David Stockman: It's "Damn Near Impossible" To Avoid A 30-50% Market Correction

Everything is overvalued at this point

To better understand the current economic environment we find ourselves in, it helps to better understand how we ended up here.

And few have as detailed an understanding as today's guest, who has been a true insider in both Washington DC and Wall Street for his extremely long & accomplished career.

We're fortunate today to speak with former Congressman, economic policymaker & financier, David Stockman.

David represented Southern Michigan in the U.S. House of Representatives from 1976 to 1981, and later served as the Director of the Office of Management and Budget in the Reagan Administration and was the youngest Cabinet member of the twentieth century. Since then he has held executive positions in many of the most influential banking, buyout and private equity firms, including The Blackstone Group and Salomon Brothers.

He warns that "everything is overpriced" that it will be "damn near impossible" to continue the current high levels of deficit spending without re-stoking inflation.

It would not surprise him to see a 30-50% downwards correction in financial asset prices begin next year.

To hear his many reasons why, click here or on the video below:

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Adam’s Notes: David Stockman (recorded 10.31.24)

EXECUTIVE SUMMARY:

• David points out that the U.S. government is locked into a structural deficit, spending around 25% of GDP while tax revenues only account for about 17-18%. This imbalance leads to a deficit of 6-7% of GDP each year, adding approximately $2.5 trillion annually to the national debt, which is currently around $36 trillion. David predicts that under current policies, an additional $25 trillion could be added over the next decade, pushing the debt load to unsustainable levels. Both major political parties, despite differences in rhetoric, have proposed significant spending and tax cuts that ignore the existing debt burden, with potential new additions of $7.5 trillion (Democrats) and $10 trillion (Republicans).

• The era of debt monetization that began with Alan Greenspan in 1987 appears to be over. From then until 2022, the Fed enabled massive government borrowing by keeping interest rates artificially low, buying Treasury bonds, and expanding its balance sheet from $200 billion to a peak of nearly $9 trillion. This 36-fold increase in the Fed's balance sheet allowed the government to run large deficits without crowding out private investment or spiking interest rates. However, with inflation reaching a 40-year high, the Fed has been forced to reverse this policy, making it more challenging for the government to finance its debt without spiking yields.

• With inflation remaining above target, David predicts that interest rates may stabilize at around 5% for the 10-year Treasury bond, significantly higher than in recent decades. He notes that historically, interest rates must offer a "real yield" of 2% above inflation, and with inflation around 3%, this would necessitate a 5% yield. Rising rates will lead to higher borrowing costs across the board, impacting everything from federal debt servicing to consumer credit, mortgage rates, and corporate financing. This rate increase, David argues, will also negatively impact high-growth sectors like tech, where valuations rely on lower discount rates.

• David suggests that “smart money” investors