Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan
Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009) and "The
Coming Collapse of the Municipal Bond Market" (Aucontrarian.com, 2009)
Conventional wisdom, as expressed
through the noisiest channels (Federal Reserve officials' daily speeches, Wall
Street TV experts), believes Quantitative Easing (QE) has been of negligible
effect. As such, this opinion expresses little concern, indeed, little
interest, in reversing the inflation of the Federal Reserve's balance sheet,
which has increased in size from $900 billion in 2007 to $4.5 trillion today.
Conventional wisdom will state "it's only accounting." As every
student of elementary accounting knows, a balance sheet has two sides: assets
and liabilities. The Federal Reserve composition will be discussed below.
Conventional wisdom
describes stock market gains as the fruit of great profits, and does not
acknowledge the trillion dollars of QE in 2013 as boosting markets.
Conventional wisdom
expresses confidence in the economy, since, in its view, the stock market is an
expression of the economy.
Conventional wisdom
believes QE has not done much of anything. The Fed's "liquidity" sits
"inertly" as "reserves" on the banking system's balance
sheet. This representation reminds Doug Noland, author of the weekly Credit
Bubble Bulletin at the Prudent Bear website, of conventional wisdom (circa
1994-2004) that held the explosion of Fannie Mae and Freddie Mac's balance
sheets were inconsequential because "only banks create credit".
In 1990, the combined
balance sheets of Fannie and Freddie held $132 billion of assets: 5.6% of the
single-family house market. In April 2003 (that month, alone), Fannie (alone)
bought $139 billion of mortgages. By 2003, the two agencies' balance sheets
held 23% of the U.S. home mortgage market. This interference pushed up house
prices, created collateral, home-equity lines of credit (HELOC), boosted the
stock market, Home Depot's profits, the employment of plumbers, electricians,
and realtors. It inflated prices and instigated activity across and within the economy.
Most of this busyness wilted when mortgage inductees failed the draft board.
The German army raised the age of induction to 40- or 45-years-old by 1945.
Whatever the age, the product could no more make a long march than late-stage
mortgagees made their payments.
At that point, the
temporary and illusionary portion of the economy receded, along with the
temporary and illusionary asset prices, including stocks, houses, and bonds of
such little merit, we were sure these derangements would not reappear in our
lifetimes.
Doug Noland disagrees
with the experts. He covers the ground in his March 28, 2014, Credit Bubble
Bulletin. "It's only accounting" only tells us the
"level" of reserves, but nothing about the "flows."
A transaction takes
place in which the (a) Fed purchases securities from (b) financial
institutions. The liabilities "by design are held by financial
institutions that have a clearing relationship with the Fed, largely
U.S.-operated financial institutions."
This purchase is a
"deposit" in the banking system. Quoting Noland: "[T]he Fed
"credits" accounts with new purchasing power as it consummates
purchases of Treasury and MBS securities in the marketplace. Essentially, the
Fed creates new electronic liabilities ('IOUs') that provide immediate
liquidity/purchasing power ('money') to the seller of securities."
Graham Towers,
Governor of the Bank of Canada from 1934 to 1954, described how modern, central
banking-created "money" is no more than accounting: "Banks
create money. That is what they are for...The manufacturing process to make
money consists of making an entry in a book. That is all. Each and every time a
Bank makes a loan... new Bank credit is created - brand new money."
The asset side of the
Fed's balance sheet holds the securities it has bought (and about 12 ounces of
gold). The liability side of the Fed's balance sheet acknowledges the dollars
it has issued. The dollars are redeemable - each, into another dollar. This is
not terribly interesting, but, is where the whirlwind of economic activity
inspired by Fannie's and Freddie's expansion helps explain the financial and
economic distortions driven by the Federal Reserve's expanding balance sheet.
After the QE
operation described above, the Fed's dollar liabilities are matched by dollar
assets on financial-institution balance sheets. Both have risen. Noland writes:
"[T]he 'level' of 'reserves' informs us nothing about the 'flows' - flows
that could be in the hundreds of billions or more on an intra-day basis (who
knows?). And it is these transactional 'flows' that have profound impacts on
market dynamics and pricing."
An example (from
Noland): "[T]he Fed [purchases] Treasuries and MBS from a rather large
"bond" fund ['that has a clearing relationship with the Fed,"
one that is among, as Noland writes, the "largely U.S.-operated financial
institutions' - FJS] suffering redemptions. In this case, Fed liquidity would
then be used to fund bond investor outflows that find their way to, say, a
major U.S. equity ETF." This is one example of how Fed
"liquidity" (a) forestalls market disruptions that (b) will
eventually be much worse when the Fed sneezes.
Chase van der Rhoer
wrote in the April 2, 2014, edition of Bloomberg Economics Briefs:
"[Federal Reserve Chairman Janet] Yellen presides over a Fed whose asset
purchases currently equate to 42 Baring Brothers or 15 Long-Term Capital
Management bailouts - $55 billion - each and every month." The April 2,
2014, Wall Street Journal published "Pimco Fund Sees March
Outflow." We learned: "Bill Gross hasn't yet stemmed the flow out of
the world's largest bond fund. Investors pulled $3.1 billion from Mr. Gross's
Pimco Total Return Fund in March, marking the 11th consecutive month
of outflows at the marquee fund for Pacific Management Group."
The March withdrawal
approximates the amount of money that was needed to bail out Long-Term Capital
Management. Jeffrey Gundlach, head of DoubleLine Capital LP, thinks such
support operations are long in the touth: "The junk-bond bonanza
that's doubled the market to almost $2 trillion since the credit crisis has
Jeffrey Gundlach... trimming his allocations... 'They've squeezed all the
toothpaste out of the tube,' the bond manager said... 'There is interest-rate
risk that's just being masked by fund flows holding up the prices of junk
bonds." (Bloomberg, March 19, 2014) Such observations are becoming more
common: "Michael Hintze, chief executive and founder of CQS, one of
Europe's largest hedge funds, has argued [the result] of too loose central
banks have forced too much money into the same assets." Hintze warned:
"Everyone is thinking the same and being driven into the same trade....It
is not healthy to have a 'rigged' market."
So, what happens to
these, brand new, hot-off-the-keypad, dollar liabilities of the Fed?
"The ETF then uses this liquidity to buy stocks." The dollars, assets
to the "the sellers of the liquidity [those who sold their positions in
the ETF - FJS] can buy other securities (or things)".
These dollars can now
head in a million directions, another reason the Federal Reserve and
conventional wisdom pretense of the Fed being able to target anything, other
than the operation described above, is nonsense. Noland gives another
example: "Fed liquidity accommodating a rotation of hedge fund positions
from bonds to equities. In this example, a hedge fund might sell an
(underperforming) 10-year Treasury note to purchase an outperforming Facebook
stock."
In the next step, these Federal Reserve liabilities, the Fed's
"liquidity" that conventional wisdom so admires, might wind up in the
hands of "Mark Zuckerberg [if he is the seller of the stock - FJS]."
Next "a chunk of his sales proceeds will boost California and federal
income tax receipts (quickly spent by both governments). Zuckerberg's employees
can use stock sale proceeds to buy homes and luxury automobiles (and planes!).
And Zuckerberg can use booming Facebook stock as currency to buy companies in a
hotly contested industry acquisition boom."
Distortions engulf the economy, including companies. Some lose their heads. If
they are in New York, they behave like the Yankees and hire heavy-hitters: 'Our
customers already have everything they really truly need,' says Marigay McKee,
Saks's [Fifth Avenue] new president. 'We really have to offer rarer, more
unique things.'.... Ms. McKee, an energetic 48-year-old imported in January
from London's Harrods, seems not to know the meaning of hesitation. She has
pressed Saks buyers to add more emerging designers-a group whose inexperience
and often-shaky finances scare off many retailers..... In a meeting last week,
Ms. McKee asked the company's financial planners to relax their budgeting
systems to give more leeway to buyers in the field, who she says must be able
to buy fashion based on 'passion' and instinct. 'What I was telling them,' she
says, 'is we have to buy from the gut.'"
The market
capitalization of Facebook stock is (on April 1, 2014) $160 billion. The
company is trading at a price-to-earnings ratio of 102:1. In March, Facebook
used this liquidity (its common stock as money, or currency, or scrip) to buy
What'sApp for $19 billion (of Facebook stock) and $2 billion for Occulus Rift.
Analysts project
revenues that support such acquisitions. The analysts are at brokerage houses
that want the investment banking business. (Looking back to such conflicts in
2001: An email that highlights the conflict of interest when the same firm
(Merrill Lynch, in this case) prods analysts to boost "price targets"
while bidding for the underwriting business: Kirsten Campbell, Merrill analyst,
sent an e-mail to Henry Blodget, Merrill rock-star analyst: "I don't want
to be a whore for f-king mgmt.If 2-2 means that we are putting half of Merrill
retail into this stockbecause [Merrill is] out accumulating it then I don't
think that's the right thing to do....")
Analysts at UBS
increased their price target of Facebook to $90, according to the March 11,
2014, Financial Times. The headline should have been good for $10 a
share: "Facebook Lifted by Optimism on Ability to Charge More for
Ads." That shares have fallen from an intraday high of $72.59 on that date
to $62.62 at the April 1, 2014, close, is a warning of no floor below.
The Financial
Times noted that eight out of ten analysts rated Facebook as a
"buy," the projected growth in advertising revenue sounding like
1999. (UBS: "Our... channel checks suggest that the pricing strength... up
92 per cent year-on-year price-per-ad, has carried over into early 2014 and is
likely sustainable for longer than our previous estimates....")
Doug Noland writes in
his March 28, 2014, analysis: "QE1-3 liquidity has ensured that only more
and bigger companies from Silicon Valley to China to 'Hollywood' provide a
virtually limitless supply of smartphones, computers, tablets and electronic
gadgets, along with a plethora of downloadable content and services. Throughout
the markets and the real economy, it's all leading to unusual price
instabilities (which the Fed is expected to counter - of course, with only more
QE)."
From the March 7,
2014, Wall Street Journal: "In a scramble reminiscent of the 1990s
Internet heyday, companies are going public at the fastest pace in years, hoping
to take advantage of booming share prices and investor demand while they last.
In the first two months of this year, 42 companies went public in the U.S.,
raising $8.3 billion and tying 2007 for the busiest start of a year for initial
public offerings since 2000, when there were 77 in the period, according to
Dealogic." There is no stopping them: "[I]nvestors are bidding more
aggressively for newly minted shares this year than they have in more than a
decade, paying a median 14.5 times annual sales, compared with six times in
2007...."
The volume is telling
but not definitive. Later in the article, William Bowmer, Head of Americas
technology-stock offerings at Barclays PLC observed the surge in interest
"is bringing in lots of companies out of the woodwork that couldn't have
gone public in the past.... Morgan Stanley analysts wrote in a recent research
note: 'In many meetings we've had investors, really starting last fall... the
word 'bubble' or 'year 1999' has been referenced as relevant.'"
On March 25, 2014, a
headline alone could have been out of The Short-Sellers Handbook:
"Why Trade Bonds When You Can Trade Ads?" The Wall Street Journal
introduced Ted Yang. Two years ago, he launched a start-up in the fast-growing
world of digital ad trading, after 15 years in the financial industry. The Journal
quoted the budding billionaire: "'We're talking about a market that shares
a lot of the same characteristics as the financial markets.' It is looking to
apply investment banking tools and philosophies to online advertising."
This brings to mind
"hollow swaps." As with today, the money (i.e. Federal Reserve dollar
liabilities) poured into the New Economy. As long as the gadget could not be
understood, the price went up. Companies built far more capacity and structure
than a sane world could digest. The same is true today.
In March 2001, Andy
Grove, Intel's wunderkind at its founding, reflected: "I don't
expect the end demand to snap back ....For a number of years [the
high-technology industry] had huge momentum - technology buying and manufacturing
had a tremendous investment cycle going. I think people loaded up with not just
physical inventory but got ahead of themselves in capacity building and network
capacity building. We built in an overcapacity of all physical
things."
Companies found
themselves in an unstable position they had obviously never contemplated. How
did they extract themselves? By calling their investment banks. Yang, you will
recall, is "looking to apply investment banking tools and philosophies to
online advertising."
Enron called J.P.
Morgan and Citigroup. The banks swapped cash flows with Enron at the end of
each quarter. Enron booked this profit on its income statement. Early in the
next quarter, Enron swapped that flow back to the bank.
According to Yang:
"Nowadays ad space, particularly websites, is auctioned on computerized
exchanges." This has the odor of "hollow swaps." After the
Internet moonshots dropped into Grove's sunless sea, hollow swaps were used to
trade unused broadband fiber. The overinvestment in broadband fiber (the cable
used to connect houses and businesses with the Internet) had grown to absurd
proportions. Enron and other companies came up with the idea of trading unused
fiber, known as "dark fiber." (Unlike the producing fiber which was
"lit.") Enron sold $500 million of dark fiber to Qwest, which sold
$500 million to Enron. Nothing changed hands and the fiber remained just as
dark as before. Schematically, Federal Reserve open-market operations with
financial institutions look similar.
In time, we may
observe a comeuppance for the most hallowed firms of all. Jay Cooke in 1873;
Goldman Sachs Trading Corporation in 1929; Drexel, Burnham, Lambert in 1990. Fortune
rated Enron the most innovative company six years in a row. According to
the Journal of Applied Corporate Finance: "Enron's business model
differs in a very critical way from the other energy companies, that
traditionally invest heavily in fixed assets. Enron focuses on leveraging its
investments in human capital." Correct.
Finance grows larger
and faster towards the end of a blowoff. The Internet silliness came a cropper
in the spring of 2000. The telecommunications wave carried mutual fund managers
into the fall, and the optical networking mania finally ran out of energy in
the early winter. All came apart by January of 2001.
Bloomberg reported on
March 28, 2014: "The megarich are dominating U.S. megadeals. Seven of the
15 U.S. takeover bids worth more than $10 billion since January 2013 were
initiated by firms founded and controlled by one of the 200 wealthiest men in
the world." Andreessen Horowitz, a Silicon Valley venture capital firm,
closed a $1.5 billion fund in March 2014, its fourth fund of that size."
The percentage of corporate buyouts that use equity as currency (i.e. Federal
Reserve liabilities that run wild) has never been higher - 67%.
Doug Noland observed:
"[W]ith 2013/early-2014 too reminiscent of Nasdaq 1999, one should not
understate the role QE3 has played in stoking another historic Bubble and 'arms
race' throughout the broadly-defined 'technology' sector. The mad dash for
hits, clicks, likes, advertising dollars, and revenues throughout 'social
media,' the 'cloud,' 3D printing, solar, etc. even surpasses 1999 - whether the
bulls are willing to admit as much or not. At this point, it's a full-fledged
mania (again). It's ironic - and I believe really important. The Bernanke
Doctrine holds that the Fed's printing press can basically guarantee a rising
general price level. Meanwhile, QE1-3 liquidity has ensured that only more and
bigger companies from Silicon Valley to China to 'Hollywood' provide a
virtually limitless supply of smartphones, computers, tablets and electronic
gadgets, along with a plethora of downloadable content and services. Throughout
the markets and the real economy, it's all leading to unusual price
instabilities (which the Fed is expected to counter - of course, with only more
QE)."
Noland thinks a
comparison to 1929 is more apt. The 1920's Federal Reserve believed a stable
price level (that is, consumer prices remaining still: a zero-precent inflation
rate). Today, it aims to "basically guarantee a rising general price
level."
John Maynard Keynes,
a paid up New-Economy believer ("The market is very appealing, and prices
are low.... We will not have any more crashes in our time."), wrote later
he had been wrong: "Anyone who looked only at the index of prices would
see no reason to suspect any material degree of inflation, while
anyone who looked only at the total volume of bank credit and the prices of
common stocks would have been convinced of the presence of inflation actual or
impending...." (A Treatise on Money, 1930)
For those who are selling "hits, clicks,
likes, and advertising dollars" another artifact of the 1920s was the role
of credit. Between 1923 and 1929, worker's wages rose 11%. Corporate profits
were up 62% and dividends paid to shareholders increased 65%. There came a
point when credit swamped consumers who had been swept up in the euphoria, but
whose salaries had not kept up.
The same is true today. It takes no intelligence to see, even if one does not
read Census Bureau data, that incomes have been falling for years. House and
HELOC credit kept the machine purring up to 2007. Since then, student loan,
auto and truck financing, credit cards, and mortgages have propped consumer
buying.
Prices have been rising at a ferocious rate, no matter what the government
says. From an engaging chart on David Stockman's Contra Corner website: between
January 2000 and March 2014, a barrel of oil increased 314% in price. Fuel oil
per gallon: +242%; Gallon of gasoline: +176%; Dozen eggs: +106%; Annual
health-care spending per capita: +104%; Ground beef per pound: +96%; Movie
ticket: +95%; Average private-college tuition: +68%; Electricity per kilowatt:
+59%; New car: +59%; Coffee per pound: 52%; Natural gas per therm.: +51%;
Average home price: +50%; Postage stamp: +49%; Average monthly rent: +48%; CPI:
+39%; PCE deflator (the Fed's measure, as it continues to tell us "inflation
is not high enough"): +31%.
Everywhere the average person turns there has been no relief. Their interest
income has been confiscated. Even with the flagrant attempt to turn
savers into speculators, public participation in the stock market is low. Maybe
people do not trust it or maybe they have no money left. As for the fun and
games pouring out of Silicon Valley, that, too, gets more expensive:
"Wireless Bills go up and stay up" "Competition in the U.S.
wireless market has increased over the past year, but so have Americans'
overall phone bills.... [B]illings for the industries' lucrative postpaid
[billed monthly - FJS] customers are continuing to rise. Average monthly
revenue per postpaid customer across the industry rose from $55.80 in the first
quarter of 2010 to $61.50 in the fourth quarter of 2013."
The only surprise is
how slowly prices are rising. Uncle Obama is doing his best to prevent a
consumer collapse. In the President's recent budget, 70% of all money spent by
the federal government will be direct payments to individuals, an all-time
record. This, as NewsInvestors.com said is: "a massive money transfer
machine: taking $2.6 trillion from some and handing it to others."
There is a limit.
Yields will rise.
The Bank for International Settlements (BIS) reports that global debt has risen
40% since mid-2007, from $70 trillion to $100 trillion. Marketable U.S.
government debt outstanding has popped from $4.5 trillion to $12 trillion.
Global corporate issuance has increased more than $21 trillion. In direct
contradiction to the history of the world, more quantity has produced better
quality: Bond yields, across the spectrum, have fallen from 4.8% to 2%. In an
open market, bond investors handicap their purchases according to a calculated
risk. This is a rigged market, though. The rising quantity has produced worse
quality, but central planners disguise that fact.
The issuance
recalls 2003 through 2007, as the Financial Times reported on March 20, 2014:
"Second-lien corporate loans, a type of debt structure popular in the
build-up to the financial crisis, are staging a comeback as a thirst for
higher-yielding assets continues to drive investors into the riskier corners of
U.S. credit market. Sales of second lien-loans, which are subordinated to the
first-lien loans generally issued by companies, total $8.5 billion this year,
more than double the amount in the same period of 2013, according to Standard
& Poor's data. The resurgence follows a rebound of other financing tools
that were popular in the years up to 2008, including dividend deals,
payment-in-kind notes and 'cov lite loans,' which contain less lender
protection."
In fact, the
situation is worse than 2007. There is no backstop behind the central banks.
Federal Reserve dollar liabilities will rise until they do not. Investors will
demand Federal Reserve assets (dollars) and redeem shares, for instance,
"from a rather large bond fund" at a speed for which we can thank
Facebook and Twitter.
The situation is also
worse because excesses that peaked in 2007 are now coming due. On
March 25, 2014, the Financial Times reported: "Maturing 'HELOC'
Loans Pose Default Risk for Banks." Citing Federal Reserve stress tests,
the paper warns "a looming repayment wave" of "HELOCs and
junior-lien debt that was lent against people's homes" are being repriced.
Many HELOCs (and related contrivances) "were structured as 10-year
interest-only loans that could be drawn on in." The problem is coming due
now since "originations started to swell 10 years ago."
It was 10 years ago,
on February 23, 2004, when Federal Reserve Chairman Alan Greenspan told
Americans to buy adjustable-rate mortgages. ("[M]any homeowners might have
saved tens of thousands of dollars had they held adjustable-rate mortgages
rather than fixed-rate mortgages over the past decade.") Adjustable-rate
mortgages went through the roof and by June 2005, the median California
residential house price cost $542,720.
Alas, the U.S.
government has learned no lessons from the abandoned housing projects in
California. It continues to spend more than its revenue. In February 2014,
Treasury receipts (mostly taxes) were $144 billion. The Treasury spent $337
billion. Tax collections covered 42% of expenditures. This was an unusually
poor month, unless revenues have collapsed. The Federal Reserve's Quantitative
Easing policy buys most of the Treasury debt issues. This permits the U.S.
government to pay its bills, including transfer payments. One federal program pays
cell-phone bills for those who cannot afford them. The click-and-clack
advertising revenue projections at Facebook (we can be sure) do not address a
contingency in which Treasury rates rise to 5% or to 8%. There is no instance,
in the history of the world, no matter how battered and maimed, when the
markets did not assert their provenance. The "creat[ion of] new electronic
liabilities ("IOUs") that provide immediate liquidity/purchasing
power" will swoon.
This discussion has
been of tech stuff, but the corporate suffering will be broad and deep. In
Wal-Mart's 10-K released in March 2014, the retailer noted the risk to revenues
and profits should the government reduce supplemental food programs. Note:
food. This, after five years of the central-banking experiment. Yet, each
quarter, the commissars see green shoots. Any minute now, the QE injections
will boost the world's economy to some pseudo-scientific "escape
velocity."
In the movie Ninotchka
(1939), a Parisian (Melvyn Douglas), encounters the Russian agent, Ninotchka
(Greta Garbo).
Ninotchka: I have heard of the arrogant male in
capitalistic society. It is having a superior earning power that makes you that
way.
Leon: A Russian! I love Russians! Comrade. I've been fascinated
by your Five-Year Plan for the last fifteen years.
Ninotchka: Your type will soon be extinct.
Their assumption of
revival is preposterous. We read otherwise: "Only 11% of U.S. long-term
unemployed find jobs in any one year." "Since 2008, the number of
Americans who call themselves middle class has fallen by nearly a fifth,
according to a survey in January by the Pew Research Center, from 53% to 44%.
Forty percent now identify as either lower-middle or lower class compared with
just 25% in February 2008."
They are sinking,
thanks to our policy makers errors, or, perhaps not.
Also from Ninotchka:
When Ninotchka is
asked about the latest news from the Soviet Union: "The last mass trials
have been a great success. There are going to be fewer but better
Russians."
From the April
4, 2014, Wall Street Journal: "For decades, Americans' purchases of
basics like laundry soap and toothpaste roughly kept pace with the rate of
growth in the overall economy. But that rule of thumb no longer applies, which
is bad news for billion-dollar brands like Tide and Colgate."
One might think this
is worse news for Google, Twitter, and Facebook, should they not only produce
fewer sales from the advertising they sell, but lose the base of
gadget-subscribers who (1) cannot afford an i-thing and a "postpaid"
monthly bill, but also (2) resent their straightened circumstances, cannot put
their finger on why, but can exact mild redress by not transferring their
sinking income to Silicon Valley or Hollywood or the bloated, money-hungry
sports industry. (Opening day tickets for bleacher seats at Fenway Park (Boston
Red Sox) this year are $40.00. In 1974 they cost $1.25.)
In the April 4 story,
the Journal quotes Jim Craigie, CEO of Church & Dwight - twice. The
two statements show the bind companies find themselves. First, the owner of Arm
& Hammer brands (and many others) states: "Price wars don't help
growth and are not good for the industry." Mr. Craigie notes later:
"It's still a tough time for the average American. There's nothing wrong
with the industry. You just have an economy that's stagnant and people are having
to trade down." How does a CEO who discovers his customers cannot afford
baking soda make money? How will he satisfy shareholders when the $2.6 trillion
of annual transfer payments to potential Church & Dwight customers shrinks?
And yet, after five
years, the portion of the economy that might inject some "escape
velocity" (capital spending) is shriveling: "The latest data on
business spending remains sluggish....The numbers suggest [nondefense capital
goods contributed] contributed almost nothing to first quarter [GDP}
growth....New orders for core capital goods fell 1.3% in February, the second
large decline in three months. Demand for machinery, communications equipment
and electronics, appliances and parts declined in January and
February...."
Goldman Sachs
expects the downward trend to continue. In the words of Andy
Lees (February 14, 2014): "(Goldman) no
longer expects a recovery in US or developed market capex. Aggregate capex to
sales have fallen in Europe from 10.7% in 2000 to 5.2% today, while US capex to
sales has fallen from 8.8% to 5%. It expects these ratios to fall further to
4.7% and 4% respectively by 2017."
The combination of
stock-option mania and the negligible returns on investment a company gets when
interest rates are close to zero will prolong current practices. There is
little incentive for capital investment. The liquidation process has been
discussed here before: Investment-grade companies issued over $1 trillion of
debt in 2013. Share buybacks, in 2013, accounted for 75% of the increase in
S&P 500 earnings per share (fewer shares). In the third quarter of 2013
alone, companies bought back $128 billion of shares: the most for any quarter
since 2007. Buybacks and dividends for the third quarter were $207 billion,
also the highest in any quarter since 2007. The higher the profits per share
and dividend payouts (per share), the share price trades higher, then higher.
During the 1923 to 1929 period discussed above (worker's wages rising 11%.
corporate profits up 62%, and dividends paid to shareholders increasing 65%),
there were zero net manufacturing jobs added to the U.S. economy. In fact, this
is true of the period from 1919 to 1929. This may have been a victory of
productivity, which is most certainly not the reason today. Cheap assets that
remain orphans are the precious metals, the real stuff and the common stocks.