Ronald Reagan’s budget chief David Stockman says the stock market could fall in value by half if a recession kicks in, calling the current market levels “crazy.”
The expansion is getting too long, Stockman warns, and there is little behind President Trump’s economic policies to fend off disaster.
“I call this a daredevil market. It’s all risk and very little reward in the path ahead,” he said.
“This market is just way, way overpriced for reality.”
Stockman’s thoughts came as the Nasdaq hit all-time highs.
The longest bull market in history lasted a little more than 12 years and through the Reagan, Bush and Clinton administrations before collapsing in the dot-com crash in 2000.
The current bull market started in March 2009, so possibly it has a few more years to go — unless the economy itself gives out.
“The S&P 500 could easily drop to 1,600 because earnings could drop to $75 a share the next time we have a recession,” Stockman said.
“We’re about eight or nine years into this expansion. Everything is crazily priced. I mean the S&P 500 at 24 times at the end, tippy top of a business cycle.”
One of Stockman’s biggest problems is the notion that Trump’s tax cuts are providing a significant boost to stock prices.
As Reagan’s budget guru, Stockman resigned in protest of deficit spending following the massive Reagan-era tax cuts. He then made his own fortune as corporate raider, borrowing money to buy out floundering firms.
He’s still no fan of government budgets that don’t add up.
“These tax cuts are going to add to the deficit in the 10th year of an expansion. It’s just irresponsible crazy,” he said.
“It’s all going to stock buybacks and M&A deals anyway. That doesn’t cause the economy to grow.”
Whatever gas tax cuts give to the economy, it’s not sustainable, he said. “It’s just a short-term boost to the stock market that doesn’t last.”
Stockman has made similar bearish call in the past that have not materialized.
“This is one of the most dangerous market environments we’ve ever been in. It’s the calm before a gigantic, horrendous storm that I don’t think is too far down the road,” he said in June 2017.
He said at the time, too, that tax reform was unlikely, which was something that did come to pass.
“I don’t know what Wall Street is smoking. They ought to be getting out of the casino while it’s still safe,” Stockman said then, when the S&P 500 Index was nearly 9% lower than today.
“There is nothing rational about this market. It’s just a machine-trading-driven bubble that’s nearing some kind of all-time craziness, mania,” he said.
More recently, Stockman warned: “There are some huge surprises lurking out there because we’ve had eight years of monetary expansion that is just off the charts of history.”
Pressured to give a time frame for this colossal stock sell-off, Stockman would only add that, “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.”