Washington DC

It’s All About Interest

By David Stockman  |  November 7, 2018

Same as it ever was
Same as it ever was
Same as it ever was
Same as it ever was
Same as it ever was
Same as it ever was
Same as it ever was
Same as it ever was

– Talking Heads, “Once in a Lifetime” (1981)

“…an outcome that will allow both ‘red’ and ‘blue’ to claim ‘victory.’”

I’ll stand by that forecast.

Democrats took the House. Republicans still hold the Senate.

The Donald will be the Donald, and he’s already hit the 2020 campaign trail…

Markets are pleased, of course; that’s what Wall Street does these days, “get pleased.” There really isn’t much rigorous price discovery going on to distract it, so, why not?

And the Donald, alas, is ready to do the deed.

Here’s the Tweeter-in-Chief bullypulpitting the Federal Reserve:

Trump told in no uncertain terms that he was “intentionally sending a direct message to Mr. Powell that he wanted lower interest rates.”

While the Fed is supposed to be independent “in theory,” Trump suggested that he wouldn’t keep quiet and let the central bank wreck the economy.

“To me the Fed is the biggest risk, because I think interest rates are being raised too quickly,”

Mr. Trump demurred when asked under what circumstances he’d remove Mr. Powell. “I don’t know,” he said.

You might have caught wind of that report from The Wall Street Journal on CNBC, Fox Business, or Bloomberg; Bubblevision (Politics), of course, was still all over Khashoggi and Pittsburgh and Sayoc and Caravans…

Well, it was more than a thousand Dow points ago…

And it was before the Donald got emboldened by his midterm results.

The Dow Jones Industrial Average read 24,768.79 at its low on October 23. Today, it’s up at levels it hasn’t seen in, gosh, nearly a month – 25,981.31 and climbing as of high noon.

We are indeed at a decisive pivot point.

And it’s far more consequential than this or any midterm election. Still, we can’t but marvel at Wall Street’s complacency.

Monetary central planning’s 30-year party is over.

The Keynesian money-printers who fueled a massive, global bond bubble are tomorrow’s bond-dumpers, all in the name of “normal.”

(Normal, here, means, of course, that Keynesian central bankers are creating “dry powder” so they can ride to the rescue amid the next crisis of their own making.)

Here’s what it means, as a matter of global bond market mechanics.

With “quantitative easing,” the Fed was “sequestering” bonds on its balance sheet. That, in effect, stimulated demand and held yields down.

With “quantitative tightening,” the Fed is letting those bonds roll off its balance sheet. This, in effect, creates supply.

A lot of other central banks around the world are or will be doing the same thing.

The bottom line is, there’s some fresh discovery to be done as far as bond yields and interest rates are concerned.

Experience tells me we’re headed much higher than the 3.19% we see on the 10-year U.S. Treasury today.

And there’s a major line about to be crossed on this march, the 35-year downtrend in place since I was contemplating the desultory math of $200 billion Reagan deficits as far as the eye could see in the face of a 16% read on the 10-year.

graph

Paul Volcker took care of that problem. All he had to do was plunge the U.S. economy into a nasty recession and wring out the 8% or so inflation expectation embedded in that benchmark bond yield.

From there, it was the longest-running bull market in recorded history.

It’s about to reverse.

And you’ve heard virtually nothing about the consequences via Bubblevision.

Well, here it is.

We’ll have a non-functioning government over the next two years.

And Imperial Washington’s fiscal incontinence will soon embarrass even this doped-up, dumbed-down Wall Street crowd.

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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.MORE FROM AUTHOR