It’s the End of the Beginning of “Normalization”

By David Stockman  |  October 5, 2018

Cheer up, the worst is yet to come!

– Mark Twain, Those Extraordinary Twins (1894)

The yield on the 10-year U.S. Treasury note hit seven-year highs this week.

It made the biggest single-day move since November 2016 on Wednesday.

It’s been above 3% for two and a half weeks, and Wall Street is already talking about new stages of cycles and new trading ranges.

If you’d clicked that link just short of noon on Friday, you’d have seen a big red banner across the top of the page blaring, “Dow drops more than 250 points as rates pop on jobs report”…

Bubblevision nearly broke itself, between Imperial Washington’s Kavanaugh Kvetch and the trickle of blood on Wall Street.

It’s a breakout, alright, but it’s just another of the hot-chyron variety.

Yes, the 10-year is at 3.23%, and it’s just another stop on the “normalization” path.

Indeed, Fed Chair Jerome Powell told PBS this week that interest rates are “still accommodative,” that monetary policy is “a long way from neutral.”

Yet, here we are, a “MARKET SELL-OFF,” brought to you by CNBC… because the benchmark risk-free rate of return ticked up 20 basis points.

Folks, this is just a great aunt of yield shocks, maybe a close cousin…

Where the Great Disruptor will ultimately lead us is anybody’s guess.

But it’s a far worse place than either Imperial Washington or Wall Street imagines.

And his Trade War will have a lot to do with it.

The Donald is playing blind man’s bluff, poking his tariff stick into a hornet’s nest better known as China.

The Red Ponzi is the greatest financial house of cards in human history. And his orange-hair-brained attack is about to generate an ugly trifecta.

To wit, he’s aiming for 10% to 25% tariffs on $517 billion of current Chinese imports to the U.S.

That’s insane. As Wal-Mart wrote in a letter to U.S. Trade Representative Robert Lightizer, “The immediate impact will be to raise prices on consumers and tax American business and manufacturers.”

So, it’ll hammer the pocketbooks of his Red State constituency. Here’s Forbes:

In the three months after the United States imposed tariffs on washing machines to protect Whirlpool and other U.S. manufacturers, a decision at cross-currents and exacerbated by tariffs on imported steel and aluminum, prices for washing machines increased more rapidly than any three-month period in the 40-years data has been collected and those prices increased more than twice as fast as any of 300 other categories in the last two of those three months.

Here’s the picture:

3-Month Increase in the CPI for Major Appliances graph

But it will also send the Middle Kingdom – a giant experiment in “if you build it, they will come” – into a terminal tailspin.

China, enabled by an endless $40 trillion flow of credit from its state-controlled banking apparatus and its shadow banking affiliates, went berserk on easy money.

And it consumed more cement 2011 to 2013 than did the U.S. during the entire 20th century – enough to build 160 Hoover Dams in every state in the union.

It’s actually factories, warehouses, ports, office towers, malls, apartments, roads, airports, train stations, high-speed railways, stadiums, monumental public buildings, and much more.

They might just as well have poured all that cement in the Gobi Desert. That stuff drove crazy Keynesian GDP accounting.

But it isn’t sustainable.

Finally, the impending inflationary surge due to rising tariffs will force the Fed into a tightening campaign far more stringent and long-lasting than Wall Street expects.

Our monetary central planners painted themselves into a corner. They delayed “normalization” until the 11th hour – and then the Donald showed up…

Prices at the consumer and producer levels are already picking up…


Changing the name of NAFTA will prove a Pyrrhic victory. Full of confidence in his methods, there’s no way now the Donald will back off China.

Talking heads on Wall Street and in Imperial Washington expect a deal, with differences on timing and content. Either way, it’s “just around the corner.”

It’s not. It looks more like the beginning of what Alibaba’s Jack Ma called a 20-year war.

It looks like the end of Bubble Finance, too.

But it has to get that kind of “so much worse”…

Because that’s the only way it’ll get better.

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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