Tags: David Stockman | Stocks | Economy | United States

Former Reagan Budget Head David Stockman: Stocks Will Fall to Earth Because America Is Tapped Out

Monday, 04 Aug 2014 12:27 PM

By John Morgan

Investors should not buy the dip this time because the stock market is flying in the final approaches toward self-destruction, according to David Stockman, former budget chief in the Reagan White House.

In his Contra Corner blog, Stockman said last week’s 2 percent sell-off is likely to be viewed as a chance to simply buy back in by the “well-trained seals and computerized algos which populate the Wall Street casino.”

“But that could be a fatal mistake for one overpowering reason: The radical monetary policy experiment behind this parabolic graph is in the final stages of its appointed path toward self-destruction.”

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Stockman, a former director of the Office of Management and Budget and one-time Michigan congressman, is a consistent critic of the Federal Reserve’s uber-easy monetary policy and its larding on of massive debt purchases.

He wrote that the Fed’s “madcap money printing campaign was a drastic error because it failed to account for the immense roadblock to traditional monetary stimulus that had been built up over the last several decades — namely, ‘peak debt’ in the household and business sector.”

According to Stockman, it’s little wonder that the Fed’s moves have not prompted a recovery in consumer borrowing and business capital spending.

“Instead, the entire tsunami of monetary expansion has flowed into the Wall Street gambling channel, inflating drastically every asset class that could be traded, leveraged or hypothecated,” he wrote.

“Stated differently, 68 months of zero interest rates had virtually no impact outside the canyons of Wall Street. But inside the casino, they provided virtually free money for the carry trades, causing an endless bid for leveragable and optionable financial assets.”

Stockman said that economists and government planners counting on consumers to step forward and buy back into the American Dream have got a lot of waiting in vain to do.

“The 10,000 baby boomers retiring each and every day between now and 2030 will not be adding to household debt; they will be liquidating it,” he predicted.

“Business is not rushing to the barricades to add to capacity because it is plainly evident that consumer demand is not growing at traditional recovery cycle rates; and that it will never again do so given the constraints of peak debt and the baby boom retirement cycle ahead.”

MarketWatch reported investors should brace themselves at minimum for a return of volatility in the stock market.

Last week’s 317 point plummet in the Dow Jones Industrials may not be the last knee-jerk reaction from investors, MarketWatch reported.

“A very small impetus can have an exaggerated effect. That may be the kind of market we are in for the rest of the year,” said Scott Clemons, chief investment strategist at Brown Brothers Harriman Private Banking.

Cash and cash-like investments are growing, but Clemons maintained that will lead ultimately to fresh investment opportunities.

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