‘Daredevil’ Stock Market Poised to Drop 40%: Stockman


The mix of tax cuts and increased federal spending passed by Congress and signed into law by President Trump in recent months may be giving the economy and corporate profits a big boost right now, but the downside is that the federal budget deficit is projected to reach a staggering $1 trillion in 2019, according to analysis by the Congressional Budget Office (CBO), as cited by PBS. This worries David Stockman, who came to national prominence as director of the Office of Management and Budget (OMB) under President Ronald Reagan in 1981. “I call this a daredevil market. It’s all risk and very little reward in the path ahead,” he said in a TV interview with CNBC, adding, “This market is just way, way over-priced for reality.”

‘Crazily Priced’

Holding Firm

When pressed to predict when stocks might begin the bear market plunge that he foresees, Stockman declined to offer a timetable: “When the catalyst finally comes, it’s hard to say. No one can ever define what the black swan is because that is why it’s called a black swan.” During the last bear market, from October 2007 to March 2009, the S&P 500 shed 57% of its value, per Yardeni Research Inc.

‘It’s Just Irresponsible Crazy’

Additionally, Stockman is alarmed by the potential impact of a ballooning federal deficit on interest rates. As yields are propelled upward, the carrying costs on the national debt will increase, resulting in yet higher deficits.

Rising Rates and Stocks

Higher interest rates also will increase borrowing costs for companies, decreasing profits. A notable exception tends to be banks, which normally increase their net interest spreads, and thus their profit margins, as interest rates rise. Finally, stock valuations generally have an inverse relationship with interest rates, as rising rates cause anticipated future profits and dividends to have a lower present value. Meanwhile, rising rates mean that bonds become relatively more attractive investments compared to stocks.

Other Big Bearish Calls

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