robust earnings, and improving confidence is expected to carry stocks higher for at least another year, if not longer, he said.

“There are several reasons we don’t expect a recession soon. One is that the past three recessions were preceded by annual wage growth of more than 4%. Recent data showed wages growing at 2.7% year over year, suggesting inflation remains tame,” he said.

While this bull market and economic recovery may very well be old, adding it all up, we see few signs that suggest an end is near,” said Lynch.

The U.S. stock market has plenty of upside. Fundamentals are actually awesome. None of today’s headwinds matter.

Here’s the thing.

Economic indicators – based on seasonally maladjusted, guesstimate-ridden, imputation-laced, perennially-revised numbers from Imperial Washington’s data mills – never tell you of a market crash before the fact.

It didn’t happen in April 2000. It didn’t happen in September 2008.

The Acela Corridor was seized by “Goldilocks” groupthink.

They didn’t see what was coming. All they had was a rearview mirror, and most of Wall Street wasn’t bothered to look. Even if it was, the statistical models were questionable, at best.

The bulls were flying blind. They didn’t understand a simple truth of the Era of Bubble Finance.

Recessions don’t cause stock-market crashes. Stock-market crashes cause recessions.

If it seems backwards from a Main Street perspective, that’s because it is.

Stock-market down-spikes inject spasms of panic into options-obsessed CEOs and CFOs. Corporate America is no longer the domain of captains of industry.

MBAs – marinated in a speculative culture based on “momentum” and financial engineering – occupy the C-Suites these days. And they’ve been made handmaidens of Wall Street.

Potential catalysts for a market shock add up by the day… North Korea… Russia… Turkey…

That’s to say nothing of the white noise of the Middle East.

And, of course, we have the Mother of All Yield Shocks.

Whatever it is, Wall Street won’t see it. Stocks will crash. Corporate America will “restructure.”

It’s all part of our “new normal.” Four decades of Bubble Finance has destroyed financial literacy on Wall Street.

And the consequences of the state’s role in contemporary capitalism have been ignored completely.

Sound money and fiscal rectitude are first principles. The moment you stray from them, the foundation of both the domestic and the global economies are impossible to maintain.

Make no mistake about it: Main Street is reeling because of monetary central planning and Bubble Finance.

So, yes, as MarketWatch teased, the stock market has made “history,” if that’s the story you want the data to tell, with longest bull market ever.

But – justlikethat – it’ll be “Risk Off!”

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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