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Wall St. is misreading Trump, and a market bloodbath is imminent: Stockman

Former top federal budget official David Stockman has a stark warning for investors: There's going to be a disaster in Washington and you're not going to see it coming.

Stockman, an ardent critic of President Donald Trump, has strong doubts that the rosy view investors are taking on the economy can hold water in the near-term. As usual, he didn't mince words when explaining his perspective to CNBC.

Last week, the Dow Jones Industrial Average and S&P 500 Index jumped following Trump's speech to Congress, with markets growing more bullish about the Trump policy agenda. Yet since Wednesday, both indexes have failed to continue the trend of new highs.

The stall in the rally has Stockman, former OMB director under the Reagan administration, labeling Trump's address as "irrelevant" to what will happen to the market and the economy.

"Wall Street is totally misreading Washington," Stockman told CNBC's "Futures Now"in a recent interview. "It's pricing in a fantasy about a Trump stimulus that simply isn't going to happen. There will be no tax cut, there will be no 15 or 20 dollar a share reduction in the corporate rate."

According to Stockman, the main catalyst for his pessimism about Trump's policies is the "debt ceiling trap" that he contended will prevent tax reform, infrastructure and defense spending that have excited so many investors.

Given the "factions" among the Republican Party today, the former Reagan aide also believed that the political turmoil could result in a gridlock the markets don't see coming.

"We will have a government shutdown," said Stockman. "It is totally unexpected, unpriced in by Wall Street, [and] it will spook everybody."

At least for now, the Federal Reserve believes current economic conditions — bolstered in part by Trump's policy agenda—justify tighter monetary policy as a preemptive strike on price pressures. On Friday, Fed chair Janet Yellen strongly hinted that a rate hike was on the table when the Fed meets this month.

Yellen told an audience that "gradual increases in the federal funds rate will likely be appropriate in the months and years ahead: Those increases would keep the economy from significantly overheating, thereby sustaining the expansion and maintaining price stability."

Stockman, however, remained unimpressed.

"I see nothing to re-accelerate the economy or profits, and I see a huge mess, bloodbath, fiscal stalemate in Washington that will remove any of the stimulus that any of the traders are expecting from infrastructure and big tax cuts and all the rest," he added.

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