Still Chop, Chop, Choppin’ At The Fed’s Front Door – David Stockman’s Contra Corner 08-06-15

David Stockman writes:

Wall Street believes the sideways market of the last 6 months is a healthy market correction in time, not price, and that markets cannot go down unless there is a recession and that none is remotely in sight.

We are in month 74 of the current recovery, beyond the 61-month average for post-war business expansions. The 105 month expansion of the 1960s took nearly 3 years of sub-par economic growth to stabilize the macro-economy and purge inflation. The 91 month expansion of the 1980s and 119 month expansion of the 1990s were largely fueled by cheap mortgage and consumer credit: the historically stable ratio of household debt to wage and salary income of 75%-80% prior to 1980 rose nearly vertically during the next 25 years to its peak in 2008. Households are not remotely in a position to re-leverage.

The US economy is saturated with $59 trillion of total public and private debt and faces unprecedented headwinds from the global economy. None of the prior post-war business cycle expansions were accompanied by the frenzy of construction, investment, borrowing and speculation by China and supplier base that we have seen since 2008.

Huge global excess capacity means gale force deflation as China and its supplier base attempt to ship materials and goods at any price to service their huge debt created over the last two decades. The modest contribution to US GDP from exports since the Great Recession is over. Global deflation will devastate US exports because China and the EM economies are entering a prolonged period of plunging demand for capital goods and raw materials.

The extended scramble for yield in EM debt will now turn into panicked flight as losses and cash shortages mount for EM borrowers; meaning the dollar has only begun its rise. The drying up of demand for exports and impending flood of dumped imports of steel and related industrial goods will curtail domestic capital spending. CapEx spending in the domestic oil and gas patch and other extractive industries is falling off a cliff, and government sector spending is hobbled by peak public sector debt. Business inventories are rising to pre-recession levels.

Most households are not in a position to increase their leverage and can only spend what they earn. Consumers are reaching the end of their spending limit is evidenced by the sharply falling 3-month rolling average of withholding taxes.

Read the full article at http://davidstockmanscontracorner.com/still-chop-chop-choppin-on-the-feds-front-door/

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