Courtesy of Pam Martens
David Stockman on CNBC, February 27, 2018
Investors have been whiplashed so far this week and it’s only Wednesday morning. On Monday, the Dow rocketed ahead by 399 points. On Tuesday, it plunged by 299 points. What changed investor sentiment so dramatically in 24 hours?
David Stockman, the former Director of the Office of Management and Budget under President Ronald Reagan who blogs at Contra Corner, appeared on CNBC yesterday to size up the situation. Commenting on the new Chairman of the Federal Reserve, Jerome Powell, who gave testimony for the first time in his new role before the House Financial Services Committee yesterday, Stockman said he thinks Powell is “missing three giant skunks sitting on the wood pile.”
The biggest skunk according to Stockman is an “epic monetary fiscal collision” that Stockman says he hasn’t seen before in his lifetime. Stockman explained that starting this October, which begins the Federal government’s Fiscal 2019, the government is going to borrow $1.2 trillion. Stockman called this “an astronomical number” given that the U.S. is ten years into an expansion. (Borrowing of that magnitude has traditionally been done only during a deep recession.)
At the same time says Stockman, the Federal Reserve has pivoted to Quantitative Tightening (QT) “and they will be dumping $600 billion” of their bonds into the market at the same time as the government is pumping up debt issuance. (The Federal Reserve began trimming back its purchases of Treasury bonds in October of last year in order to normalize its bloated balance sheet that resulted from the financial crisis. That trimming, which is an effective tightening of monetary policy, will expand this year.
The Fed’s $600 billion combined with the $1.2 trillion from the government means that $1.8 trillion in Treasuries “will be looking for a home” in Fiscal 2019 said Stockman. This leads Stockman to believe that the market simply can’t clear all of this debt at anywhere near the 2.90 percent interest rate at which the 10-year U.S. Treasury has been trading. He says there is going to be a “monumental yield shock” that will take 10-year Treasury yields to 3 to 4 percent “and probably overshoot beyond that.”
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