INFLATION NIGHTMARE

David A. Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street. Stockman’s career in Washington began in 1970, when he served as a special assistant to U.S. Representative, John Anderson of Illinois. From 1972 to 1975, he was executive director of the U.S. House of Representatives Republican Conference. Stockman was elected as a Michigan Congressman in 1976 and held the position until his resignation in January 1981. He then became Director of the Office of Management and Budget under President Ronald Reagan, serving from 1981 until August 1985. Stockman was the youngest cabinet member in the 20th century. Although only in his early 30s, Stockman became well known to the public during this time concerning the role of the federal government in American society. After leaving government, Stockman joined Wall Street investment bank Salomon Bros. He later became one of the original partners at New York-based private equity firm, The Blackstone Group. Stockman left Blackstone in 1999 to start his own private equity fund based in Greenwich, Connecticut. Stockman is the author of numerous New York Times bestselling books and also provides private research and analysis to professional investors and firms globally through “David Stockman’s Contra Corner,” his subscriber advisory relating to investing, global economics, and public policy. Stockman was born in Ft. Hood, Texas. He received his B.A. from Michigan State University and pursued graduate studies at Harvard Divinity School. He lives with his wife Jennifer Blei Stockman, and they have two daughters, Rachel and Victoria. He lives & works in the Miami, Florida metro area. www.davidstockmanscontracorner.com

OUTLINE for INFLATION NIGHTMARE: How to Protect Your Money in the Coming Crash by David A. Stockman
Part 1

Chapter 1: Washington’s Infernal Inflation Machine




An economist’s definition (classical, a la Friedman): Inflation is caused by central bank money printing, not by supply and demand for goods and services in the market




Inflation artificially increases the price of almost everything: goods, services, housing, stocks, other financial assets, collectibles and crypto


Real world examples here







Different kinds of inflation


Core inflation vs. food/energy


Real world examples here, story format



PPI, CPI, inflation expectations, “stagflation”


Real world examples here, story format










What’s “normal” inflation? Is it necessary for growth?




Stockman’s thesis: Massive money printing is causing massive asset inflation in the form of stock prices that are not justified by earnings and interest rates that are drastically below what is needed to cover inflation and risk of loss, and it is tying up capital for long periods of time.


Chapter 2: How do normal people experience inflation? How do you know if inflation is happening?




Stories > as in what an average person experiences to what happens to paycheck/dividends/savings accounts


Risk-free rate lower than inflation


Real world examples here, story format



What happens to your paycheck when inflation runs hot


Real world examples here, story format



Savings rates in the age of QE


Real world examples here, story format



Fed’s “hedonic adjustment” to hide inflation from ordinary people


Real world examples here, story format










How long you have to work to buy a good, such as a house or car


For instance, the average worker had to work 7,160 hours (almost four years) to buy the median home in 1971. By 2020, he had to work double that: 14,365 hours.
Same was true of a new car. To buy a standard Ford Mustang Coupe, the average worker had to work 5.3 months in 1971, 8.2 months in 1997 and 10.8 months in 2020.
While all that was happening, ordinary savers are barely keeping up with inflation in their paycheck while any savings they have suffer from low rates


Examples and data illustrating the above, 1990s CD rates vs. today, etc








Chapter 3: How to read the signs of inflation




Lessons from previous period (stories, not economic theory/economic policy)


How Reagan and Paul Volcker fixed the inflation disaster of the 1970s


Brief history of the period
Real world examples here, story format



The “Great Moderation” of low inflation and growth ballyhooed by Bernanke in 2005 was a ruse.


In fact, goods and services inflation was just temporarily pushed underground owing to imported deflation from China
A generation of investors and savers has now lulled to sleep by artificially low inflation








Chapter 4: Why inflation is a danger now




For consumers, goods inflation has been artificially cheap while services inflation has taken off. As China matures, goods inflation will catch up.




For investors, fiat credit has led to asset inflation, going to the top 1% as a massive, serendipitous windfall


Stock valuations are an illusion of the worst kind (Stockman thesis)
P/E ratios are vastly inflated...earnings haven’t increased materially since 2007


15x earnings to now 35x earnings, the result of monetary inflation
Tech leaders have driven the indexes today for the most part (FAANG stock effect)


Real world examples here, story format



Projected capital appreciation is falling (according to Vanguard et al) and yet new market highs keep getting printed, over and over


How long can the Fed keep this up, inflating the system?
Inflation of asset has become institutionalized, nobody even thinks about it anymore
At some point the music stops...right?



Bond yields will go up, but bond prices will drop causing big capital losses



When bond yields go back to normal, justification for ultra high P/E multiples will collapse, causing stock prices to adjust drastically lower
So what would actually happen to a typical retiree portfolio, real world examples here, story format






Similarly, financial asset inflation makes the carrying cost of debt dirt cheap, thereby encouraging households to over-borrow in order to make up for the shrinking purchasing power of their wages.


Accordingly, during the past three decades, household debt in all forms has increased from $36,000 per household to $130,000
Expand on household debt examples: credit card explosion, home equity boom of 2007









Part 2

Chapter 5: The slippery slope for investors now




Essentially when the Fed finally gets cornered and it becomes apparent that inflation is no longer transitory, and it has to deal with America’s $85 trillion of combined public and private debt, there will be big corrections


Bond market is biggest bubble in history


Stories from bond market breaks past



Bond repricing will spread to the stock market


When all correlations fall to zero, as in 2007, “nowhere to hide”


Real world examples here, story format






Investors think high stock prices are sustainable because high P/E multiples are justified by ultra-low bond yields


But that will correct in the tech sector, deflating the value of the whole stock market since they have lead the growth for years
Everything prices off the 10-year bond, if that’s 200 bp under inflation, can that last? It can’t








Chapter 6: How to invest once inflation really takes off: how to protect hard-earned savings




Inflation-proof "real assets" investments


REITS/Real Estate
Art (Alternative investments)
Cryptocurrency 
Commodities
TIPS







Growth Stocks that do well in inflationary times


Banks/Financials
Food
Healthcare
Energy
Building Materials







What will in fact work: The role of cash and true hedges



Stick to short-term cash-type investments (T-bills, savings accounts, CDs) cash and keep as liquid as possible
Cash is not trash, it will soon be treasure
Gold as a hedge
Buying puts (how to do this safely using funds or ETFs)
Federal government is not going away


Treasury bills are safe, if lower rate of return: likely 2% to 4% return once Fed is forced to let interest rates rise to check CPI inflation








Chapter 7: What Investments to Avoid and Why




Avoid meme stocks, tech stocks, flavor of the month trading, crypto schemes




Bubble thinking is a symptom of underlying sickness


Chapter 8: Debt Strategy




What to do with any debt you might have/credit cards, mortgage, college loans, medical bills