Friday, December 15, 2017

Bubble Finance - By David Stockman

Today’s single most dangerous Wall Street meme is that there is no risk of a stock market crash because there is no recession in sight. But that proposition is dead wrong because it’s a relic of your grandfather’s economy. That is, a reasonably functioning capitalist order in which the stock market priced-out company earnings and the underlying macroeconomic substrate from which they arose.
Back then, Economy drove Finance: You therefore needed a main street contraction to trigger tumbling profits, which, in turn, caused Wall Street to mark-down the NPV (net present value) of future company earnings streams and the stock prices which embodied them.
No longer. After three decades of monetary central planning and heavy-handed falsification of financial asset prices, causation has been reversed.
Finance now drives Economy: Recessions happen when central bank fostered financial bubbles reach an asymptotic peak and then crash under their own weight, triggering desperate restructuring actions in the corporate C-suites designed to prop up stock prices and preserve the collapsing value of executive stock options.
Accordingly, you can’t see a recession coming on Janet Yellen’s dashboard of 19 labor market indicators or any of the other “incoming” macroeconomic data—industrial production, retail sales, housing starts, business investment—- so assiduously tracked by Wall Street economists.
Instead, recessions gestate in the Wall Street gambling parlors and become latent in carry trades, yield curve and credit arbitrages and momentum driven excesses. Eventually, these latencies—central bank fostered bubbles—–erupt suddenly and violently. So doing, they spew intense, unexpected contractionary impulses into the main street economy via the transmission channel of C-suite “restructuring” actions.
Within weeks of a bubble implosion, therefore, a No-See-Um Recession is born and goes rampaging across the economic landscape. But it comes as a shock to economists and especially the Keynesian apparatchiks at the Fed because they are focused on the macroeconomic externals rather than the coiled spring internals of the financial markets.
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In this context, it can be said that the Great Recession was the first major business cycle contraction that reflected the new regime of central bank driven Bubble Finance.
What happened was that a garden-variety macroeconomic slowdown which incepted in 2007 went rogue when it was monkey-hammered by the Lehman bankruptcy and the related crash of fundamentally insolvent Wall Street gambling houses thereafter.
This is evident in much of the macroeconomic data, but the snapshot of retail sales below aptly illustrates the case.
From July 2006 through August 2008 (the ninth orange bar in the shaded area) the US economy oscillated along a flatline of weak and inconsistent retail sales growth. Although in its wisdom the NBER dated the recession as incepting in December 2007, the retail sales pattern during the first nine months of the downturn was not appreciably different than during the 17 months just prior.
But in September 2008 retail sales went into free fall—-coterminous with the Wall Street meltdown and the desperate Washington interventions via the massive Fed liquidity injections and the TARP bailout.  During that month, retail sales plunged at a 21% annualized rate—–followed by 50%annualized rates of collapse in November and December and nearly a 30% rate of shrinkage in January 2009.
As demonstrated more fully below, those four months were ground zero of the Great Recession. 

(Link to website for charts and other details)

In short, there can be little doubt that Finance drives Economy in the world of monetary central planning, and that the only place to look for the next recession is in the coiled springs of Bubble Finance.
Needless to say, you can once again find them metastasizing rapidly from one end of the casino to the other; and you will also find not a single word about them in today’s swan song by our Keynesian School Marm.
Then again, Janet Yellen’s cluelessness is also why Wall Street is telling you that the macroeconomic dashboard shows nary a sign of recession, and that its safe to plunge into the casino at 110X the Russell 2000 and 280X AMZN’s miserly earnings.
Call that misdirection like never before. But also know that another No-See-Um Recession is coming right at you.
Reprinted with permission from David Stockman’s Contra Corner.
Former Congressman David A. Stockman was Reagan’s OMB director, which he wrote about in his best-selling book, The Triumph of Politics. His latest book is The Great Deformation: The Corruption of Capitalism in America. He’s the editor and publisher of the new David Stockman’s Contra Corner. He was an original partner in the Blackstone Group, and reads LRC the first thing every morning.
Copyright © 2017 David Stockman
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