David Stockman: Trump is playing with fire

David Stockman is very familiar with US government debt he served under President Ronald Reagan from 1981 to 1985 as his budget controller, and was a keen advocate of balancing budgets and cutting government spending. It's safe to say he is not impressed by President Donald Trump.

By cutting corporate tax rates and expanding the US government deficit (its annual overspend), Trump is "playing with fire at the very top of an ageing expansion", he tells CNBC. And Trump's criticisms of the Federal Reserve for raising interest rates is also wrongheaded: "He's attacking the Fed for going too quick when it's been dithering for eight years. The funds rate at 2.13% is still below inflation."

All of this means investors need to be extra-defensive. In fact, Stockman who has a history of being very bearish reckons the S&P 500 (the main US stockmarket) is set to fall by as much as 40% from its current level of around 2,800. "No-one has outlawed recession. We're within a year or two of one." When it arrives, unwary investors will get a brutal shock. "Fair value of the S&P going into the next recession is well below 2,000, 1,500 way below where we are today."

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

As for Trump's attacks on China: "The trade war is not remotely rational." China, says Stockman, accounts for about 30% of US goods imports. As a result, if tariffs drive up prices or force the US to source its goods from elsewhere, then it "is going to hit the whole goods economy with inflation like you've never seen before."