Enjoy the Upside While Preparing for Shock & Awe

by Sep 11, 2019Article0 comments

One of the reasons I talk with and follow David Stockman is because of his most interesting resume.  He worked in the government for twenty years to include being 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. In the words of Shirley Chisholm, the first African American woman in Congress, Stockman is “unbought and un-bossed.”  Stockman is no longer in the business of protecting his boss, nor does he have to defend decisions made at securities firms. With an informed perspective, he calls it like he sees it.

Here is what Stockman shared with subscribers on September 4, 2019. “The Federal Reserve’s massive injections of fiat liquidity – via Federal Open Market Committee (FOMC) operations and “quantitative easing” – have never left the canyons of Wall Street. They’ve simply inflated prices of financial assets to ever-higher levels.

Suppose history repeats itself

And, now, we wait until speculators’ natural greed grows so rampant that it generates a blow-off top and a subsequent 50% to 80% crash…”

Stockman went on to say, This sort of monetary metastasis has occurred twice already this century. The shared characteristic is that prices of “risk assets” like stocks uncouple – egregiously – from cash flows they purportedly capitalize. The post-Global Financial Crisis/Great Recession reflation by the Fed and its fellow monetary central planners around the world was the most radical attempt yet to stimulate Main Street by through the wealth effects channel of Wall Street.

But the household sector, for all practical purposes, is at Peak Debt. With $15.6 trillion already outstanding, regular Americans can’t borrow more, relative to income, no matter how low interest rates go. The business sector, meanwhile, entombed by its own $15.6 trillion pile of debt, has been lured into heavy financial engineering, said Stockman.

Corporate America now prefers to channel the cheap borrowings enabled by our monetary central planners into self-dealing distributions of capital and cash flows to options-holding management and Wall Street speculators.

The devil is in the details

Stockman’s observations fall right in line with Michael Burry of ‘The Big Short’ who said he has found the next market bubble on Bloomberg News, September 4, 2019.  Burry opined that passive investments are artificially inflating stock and bond prices in a similar way that collateralized debt obligations did for subprime mortgages twelve years ago.  “Like most bubbles, the longer it goes on, the worse the crash will be,” said Burry.

Burry went on to say, “This is very much like the bubble in synthetic asset backed CDOs (collateralized debt obligations) before the Great Financial Crisis in that price-setting in that market was not done by fundamental security-level analysis, but by massive capital flows based on Nobel-approved models of risk that proved to be untrue.”

Whether a cause nature or man-made, once a disaster happens, the time to prepare is gone.  The best way to prepare for disaster is to prepare by having a plan before it strikes. Americans are very fond of football.  Every enthusiast knows each team has eleven players on offense and eleven players on defense. Now is the time for investors to design and employ their defensive strategies.  In advance of shock and awe.

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