Finance

This Clown Opera Is Just the Prologue

By David Stockman  |  June 25, 2018

“Taking crazy things seriously is a serious waste of time.” – Haruki Murakami, Kafka on the Shore (2002)

So, you think there’s some sense left in global financial markets?

I point you to the hilarious mid-June plunge in the yield on the Italian government’s two-year bond.

It happened when recently installed Finance Minister Giovanni Tria said the new populist government is “committed to the euro.”

He added that the “public debt will fall.”

Something and/or someone will take a “fall.”

More like a “pratfall”… That’s because fake demand for Italian bonds is about to disappear.

It’s as sure as the populist-driven borrowing breakout that’s about to hit Italy’s already tattered accounts.

And it’s more like “somethings” and “someones”…

Nothing quoted during the relevant history – even the recent spike to 1.75% – is remotely sufficient to compensate for the risks ahead.

In Italy or anywhere else, for that matter…

Meanwhile, Italy has itself a populist coalition of elements from the right and the left.

Of course, this monster’s cranking up a massive budget breakout.

Tax cuts, “citizen income” handouts, infrastructure boondoggles, and the reversal of 2011 pension reforms are just a few of the things on its mind.

This stuff could double or triple Italy’s existing deficit. Yields, of course, will surge even more.

There’s no reason for a rational investor to buy Italian debt.

But what’s happening is just a symptom.

Central-bank money-pumpers fostered a vicious pack of spirited, animalistic short-squeezing algos and day-traders.

They maraud through markets, pouncing on meaningless headlines and other noise like Signor Tria’s spin-doctoring.

Indeed, one short-squeeze tends to beget the next.

Soon, Bubble Vision’s talking heads proclaim Wall Street’s “risk on!” to Main Street.

And the day of reckoning gets kicked ahead another 24 hours…

These folks either don’t know (which makes it “bullshit”) or don’t care (which means they’re lying).

Either way, we know there are massive risks out there.

Primary among them is the fact that the world is being run by a ship of fools fixing to do dangerous things.

A trade war of tit-for-tat provocation and retaliation is now being fueled by rapidly intensifying personal animus toward the Donald among the world’s globalist ruling class.

The G-7 and other multilateral gabfests are complete wastes of taxpayer dollars.

There is indeed some opportunity there… but it’s for permanent-government policy-wonks to pollute the minds of elected leaders with statist propaganda.

The Donald’s tweets blowing up gobbledygook “draft communiques” is a welcome development.

So are his unscripted suggestions that fly in the fact of Washington Consensus groupthink.

Of course Russia should be invited back to complete a true, beyond-Cold-War G-8. That’s if these pointless meetings are to be held at all.

Meanwhile, Trump’s offensive on trade is off point.

Look, this is contrary to the Donald’s well-intended but utterly misinformed view.

But trade deficits don’t result from international trade deals or government tariff and non-tariff barriers.

America’s trade deficit, in fact, is rooted in bad money.

You can’t solve a massive trade imbalance by attacking foreign tariffs when the problem actually originates with the Federal Reserve.

Up-trending inflation of U.S. costs and wages? That’s the Fed’s ludicrous 2% inflation target in action.

It makes the U.S. economy increasingly uncompetitive in global markets driven by the China Price for goods and the India Price for services.

The strip-mining of balance sheets and cash flows? That’s the Fed’s massive incentivizing of financial engineering by Corporate America.

It’s starved investment in assets, manpower, and productivity.

Meanwhile, this shows up on Main Street, too.

But it’s in the form of massive household borrowing. And all that debt goes to support unearned yet steadily sliding standards of living.

Let’s think about when push comes to shove.

There’s no reason to believe that broader bases of voters here or elsewhere are any less prone to populism than is already evident in growing parts of the West.

A major blow-up – of the eurozone or among some other globalist fiction – is only a matter of “when.”

Wall Street pretends there’s no risk because nothing “bad” has happened yet, on trade or any other front.

This persistent inability to assess risk will be the heart of the impending financial calamity.

It beats to the rhythms of monetary central planning.

What happens when that heretofore happy band switches things up?

Sounds like “Nearer My God to Thee”…

David Stockman

P. S. If you’re interested in a deeper dive into the machinations of the Deep State, the place to go is David Stockman’s Contra Corner.

It’s a fiercely independent, totally original, facts-figures-and-charts-based take on the ongoing corruption of American Liberty by Wall Street and Imperial Washington.

And it’s all based on my 40 years working at both ends of the Acela Corridor. Click here to learn more

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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