Newsmax Finance Insider David Stockman, White House budget director under President Reagan, warns that the stock market is in for a "thundering reset."
He was blunt in a recent CNBC
interview with his advice to investors: "It's time to get out of the market completely."
Stockman believes that the flood of easy money from central banks around the world has formed a credit crisis so severe that it could take years to dig out of the hole that's been created. He cited a stunning $21 trillion collective balance sheet build up around the world, up from $2.1 trillion just 20 years ago.
"This is high powered money that caused an enormous expansion of credit and financial valuation bubble," he recently told CNBC
. Stockman noted that the rapid increase of credit has resulted in debt around the world of more than $225 trillion. "We are at peak debt," he added.
Stockman believes that the Fed's hands are tied after sitting on zero interest rates for nearly a decade. "There's nowhere to go but negative," he said.
He also says the nation suffers from the four “no” syndrome: no escape velocity, no earnings growth, no dry powder from the central banks and no reflation. Taken together, it leads him to believe the U.S. economy is on the cusp of a full-blown recession.
"We're getting to a point where the chickens are coming home to roost. There's no help from the central banks and that's why these rallies are getting weaker and weaker and shorter and shorter," said Stockman, who was the former OMB Director under President Ronald Reagan.
To be sure, U.S. stocks fell Monday as the price of oil slumped again, giving up some of the ground it gained late last week. That forced energy companies lower. The Dow Jones industrial average fell 208.29 points, or 1.3 percent, to 15,885.22. The Standard & Poor's 500 index shed 29.82 points, or 1.6 percent, to 1,877.08.
The price of benchmark U.S. crude fell $1.85, or 5.7 percent, to $30.34 a barrel in New York. Brent crude, a benchmark for international oils, lost $1.68, or 5.2 percent, to $30.50 a barrel in London. U.S. oil jumped 9 percent Friday after setting 12-year lows earlier in the week.
Plunging oil prices have been decimating profits at energy companies and getting investors worried that the global economy is slowing down. Companies that mine metals, especially copper, face the same problem. Low oil prices are also hurting banking stocks because some banks hold large amounts of loans from energy companies, and investors fear they may not get paid back, the AP
Stockman isn't alone in his gloomy forecast.
Defaults in the U.S. are going to rise in 2016 and volatility in the credit markets could increase the likelihood of a recession, according to New York University Prof. Edward Altman, Bloomberg
“There is no question in my mind this year default rates will go beyond the average rates, maybe a lot more,” said Altman, who was speaking at the Turnaround Management Associations’ Annual Altman Luncheon Conference in New York Monday. Altman teaches finance at NYU and is considered a specialist in credit markets.
(Newsmax wire services contributed to this report).
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