David Stockman: It's "Damn Near Impossible" To Avoid A 30-50% Market Correction At This Point

**David Stockman** (0:00)
It's going to make it damn near impossible to finance 7% of GDP deficits, have a non-inflationary monetary policy, and expect, you know, the ends to meet. You know, the math isn't there, the logic isn't there. You know, we're functioning to bottom line here in an environment where everything is overpriced, and as reality breaks through and yields move to market clearing levels, we're going to have some major downward adjustments in prices, you know, 30, 40, 50%.

**Adam Taggart** (0:56)
Welcome to Thoughtful Money. I'm its founder and your host, Adam Taggart. Today's guest has been a true insider in both Washington DC and Wall Street for his extremely long and accomplished career. He's very concerned about the unsustainability of current monetary and fiscal policy, and expects that no matter who the next US president is, central planning will start encountering hard limits in 2025, limits that will likely create a painful downwards repricing in the financial markets. To understand why, we're fortunate today to speak with former congressman, economic policy maker, and financier, David Stockman. David, thank you so much for joining us today.

**David Stockman** (1:37)
Thank you. And I think we got a lot to talk about. Long career, notwithstanding, right?
But, you know, currently, we're on the verge of the most important election in history, we're told. And I've been hearing that ever since 1964 And so forgive me if I'm a little bit cynical, but I don't see it that way at all. But unfortunately, my cynicism doesn't go in a positive direction.
I think, you know, we're ruled by a uniparty in the Congress, notwithstanding what the two presidential candidates are, the mud they're throwing at each other on kind of peripheral issues, like, you know, the current garbage debate, and a lot of sort of cultural, social issues of that sort, and, you know, the Hitler and all the rest of it.
And, you know, okay, he's not Hitler, and she's not a communist. In fact, if you look at the policies of the Democrats and the Republicans in the uniparty, they're pretty much the same, which is we spend, we spend, we spend. We don't nearly tax what we're spending, 25 percent of GDP, and spending 17, 18 percent of GDP in taxes, that's the structural built-in 6 to 7 percent deficit. We add, add it to the debt every year. We're at 35 trillion right now. I've looked at the detailed proposals for tax cuts and spending increases of both candidates. Trump has about 10 trillion that he would like to pile on of tax cuts and spending increases for defense and border control and a few other things. Harris has seven and a half trillion, but what they don't tell you is that underlining their proposals, which they're campaigning on, is a structural deficit that's already built in. In other words, current law, current policy, where we're going if nothing changes and the dials aren't shifted. And the answer is 25 trillion more of debt built in to the baseline for the latest CBO. If you give a little adjustment for a weaker economy than they expect. And so we start with 25 trillion on top of the 36 trillion we have. And these candidates want to have a debate whether they should add seven and a half or 10 trillion on top of that. So we're heading for big trouble fiscally. And what's different? And I know we've been saying this for a long time, this long career that you mentioned at the beginning. What's different is that we got lucky for a period from about 1987 when Greenspan took over till, I would say, March 2022, when finally even the Fed cried, Uncle, we were on the cusp of 40-year high inflation, and they finally said, we got to shut down the printing press. That is to say, stop monetizing the debt. And that interval there from September 1987 when Greenspan took over to March 2022, there was a massive monetization of the debt. Greenspan had a balance sheet at the Fed of about 200 billion. It peaked at 9 trillion. Okay. So, you know, that's about 36x in that interval of time when the GDP in that same period may have been up by five or six times. So, what I'm saying is the Fed made it possible to continue to run these large structural deficits without a crowding out in the private financial markets, without a roaring run up in yields and interest rates, because they were essentially removing massive amounts of treasury paper from the market, and tucking it away on the balance sheet of the Fed, and pretending that the resulting yields and interest rates reflected in honest free market or let's say a law of economics solution. Well, it wasn't. Now, I'm going into this because I think we're at the end of that era. What the real message was in March 2022 when the Fed finally, you know, Paul said, I guess it wasn't transitory after all, and went into an inflation fighting mode, the real meaning of that was probably the era of massive monetization of the debt is over. Yet, we have built in, as I said, two and a half trillion a year of structural debt deficit. And on top of that, both, as I call it, uniparty candidates are proposing a heck of a lot more. So in that sense, it really doesn't matter, you know, what the outcome of this election is. We're heading deep into the, you know, further into the wrong direction. Now, from the point of view of markets, Adam, you often ask me, well, what does this mean for markets? I saw a pretty good chart today that says, well, it probably doesn't mean anything until it does. And by that, I mean, to this point in his first term, the market was up 43.4% under Trump. And to the very same number of months and days in the Harris-Biden term, it's up 42.8%, rounding error difference. So the market doesn't care whether Trump added 8 trillion to the debt, the Fed monetized it. The market doesn't seem to care whether Biden is going to end up when he leaves office, adding another 8 trillion to the public debt, because they assume the Fed will monetize it as it signaled a few weeks ago when it went into another go-round of easing and rate reduction. But I think the big surprise coming down the road, and I don't think it's that far away, is when the Fed finds it can't monetize the debt, and it doesn't take everybody in the market. It probably only takes two or three or four percent of the smartest guys and the fastest money to say, wait a minute. They're not going to be removing all of this flood of paper that's coming at us, as they have in the past, because they really don't have inflation under control yet. And therefore, we might be facing an environment in which a market clearing yield emerges in the market, not an artificial suppressed yield, as a result of the massive rounds of QE that we've had. So when it begins to dawn on the smartest money in the bond market, and some people say there's not a lot of smart money there, but there couldn't be. How were they buying? They were buying the treasury bond two years ago at under 1 percent, the 10 year, okay? It couldn't be smart money. It couldn't be doing that. But in any event, I'm saying that once the, once the herd shifts and on the margin, they start selling and the Fed isn't buying, and then they see the yields going up, and prices going down, what is the smart money say? They say, oh, we need to sell what, you know, the Fed is selling effectively because it's not monetizing the debt, what Uncle Sam is selling. And therefore, we're going to make money on the short side of the bond market, rather than scooping up price gains from declining yields on the long side of the market. And once the herd, you know, I call it, you know, student body left and student body right in the market, once the student body shifts from left to right, let's say, and they begin to front run the massive selling of debt that's built into the future for the next decade or longer, I think we get a totally different ballgame, because then everything adjusts, you know. I mean, why is tech price the way it is today? Why have we had, you know, the run up that we've had in the seven leading tech stocks? The answer is, long term, you know, the long term cap rate has fallen. PE multiples have expanded. It's all about duration in the stock market. And when that changes, because of where the bond market is being driven by fiscal policy, I think we get a different ballgame across the board. Everything starts to adjust, and it's not likely to be a pretty sight. I don't know how soon it will happen, but it certainly has to happen because we're not going to see the kind of yields we've had in the last 10 years, anytime soon in the next 10 years.