There’s Work To Be Done

By David Stockman  |  August 9, 2019

The Dow Jones Industrial Average is back in the red again after three days of “Let’s BTFD Again!” (sung to the tune of “Let’s Do the Time Warp”…) clawed back what was lost on Monday.

It’s All Going Downhill

So far in August, that iconic index has shed 2.8%. The S&P 500 Index (-2.6%), the Nasdaq Composite (-3.1%), and the Russell 2000 Index (-3.9%) are down by similar percentages.

You know what else is down or slowing? Well…

Corporate earnings… GDP growth… bond yields… global trade… share buybacks… manufacturing indexes… industrial production… new construction… housing starts… capital expenditures… real investment…

Even share buybacks are on the wane.

Sven Henrich helpfully points out, though, that rate cuts, public and private debt, government deficits, and economic, financial, and geopolitical uncertainty are on the rise.

And, of course, multiples are expanding, and price targets are growing…

That’s because Jerome Powell has made the old Bernanke Put an Empire Hedge. Our monetary central planners are going all the way with easy money, whether their “wealth effects” ever reach Main Street.

Indeed, as I note in the August issue of The Stockman Letter, “Over the 125 months since the March 2009 bottom… there have been more than 50 distinct opportunities to buy the (small) dips… and, if done on leverage or with options, make a killing in the next upward move.”

Preservation Of Wealth

Markets are irrational right now. And the Federal Reserve has amply demonstrated it will do everything it can to preserve this status quo.

And that’s why things are about to get a little more dynamic with the asset allocation model that centers The Stockman Letter.

“Preservation of wealth” is and will always be our No. 1 priority. But we’ve added talent in the form of a season trader who will help us “make a killing in the next move”… whether that move is “up” or “down.”

Wall Street has been stimulated into a monumental asset bubble because that’s what 21st century monetary central planners do.

They’re unable to “make” inflation in one country – stupid as that objective is – because inflation is rooted in intricate global dynamics. These dynamics are simply not controllable by the crude instruments of central bank policy rates, or even large-scale bond-buying.

Nor can the Federal Reserve and its developed-market allies stimulate real growth in domestic household spending and business investment.

Households are stranded at Peak Debt. They can’t borrow and spend much more. And the C-suites of Corporate America have been turned into financial engineering joints that mainly recycle cash flows and borrowings back to Wall Street rather than invest in the growth of productive assets.

Not Much Has Been Done

June 2007 marks both the top of the pre-Global Financial Crisis/Great Recession business cycle and, more importantly, the point where the last vestiges of monetary sanity were abandoned by the Fed.

Not much has been accomplished during these 12 adventurous years of money-printing and rate-repressing.

The leading edge of the third great bubble of the 21st century is the tech-heavy Nasdaq 100 Index, represented by the dark line in the chart below. It’s up more than 300% on a peak-to-present basis.

That huge gain is not from the March 2009 bottom. It’s from the very tippy-top of the previous housing-based boom cycle.

During that same 12-year period from June 2007 to June 2019, the 16% trimmed mean consumer price index, represented by the yellow line, has risen by 29.5%. That’s 1.94% per year – about as close as you please to the Fed’s ritualistic 2% inflation target.

Of course, in real terms, conservative bank depositors have lost nearly a third of their pre-existing savings. At the same time, stock-market speculators gained 215%, even after adjusting for inflation during the period.

Meanwhile, in June 2019, manufacturing output – that’s the purple line – was still 1.3% below the June 2007 level. And total industrial production – that’s the red line – is up by 5%. That’s not much when you consider all the hype surrounding the so-called Shale Boom, which caused U.S. crude oil production to double.


We’ve had the most massive monetary stimulus in recorded history, and the outcome is a pitiful 0.4% per year rate of growth in the output of the entire U.S. industrial economy, manufacturing, utilities, and energy and mining combined.

This bubble is not just about the extra-frisky tech sector. Even the large-cap S&P 500 is up 55% in real terms during that 12-year period. That’s 10 times more than the 5% gain in the industrial production index.

Throw in all the service sectors, from construction to retail to Pilates studios. You still get a punk rate of gain in the real value added of the entire nonfarm business sector. It went from $11.65 trillion in 2007 to $14.22 trillion in 2018.

The Numbers Are Punk

That’s an annualized growth rate of just 1.8%.

For want of doubt, by all historic standards, that latter figure is punk. During the 2000-to-2007 peak-to-peak cycle, real nonfarm value added was 2.8% per year. During the 1990-to-2000 cycle it was 4%.

That followed the 3.7% during the 1981-to-1990 cycle, which happened notwithstanding the deep 1982-83 recession.

The fact is, no matter how you slice the data, Main Street growth since the 2007 peak is as weak as it comes. And it’s way, way out of sync with the booming gains in the value of financial assets.

In today’s debt-encumbered, excess-capacity-ridden globalized economy, nearly all the stimulus emitted by our monetary central planners is stuck in the financial system – particularly the hyperactive stock, bond, and derivatives markets.

Pure and simple, central banks, led by our own Federal Reserve, are printing asset inflation.

And we can be weary from these ridiculous rules of the Bubble Finance game.

But that doesn’t mean we can’t profit from them.

All The Right Moves

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…

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