Date: 2024-08-16 Page is: DBtxt003.php txt00006162
FINANCIALIZATION
DAVID STOCKMAN
Stockman: The Fed has created a huge global bubble
DAVID STOCKMAN
Stockman: The Fed has created a huge global bubble
Peter Burgess COMMENTARY
This commentary is being made in early November 2023, about 10 years after the article was originally written.
I think that this article is dangerously simplistic. There is a case to be made that the Fed policy choices have been far too 'easy' and a tighter policy would have been better. The many different 'market makers' also have a big role in market outcomes.
There is also the underlying productivity of the economy that absolutely must be taken into consideration. Over the last several decades there has been a lot more of productivity improvement than is widely reported and this has translated into a lot more profit.
Many good trends in the US economy and to a great extent in the modern parts of the global economy were dislocated significantly during the Covid crisis, but this looks to have been handled quite well in the US and Europe, less so in China in the last couple of years.
Looking back at David Stockman's observations from more than a decade ago, they don't seem to have stood the test of time very well! The Biden economy is in quite a good place, though it could be disrupted by some of the policies being advocated from the GOP House, and this could be aggravated by Fed actions in the same direction.
Peter Burgess
Written by CNBC’s Alex Rosenberg.
PUBLISHED TUE, NOV 26 2013 at 3:34 PM EST ... UPDATED TUE, NOV 26 2013 at 4:59 PM EST
The actions of the Federal Reserve have created a massive bubble not just in U.S. stock prices, but in a variety of assets all across the world, contends David Stockman, who served as the director of the Office of Management and Budget under Ronald Reagan.
“The Fed is exporting this lunatic policy worldwide,” Stockman said, referring to the Federal Reserve’s asset-purchasing program. “Central banks all over the world have been massively expanding their balance sheets, and as a result of that there are bubbles in everything in the world, asset values are exaggerated everywhere.”
“It’s only a question of time before the central banks lose control, and a panic sets in when people realize that these values are massively overstated,” he said.
The issue, says Stockman, is that central banks around the world have followed the Fed’s dovish lead “for either good reasons of defending their own currency and their trade and their exchange rate, or because they’re replicating the Fed’s erroneous policies.”
Either way, “Central banks have been massively expanding their balance sheets,” which has reduced interest rates on government bonds, and increased the amount of money chasing a fixed set of assets.
Stockman, who is the recent author of “The Great Deformation: The Corruption of Capitalism in America,” says that it takes little digging to discover that assets are overextended.
“This is a financial asset bubble, and you can see it in the valuations if you want to look at it,” Stockman said on Tuesday’s episode of “Futures Now.” “The Russell 2000 is hitting another peak today—it’s trading at 75 times reported trailing earnings. That makes no sense. It’s up 43 percent in the last year, but earnings of the Russell 2000 companies have not increased at all. It’s up 230 percent from the bottom. Mainstream America is not doing that well.”
In fact, Art Cashin, director of floor operations for UBS, made a similar point on the same episode of “Futures Now.”
“This market, this whole economy has kind of a split personality,” Cashin said. “Wall Street is making a record, and yet your brother-in-law can’t find a job.”
Yet while Cashin doesn’t call this a Fed-induced bubble, crediting the situation instead to “the miracle of managers in all the major corporation doing more with less,” Stockman warns that the end of the bull run will be very painful.
“This is dangerous. We’re in a dangerous financial system that has been more or less wrecked by central banks and their policies,” Stockman said, adding that “I haven’t seen too many bubbles in history” that haven’t ended violently.
By CNBC’s Alex Rosenberg. Follow him on Twitter: @CNBCAlex.
- Watch “Futures Now” Tuesdays and Thursdays at 1 p.m. ET exclusively on FuturesNow.CNBC.com!
- David Stockman: There's a worldwide bubble in stocks ... VIDEO02:58
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