Paul Craig Roberts: How Long Can The Fed Hold Off The Inevitable?

“those who understood it was a Ponzi scheme but did not realize the corruption that has beset the Federal Reserve and the central bank’s…”

by Paul Craig Roberts via PaulCraigRoberts.org

How Long Can The Federal Reserve Stave Off the Inevitable?

When are America’s global corporations and Wall Street going to sit down with President Trump and explain to him that his trade war is not with China but with them. The biggest chunk of America’s trade deficit with China is the offshored production of America’s global corporations. When the corporations bring the products that they produce in China to the US consumer market, the products are classified as imports from China.

Six years ago when I was writing The Failure of Laissez Faire Capitalism, I concluded on the evidence that half of US imports from China consist of the offshored production of US corporations. Offshoring is a substantial benefit to US corporations because of much lower labor and compliance costs. Profits, executive bonuses, and shareholders’ capital gains receive a large boost from offshoring. The costs of these benefits for a few fall on the many—the former American employees who formerly had a middle class income and expectations for their children.

In my book, I cited evidence that during the first decade of the 21st century “the US lost 54,621 factories, and manufacturing employment fell by 5 million employees. Over the decade, the number of larger factories (those employing 1,000 or more employees) declined by 40 percent. US factories employing 500-1,000 workers declined by 44 percent; those employing between 250-500 workers declined by 37 percent, and those employing between 100-250 workers shrunk by 30 percent. These losses are net of new start-ups. Not all the losses are due to offshoring. Some are the result of business failures” (p. 100).

In other words, to put it in the most simple and clear terms, millions of Americans lost their middle class jobs not because China played unfairly, but because American corporations betrayed the American people and exported their jobs. “Making America great again” means dealing with these corporations, not with China. When Trump learns this, assuming anyone will tell him, will he back off China and take on the American global corporations?

The loss of middle class jobs has had a dire effect on the hopes and expectations of Americans, on the American economy, on the finances of cities and states and, thereby, on their ability to meet pension obligations and provide public services, and on the tax base for Social Security and Medicare, thus threatening these important elements of the American consensus. In short, the greedy corporate elite have benefitted themselves at enormous cost to the American people and to the economic and social stability of the United States.

The job loss from offshoring also has had a huge and dire impact on Federal Reserve policy. With the decline in income growth, the US economy stalled. The Federal Reserve under Alan Greenspan substituted an expansion in consumer credit for the missing growth in consumer income in order to maintain aggregate consumer demand. Instead of wage increases, Greenspan relied on an increase in consumer debt to fuel the economy.

The credit expansion and consequent rise in real estate prices, together with the deregulation of the banking system, especially the repeal of the Glass-Steagall Act, produced the real estate bubble and the fraud and mortgage-backed derivatives that gave us the 2007-08 financial crash.

The Federal Reserve responded to the crash not by bailing out consumer debt but by bailing out the debt of its only constituency—the big banks. The Federal Reserve let little banks fail and be bought up by the big ones, thus further increasing financial concentration. The multi-trillion dollar increase in the Federal Reserve’s balance sheet was entirely for the benefit of a handful of large banks. Never before in history had an agency of the US government acted so decisively in behalf only of the ownership class.

The way the Federal Reserve saved the irresponsible large banks, which should have failed and have been broken up, was to raise the prices of troubled assets on the banks’ books by lowering interest rates. To be clear, interest rates and bond prices move in opposite directions. When interest rates are lowered by the Federal Reserve, which it achieves by purchasing debt instruments, the prices of bonds rise. As the various debt risks move together, lower interest rates raise the prices of all debt instruments, even troubled ones. Raising the prices of debt instruments produced solvent balance sheets for the big banks.

To achieve its aim, the Federal Reserve had to lower the interest rates to zero, which even the low reported inflation reduced to negative interest rates. These low rates had disastrous consequences. On the one hand low interest rates caused all sorts of speculations. On the other low interest rates deprived retirees of interest income on their retirement savings, forcing them to draw down capital, thus reducing accumulated wealth among the 90 percent. The under-reported inflation rate also denied retirees Social Security cost-of-living adjustments, forcing them to spend retirement capital.

The low interest rates also encouraged corporate boards to borrow money in order to buy back the corporation’s stock, thus raising its price and, thereby, the bonuses and stock options of executives and board members and the capital gains of shareholders. In other words, corporations indebted themselves for the short-term benefit of executives and owners. Companies that refused to participate in this scam were threatened by Wall Street with takeovers.

Consequently today the combination of offshoring and Federal Reserve policy has left us a situation in which every aspect of the economy is indebted—consumers, government at all levels, and businesses. A recent Federal Reserve study concluded that Americans are so indebted and so poor that 41 percent of the American population cannot raise $400 without borrowing from family and friends or selling personal possessions.

A country whose population is this indebted has no consumer market. Without a consumer market there is no economic growth, other than the false orchestrated figures produced by the US government by under counting the inflation rate and the unemployment rate.

Without economic growth, consumers, businesses, state, local, and federal governments cannot service their debts and meet their obligations.

The Federal Reserve has learned that it can keep afloat the Ponzi scheme that is the US economy by printing money with which to support financial asset prices. The alleged rises in interest rates by the Federal Reserve are not real interest rates rises. Even the under-reported inflation rate is higher than the interest rate increases, with the result that the real interest rate falls. If the stock market tries to sell off, before much damage can be done the Federal Reserve steps in and purchases S&P futures, thus driving up stock prices.

Normally so much money creation by the Federal Reserve, especially in conjunction with such a high debt level of the US government and also state and local governments, consumers, and businesses, would cause a falling US dollar exchange rate. Why hasn’t this happened?

For three reasons. One is that the central banks of the other three reserve currencies—the Japanese central bank, the European central bank, and the Bank of England—also print money. Their Quantitative Easing, which still continues, offsets the dollars created by the Federal Reserve and keeps the US dollar from depreciating.

A second reason is that when suspicion of the dollar’s worth sends up the gold price, the Federal Reserve or its bullion banks short gold futures with naked contracts. This drives down the gold price. There are numerous columns on my website by myself and Dave Kranzler proving this to be the case. There is no doubt about it.

The third reason is that money managers, individuals, pension funds, everyone and all the rest had rather make money than not. Therefore, they go along with the Ponzi scheme. The people who did not benefit from the Ponzi scheme of the past decade are those who understood it was a Ponzi scheme but did not realize the corruption that has beset the Federal Reserve and the central bank’s ability and willingness to continue to feed the Ponzi scheme.

As I have explained previously, the Ponzi scheme falls apart when it becomes impossible to continue to support the dollar as burdened as the dollar is by debt levels and abundance of dollars that could be dumped on the exchange markets.

This is why Washington is determined to retain its hegemony. It is Washington’s hegemony over Japan, Europe, and the UK that protects the American Ponzi scheme. The moment one of these central banks ceases to support the dollar, the others would follow, and the Ponzi scheme would unravel. If the prices of US debt and stocks were reduced to their real values, the United States would no longer have a place in the ranks of world powers.

The implication is that war, and not economic reform, is America’s most likely future.

In a subsequent column I hope to explain why neither US political party has the awareness and capability to deal with real problems.

Subprime Chaos: The Auto Bubble's Bursting And The Data Is Worse Than 2008

Last week, used car prices had their biggest drop since 2009 – directly after the financial market meltdown of 2008.

Right now, the auto market is showing signs of incredible worry.

Delinquent subprime auto-loans are higher than they were in the last recession.

Look for yourself...

What’s interesting – and worrisome – is that consumers are defaulting on subprime auto loans when the economy is reportedly doing ‘very well’.

Like I wrote last week – there are cracks under the economy’s foundation. And it’s like a bucket of cold water in the face of the mainstream financial media that’s pushing the ‘growth’ story.

We must ask ourselves – “if things are going so well, why are subprime loan delinquencies at a 22-year high?”

I can’t help but feel a bit nostalgic. This was the same situation that led up to the 2008 housing crisis. . .

First, there was massive growth in mortgage-backed securities and mortgage debt. Then, the Federal Reserve – led by Alan Greenspan – began aggressively raising rates after years of low rates. Soon after, subprime loans started blowing up – which trickled into the prime loans. And eventually, everything was in chaos.

Using the often-ignored Austrian Business Cycle Theory (ABCT) – coined by the little-known but brilliant economist Ludwig Von Mises – I am blaming the Fed for all this.

Thanks to the Fed, a near decade of zero-interest rate policies (ZIRP) and three rounds of Quantitative Easing (which totaled over $3.8 trillion in printed money) – the consumers became hooked on cheap auto loans. . .

Their policies made the entire system fragile by getting consumers addicted to cheap debt through their easy money.

They then began tightening credit – crippling the borrowers.

Think of it this way – imagine you’re addicted to alcohol. And your bartender keeps giving you cheap drinks each night for months. Eventually, from drinking way more than you should’ve been able to afford, you now have a very high tolerance.

But suddenly – the bartender becomes strict and starts giving you less booze. He tells you, “sorry but no more free alcohol for you.” Problem is, you wouldn’t have drank so much if you had to pay full price for it.

Now you’re left with awful withdrawals – scrounging together all the extra money you can just to pay for a drink. But the only way you can really afford to feel better is if he starts giving out free drinks again or you painfully detox.

Just look at the collapse in auto-loan growth since 2015 – when the Fed began tightening with their end of QE and talk of rate hikes...

Clearly the higher rates had an impact on new auto loans.

But a bigger – and more pressing – problem is that the Fed’s short-term interest rate hikes are making these current subprime auto loans unserviceable. The borrowers are having a harder time paying more interest for an asset that depreciates 15% the moment they take it off the lot.

Clearly, affordability is becoming a problem. . .

As I learned from Ludwig Von Mises and the other brilliant Austrian economists – the Fed created a bubble in auto-loans by keeping rates low and printing trillions. And now they’re going to blow the whole thing up with their rate hikes.

Just like taking the free drinks away. . .

I expect delinquent subprime loans to keep hitting new highs. And I expect the ‘growth’ story the pundits keep pushing down our throats will fade.

Because even if the auto-loan industry and general economy hasn’t rolled over yet, each new Fed rate hike pushes us one step closer to the edge.

0.25% at a time. . .

So, with our Macro-Fragility Index (MFI) alarmingly high in the auto sector – I’m going to spend time looking for opportunities here.

History shows us that when things start their descent into collapse – the subprime market is the first to get hit.

Food for thought. . .

Authored by Adem Tumerkan via Palisade Research

"What Is The Magic Number?": Wall Street Answers The Most Important Question For Investors Today

In its latest Fund Manager Survey, Bank of America asked what may be the most important questions for investors today: "What level of US 10y Treasury yields would cause you to rotate from equities into bonds?"

That level, which Bank of America's Michael Hartnett has repeatedly dubbed the "magic number", rose from 3.5% last month to 3.6% in the May survey, and represents that weighted mid-point of the responses by the 223 survey participants, who manage a total of $643BN .

As a reminder, last week Hartnett explained why he agrees with the FMS response, saying "it should not be a surprise if reallocation starts before yields get to 3.5%. Indeed, as we breached 3% the following asset classes all suggested that the 3-3.5% range would become “painful” if not accompanied by much stronger economic data."  As the BofA CIO further added, banks, homebuilding stocks, US dollar, EM, yield curve all suggested 3% on the 10-year Treasury yield was the "magic number."

• Lower US bank stocks: rise in rates was shifting from a “good” rise to a “bad” rise (financials underperformed utilities by 1250bps since mid-March)
• Lower US homebuilding stocks: a good lead indicator of interest rates, homebuilding stocks are saying the Fed is making a “policy mistake”

Then, yesterday, as 10Y yields broke out to fresh post-Taper Tantrum highs, rising above 3.05% and as high as 3.09%, a level not seen since 2011, Bill Gross tweeted that "the Economy can't support yields higher than 3.25% for 30s and 10s, nor 3% for 5s. Continuing hibernating bond bear market is best forecast."

And, as we also showed yesterday, demonstrating the recent sharp drop in loan demand across the board as a result of higher rates despite far easier lending conditions, and affecting everything from C&I loans...

... to residential mortgages...

... to consumer loans...

... Gross is right, only the Fed hasn't quite realized yet that US interest rates are now at a level that leads to not only lack of loan growth, but outright deleveraging, loan destruction and thus, deflation.

To underscore his point, Gross also noted the technicals and said that "30yr Tsy long-term downward yield trendline for the past 3 decades now at  3.22%, only ~4bps higher than today's yield." Asking rhetorically, "will 3.22% be broken to upside?" his answer was no.

Then, overnight, another bond titan - and Gross' former employer - Pimco also agreed with the "magic number" consensus, when its co-head of Asia-Pacific, Robert Mead, said that 10Y yields will move in a 3% to 3.5% range for the rest of the year as the Federal Reserve continues raising interest rates.

Addressing the second longest US economic expansion, and second oldest business cycle in US history...

... Mead stated the obvious to the Bloomberg Invest summit in Sydney: "we do think this hiking cycle is quite well advanced." adding that while "the backdrop of the U.S. economy has been pretty strong and going for a long time. At some point we will find these high yields will become an impediment for growth.”

As the charts showing negative loan demand above suggest, that point is now.

Mead then said that the higher rates rise, the more the record short overhang will, or at least should, be unwound: “Nothing is pound-the-table cheap,” but rising yields mean investors can gradually reduce their underweight bond positions, Mead told the Bloomberg conference.

Confirming this observations, Mark Delaney - the chief investment officer of AustralianSuper Pty, the nation’s largest pension fund - said he was thinking about buying bonds again after selling almost all holdings last year.

"We sold almost all our bonds in 2017, but now they’re a percent higher - a percent plus, a bit higher - we’re starting to think about whether or not we should start closing those short positions," Delaney told the Australian summit.

It's not just positioning however, and the inevitable short squeeze: according to Jeffrey Johnson, head of Asia-Pacific fixed income at Vanguard Australia, inflation will remain anchored due to the global secular deflationary tailwinds: 

Powerful forces such as demographics, globalization and technology should keep a cap on yields, Johnson told the summit.

Putting that in numbers, Johnson said that the fair value for U.S. 10-year yields would be 3% to 3.25%. And as evidence, he added that Vanguard has seen evidence of investors getting back into fixed income to take advantage of the higher yields.

Ultimately, it will be up to the pension funds of the world, most of whom are significantly underinvested in fixed income having rushed into equities in recent years, to be the marginal buyer that pushes rates decidedly lower, especially if the Fed indeed plans to hike at least another 3 more times this year, in which case if Wall Street is right, it would be the Fed itself that inverts the yield curve.

But there's time before that happens. For immediate next steps, just keep an eye on the value of the US Dollar: should the recent torrid rally finally fizzle, that will be the time to go long bonds. Fonte: qui

The ‘Dumb Money’ Is Helping The ‘Smart Money’ Exit The Stock Market Before It Crashes

After a euphoric rally in a market preparing to crash, all the Joe Sixpacks, mom, pop and family dogs opened trading accounts. Here’s how it ends…

by David Haggith of The Great Recession Blog

Bloomberg this week ran a story telling us how the smart money gets out of the stock market when it hits its all-time peak and how the dumb money helps the smart money out. Only they didn’t know that was what they were writing. It typically happens this way:

At the end of a deliriously euphoric market rally when the market is preparing to crash, all the Joe Sixpacks, mom and pop and the family dog open trading accounts and try to chase the tail of market action. Many throw in their entire retirement funds, pawn the dog’s collar and take out loans on credit cards to buy in as much as they can. By buying in late, they help provide a smooth exit for the smart money. At least for some of it. It is the little guys, tough from hard labor, whose muscles are employed to push the money bags of the rich to the top of the mountain from which the little guys are allowed to jump off.

That appears to be happening right now. While retail investment (at the mom-and-pop level) in stocks mushroomed last quarter, household debt also mushroomed, jumping at an annual rate of 5.2%, which is the fastest pace since …. 2007. (There is that comparison we keep finding in data everywhere.) Consumer credit rose at an annualized rate of 7.8%. Consumer credit-card debt just topped out at over a trillion dollars, and savings at the same time bottomed out to one of the lowest rates in history.

It’s hard to say with certainty what all that debt all those savings were used for, but the change in both certainly matches the pace of growth in retail stock investments. (The S&P 500 rose 6.1% last quarter, with much of the new money pouring in from retail investors.) With no hard connection in those numbers at my immediate disposal, it would be a fallacy to claim them as proof that people are taking out credit card debt and depleting their savings to buy stocks, but that correlation certainly matches up with anecdotal accounts that many stock brokers are reporting at the street level.

All Trumped up and nowhere to go

Certainly the roar of mom and pop into retail stock investing is happening now …. big time, big league, in a hyuuuge way with the Donald’s supporters being the ones who are rushing headlong in to provide the gold-bricked exit path for the 1%:

As 2017’s roaring bull market gives way to a markedly choppier 2018, the buzz among Wall Street stock touts is that the best of the Trump Trade has passed…. Don’t try to tell that to the true believers in San Angelo, Texas. Or Covington, Louisiana. Or Sioux Falls, South Dakota. They’re sure this rally has just begun, and they’re sure they know why. “I hear it every day,” said Jimmy Freeman, a financial adviser at Edward Jones … east of the booming Permian Basin shale oil fields. “The market’s going up because of Trump….”

Across middle America, in the towns big and small that voted overwhelmingly for Donald Trump, his most ardent, and financially comfortable, backers are opening stock-market accounts or beefing up existing ones, according to interviews with more than a dozen advisers and brokers. They were spurred on by a stream of presidential tweets crowing about, and taking credit for, the gains throughout 2017 and they remain undaunted now as the rally sputters and the tweeting dissipates. (Bloomberg)

Yes, the Trumpettes — by which I mean the little guys who supported the Donald because they were stomped all over by Bush and Obama — are now flooding into the market to provide the essential other side of the trade needed in every market sell-off — buyers. It’s a market maxim that you cannot have a market sell-off without a lot of buyers willing to leap for falling prices.

…From what financial advisers in conservative areas are seeing, there is a Trump-minted rush. Clients … at Concho Investment Advisors in San Angelo “are now more inclined to invest into riskier assets like the stock market” … and many cite the president. Todd Neff, for one, has put $400,000 into stocks since Trump’s election. Before, he wasn’t much of an investor, basically topping out his out his 401(k) and dabbling in shares here and there. A sheep breeder and small-business owner in San Angelo, he said he would have “dropped back big time” if Hillary Clinton had won. Consumers’ confidence in the stock market soared to a record high in January before fading in February…. Among Trump’s fans, though, trust in the firebrand politician as a stock-market bulwark easily endured the selloff

Share buybacks surging

That’s one side of how the smart money gets out at the last minute and winds up richer than ever: they are helped by the good-meaning people who hope to get a last piece of the action — this time from the champion they elected and believe in. The other side is orchestrated by the executive rats who flee their own sinking, stinking corporate stocks by using the company money to buy back their own shares. That’s the bigger action. And that appears to be happening on steroids right now, too.

As the stock market roars toward its triumphant collapse, you hear the big-name analysts talking about how stocks are not overvalued because “earnings are doing great. They’ve never been better.” What they usually mean is earnings per share, and what is really doing better in that fraction is the denominator. The number of shares is shrinking as corporate boards make decisions to drain the company coffers in order to buy back shares … often from themselves … sometimes even in special deals offered only to themselves off the general market (as I’ve reported in the past).

Buybacks have a double edge of cutting power. First, they cut the number of shares over which earnings are divided, making “earnings” look stronger; but secondly, they create their own market demand. Increasing demand = increasing price:

Over the past decade, there has been no corporate instrument of mistruth more powerful than buybacks, an issue we have dissected in these pages for years. U.S. firms have spent roughly $4 trillion on buybacks since 2009, making corporations the biggest single source of demand for U.S. shares…. Buybacks have “accounted for +40% of the total earnings-per-share growth since 2009, and an astounding +72% of the earnings growth since 2012. (13D Research)

What better plan could there be for the smart money, which owns the major shares, to exit the market without crashing the value of their own shares than by creating demand from within the company that the smart money governs? Just vote to use company money to buy shares in numbers equal to or greater than all those the major investors wish to sell (major investors being the ones who sit on the board or hold executive positions).

Thanks to Trump’s new tax law encouraging repatriation of cash that has been stored overseas, companies are doing exactly what I and many others warned they would do with their one-time tax savings on this mother load. No, they are not using it to invest in their own companies as proponents of the plan promised, and as I predicted they would NOT do. They are using their overseas cash stockpiles to buy back stocks.

Buybacks are already on record pace — $171 billion worth have been announced so far in 2018, more than double the amount disclosed by mid-February 2017. If a tax-bill-fueled buyback bonanza can effectively “buy the dips”, market tranquility can be protected, preventing a large-scale unwinding.

In fact, the first six weeks of announced buybacks this year already were higher than the entirety of 2009. JP Morgan projects that, at this rate, S&P 500 companies will by back a record $800 billion in stocks in 2018. JP noted that large accelerations in buybacks like this tend to happen during market selloffs and for that reason says that buybacks could go higher than $800 billion this year if they rise to the level seen right at the end of the last business cycle where companies returned more than 100% of profits to shareholders.

These enormous buybacks are the only action saving the market right now from crashing. The Trump cash cache came through just in time to offset the initial stages of the Fed’s quantitative tightening. Of course, that was also my basis for predicting that the market would likely plunge in January but that this wouldn’t be the big collapse … not yet.

That collapse, I maintained, will come in the summer when much of the cash repatriation is winding down, just as the Fed is stepping its own unwind up to third gear. At about that point this year, the Fed’s reduction of its balance sheet and the effect of rising interest rates could outstrip the pace of buybacks and other benefits the market gets from the new tax plan. So, that’s the basis for my giving that timing.

Analysts estimate $200 billion in buybacks from cash repatriation and $100 billion in buybacks funded by tax savings. I see the $450 billion in Fed bond sell-offs as playing against that flood of investments by raising interest on bonds. If JP Morgan’s prediction of $800 billion in buybacks is right, then I’ll be wrong about the Fed taking the wind out of the stock market and the general economy that soon; but I think rising interest will turn back the flood tide of buybacks later in the year by stripping away their easy funding, so that they wind up not happening in the big numbers that are being projected. (That is a dynamic that I think those who are promising the buybacks are not seeing.)

David Stockman sees it and projects the current buyback rate would hit even higher than JP does — at a record $1 trillion this year — except that, like me, Stockman doesn’t see the current rate as being sustainable.

To be sure, we don’t believe they will ever get there because the bond “yield shock” is going to be sobering up corporate boards right soon. (TalkMarkets)

I agree. As you can deduct from the following graph, much of the buyback action during the so-called “recovery” period was financed from debt (largely corporate bonds) prior to the Trump’s tax changes:

Buybacks happen the most right at the market’s peak in order to delay the sell off (so the smart money can get out), but then they fall off quickly with the market once all hope is gone.

The drainage of the bulk of Trump’s tax benefits that is now running straight into the buyback pit (as I predicted it would) is already causing a backlash among politicians who are just now learning what nonsense the talk was of using that money to develop businesses, build new plants, develop new products and … the biggest lie of all, boost wages. Some of us pay attention to history —  and learn from it — so knew from the beginning that those promises were completely bogus.

Since passage, total buybacks announced exceed worker bonuses and raises by roughly 63x.

Yes, the dollars spent on buybacks amount to only 6,300% more than the bonuses and wage boosts that have been announced. And who benefits from all of that?

The smart money.

The CEOs and other top managers who received much of their compensation over the years in stock options and the board members and other shareholders in the company. But, hey, if you as a laborer got your one-time, thousand-dollar bonus, what is to complain about, right? That ain’t crumbs.

Well, not to you maybe, but it is mere dust under the table compared to what the shareholders are getting. God rest their merry souls … hopefully for a very long time.

The nice thing (for them) is they are also able to use that repatriated money and their corporate tax savings to bail themselves out of all that debt they used in preceding years when interest was cheap to drive their stock prices up:

According to an IMF estimate from last spring: “Large U.S. corporations have experienced a negative net equity issuance of $3 trillion since 2009 due to share buybacks.” U.S. corporate debt — piled on by both strong and weak hands — sits at an all-time high of $13.7 trillion.

If they want to. Or they can just jump ship and leave the corporation buried in debt. What do they care if they sell their shares first?

Meanwhile, the tax bill will disproportionately benefit the strong hands — for one, the richest 10% of companies control 80% of the $1 trillion offshore cash hoard.

Uh huh.

Since 2009, the largest equity drawdowns — August 2015, January to February 2016, and two weeks ago — all occurred in or right after the share buyback blackout period. Even less surprising, corporations stepped in after February 5, 2018, bought the dip, and suppressed volatility. Goldman Sachs’ unit that executes share buybacks for clients had its busiest week ever, seeing roughly 4.5x its average daily volume over 2017.

Uh huh.

That’s where I said the vast majority of the repatriated money would go.

Share buybacks are a major contributor to the low volatility regime because a large price insensitive buyer is always ready to purchase the market on weakness.

Those companies that don’t have the free cash that the top 10% of companies have will not be able to keep inflating their stock values against downward market forces, and will be the first to start sliding away, taking more and more of the market with them over time.

Said Moody’s in the article referenced above,

High quality companies will benefit but low-quality levered companies could get hit hard.

The highly levered companies that used debt to do buybacks during the “recovery,” are most likely not the companies with cash stockpiles overseas that can now be repatriated cheaply. Now, that interest rates are rising, they will get caught in a debt trap and hammered badly.

So, here we go over the Niagara falls of debt … again

Because assets are bundled, it may take dangerously long to identify a toxic asset. And once toxicity is identified, the average investor may not be able to differentiate between healthy and infected ETFs. (A similar problem exacerbated market volatility during the subprime mortgage crisis a decade ago.) As Noah Smith writes, this could create a liquidity crisis: “Liquidity in the ETF market might suddenly dry up, as everyone tries to figure out which ETFs have lots of junk and which ones don’t.”

Been there, done that, learned nothing.

Did you know that buybacks used to be illegal in the United States because regulators feared corporate boards would use them to manipulate the prices of their own shares?

Go figure, huh? What a dumb idea! Nobody would do that, so let’s deregulate it!

That buyback regulation that was removed is now an area of law Democrats are focusing in on for the mid-term election cycle. If the law reverts to ending buybacks, the low-volatility regime ends with it. But don’t worry. If the Dem’s don’t get elected in sufficient numbers to reinstate that regulation, rising interest rates will accomplish the job anyway as soon as that hoard of repatriated cash runs out. You can only dam against the tide so long before market forces have their way.

The exodus is underway

So, that’s how the smart money gets out of the stock market, leaving their ultimately devalued stocks in the hands of the dumb money.

As the Financial Times humorously noted,

Flush with cash after the Republican tax cuts, Cisco announced on Wednesday that it was building gleaming factories across the US, employing hundreds of thousands of workers to make the latest cutting-edge routers…. Sorry, of course not. The money is going back to shareholders.

Yeah. That’s the way the real world works these days. Sorry wage earners. You get the crumbs after all.

Finally, having finished and published this article, I just read the following verification:

In a week in which the S&P did not suffer one down day despite the “Cohn Gone” scare and Trump’s trade war announcement, US stocks suffered “massive” – in Reuters’ words – outflows, according to BofA analysts … which found that investors rushed into government bonds and other safer assets. Yet while investors bailed on stocks, someone else was clearly buying, as seen by the S&P’s weekly performance.  How is this possible? Two words – stock buybacks. (Zero Hedge)

As noted by Reuters, the outflows from stocks were massive yet prices held. Massive outflows mean big investors are fleeing for safety. How do they do that without driving down the stocks they are rapidly selling off? Use the company money to buy themselves out at a price they will love. Easily done with all that repatriated cash flowing in.

In fact,

The risk-off mood drove investors to put money into the safest of venues, money market funds, whose assets jumped to $2.9 trillion, the highest level since 2010. Gold also saw inflows of $0.4 billion.

Meanwhile, mom and pop aren’t in on the board-room discussions, so they see prices holding stable and keep their retirement funds fully invested with no awareness that a mass exodus is even happening.

Fonte: qui