David Stockman: Terrific Interview

M

Musburger

500+ Posts
David Stockman


Starts off slowly and picks up steam. Highlights:

*Treasury Bubble has developed
*Debt is unsustainable
*Massive deleveraging ahead - higher unemployment, defaults, etc.
*Federal Reserve is managed by idiots
*Greenspan panicked after dot.com implosion
*Markets are essentially rigged
*Dollar will strengthen relative to other currencies (happening now)
*asset values will plunge (equities, real estate, eventually treasuries)
 
I have lumped Stockman in with Jim Rogers as guys who are always extreme in their views and usually have a negative slant on the future. When the economy hits a pothole or steers into a ditch, they are hailed as oracles but they spend 98% of their times in the unrealistic minority of market watchers.

I used to give him more of my attention due to the Reagan White House/Blackstone Group items on his resume but he has jumped off the deep end and become a media ***** the last few years.

Great fodder for the zero hedge crowed though.
 
I've got a few questions and comments for you Keynesian gurus (Kramer, DFWAG).

1) US Treasury rates are at historic lows, even as US deficits, and debt/GDP ratios are at all time highs. I imagine the rates will go even lower for some time. Does this not constitute a bubble? What happens to Treasury rates if the Fed ends continual market intervention (QE, twist, purchases of MBS)? The fed has implemented these policies for nearly 4 years now and we're headed into recession. What would it take for you to consider that perhaps the economy can no longer function without permanent intervention?

2) The people cited by DFWAG - Schiff and Faber - both believe that fed intervention will eventually lead to hyperinflation. If you listened to the video, you should have noticed that Stockman believes deflationary forces will eventually overwhelm even the federal reserve. Asset prices will plunge. This is deflation. Did you even notice the differentiation between Stockman's prognosis as opposed to Schiff/Faber?

3) Several non-Keynesian analysts have similar views as Stockman. Just to name a few:
Charles Hugh Smith, Karl Denninger, and Mike Shedlock have popular websites.
Zero Hedge blog publishes thoughts of dozens of non-Keynesian perspectives, some of which like Kyle Bass (Bass is a holder of gold, and he may expect inflation in the long term) see deflation in the future. Many of the other opinions see inflation or hyperinflation as a result of fed policies. The general Keynesian perspective (your's I suppose?) is that continual monetary stimulus combined with lower taxes will result in renewed growth and debt really doesn't matter. Greece and Spain would be just fine if they could print EUROs I guess?

4) Stockman didn't go into systemic structural problems within the economy (maybe he doesn't agree), but some analyists - Smith and Paul Craig Roberts are two I can think of - make a strong case for the premise that the economy cannot recover because of:

In reply to:
Click to expand...
 
Part of the problems this board is dead and those here make ridiculous partisan posts on both sides (the most outrageous of which is the NRA thread of which I will have no part of). Will respond later.
 
Stockman rambles and does not stay on point. Profits are "overstated?" What does that mean? Is he going after accountants? He goes back and forth in his criticisms of the Fed and our government's continual deficits that have led us to this great debt level to individual's debt levels. I am criticizing Stockman for his criticism of The Fed - I am interested in nothing else. In fact, I agree with much else of what he says - but The Fed is not culpable, and people don't understand that. The Fed didn't "lure" people into 100% mortgages in the early 2000s.

He is big into labels - and you are regurgitating his Keynesian label here. I'm not a Keynesian. I hate the debt, and more importantly, think it is very significant. Austerity is needed, and like Stockman, I am much more in favor of attacking our spending habits than anything else. Trying to generate incremental revenue via tax rate hikes is insanity.

At any rate, some of prognostications seem reasonable; some seem like far fetched fear mongering - a la Schiff. That is why I mentioned him. I'll get into those prognostications in a second.

I am simply defending Bernanke's actions. Keep in mind Keynes, in times like these, wasn't terribly interested in monetary policy, so you can drop the labels. You have to ask yourself, what are Bernanke's goals? To lower unemployment and to temper inflation. We are simply not in danger of inflation at this point, and Stockman admits as much. On unemployment, Bernanke simply has got to keep rates low; otherwise you have another Depression, and a **** ton of smart critics like Friedman, chastising The Fed for not doing enough, which is precisely what Bernanke seeks to avoid.

About inflation/deflation, Bernanke is hoping that inflation will coincide with a downtrend in unemployment, I would assume. He's not worried about inflation now; he's obviously very concerned with what Stockman and Bass warn about: deflation. Once employment improves (we're kinda stalled out now), inflation will have already reared its ugly head. At which point, I hope Bernanke quickly jacks up rates. I have no opinion on the man, other than he's done what he HAS to do to stave off Depression. It's obvious, quite frankly.
 
"*Treasury Bubble has developed"

Okay, explain what the ramifications are here. I'm genuinely interested in your take on how this will play out.

"*Debt is unsustainable"

Agreed. Austerity is the answer.

"*Massive deleveraging ahead - higher unemployment, defaults, etc."

Why is unemployment going higher? Who is defaulting, and HOW? I assume you mean homeowners, and it's tied to unemployment going up?

"*Federal Reserve is managed by idiots
*Greenspan panicked after dot.com implosion"

Fed is doing what it can. It's in an incredibly tough spot, and yes, I would agree Greenspan didn't contract as he should have, and let an equities market decline lead him to inexplicably leaving rates too low for too long. However, now? They HAVE to be this low - otherwise you WILL have higher unemployment and a higher rate of defaults.

The dollar is already strengthening and will continue to do until Europe works its way out of this clusterfuck, if they ever do.

Your asset value plunge is surely predicated on unemployment which I am interested to hear about.

I understand these are Stockman's points but you term it a "terrific interview" and I heard a lot of rambling and misdirection, and nothing new. What you highlight above largely is predicated on a rise in unemployment, and nothing you quote above is outrageous. What I find "far fetched" as I said earlier is that the economy will collapse, gold is a good asset, etc. It's the same old bull ****.
 
I think most people's knock on Schiff is that he's not a great investor, which is fine and very well could be true. however, he is very intelligent on economics and monetary policies. i think that is where his strength lies, and not as much as to where to actually put someone's money in the stock market.
 
a) Rebalancing doesn't occur over night. We're talking years or decades.

b) Again, when entitlements get scaled back, this will translate into less spending, ergo a lowed standard of living and a contraction in the economy due to decreased consumption. How do you continue to miss this?

c) Housing values will continue falling should interest rates rise. It's simple math.

d) not paranoia - fact

e) Student loans cannot be defaulted. Banks are using mark to model accounting and postponing foreclosure procedures in order to avoid default. In fact much fed policy is designed to help banks avoid recognizing losses.
 
DFW, as to your point about increased savings, a record number of early withdrawals from retirement accounts are occurring. Much of the proceeds are used to pay down debt and/or meet mortgage and rent obligations. This - the paying down of debt by dipping into money allocated for retirement - is considered officially as savings.
 
I would also like to say posters here just need to stop using terms like simple math when talking about economic concepts. If you really understand economic relationships, you will be forced to admit that almost everything is locked into a dynamic and ever changing system where there are no fixed relationships that merit the sort of certainty put forth here.

Economics is not physics. There is no fixed boiling point of water equivalent. At best you hope things like no arbitrage pricing keep certain relationships in check over the long term but in reality it is very very hard to find anything that is "Simple math" as you would like to think.
 
Rex, what you say is true re: rising interest rates, however the problem was skirted by via variable rate products. You are surely cognizant of that. Given the aftermath of what happened, I expect we won't see variable rate mortgages in mass for some time.

DFW, assuming wages do not increase and rates go from 4 to 6 percent, you would be nuts to think you could sell your house at the same price.
 
Maybe or maybe not. Neighborhoods differ in their desirability. The long term average borrowing cost is around 4-6% so you are not extending any sort of doomsday scenario. People substitute within their budgets to afford certain items.
 
One that makes his whole point rather unrealistic. Rates back up due to economic growth and concerns over inflation. Stagnant real income usually does not go along with this scenario.
 
DFW, rates would be currently higher if not for fed intervention. In the past, you are correct that wages have risen with inflation, however with globalization companies have the option to move jobs offshore. This is a new variable that did not exist prior to the last 15 years or so. You are relying on a paradigm that no longer is applicable.
 
Agreed re the Fed and Rates. They have been pretty forthright about pushing rates down.

Re offshoring, you yourself just agreed with me that re-balancing a few posts back. Repatriation of jobs is happening. Offshore centers are becoming less cost effective. It is not a permanent condition.

The trends of the last ten years are likely to be viewed as an abberation rather than a permanent change in the long run trend-line, as you seem to be implying.
 
DFW, I agree that the off shoring trend will eventually reverse. But for the present (and the next several years) we will pay the price - whatever that turns out to be - as the adjustments take place.
 
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