What’s holding up the U.S. stock market? The facile answer is the Federal Reserve (“the Fed has our back,” “don’t fight the Fed,” etc.) but this doesn’t actually describe the mechanisms in play or the consequences of a market that levitates ever higher on the promise of more Fed money-for-nothing injected into the diseased veins of the financial system.
As Gordon T. Long and I discuss in our latest half-hour video program, What’s Holding the Market Up? (34 minutes), the primary prop under stock valuations are corporate buybacks, which total in the trillions of dollars since the 2008-09 Global Financial Meltdown and the Fed’s “rescue of the rich,” which continues to this day.
Rather than risk capital in productive investments, U.S. corporations have borrowed trillions of dollars and used the cash to buy back their own shares. The Fed’s suppression of interest rates has incentivized stock buybacks in several ways:
It’s not just a movie, it’s real life: the Fed-Farce awakens. Now that the Federal Reserve has finally voted to “restore order to the galaxy” with a tiny .25% rate increase, the true measure of our travesty of a mockery of a sham economy–in a phrase, The Fed-Farce–has been revealed.
Here’s a snapshot of the Fed meeting, “restoring order to the galaxy” in a show of unanimous galactic-scale hubris:
As long as corporations continue borrowing money to buy back their own stocks and the yen keeps dropping, the SPX will continue lofting higher.
Why is the S&P 500 rising, even as valuations are getting stretched, profit growth is declining and sales are stagnant? Two charts explain it all. Here is a chart showing the S&P 500 companies that have been buying back their own stocks (often by borrowing cheap money to do so) and companies that haven’t bought back hundreds of billions of dollars in their own stock.
The unmanipulated sector rose a bit, while the stock buyback crowd soared:
What I see as extremes that must necessarily end badly, others see as mere extensions of recently successful policies and trends.
A long-time reader recently chastised me for using too many maybe’s in my forecasts. The criticism is valid, as “on the other hand” slips all too easily from qualifying a position to rinsing it of meaning.
That said, given that we’re in uncharted waters, maybe’s become prudent and certainty becomes extremely dangerous.