By David Stockman as originally published on Contra Corner and reprinted here with permission
In Part 2 we noted that the key main street economic metrics reflect no MAGA magic whatsoever. Since the election, inflation-adjusted paychecks have gone nowhere and almost anything else you can name—-business investment, real retail sales, productivity, employment and even real GDP—-continue to slog along in the tepid “recovery” channel that has prevailed since 2010.
Notwithstanding the Donald’s tweets, that’s happening because the foundation of the US economy is rotten to the core. And that lamentable condition is the product of three decades of central bank driven Bubble Finance—that is, bad money, not bad trade deals, free markets or nefarious foreigners.
The real culprit behind the economic distress in Flyover America that brought the Donald to the Oval Office, therefore, is a rogue central banking regime that has functioned to:
- bury all sectors of the American economy in unsustainable debt ($68.5 trillion);
- massively off-shore jobs and production of goods and services owing to the Fed’s specious 2.00% inflation target and the wage and cost inflation artificially induced thereby;
- transform money and capital markets into gambling arenas that massively siphon real resources from main street to Wall Street;
- financialize the U.S. economy by decoupling growth of asset values from gains in production and income; and
- drastically mal-distribute the windfall gains from financialization to the very top of the economic ladder.
Needless to say, the Donald’s fondness for protectionism, “low interest” and epic fiscal profligacy has absolutely nothing to offer: It will be making the symptoms far worse and has left the Keynesian money-printers’ posse unchallenged and fully empowered in the Eccles Building.
And that will prove to be a fatal mistake—-the equivalent of Trump signing his own political death warrant.
In the first place, the 35% eruption of the S&P 500 between the election and the January 26th high wasn’t remotely real, warranted or sustainable. Wall Street’s already egregiously inflated stock averages, in fact, were inexorably doomed to tumble from the day the Donald took the oath of office.
What the Trump bubblet amounted to was the financial equivalent of rigor mortis. That is, the last involuntary dip-buying spasms of gamblers and robo-machines which had gotten so intoxicated by years of the Fed’s free money and price-keeping operations that they can’t see the brick wallsstraight ahead.
We are referring, of course, to the monetary monkey-hammering that’s headed straight for the canyons of Wall Street.
It is being dispatched by our Keynesian monetary central planners in the foolish belief that they have completely healed the American economy and that it is now as strong as an ox. Accordingly, it is putatively ready for normalization of interest rates and an unprecedented experiment in drastic balance sheet shrinkage via QT (quantitative tightening).
To the contrary, the US economy is an exceedingly fragile house of cards. It will buckle like a lawnchair in the face of rising interest rates, a multi-trillion drain of cash from the bond pits and the end of the Fed’s price-keeping operations at anything remotely close to current stock index levels.
That is to say, the delusional money printers in the Eccles Building have effectively pulled the put.
Call it the Powell Pivot. Unlike the two clueless academics who preceded him, he’s actually taken a few spins around the Wall Street casino. He appears to grasp—at least dimly—the danger of the speculative excesses that has been fostered by nearly nine years of free carry trade funding and the proverbial Greenspan Put.
But do not forget that Jerome is also Janet in trousers and tie when it comes to the main street economy. He’s a true believer in the efficacy of monetary central planning, and buys the Keynesian catechism lock, stock and barrel.
To wit, that under the Fed’s diligent ministrations the great bathtub of the nation’s GDP has been nearly filled to the full-employment brim and that most of the “slack” has been drained from the labor market.
Accordingly, the great financial crisis is now a dim visage in the rear view mirror—even as a virtuous cycle of rising demand, hiring, wage rates, income, investment and more of the same rinse and repeat dynamics has gained a firm footing.
So the march in the Eccles Building toward four rate increases this year and a $600 billionannualized rate of bond-dumping by Q4 is pretty well baked into the cake. For reasons we will elaborate upon further below, this means that the Fed is fixing to blow-up its own financial bubble in a fiery clash in the bond pits, which will be hammered in FY 2019 by $1.8 trillionof old (from the Eccles Building) and new (from the US Treasury) government debt paper.
At length, Jerome and his posse will panic and attempt to reinstate some form of QE for made-up reasons that will strain credulity.
But by the time they admit to reigniting the printing presses for no other reason than to rescue the plunging stock market— it will be way too late. They don’t have the dry powder to do the job and, besides, by then the Fed will be facing a relentless and vicious tweetstorm from the East Wing Residence.
Needless to say, the Donald’s inevitable attack on the Fed will smack the boys and girls and rob0-traders on Wall Street right between their mulish eyes with the proverbial 2X4. And at that event, they will surely feign surprise and outrage that anyone other than the self-entitled gamblers in the casino would presume to instruct the Fed.
Indeed, the Donald’s impending attack on the purported sacred “independence” of the Fed is the Orange Swan that looms over the casino. It will predictably come from the same Twitter board that took on Rocket Man, the Fake Media, Amazon, Comey, the Russia Collusion Hoax and OPEC, among countless more.
But the Donald’s upcoming attack will also mean that Powell & Co will wait even longer than otherwise to capitulate and ashcan their normalization campaign—in order to defend the institutional honor of the Fed.
In the interim, of course, the hissy fits on Wall Street will reach epic intensity as the arrogant gunslingers and self-entitled flowers alike futilely demand a liquidity fix and bailout.
Moreover, the agonized cries from Wall Street will only infuriate the Donald and intensify his Fed-bashing campaign. If we know one thing by now, it’s that the Donald is the world’s most unabashed and brutal scape-goater; and that he has zero capacity to recognize–let along take responsibility for– his own mistakes.
Needless to say, embracing and boasting loudly and endlessly about the surging stock market—which he had accurately called “one big, fat, ugly bubble” during the campaign—was a colossal mistake. It means the Donald has set himself up for withering attack by the Dems and off-script Republicans when the bubble finally blows.
It also means that whether they acknowledge it or not, Powell & Co have now positioned themselves smack dab in harm’s way. They will get blamed for the tumbling stock averages, and not just in the normal generic way as in past market crashes.
This time the Fed will face a blistering tweet-storm from the Donald as he attempts to deflect the predictable attacks by his political opponents and explain why MAGA has come a cropper.
In turn, that will only function to savage confidence in the casino, thereby tapping deep veins of panic that have been dormant since Black Monday in October 1987.
And that also brings us back to the rot at the core of the US economy and financial markets. Blindly peering through their Keynesian beer goggles, our monetary center planners are blissfully unaware that their policies have been an epic failure, and that their pending “normalization” campaign will blow the edifice of Bubble Finance sky high.
So they are plunging forward—-giving obtuseness a new definition as they do.
To be sure, we are not suggesting that they have any choice or that real interest rates can be kept at or below the zero bound indefinitely. But in blithely charging ahead, they will be giving the casino exactly the wrong message.
Namely, that their normalization campaign poses no danger to the casino and is predicated upon macroeconomic strength. Indeed, the denizens of the Eccles Building have unaccountably come to believe—in Orwellian fashion—-that failure is success.
The chart below shows failure. To wit, during the past 30 years, the real median household income has crept forward at just 0.39% per annum; and since 1999 it has made no net gain at all.
Right then and there should be a tip-off. How in the world can the net worth of US households have grown from $18 trillion to $99 trillion over the last three decades—when real incomes have hardly risen at all?
The answer, of course, is embedded in the graph below. In 1987 US households earned $2.3 trillionin wage and salary incomes and held $13.0 trillion of financial assets. Call it a capitalization ratio of 5.75X.
Since then, however, household financial assets have soared to $80.4 trillion or by more than 520%. By contrast, wage and salary incomes have risen to only $8.5 trillion and reflect a gain of just 275%.
So the question recurs. Why has the household capitalization ratio soared to 9.45X—thereby nearly doubling— when the main street economy has been steadily drifting toward the flat line?
Needless to say, that giant, unstable, dangerous anomaly is the fetid fruit of Bubble Finance.
Accordingly, in the final part in this series (Part 4), we will document how completely this great financial bubble has become decoupled from the main street economy, and why the Great Disrupter’s ultimate contribution will not be MAGA, but a frontal attack on the rogue central banking regime that is destroying capitalist prosperity and democratic self-governance in America.