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.
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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