Economy

Inside the Acela Corridor’s Bubble Brain

By David Stockman  |  October 30, 2019

Bubblevision wants you to know that the initial reading on third-quarter real gross domestic product (GDP) growth came in at an annualized rate of 1.9% and that that 1.9% was better than the 1.6% the consensus expected.

So does the Tweeter-in-Chief…

Bubblevision does not want you to know that that 1.9% represents a 35% slowdown from the 2.9% growth rate posted during the third quarter of 2018.

Note too that personal consumption was up by 1.7% versus a consensus forecast of 2.6% and a prior-year print of 4.6%.

Also, business investment – this was what was supposed to stimulate growth following the Donald’s and the GOP’s fiscal debauch of a tax cut – fell by an annualized rate of 3% from July through September. This is the second consecutive quarter of shrinking business investment.

Growth this year is tracking to about what it was during Barack Obama’s second term.

MAGA? My ass…

This Is Not the “Greatest Economy in American History!”

And the people are taking notice. They’ve felt if for years – decades, even.

That’s why Elizabeth Warren’s wealth tax is the sleeper issue of the 2020 campaign. It’s an instrument of condign justice for the financialization of the American economy. Not only that, it provides easy revenue to pay for all the stuff she wants to give the 99%.

Three decades of central bank asset inflation has skewed wealth artificially and radically to the tippy-top of the economic ladder. The math permits no other outcome, in fact, given that the top 1% own well more than 40% of the financial assets.

And when the market plunges and CEOs and CFOs initiate their layoff, writedown, and restructuring plans, billionaires and the super-rich will be in the crosshairs.

It’s set so high up the wealth scale that it’ll be immune to GOP demagoguery: The top 0.1% of U.S. households will pay the entire $2.4 trillion of wealth tax collections projected over the decade after enactment.

Indeed, the 83,500 households eligible for it constitute only 0.07% of America’s 127.5 million household units.

Oh, it’ll resonate powerfully…

The Great Disruptor Is at Work

Look, the Donald is basically just a patsy at this point. He’s served his purpose to the Duopoly, and their Deep State has him in its crosshairs.

We can rely, however, on the Great Disruptor to burn down as much of the Acela Corridor as he can on his way out.

That’s because 12 knuckleheads domiciled in the Eccles Building have spent decades inflating the hell out of U.S. Our monetary central planners have caused household financial assets to grow at two times the rate of income growth for the past 32 years running. That’s even as the growth rate of the U.S. economy has fallen by two-thirds from its historic norm.

That’s not a “free market” at work, no way, no how.

In 1987, household financial assets of $13 trillion represented 2.7 times national income of $4.8 trillion. As of the second quarter of 2019, financial assets had exploded to $91 trillion. That represents 4.3 times current-period GDP of $21.3 trillion.

Had this massive valuation creep and financialization of the U.S. economy not occurred, household financial asset holdings would currently total about $58 trillion at the pre-1987 ratio to GDP.

The $33 trillion difference is basically the Fed’s gift to the wealthy…

And it is a “gift.”

It’s Downhill from Here

The U.S. economy is on an unmistakable downward trajectory of ever slower growth. A 10-year trend growth rate of 1.5% should be capitalized at a lower multiple than was the pre-Greenspan economic growth rate of 3% to 4.5%, not a sharply higher one.

Of course, financial asset values no longer bear any relationship at all to Main Street fundamentals.

Wall Street permabulls would say this uncoupling is about huge gains in corporate profits, which get capitalized in stock market values. That cover story doesn’t hold water. Pre-tax corporate profits of $1.9 trillion in the third quarter of 2006 inched upward to $2.08 trillion in the second quarter of 2019. That’s a meager gain of 0.73% per year.

By contrast, nominal GDP grew from $13.9 trillion to $21.3 trillion during that 13-year period. The 3.4% rate of nominal GDP growth indicates that the pre-tax profits’ share of GDP actually fell. That’s even as the household net worth ratio continued to climb skyward.

Central bankers are in the reverse Robin Hood business. The Fed is about to cut its benchmark interest rate again, and it’s already engaged in another, “shadow” QE program.

Whether this desperate gambit could keep the Everything Bubble aloft at this late stage of the cycle would ordinarily remain to be seen.

This time, however, they’re laying track for the Elizabeth Warren Express.

And the faster it gets, the more certain it becomes that the Greatest Bubble in American History will reach its sell-by date before November 2020.

Ali Was “The Greatest”…

… But this is indeed the most politicized market in history. And the Tweeter-in-Chief is still in charge. So, the situation is changing almost by the minute.

It’s “Impeachment!” in Imperial Washington and all over the Mainstream Media. It’s “Easy Money!” on Wall Street and across Bubblevision.

And it seems as if the whole world has, indeed, gone mad.

Amid this chaos, prices will continue to rise and fall, trends will continue to develop and dissipate. You’ve got to be able to “float like a butterfly, sting like a bee” in this market.

Well, The Stockman Letter is made for times like these. And we’ve updated our design to help us better navigate to not only the safest harbors but also the most promising opportunities.

The stakes are as high as they can be heading into 2020. Markets appear to be straining, catching up to an economy that’s been weak and getting weaker for years.

The Donald is tied up in the day-to-day movements of the major stock indexes like no president before him. The increasingly desperate incumbent will do anything he must to hold the White House.

It’s a major tipping point. And there’s no telling what the Donald’s great disruptions could do to your wealth.

You’ve got to be nimble to win in this market…

If You Need Your Money in the Next 5 Years…

America is at a crossroads. The middle class is disappearing… government spending is out of control… and the implosion of Bubble Finance will cause the greatest market crash in history. So, if… Read More
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