Tags: Stockman | market | stock | Fed

David Stockman: The Wall Street Casinos Have Empty Vaults

By John Morgan   |   Wednesday, 27 Aug 2014 12:28 PM

The Wall Street casino is dangerous because there is no safety net left to save investors when the bottom falls out, according to David Stockman, former White House budget chief and central bank policy skeptic.

In a column for his Contra Corner blog, Stockman said the professional traders have succeeded in busting the 2,000 barrier on the S&P 500 to take stocks to record highs, but individual investors better watch out.

"Honestly measured earnings have been growing only at a tepid rate, and have no prospects for acceleration given the sharp slowdown in both the global and domestic economy," Stockman wrote.

Editor’s Note:
New Warning - Stocks on Verge of Major Collapse

"And, please, how can we discount a distant stream of corporate earnings based on utterly artificial and unsustainably low interest rates that simply can't be sustained over time without destroying the monetary system?"

As evidence of impending problems, Stockman noted the "thunderous collapse" in stock market volume since the 2008 financial meltdown, with exchange trading down by 60 percent on the NYSE and a whopping 75 percent on the Nasdaq.

He said much of the missing liquidity has flowed into exchange-traded funds and options markets where, when the wheels finally come off, it will be subject to violent unwinding magnified by massive hedge fund leverage.

At the same time, the massive stock repurchases of corporate America that have helped the stock market levitate will come to a roaring halt when the market finally falls, removing another liquidity prop, according to Stockman.

"In short, the Fed and other central banks have ruined the internals of all capital markets, but especially the stock markets. The short interest has been destroyed; one-way trade based on zero carry costs rules the day on Wall Street; and corporate America is plundering its own balance sheets in order to feed the fast money and fuel artificial winnings in the stock options racket."

Some economists predict the current bull market in stocks is bound to end when the Federal Reserve finally starts to raise rates, a step expected by mid-2015.

At Blackrock, chief global investment strategist Russ Koesterich said it is not too early for investors to start planning to re-position their portfolios.

Koesterich, who is considerably less pessimistic than Stockman is, advises investors to stay away from traditional havens like short-term Treasury bonds and commodities like gold. He advocates sticking with stocks for now.

"Traditional 'safe haven' assets such as short- to intermediate-duration U.S. Treasurys and gold may, in fact, be more vulnerable than stocks in the near term as a period of interest rate normalization approaches. Although not cheap, stocks have the tailwinds of still-low rates and improving economic conditions at their back," he wrote on his firm's blog.

Editor’s Note: New Warning - Stocks on Verge of Major Collapse

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