Stockman: The markets are in store for a ‘thundering reset’

Stockman: We are at peak debt headed for a recession
Stockman: We are at peak debt headed for a recession   

Wall Street is breathing a sigh of relief after the S&P 500 Index managed to eke out its first weekly gain of the year. Despite the signs of strength, one prominent market watcher says stocks are still in store for a "thundering reset."

"I think we have a dead cat bounce in no-man's-land," David Stockman told CNBC's "Fast Money" last week. According to Stockman, the broad market has been trading in the abyss since breaking above 1,870 in 2014, seeing a meager 1 percent return since then.

"We're been there now for 700 days…we've had something like 35 attempts at rallies and all of them have failed for what I call the "four no's"," he added.

For Stockman, those "four no's" consist of a combination of no escape velocity, no earnings growth, no dry powder from the central banks and no reflation. Taken together, it leads him to believe the U.S. economy is on the cusp of a full-blown recession.

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"We're getting to a point where the chickens are coming home to roost. There's no help from the central banks and that's why these rallies are getting weaker and weaker and shorter and shorter," said Stockman, who was the former OMB Director under President Ronald Reagan.

'Nowhere to go but down'

Investors took heart last week from the prospect of more easing from the European Central Bank, which broadly lifted markets. By contrast, economists widely believe the Federal Reserve has all but exhausted the weapons in its economic war chest, with its balance sheet having exploded from $850 billion before the 2008 crisis to nearly $4.5 trillion currently.

Stockman believes that the flood of easy money from central banks around the world has formed a credit crisis so severe that it could take years to dig out of the hole that's been created. The market watcher pointed to a stunning $21 trillion collective balance sheet build up around the world, up from $2.1 trillion just 20 years ago.

"This is high powered money that caused an enormous expansion of credit and financial valuation bubble," he said. Stockman noted that the rapid increase of credit has resulted in debt around the world of more than $225 trillion. "We are at peak debt," he added.

At this point, Stockman believes that the Fed's hands are tied after sitting on zero interest rates for nearly a decade. "There's nowhere to go but negative," he said. "It's time to get out of the market completely."

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The S&P 500 has been steadily in correction territory in 2016. The large-cap index closed the week roughly 11 percent from its 52-week high, but Stockman believes it could plunge another 30 percent from where its trading now, which takes it back to levels not seen since 2012.

"It's a dangerous thing to catch a falling knife, the coming correction will come quickly in the next year," Stockman concluded.