Stockman: "The Everything Bubble Is Just Waiting For The Pin"

Authored by David Stockman via Contra Corner blog,

Yesterday we noted that financial markets have become completely uncoupled from reality and that the recent feeble bounces between the 20-day and 50-day chart points were essentially the rigor mortis of a dead bull. As it happened, we were able to share those sentiments with what remains of CNBC's audience of carbon-based units:

As we also noted as per the chart point mavens, the 20-day average down at 2703 (red line) on the S&P 500 was supposed to represent "support" while the  50-day average (blue line) purportedly functioned as "resistance".

Well, upon the official announcement of the Donald's lunatic trade war, there she sat at yesterday's close---less than one point under the 50-day moving average at 2739.8 (blue line).

But rather than "resistance", which the raging robo-machines ripped through today like a hot knife through butter, we'd say the blue line represents the last frontier of sanity. That's because a stock market trading at 25X earnings under today's baleful circumstances is nothing less than a brobdingnagian bubble (i.e. a huuuge one) frantically searching for the proverbial pin.

We essay the razor sharp aspects of the pin below, but suffice it to say here that the cyclical calendar has just plain run out of time. It is way, way too late in the cycle at 105 months of age to be "pricing-in" anything except the end of the party. And this bubblicious party has embodied the most spectacular central-bank fueled mania yet---meaning that the morning after is going to bring a truly hellacious hangover.

^SPX Chart

Among the many sharp edges of the pin are these:

  1. the virtual certainly of a recession within the next two years and a typical 30%-50% drop in earnings;

  2. the epochal Fed pivot to QT (with other major central banks to follow) and the consequent massive drainage of cash from the bond pits;

  3.  the mad man in the Oval Office and (among other follies) his swell new Trade War, which absolutely will get out of hand globally;

  4.  the impending "yield shock" which will thunder through the financial markets when Federal borrowing hits $1.2 trillion in the coming year--on the way to $2 trillion+ annual deficits as far as the eye can see;

  5. a deeply impaired underlying main street economy which is groaning under $68 trillion of public and private debt and a reverse robin hood financial regime that has left 80% of the population on welfare or struggling to make ends meet on earnings that barely keep up with inflation; and

  6. the swaying giant red elephant in the global economic room---meaning China's historically unprecedented and freakish explosion of debt, manic building, monumental speculation, systematic lying and fraud and serpentine centralized command-and-control that is destined to end in a spectacular implosion.

Yet the financial system has been so corrupted by the central bank's long-running regime of financial asset inflation and price falsification that it no longer recognizes anything that is important, fundamental and persisting. Instead, owing to the cult of an ever rising stock market, Wall Street is hopelessly enthrall to recency bias and context-free short-term deltas in the incoming monthly data.

The latter are virtually meaningless under today's central bank driven Bubble Finance regime, of course, because the direction of economic causation has been reversed.

To wit, clumsy central banks in the pre-1987 world often fueled overheated credit on main street. Rising wage and consumer inflation then forced them to garrote the banking system, thereby triggering a collapse of housing, big ticket durables and CapEx. So the early on-set warning indicators and the eventual fact of main street recession caused the stock market to dive.

By contrast, in a debt saturated global economy run by a linked-convoy of central banks, monetary "stimulus" does not inflate main street or real economies when they are impaled on Peak Debt. It simply inflates monumental financial bubbles in the money and capital markets----ever expanding bubbles which eventually burst.

These episodically bursting bubbles, in turn, shock the C-suites of the corporate world into desperate sprees of liquidation. That is, the dumping of employees, inventories, fixed assets and restructuring plans designed to brake the fall of their artificially inflated share prices and stock options.

Consequently, neither central bankers nor Wall Street ever see these new style recessions coming because, in fact, they can't be detected from even an astute reading of the macro-economic tea-leaves.

Self-evidently, that's because the triggers for recession are embedded in the interstitial bubbles of the financial markets; and while the latter may be obvious to the outsider or even a visiting Martian, they are adamantly denied by the Wall Street stock peddling apparatus and are invisible to the Fed's financially clueless Keynesian academics and policy apparatchiks who remain glued to their macroeconomic dashboards.

Alas, the sheer resilience of main street capitalism keeps these dashboards mostly flashing green, most of the time. And it doesn't take much to impress the bubble-besotted financial commentariat and day traders, as this current anemic recovery has amply demonstrated.

In a system so addled by phony bubble wealth, in fact, it apparently doesn't even matter that the current expansion has generated real final sales growth of only one-third its historic rate; and that even the 1.2% growth rate shown below probably overstates the case owing to systematic and deliberate under-measurement of inflation by Washington's officialdom.

Stated differently, the macroeconomic "new normal" has been so tepid that it has barely lifted the main street economy out of the deep hole trigged by the last financial bubble meltdown in 2008-2009. Yet as long as the monthly indicators show a smidgeon of green----- as capitalism trudges uphill against the headwinds of debt and central bank induced strip-mining of corporate cash flows and balance sheets----it is apparently enough to keep the recovery narrative going.

Needless to say, we had a classic case of that this AM with the so-called "blow-out" jobs print at 313,000 for the month of February. Indeed, that number seems pretty impressive----that is, until you read the fine print on the chart below.

It seems that during the 12 month period depicted in the chart, there were five months in which the BLS establishment survey reported a gain of @300,000 or more jobs, and an average gain of 240,000 per month for the period as a whole.

Except, except. This chart ends in spring 2006!

And about 20 months later the US economy was plunging into the Great Recession.

Moreover, by October 2009, every single one of these jobs had disappeared on a net basis. In fact, the 136.1 million jobs beneath the +300,000 print in March 2006 tumbled all the way to 129.7 million before it was over.

As it happened, the March 2006 high water mark depicted above, was not recovered until  July 2013----seven full years later!

Needless to say, back then that did not stop the talking heads of bubblevision from celebrating the Goldilocks Economy and claiming that it was smooth sailing ahead because there wasn't a hint of recession in sight.

Au contraire. There most definitely were numerous neon-lights flashing recession warnings, but they were domiciled in the canyons of Wall Street, not the BLS reports. The imminent threat to goldilocks was the manic sub-prime, credit and stock market bubbles that were being fostered there by the Greenspan Fed.

Although the Great Recession technically incepted in December 2007, the real plunge did not occur until the stock market meltdown of September-October 2008, which caused the C-suites of  corporate America to begin pitching labor, inventories and assets overboard with virtually reckless abandon.

The corporate mayhem only stopped in mid-to-late 2009 (i.e. that's when the massive monthly layoffs and inventory liquidations essentially ended) when Bernanke's tripling of the Fed's balance sheet caused the stock market to begin to convincingly reflate.

At that, the C-suites got their options packages re-priced to far lower levels, thereby permitting  business as usual to begin slowly climbing out of the deep hole triggered by the bursting Wall Street bubble. Still, it took seven full years as documented in the chart below for the establishment payroll count to recapture its Goldilocks level of March 2006.


It is also worth noting that the BLS report made its last monthly print at 300,000 in March 2006 (actually it has now been revised multiple times to 297K, which is close enough for government work). That was month # 52 of the Greenspan/housing expansion. By contrast, the US economy is now in month #105 of the Bernanke/Yellen Everything Bubble.

Still, during the last 12 months there have been only two 300,000+ prints and the average monthly employment gain has been just 190,000. That's 21% below the 240,000 average in the 2006 chart above, and its in a context in which the potential labor force has grown by 29 million or 13%.

Likewise, back in 2006 the Red Ponzi was still in its relative infancy, the Fed had restored some semblance of sanity to the money market with the funds rate at 5.25% by mid-2006, and no one had yet heard of the idea of QT (quantitative tightening) because QE (quantitative easing) has not yet been invented---at least in the US context.

Stated differently, the Fed's balance sheet was about $700 billion and had plenty of headroom to the upside. Now it is trying to crawl off the ledge at $4.4 trillion---with a destination at +/- $2.5 trillion, as the new Janet in ties and trousers explained to the Congress last  week.

In as word, we don't think the February print means anything at all----not in month #105 of a feeble business expansion which is confronting all of the headwinds described above. But as we shall explore further next week, here is the ultimate measure of  Wall Street's big, bloated, manic bubble begging to find the pin.

To wit, the new quarterly data on household net worth to disposable personal income is literally off-the-charts; it reflects the massive inflation of financial assets and real estate during this third and greatest central bank bubble of this century.

But here's the thing. The underlying level of income, which is now effectively capitalized at a record 6.8X  is the lowest quality income in modern times. Fully 22% of it is accounted for by transfer payments----a figure which has more than doubled since the turn of the century.

Yet how can you capitalize at more than 0.0X "income" that is extracted from producers, not generated by new output and wealth?

Social Benefits vs Incomes


Likewise, the real growth of wage and salary income relative to the pre-crisis peak has slowed to a virtual crawl. Moreover, as we will also elaborate next week, the bottom half of wage and salary workers, or 80 million persons, earned total annual wages of less than $30,000 in 2016 and averaged just $13,000 each.

What it boils down to is this: The top 1% and 10% of the population, which own 40% and 80% of the financial assets, respectively, are riding high. But, alas, that is way too high for the underlying level and quality of income and the 90% of the population on which they sit.

So the Great Pin is surely coming - and it may be wielding torches and pitchforks when it arrives.


38BWD22 toady Sat, 03/10/2018 - 11:54 Permalink


I sure as hell don't know when the bubble will pop, but it will one way or another.  And it may be very ugly.

Now is an excellent time to get diversified (or more so if you have started).  Selling some high-priced stocks for gold and plain old cash is likely smart if anyone IS all-in.

You have lots of time to get back in, Mr. toady.

In reply to by toady

Endgame Napoleon Four Star Sat, 03/10/2018 - 20:26 Permalink

The USA is probably next in line to be a debt slave, ceding a massive amount of its revenue to interest payments, and for what: half of the US population, averaging earned income at $13k. There is no one like Stockman for going up against the dishonest BLS and clarifying with the math, but I am disappointed that, after all his talk about breadwinner jobs, he is against Trump’s effort to protect some breadwinner jobs in steel. We have trade deficits with almost all of the countries in question; they protect their breadwinner jobs. I realize those countries are underhandedly threatening to retaliate by targeting Harley, which supplies some of the few breadwinner jobs left on US shores. What else can Trump do to stand up for the minimal supply of decent-quality jobs that haven’t been offshored? 

In reply to by Four Star

HardAssets LetThemEatRand Sat, 03/10/2018 - 11:56 Permalink

Well , I see your point but it all comes down to definition of terms. In standard economist talk today, ‘trade war’ means an ever increasing rise in tariffs by all nations that ultimately gives none of them a relative trade advantage and only raises the cost of goods for all global consumers. The only ones who benefit are narrowly protected firms. And, like the US auto industry for many years, this can kill any need for them to become more efficient. - - On the other hand, a tough stance at the negotiating table can force other nations to stop practices that are completely one sided and detrimental to US industry (such as patent & copyright infringement- the Chinese do this on a massive scale).


At this point it’s impossible to tell what President Trump’s ultimate intention is with all this. It’s good negotiation tactics to make outsized  demands & declarations, and then to see what kind of deal can ultimately be made.


I do agree with Stockman’s recent article where he points out that the problem isn’t with trade deals, it’s with the fed reserve fiat printing press that destroys the long term real value of the dollar. This is why US industry & labor is uncompetitive.


In reply to by LetThemEatRand

snblitz HardAssets Sat, 03/10/2018 - 15:48 Permalink

"A tough stance at the negotiating table" - aka trade war

"The only ones who benefit are narrowly protected firms" -- even if this was true it would include their entire supply chain.  For the auto industry this would be a rather enormous number of firms and workers that would benefit.

What Trump is trying accomplish is pretty simple to understand:

  • US Auto Import Tariff 2.5%
  • EU Auto Import Tariff 10%
  • China Auto Import Tariff 18%+

Am I over-simplifying?   Sure. If you want the details see:

Why is it only a trade war when the US does it?  The US has been losing the trade war for 40 years.

In reply to by HardAssets

HardAssets snblitz Sat, 03/10/2018 - 21:21 Permalink

I was just outlining the conventional view on tariffs & ‘trade wars’. I’ve actually shifted away from that view. I remember listening to one Austrian economics school  advocate who thought it would be better if the USA didn’t apply retaliatory tariffs in response to those placed on us. He said this would actually be better for the domestic consumer. - That thinking is how you have other nations eat your lunch. Pure stupidity.

Paul Craig Roberts helped changed my views. Particularly his arguments on comparative advantage versus absolute advantage in trade.

In reply to by snblitz

Endgame Napoleon HardAssets Sat, 03/10/2018 - 20:59 Permalink
  1. The biggest problem is shipping over 2 million manufacturing jobs to foreign countries, which offer American-in-name-only companies—the ones preaching diversity in the press—the massive quantities of the low-wage and racially [un-diverse] workers that they prefer to employ in the manufacturing jobs, even though it has deprived several generations of young American citizens of breadwinner jobs that would have let them get a life started, with the added travesty of depriving the US budget of over 2 million Social Security contributions, right before the massive Baby Boom retirement. 
  2. The second biggest problem is that, even if Trump gets his point across that the USA has “had enough and will not take it anymore” on the unfair-trade-practices front, lights-out manufacturing threatens to remove high-quality manufacturing jobs from the mixture of available jobs, anyway.

Since our Globalist Uniparty leaders failed to stand up for US manufacturing for 40 years, with only Ross Perot and Pat Buchanan ever making enough noise on this issue to get any public debate going, we already see the results of letting the manufacturing sector wither: half of Americans working for on-average earned income of $13k.

The manufacturing sector just produces more high-quality jobs, and a few Western, high-wage, developed countries, like Germany, manage to stay competitive in manufacturing.

I still do not understand how America’s failure to maintain its manufacturing base has anything to do with monetary policy or devalued currency.

It seems like Germany just emphasizes manufacturing, whereas, for decades, the US has indulged this narrative that manufacturing jobs are unimportant, not due to automation, which is the only logical argument against it.

The MSM do not even mention automation as a reason for undervaluing the manufacturing base. I mean the Democratic MSM. I live in a household with Democrats who watch them. The MSM just mouth Clinton Era neoliberal platitudes about manufacturing that did not pan out over the decades. The Clinton mentality on manufacturing prevailed, not the Perot mentality, and we lost the US middle class. 

In reply to by HardAssets

38BWD22 LetThemEatRand Sat, 03/10/2018 - 11:58 Permalink


I think the same way LTER re Stockman. 

The Donald is a great experiment for America.  There is so much wrong that our country needs to be shaken-out somewhat.  How much?  I have no idea, but I like the fact that we have a guy as president who ACTS rather than blathers.

Still, I value Stockman's voice too, as he is unconventional in outlook.

Let a thousand flowers bloom!  Or is that talk that leads to FEMA Camp?  Imagine, FEMA learning from decades-old Chinese ideology...

Bwa ha (?)

In reply to by LetThemEatRand

HardAssets FoggyWorld Sat, 03/10/2018 - 12:06 Permalink

He writes about the actions of US mega corporations, Wall St, and D.C. -

what’s upbeat about any of that?  


IMO one of the primary reasons Americans have been getting screwed over (for more than a century, easily) . . is they run away from the truth.

Well, that’s not just Americans, but human beings in general. Also we want to believe someone will be a ‘savior’ and come make it all better with little inconvenience or discomfort to Us.

In reply to by FoggyWorld

ZENDOG Sat, 03/10/2018 - 11:07 Permalink

Yup, we need " and it may be wielding torches and pitchforks when it arrives" to light the useless ass of the Congress on fire. Fucking idiots are running this country into the ground.

Easyp Sat, 03/10/2018 - 11:14 Permalink

So with all of these recession red lights flashing stocks up while gold and silver prices are as depressed as their investors?

Let me guess, its all about to change?  OK when?

RedNemesis Sat, 03/10/2018 - 11:30 Permalink

Is the government going to buy the pitchforks for a population that has no money?  How about pitchfork training?  Most of the rioters will have never worked a job in their sad, pathetic lives.

mailll Sat, 03/10/2018 - 11:59 Permalink

If our national debt can increase by 1.1 trillion dollars in 7 months time, that only proves one thing...Money printing is endless.…

The only one that holds the pin is the Federal Reserve, and it don't pop until they say so.  And they already showed their power the day Yellen left (Dow -666) and the day Powell took over (Dow - 1175).  They just wanted to send the message to let us all know who is really in charge of the US/world economy. Put another way, mess with the fed and the fed gives it right back (to Trump in this case for replacing Yellen).

Honest Sam Sat, 03/10/2018 - 12:38 Permalink

You just noticed that stock market de-coupled from reality????   Do you not know that we have been in a parallel reality since Hank Paulson and Timmay Geithner, the tax cheat treasurer, gave---no questions asked---trillions of FRNs courtesy of Ben Bernanke.

You really should stop making an ass out of yourself. 10 years  and you just found out.  Pathetic.

You must be really short the indices.

Let it Go Sat, 03/10/2018 - 13:03 Permalink

Decades ago Fed Chairman Paul Volcker was able to bring inflation back under control and in doing so he broke the back of those speculating that metal prices would head higher. This lesson from the past that has been forgotten by many investors is everything is linked to interest rates.

Decades of interest rates drifting ever and ever lower have allowed many investors and the general public to forget the power of high-interest rates exert on defining prices. More about this interesting time in history in the article below.

 http://Metal Prices And Higher Interest Rates.html

Bemused Observer Sat, 03/10/2018 - 13:17 Permalink

Aww, poor David. All of his warnings, and the system just grrriiiiiinds on...


I know the feeling. My family is at the 'eye-rolling' stage when I start...but David, being a 'public person', must withstand the rolling of millions of eyeballs, and in a public forum...


Hang in there David...You WILL be vindicated, I and many others know this. We just don't know when. We DO want you to know we appreciate your willingness to play the role of Prophet in a 'The End Is Near!' sandwich-board though. And we admire your tenacity. Although a few wonder if there might be an element of masochism in it at this point.

For you and the shrinking pool of people willing to continue criticizing this ridiculous economy in the face of new ATH's, I'd like to suggest a new response-strategy to 'good news'...Just two words..."Yeah, whatever..."

Every time they come out with some manipulated poll or statistics showing everything is great, just say, "Yeah, whatever..." And when the market closes that day at a new ATH, just say, "Yeah, whatever..."

That's how I feel. You could tell me that they decided to solve the student loan problem by converting it in 10 dollar increments into 'credits', which the students could then spend, and I wouldn't bat an eye. I'd be like, 'Yeah, whatever..." It would never even occur to me that the idea was too ridiculous to be true...I'd take it for granted that something like that could be proposed. And I wouldn't even waste my time thinking about the effects, or arguing the pros or cons...just a long, deep sigh, followed by a "Yeah, whatever..."