Stockman's call: Get out of market now

The former budget chief under Ronald Reagan says government policies -- especially those of the Federal Reserve -- will ruin us. But his solution is painful.

By Charley Blaine Apr 1, 2013 4:18PM
Last week, the Dow Jones industrials ($INDU) and the Standard & Poor's 500 Index ($INX) hit new highs.

Cause for celebration? Nope, says David Stockman, the former budget director under Ronald Reagan. It's the beginning of the end, he wrote Sunday in The New York Times.

"When the latest bubble pops, there will be nothing to stop the collapse," he concluded. "If this sounds like advice to get out of the markets and hide out in cash, it is.
Capitalism is a mess, and it's all the government's fault. It's Franklin D. Roosevelt's fault. Richard Nixon's fault. Yes, even Ronald Reagan's fault. Both Bushes' faults. Barack Obama's fault. It's also Wall Street's fault. And Milton Friedman's fault -- for "a never-ending expansion of the money supply."

But most of all it is the fault of just about every Federal Reserve chairman since World War II but two -- William McChesney Martin and Paul Volcker.

The stock market is in a bubble, its third since the 1990s, Stockman argues in his column and his new book "The Great Deformation," which comes out on Tuesday. And the market will come to a bad end. "When it bursts, there will be no new round of bailouts like the ones the banks got in 2008," he writes. "Instead, America will descend into an era of zero-sum austerity and virulent political conflict, extinguishing even today’s feeble remnants of economic growth."David Stockman © Louis Lanzano/AP

Sounds gloomy, and Stockman is. The crucial mistakes for the United States, he thinks, were lack of fiscal discipline and going off the gold standard -- starting with FDR and ending, once and for all, when Richard Nixon ended convertibility of the dollar into gold.

The federal government since the New Deal has tried to be all things to all people. There's Social Security. Home ownership is promoted as a good thing, especially after World War II. There's Medicare.

And the Fed, via Alan Greenspan and Ben Bernanke, has made things worse. Greenspan effectively said, starting with the 1987 stock market crash, that the Fed would step in if the financial system was threatened. Bernanke gets most of the abuse because of the Fed's monumental decision to push interest rates basically to zero. Some day, probably soon, he argues, rates will move higher, and stocks, bonds and the economy will . . .

And no one -- absolutely no one -- is being truthful about the pain that will be required to fix the problems. Republicans aren't conservatives, he says. They're "Keynesians -- for the wealthy."

Stockman does like the economics of Dwight D. Eisenhower and the policies pursued by Martin and Volcker at the Fed. Martin was for "sound money," Stockman says, and Volcker jacked up rates to record levels -- to curb the intense inflationary pressures of the late 1970s. Eisenhower exhibited "fiscal rectitude."

Stockman writes like a man on a mission. He once was a divinity student, then a conservative congressman from Michigan. After resigning his post in the Reagan Administration, he worked on Wall Street and has had some successes and well-document failures.

The Times column has generated some cheers. Stockman, writes Marcus Brauchli in the Washington Post, "produces a persuasive and deeply relevant indictment of a system dangerously akilter. . . . Over the past 40 years, the United States has become a strange fantasy land where many politicians think deficits don’t matter, regulators are closely entwined with their charges, and the Federal Reserve manages the economy through high-stakes, high-risk experimentation."

But Neil Irwin, also writing for the Post, says Stockman's view is "fundamentally nihilistic." Anything the government touches inevitably turns out badly.

So, let us go back to 1933 when Roosevelt took the dollar off the gold standard. The problem at the time was that unemployment was soaring and businesses and farmers were going broke because the credit system and banking systems were collapsing. Getting the United States off gold effectively produced a reset for the economy.

Stockman believes it was a horrible mistake. To which Irwin asks, "his alternative is . . . what? Forcing millions of Americans to endure grinding poverty because gold is good."

The gold standard is one of those ideas that has struggled for relevancy since World War I. It worked wonderfully before the war, in part because the supply of gold expanded dramatically from discoveries made in Alaska and, especially, South Africa -- allowing the global economy to expand.

The war forced all participants to borrow massively to pay for their campaigns.

Efforts to re-institute it after the war stagnated the British economy and helped lead Germany to Adolph Hitler. The problem is not that fosters discipline. It does. But if a crisis erupts, its inflexibility becomes a big-time problem. Just as the euro is now causing some distress for southern Europe.

Needless to say, left-leaning economists weren't impressed. The New York Times' Paul Krugman called Stockman a "cranky old man." The University of Oregon's Mark Thoma gave Stockman the "wing-nut of the week" award.

"Angus," the author of the Kids Prefer Cheese blog, takes Stockman to task over the timing of the Fed's actions. This is what Angus seizes on from Stockman:

Since the S&P 500 first reached its current level, in March 2000, the mad money printers at the Federal Reserve have expanded their balance sheet sixfold (to $3.2 trillion from $500 billion). Yet during that stretch, economic output has grown by an average of 1.7%  a year (the slowest since the Civil War); real business investment has crawled forward at only 0.8% per year; and the payroll job count has crept up at a negligible 0.1% annually.

The problem is  the Fed's balance sheet (all that bond buying) didn't start until 2008. And on the Kids Prefer Cheese blog, Angus, a University of Oklahoma economist, notes: "A continually expanding Fed balance sheet didn't produce consistently bad economic numbers; the great recession happened and the Fed responded."

And while the economy is not going great guns, it is slowly getting better. And Stockman should know that a severe recession, like the 2007-2009 recession, takes time to heal. The Reagan Administration came to office as the global economy was struggling with high oil prices, high interest rates and deep stress in housing and automobiles. The domestic didn't show real growth until after 1984.

The biggest problem with Stockman is that he acknowledges his prescriptions -- balanced budgets, term limits for Congress, 100% financing for political campaigns and breaking up big banks -- aren't politically viable.

But having said that, he doesn't apply his considerable intellect to offering a solution that actually might work.

More on Top Stocks
Apr 1, 2013 5:16PM
Corporatism is what it is. We should seriously think about going back to Capitalism.
Apr 1, 2013 5:13PM

I believe he is on target. I, a novice small investor, as early as 03 was telling my girlfriend, who was a mortgage broker, that housing would collapse due to the artificial interest rates and high risk loans. I wasnt astute enough to know they could string it out several years with fed and treasury fiscal policy.

There is nothing FREE in the universe and nothing continues up indefinitely.

Apr 1, 2013 8:37PM
Kudos to Stockman for calling out the Repubs for not being conservatives.  And the argument to get out of stocks has been reasonably made, regardless of whether or not you agree.  However, the "hide out in cash" part - that's terrible advice if he's talking about the US dollar.  There are plenty of other options out there that make more sense.  Hell, even buying some land and planting an orchard or a stand of hardwood trees makes more sense than hoarding US dollars right now.

The new measure of wealth is not the value of your nest egg or bank account or assets, it's the amount of cash flow you can consistently generate without having to punch a clock.
Apr 1, 2013 7:19PM
For once someone  see's the monumental crash in front of us and has the HUEVOS to say it ! TAKE YOUR MONEY AND RUN ! If your money is not in your physical possession it is not your money ! LOSE IT !
Apr 1, 2013 8:13PM

Can any body have enough courage to at least say tariff,even Reagan's people know that the World policeman is going broke. Holding down labor is no help when the country main tax is income!

Apr 2, 2013 7:13AM

David Stockman is a Republican. I am absolutely NOT a GOP supporter. I would vote for Stockman if he ran for President BUT wasn't funded by the GOP. I hope the "Republican Party" gets this message and distances itself from the GOP.


Breaking up big banks: do it anyway. We fail to recognize that today's institutions are conglomerates, not single vital entities. Sever the Automated Clearing Housing and Credit Cards from bank direction. Segregate Warehouse Credit and Servicing from Origination and Lending and only regulate that part. Limit the remaining "business" that we call a bank to within state boundaries and we begin an era of balanced society without financial pariah in influence.


Balanced Budget: Is that REALLY necessary? Is it critical to GUESS ahead and then argue when the funds don't match the crises? I'd rather tie the Dollar Index to Worked Hours and focus on the integrity of the Index. Bernanke has done nothing more than dilute the Dollar while keeping that which destroyed it (banks) alive by artificial means. You can't balance something so demonized, and expect stability. Stop Bernanke, let banks fail, LEARN from this same mistake repeated like clockwork throughout history.


Term Limits: Not. Relevance is the key. Today's Congress contains the longest serving career politicians in America's History and they SUCK at the job. Familiarity breeds contempt and we are seeing it BIG by this group. The campaign to election process is broken. It costs a million to win a job that pays less than $50,000 a year! WHO do you think runs for that role? Instead of focusing on term limits, the focus needs to be on- who the candidate is on the map of relevant issues. We are killing ourselves by our lack of relevant candidates and nebulous process of validity. Honestly, are there ANY members of Congress today who accurately represent the majority of Americans as we currently are, or are they irrelevant pariah collecting outrageous pay as we decay?


I want to continue reading and hearing what Stockman has to say. Remember what I write and the positions I generally take... and this man's Party. If we don't get someone on-board that truly sees our course and takes heed of prior historic examples, we won't be here soon. There are plenty of 200 year-old societies that failed, far fewer ones that recognized course and altered for the better at that mark. Put qualified people IN, get puppets OUT. Degrees are not qualifiers, exposure is.    

Apr 2, 2013 7:38AM
David has it right...I see the same thing.
Apr 1, 2013 9:38PM

Brutus....One of your better post...

Yes there is a myriad of ways, to preserve capital or make money...

And money really isn't the end all, that some of us think..

Apr 2, 2013 9:42AM



Sure the markets are up but where is the prosperity.

It's an illusion of course, fostered by dumping $85 bill a month into an economic black hole.

And, yes, an investor's score card tells a nice story but look at all the pain around us.


Quoting a blog from yesterday, there is no such thing as a free lunch.... and the bills are coming due big time.   

I am amazed that some commenting here think that we will still keep chugging along higher and higher without a problem. Reality says otherwise. Those who ignore history are doomed to repeat it......and then tax payers bail them out.
Apr 1, 2013 8:30PM
Every week for the last 4 yrs there is some "expert" that swears the market will crash any day now as it keeps grinding higher again and again,  It will correct its self again but I bet many people wish they didn't listen to the gloom and doomers when we had Dow 7,000 , 8,000 , 10,000,  ect,  I bot heavily in 09 and 10 and don't regret it one bit!
Apr 2, 2013 11:39AM
Markets go up and down period, that is just a case for diversification and re-balancing. He is just trying to scare the public and sell his book.
Apr 1, 2013 10:23PM
He is not a market timer. He may be right but he assumes that the uncle sam sits out the crash. Uncle sam will not watch the market crash. Look at the ECB who will do whatever it takes. Look at the FRB who printed 3 trillions and can print 100 times more if forced to. inflation? What inflation? maybe 5 to 10 years later. Not now! We have to live and eat NOW!
Apr 1, 2013 8:16PM

Stockman is the guy Reagan had to fire because of his big mouth.He`s trying to

make money because he missed out on the market the last 4 years like most Republicans.

Apr 1, 2013 6:27PM

Think I met David Stockman once...?

Just tryin' to get my numbers up..

He was a Nerd...

Apr 1, 2013 8:13PM

The market is on a roll.Republicans hate to see the market doing well.The market is

rolling like Tiger Woods when he has a blonde.The bitter Republicans just can`t give

Obama credit.We`re making a ton in the market.We`ll have a market crash when we

get a Republican in the WH.That`s history repeating.

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