International Man: Whether we like it or not, the reality is, the Federal Reserve has an enormous influence over the dollar and the stock market.
And right now, the Fed has an urgent and fateful decision to make.
It can keep printing trillions of dollars, let inflation skyrocket or tighten monetary policy, and watch the stock market crash.
In other words, it can sacrifice the stock market or the dollar.
David, what do you think the Fed will do, and what are the implications?
David Stockman: Well, I think whether it wants to or not, the Fed will crash the stock market. The Fed has painted itself into a hellacious corner because it’s made such a fetish out of its 2% inflation target, especially since January 2012, when it officially adopted this quantitative target.
In fact, most of the massive money printing, which has occurred since 2012, when the economy was pretty much recovered from the Great Recession anyway, has been justified by an inflation shortfall, which wasn’t true, but that was the justification.
They were trying to raise inflation and therefore felt that they could keep quantitative easing at these huge rates, including $120 billion per month, until recently. And as a result, we’re now in a world in which inflation is heading towards double digits.
I think they’re going to have no choice but to throw on the brakes much harder than the market is expecting, much harder than they would like to do, or maybe even intend at the moment, but there’s no choice.
Now, when you have double-digit inflation, number one and second, you’re going into what’s going to be a nasty election season in which the Republicans will finally see hope for their salvation in a horrendous battle on the inflation front blaming the Democrats and Biden.
That means the Fed will not be in a position over the next 2, 3, 4 quarters to retreat on the inflation battle. Whether it wants to or not, it will have to raise interest rates even far more than are expected now.
It’s going to begin QT, quantitative tightening, or draining its $9 trillion balance sheet faster than it is talking about at the moment or what the market expects. That’s because it’s not going to be able to justify or maintain any credibility when inflation is running at the CPI level at nearly 10%.
So that’s a new ballgame.
We haven’t been in these kinds of uncharted waters for a long time, not since the 1970s, and even in the 1970s, the story was far different than it is today. So, the market will struggle with a Fed that turns out not to be their friend. It’s going to time and time again, think that the worst is over, buy the dip and make a lot of money, only to be disappointed.
I point out one final kind of analogy here.
If you go back to March 2000, when the dot-com bubble collapsed, the NASDAQ peaked at 4600, and the market dropped by 30% in the next 15 days. And after that bone-rattling drop people said it’s all over. The worst has happened, and you should buy the dip. You’re going to make a lot of money.
And over the next two years, they kept buying the dip, but over the next two years, the NASDAQ went from 4,600 to 3,300, all the way down to 800. An 80% plus decline and all that dip buying resulted in massive losses and pain.
I think we’re going to go through the same thing again.
International Man: Suppose the Fed does raise rates aggressively in the months ahead. What are the chances that they will capitulate and reverse course as soon as Wall Street starts screaming about it?
David Stockman: Well, that’s what people expect, but I think this time, they’re not going to capitulate soon and easily. In other words, the so-called Fed put is a lot lower on the S&P 500 index than people may expect or that the Wall Street bulls would like to believe. They think it might be 3,500 or something like that. I think it’s around 2000 because the Fed won’t have the maneuvering room.
Even the official inflation statistics are running high. They are understating the true inflation when you adjust for all the gimmicks they put in the CPI in the last 20 years. But when inflation on the government statistics is running at 7-10%, they’re just not going to have room to start the printing presses again.
International Man: Given the rapidly rising debt levels—corporate, personal, and for the federal government—is it even possible for the Fed to raise interest rates beyond a token amount?
David Stockman: Well, I think you can say it would be dangerous, and yes, the debt levels are really something to behold.
If you take public and private debt today, it’s $88 trillion, which is 370% of GDP. It’s off the charts compared to where a stable economy historically stood. If you go back to 1970, before Nixon pulled the plug on sound money, the ratio was 150%. In other words, we had about $1.5 trillion of total debt and a GDP of $1.0 trillion.
So now we’ve had two extra turns of debt added to the economy over the last 50 years. Two turns of additional debt amount to $50 trillion today, burdening all sectors of the economy, households, non-financial business, governments especially, and even financial institutions, than would be the case had we stuck to kind of that golden mean of 150% debt to GDP. That’s the leverage ratio of the national economy that prevailed for a century up to 1970.
So yes, there is a massive problem with this enormous debt burden. When the Fed raises interest rates, it will notch up the carry cost and service cost enormously, creating all kinds of dislocations in households that will have to pay more for their mortgages and their other debt.
As interest rates go up, all that money corporations borrowed to buy back stock and pay dividends that weren’t being earned will result in larger interest expenses and lower profits.
So the whole thing will be a pretty big mess, but that will not stop the Fed from using the only tool it has.
It has one tool. It’s like the craftsman with a hammer, and everything looks like a nail. So if the Fed wants to accomplish something, it will have to hit the nail.
So the Fed will have to raise interest rates, not just a 2% by the end of this year or 2.5%. They’re going to have to go up into the 4-6% range to slow down the economy and break the back of inflation.
I was around when Volcker took interest rates to 20% on the overnight rate to finally break the back of inflation. But, of course, that will cause a lot of damage to the economy. But I don’t think they have much choice.
In short, you’re going to have one difficult time bringing inflation under control, and the consequences of those moves will be mind-boggling and historic in terms of their negative impact.
International Man: Given everything we’ve talked about today, what can the average person do? What can they do to protect themselves and profit from what is coming next?
David Stockman: Well, I think the most important thing is to stay out of the casino.
The bond market is vastly, massively overvalued. As a result, the price of bonds will drop dramatically, and people will be shocked by how much you can lose in allegedly safe sovereign debt.
The stock market is even more dangerous, and it’s entirely because of these artificially low, ultra-low interest rates. So now we’re starting to move into the realm of reality, let’s say normalcy, as interest rates come back up. And I think they got a long way yet to go.
If you’re going to be in the stock market, be on the short side.
But if you don’t have discretionary capital or savings, and if you don’t have the stomach for what will be a very volatile ride, the best thing to do is stay in cash, even though you’re losing ground against inflation. At least bank accounts are not going to lose principle. Whereas bonds and stocks can lose 30%, 40%, 50%, 60% of their value in the next year or two as we go through this great correction.
Editor’s Note: The Fed has already pumped enormous distortions into the economy and inflated an “everything bubble.” The next round of money printing is likely to bring the situation to a breaking point.
If you want to navigate the complicated economic and political situation that is unfolding, then you need to see this newly released video from Doug Casey and his team.
In it, Doug reveals what you need to know, and how these dangerous times could impact your wealth.
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David Stockman is controlled opposition. Him predicting an imminent crash almost makes me go out and buy QQQ. Almost.
I see it 180 degrees differently. But it occurs to me that our differing perspectives may be based on what each of us fears.
For better or worse, I have zero exposure to damage from the stock market tanking, but full exposure to rising inflation. I imagine Stockman has quite a bit of exposure to a stock market crash, and so, rightly, fears that instead.
More than that, though, I fear a replacement of the dollar with a CBDC control system after prolonged massive inflation. I don’t think that’s a thing that would be necessitated by a major stock market downturn.
What if it takes 20% interest rates to reign in inflation but it only takes 5% interest rates to crash the market?
I would love to get 20% on my money.
A much more scary scenario would be the loss of the US status of petrodollar. Couple that with interest rates in the 10-15% range and we are talking major destruction.
And….the loss of US purchases of overseas goods, pharmaceuticals, etc would crash a lot more than just us.
Despite what Russia and China may WANT, i.e. an independent energy exchange in Rubles or Yuan, no country is an island and there are very serious consequences now if a big player like the US is taken out in any meaningful way in the global arena of purchasing.
China is and has been a smoke and mirror economy for a while now. They just build shit to nowhere and call it a success because they can and there is no way to verify or deny any of it. “Saving Face” is not a sustainable economic model and it will be revealed eventually.
First of all, likely the Lords at the FED probably have a lot of exposure to bonds and the stock market. They don’t select FED Chairmen or even Governors likely they do jury members at a murder trial. They pick well off political contributors, political insiders, bank chairmen.
American institutions have been turned inside out and given a good shake since 2000.
The FED has been transformed just like the military, entirely politicized,mand turned into a machine for fleecing America’s working and middle classes.
What happened when the FED had zero percent prime rates for much if not all of the Obama Presidency. Zero interest rates, so savings by working and middle classes were eaten up, inflation actually destroying any savings, even resulting in people having to pay to have banks keep their money, an ingenious method by the political classes to empty the pockets of savers and workers.
That resulted in people going on a buying spree, stocks, bonds, houses, real estate, farmland, commodities, anything to get rid of cash which has the dry rot of inflation.
Now the media, propaganda, and the politicians will scapegoat the FED, anything to get the monkey off their back. The politicians have perfected the sport of finger pointing, and the FED will simply slink away into the corner, and only come out if forced to by Washington Beltway warriors and do their tricks, roll over and jump through the hoop for a treat.
In summation, the FED is bought and paid for and will do what they’re told by the Washington political elite, because they have learned to be afraid, very afraid.
There was one thing omitted from the discussion, which I think was during the reign of Yellin as FED chairman, and that is the unemployment rate is now the benchmark used by the Fed to set rates, not inflation.
That’s one reason for the Democrats frantic rush to open the borders to unrestrained immigration, to raise the unemployment rate. If they can do that, that’s their lever over the FED to keep interest rates at zero and below,( neg interest rate).
The White House calls the shots on this one.
Hasn’t Stockman predicted 9 of the last 3 economic disasters? The inflation phenomenon is like the clot shot debacle, draw/force as many participants in as possible then violently yank the rug out from underneath them. There are still a few savers out there watching their nest egg being destroyed and reticent about throwing it into the casino. When the majority of them capitulate it will be game on.
Yup, you just beat me to it Anon. Ever since I started reading TBP our Dave has been predicting market crashes that will make 1929 look like a 10% correction and still the DJIA just keeps on making ever higher tops.
This time will be exactly the same, count on it
He didn’t lay low long enough for us to forget. I have no skin in the game but as I learned how the game works, I learned not to trust shyters like ()Stockman)).