Stockman: This Bond Market is One Giant Bubble

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David Stockman joined Greg Hunter of USA Watchdog to discuss what he views as a fiscal bloodbath and the biggest bond market bubble to ever hit the global economy.

To begin the discussion, the Washington insider was asked about the cash on hand in the United States federal budget and the fiscal conditions that Donald Trump faced where he unloaded, “I think it is a total calamity. They capitulated entirely.”

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While speaking on what cuts Trump proposed Stockman pressed, “He wants to cut $18 billion in order to ‘balance it out’ from domestic programs like the the National Institute of Health (NIH), Public Broadcasting Service (PBS) and a lot of things in between… and that’s just a down payment for the big reduction proposed for the full fiscal year that starts in October. That proposal is looking for $54 billion for defense and other domestic priorities, met with $54 billion of cuts on the domestic side… the problem is, Trump went to the Hill and they got totally fleeced. They ended up with most of the increases they wanted because that is the way Washington works. More money for the defense and border pork barrel.”

With contrarian style, David Stockman then pointed out, “He ended up with no cuts at all. He now has $30 billion in increases and a statement from Congress, that was on a bipartisan basis, allowed that we’re in control – you can have your defense and other priorities but we’ll march the budget higher together. I think that’s the opening gambit for what’s going to happen in the full year as the Congress struggles to try to pass bills for fiscal year 2018. They’re going to raise defense and all the priorities, they’ll cut nothing domestically…” Trumped! A Nation on t... David A. Stockman Best Price: $2.05 Buy New $9.50 (as of 06:30 EST - Details)

“The whole thing is headed for a real fiscal bloodbath sometime this summer or fall when they run out of debt ceiling (money) and can’t borrow any more to pay for all of this. When they use up the cash on the balance sheet right now… we’re going to be in a huge shutdown mode.”

Greg Hunter inquired with Stockman over what budget deals he would feel Trump and GOP leadership could make that would signal serious change. The former Reagan Budget Director argued, “First, he would need to rethink making defense great again. It is already far greater than we need. We don’t need that $54 billion for defense. Second, he promised he wouldn’t touch social security or medicare… A lot of people need them, I recognize that, but there are millions of affluent retirees who never earned all of the benefits they’re getting.”

When asked what his view on a Congressional budget deal is and what it could mean for jobs and the economy Stockman relayed, “There will be panic in the financial markets. This is not priced in. The market isn’t expecting anything. I think it will cause some very difficult times.” The interviewer then asked what his expectations on a government shutdown would look like with Trump.”

The author noted, “I doubt he’ll go for a shutdown by choice. The leadership is not going to stand for it. They have a false idea that Republicans can govern by keeping the Washington Monument open even if we’re bankrupting the country by piling spending. I don’t think they’re going to elect to have a shutdown. What I think is going to happen instead is they’re going to run out of borrowing authority with the debt ceiling, it is now frozen on March 15. We’re locked in at $19.8 trillion so when they run out of cash in a few months, they’ll need a majority in both houses to vote through a multi-trillion bill in both houses. They won’t have the votes.”

Stockman sounded the alarm, “This isn’t speculation, this is what is coming down the pipe. I don’t think it is even remotely anticipated by the markets. It is not priced in at all. That’s when you get huge disruptions in the financial markets. When they’re hit by surprise or black swans, that’s where we’re heading in a matter of few months.”

After the host pushed for clarity over his bubble forecast Stockman urged, “The market is insanely valued right now. They were trying to tag 2,400 points to close out last week. The point is, that represents about 25 times the trailing earnings for 2016 at a point where we’re already into a “recovery” that’s lasted 96 months. Almost the longest in history. What the market is saying is that we’ve reached a point of full employment, forever. [They appear to be behaving] as though there will never be another recession or economic surprise.”

“The market is pricing itself for perfection for all of eternity. This is crazy. We’ve got headwinds everywhere. The auto industry is now starting to roll over. The red ponzi in China has only a matter of time before it explodes. We now have debt for the household sector above where it was for the 2008 crisis. I think the market could easily drop to 1,300-1,600 by 30% or more once the fantasy ends. The government will show its true colors. We are headed for a fiscal bloodbath.”

Stockman voiced his concern for clarity remarking, “This crazy notion that there is going to be a Trump tax cut and fiscal stimulus must be put to rest once and for all. It’s not going to happen. They can’t pass a tax cut that big without a budget resolution that incorporates $10 or $15 trillion of debt over the next decade. Week by week, slowly the market is beginning to figure this out. What it means is, all of the corporate insiders are selling stock like there is no tomorrow… where institutional sales of stock have been going up since the election and what we have is the usual end of the cycle. This is the greatest suckers rally we’ve ever seen.”

When asked what he would recommend to protect yourself he urged, “The main thing is, get out of the markets. These markets are unstable. They’re rigged and unsustainable… there is no reason to own stocks at this point in the game. It is so overvalued that maybe you can get another two or three out but you’re facing a 30% or 40% down. The risk versus reward is horrible. The bond market is one giant bubble because the central bank’s have been buying bonds worldwide. They’re buying trillion and still buying a trillion or so on an annual basis. All of that is coming to a halt.”

In offering his bond market and central bank analysis he urged, “The Fed has finally run out of dry powder. They’re out of the bond buying business and even talking about initiating shrinking of their balance sheets. The European Central Bank (ECB) is near the end of its money printing spree. Even in Japan, which has gone off the deep end with quantitative easing, is beginning to have second thoughts.”

“Everywhere in the world, the central banks are finally getting to the end of the road. There isn’t going to be anymore money printing. That’s going to leave a giant mess on the doorstep of the fiscal authority. It is going to make the bond market a particularly dangerous place. Bonds are totally mispriced. If the central banks had not bought $20 trillion worth of government bonds worldwide over the last two decades, the yield on debt everywhere would be much higher.”

Stockman warned on the bond market environment that, “We have, what is roughly a $100 trillion global bond market (corporate and government) that is the biggest bubble ever seen. The advice is, get out of the bond market and stock market. Buy gold. Not all at once. When the financial system finally unwinds and the monetary authorities are discredited the one hard asset in the world is going to have another day in the sun.”

He reminded viewers, “The gold market is relatively small in comparison to the size of the equity market or bond markets. The gold markets are only a fraction of that. When the panic comes… the price of gold will rise dramatically.”

Reprinted with permission from Daily Reckoning.