Buenos dias, muchachos…..We have already looked at how “hemmed in” the US Fed is on the question of rates. We have also seen the insane cynicism of quoted corporations using Zirp to get cheap loans, and then repackage them as “dividends” to the shareholders. We have also recorded for some years now the lower volumes in play in many US market sectors….especially stocks. We have observed stubbornly low growth in real wage-spending power. And last but not least, we have tracked long periods of astonishing low volatility.
What can it all mean? All is now revealed….
The big stock buy-back bonanza-scam horror
Here are some numbers of which you may not be aware.
2018 is not yet two months old, but already $171 billion in US quoted company stock buyback announcements have been made. Yes, it is a record. To be more precise, it is DOUBLE the ten year average for this period.
The trend is nothing new: non-financial corporations – via share buybacks – have been the main buyers of shares in the U.S. since 2009, having repurchased a net US$3.3 trillion worth of US equities since 2009, according to the Fed. (Households and institutions, by contrast, have sold $2.1 trillion)
But Jan/Feb this year has seen a sudden acceleration: from $520 to $670 billion as the year estimate, 2018 over 2017.
The IMF estimates that, since spring 2017, “large U.S. corporations have experienced a negative net equity issuance of $3 trillion since 2009 due to share buybacks.” As a result, total U.S. corporate debt stands at $13.7 trillion. This too is a record.
22% of U.S. corporations are at risk of default if interest rates rise. That’s nearly a quarter.
And here’s the political killer: stock buybacks now represent 63 times the corporate money invested in employee rises, bonuses and personal development.
What they did & why it will inevitably end
This is what has happened since 2009:
- The more of your own quoted stock you control, the more you can minimise volatility.
- The more you add to shareholder dividends by borrowing, the more the stock will rise
- The rises plus the low volatility start a solid Bull run. But in reality – like everything in the financial markets – it is a chimera, a rainbow, a mirage, a 3-card trick.
- The bonus for the directors of these large tax-evading globalists has been more bucks for them, and none for the workforce….a further transfer of power from labour to capital.
- But the trick can only work with ultra-low ‘Zirp’ rates of borrowing.
Ironically, President Trump’s Tax Bill must, in the very short term, make the situation worse. Alarmingly, this doesn’t seem to have occurred to EU Greek debt fraudster and now Special Advisor to the President, Gary Cohn of Goldman Sachs. Last November, an editor at The Wall Street Journal asked a roomful of Bigwigs, “If the Tax Reform Bill goes through, do you plan to increase investment — your company’s investment, capital investment?”
“Why aren’t all the other hands up?” asked a wan Cohn.
Now we know: as long as more billions come in from corporate tax cuts, the rate of stock buybacks will accelerate….hence the Jan/Feb data showing a big expected rise.
But this won’t happen if rates rise. Or put another way, if it does because the milking machine can’t be stopped, a quarter of US quoted companies will be up the Junction by the Autumn.
And that, of course, will be down to the Fed. Um, er, hmm….right then.
This is the potential scenario: the Fed stays Bullish on rate rises, and at the next two meetings – March 21st and May 1st – rate hikes occur of equal size to those we’ve already had.
The usual White House/Wall Street whirl of spin says tally-ho, we’re gung-ho and the markets pump up some more.
And then on June 12th – or August 31st – the Fed’s belief in its own community’s BS adds another rate rise.
Holidays are over. So is the Game. Corporations cut back on stock purchases, other wisely directional money begins a sell-off. The result is massive, rapid demand dilution.
Enter panic, stage Left.