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Reagan’s Top Economist Warns Investors Should Flee Stock Market

Last Updated September 23, 2020 12:27 PM
Melanie Kramer
Last Updated September 23, 2020 12:27 PM

David Stockman, who served as the late US President Ronald Reagan’s top economic adviser, says a day of reckoning has arrived for the stock market. Stockman believes a recession is imminent and that a “bad situation” waits on Wall Street’s horizon.

He warns investors to exit the stock and bond markets in a recent interview with Neil Cavuto on Fox Business with a stark metaphor:

“We need to wake up and smell the roses here.”

Stockman says the US economy is in the tenth year of the longest business expansion in history. An increasing budget deficit comes at the “very wrong time,” coupled with the US Federal Reserve reducing its balance sheet. The Fed is doing this by allowing bonds to expire without replacing them. These factors are “catching up” with the US economy, he argues.

US Economy and Stock Market Will Live with the Consequences of a ‘Free’ Fiscal Lunch

Stockman describes the Fed’s actions of “monetizing” debt by buying bonds as delivering what appears to be a “free fiscal lunch.” Now, he says, the US will have to live with the consequences.

US debt hit $22 trillion for the first time in recent weeks, but, Stockman says the problem is even worse than it appears.

“There is $40 trillion baked into the cake over the next ten years…If you take what Trump has done on top of the bad debt he already inherited you’re going to be in multi-trillion dollar deficits year after year and we’re going to have a recession.”

He believes it’s impossible for the US economy to sustain 138 months of economic growth, a period beginning at the start of the stock market recovery a decade ago and coinciding with the remainder of Trump’s presidency.

US Economic Growth is Now Untenable

The longest period of US growth in history was 119 months in the 1990s in what Stockman calls a “much better time.” Then, there were “tailwinds everywhere” – as well as surpluses and a balance sheet of $0.5 trillion. China’s economy was just beginning to boom, and Europe moved to the single currency and began to “borrow and spend like no tomorrow.”

Today’s situation is very different, the economist says:

“When you look at how much debt we have on the economy, when you look at all the headwinds coming around the world, you look at finally delayed normalization by the Fed.”

The Day of Reckoning Has Arrived – Get Out of the Stock Market

nyse stock market wall street
The US stock market’s day of reckoning has arrived. Investors have limited time to get out, Stockman says. | Source: Shutterstock

Stockman says that for the first time in 30 years interest rates are going to be going up – at some point within the next several years anyway. Now that “maniacal” bond buying by the Federal Reserve has ceased, a recession will happen. That bond buying:

“Made a worse fire, it deferred the day of reckoning, clearly.”

Stockman thinks the day of reckoning has now arrived:

“I think you get out of the stock market, the bond market, put your money in cash, in treasury bills, wait for the collapse to come because it’s going to happen.”

Despite previous warnings of collapses that didn’t happen, Stockman is certain that the combination of headwinds, debt, normalization, trade wars, the Trump presidency, and global uncertainty stacks up to make 138 months of growth highly unlikely.

Increased Taxation is Likely

Stockman also believes if the Democrats take power in the 2020 elections amidst a recession, they will hike taxes on higher-income earners.

All this, he says, because the Federal Reserve was allowed to create an imbalance of wealth. It did so through its policies to prevent economic decline over the past three decades.

Stockman’s warnings of a recession are echoed by George Maris of asset manager Janus Henderson.

But, that’s far from a consensus view on Wall Street. A few short weeks ago, Oppenheimer’s Krishna Memani said fears of a recession were overblown. JPMorgan CEO Jamie Dimon, speaking in early January, also said a global recession is not coming and that everyone needs to “take a deep breath.”

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