Main Street

Just Another 21st Century Perversion

By David Stockman  |  June 11, 2019

There’s a genre of Social Media Socialist post with a comment along the lines of “threatening us with a good time again” above a link to a CNBC.com headline such as “Stanley Druckenmiller says stocks would fall 30% to 40% if Bernie Sanders is elected president.”

The revolutionaries just don’t know how recessions and depressions start anymore.

It’s a perverse dynamic, one we need to grasp. Indeed, I’ve prepared a new video on this issue, content that, under ordinary circumstances, would be available to my VIP readers.

But I’m making it an open presentation because as many of us as possible need to know what’s about to happen. Click here to register for “The Donald, the Deep State, and the Undrainable Swamp”…

Before we explain, again, how the game is played in the 21st century, and that, ultimately, Main Street will suffer Wall Street’s and Corporate America’s blood-letting, let’s take a moment to knock back more nonsense about the stability of the current recovery.

Bubblevision – when it’s not pushing “fear” buttons – primps and pimps all the data it can find to support its “buy the dip” narrative.

Take the weekly report from the U.S. Department of Labor on initial claims for state unemployment benefits. Last Thursday, June 6, CNBC.com said, “U.S. weekly jobless claims are unchanged, pointing to labor market strength.” That was for the period ended June 1.

Now, note that during the 80-odd weeks leading up to the official start of the Great Recession in December 2007, initial jobless claims were flatter than a pancake.

By then, anyone who wanted to could see that the subprime-floated housing bubble had reached its asymptote.

The foundation was cracking from one end of Wall Street to the other. But home-gamers in the hinterlands were still enjoying their “buy… Buy!… BUY!!!” spasms, speculating in residential housing with “no income, no job, no assets” zero-down, teaser-rate, Alt-A mortgages…

After December 2007, the incoming data began to weaken. But George W. Bush’s top guy on the economy insisted as late as May 2008 that there was no recession in sight. And the Federal Reserve kept its benchmark federal funds target rate constant between May and August at 2.00%.

Still, there was never much warning from the weekly initial jobless claims number.

That’s because it’s an ultra-lagging indicator. What gets cut first are hours, contractors, and short-termers. And most of them aren’t eligible for unemployment insurance.

The weekly claims figure was still only about 370,000 as of July 2008. But then Fannie Mae and Freddie Mac went down in August. And Lehman Brothers filed the bankruptcy petition heard around the world on September 15, 2008.

That’s when Corporate America panicked. CEOs and CFOs threw employees and assets overboard, trying to appease Wall Street and to prop up their share prices and options packages.

In barely six months, the claims rate had doubled to 670,000, and the worst recession since the 1930s was in full swing.

So, there was nothing to see in the initial jobless claims number – until suddenly there was…

There’s no doubt the Everything Bubble is far more extended than the one that led to the Global Financial Crisis.

And when it’s pricked by the Orange (or the Red or the Black) Swan this time around, the collapse will be at least as violent, unexpected, and shocking to Corporate America.

In the intervening years, CEOs and CFOs have been house-trained by the Fed to be nothing more than stock traders and financial engineers. Look at the massive flows of cash and borrowing into mergers and acquisitions; stock buybacks, leveraged recapitalizations, and dividends.

During the 12 months ended March 31, 2010, a still-chastened Corporate America spent about $600 billion on financial engineering. But, under the influence of the Fed’s easy money, lessons in prudence were quickly forgotten. By December 31, 2018, financial engineering flows back into Wall Street had quadrupled, to $2.5 trillion. And the rate is still rising in 2019.

It’s clear that the business of top management today is to top up its own wealth.

Today, the major equity indexes are all up. The Donald, Wall Street, Corporate America, Bubblevision… all smiles.

They’re in nosebleed territory. All that financial engineering has accomplished is to shrink the number of shares outstanding, not to drive real earnings growth.

Pre-crisis trailing-12-month earnings for the S&P 500 Index peaked at $85 per share for June 2007 period. Nearly 12 years and a full business cycle later, S&P earning for the March 2019 period came in at $125 per share, adjusted for the same tax rate that existed in 2007.

Earnings growth over the interval averaged 3.3% per year. Take out the inflation (about 1.8% per year) and the share count shrink, and there’s hardly any gain at all. Indeed, it’s been a meager 1.23% per year.

When the levee breaks – and it will – there will be nothing to prevent a major disaster on Main Street.

Again.

Stability Specs

Desperate times call for… “common sense” measures.

And these are desperate times… Markets are corrupted by monetary central planning. They’re confused. And the road back is going to be treacherous.

We’re looking at a major re-pricing for all financial assets. And thousand-point intraday or day-to-day swings are part of that equation. Those can be frightening… for “buy and hold” investors.

I have a different approach, one that combines strategy and tactics into a plan flexible enough for you to survive and thrive amid the coming chaos. It’s called “The Stockman Model.”

All we’re after is a little stability, perhaps a chance to pocket a windfall when opportunity presents…

To common sense,

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David Stockman

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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