Deflation Smackdown: Bernanke?s Madcap Money Printing Fails to Boost Inflation | Global Research
So, why are stocks at all-time highs when earnings and revenues are headed sideways?
Ahhh, that’s the secret of the new financial alchemy, wherein equities soar to new heights on ho-hum economic data, historic levels of margin debt, massive stock buybacks and an ocean of central bank liquidity. Earnings and revenues are a thing of the past. Get a load of this:
“Aggregate Buybacks: Dollar-value share repurchases amounted to $93.8 billion over the fourth quarter and $384.3 billion for 2012 … Dollar-value buybacks amounted to 79.1% of free cash flow on a trailing twelve month basis, which is the largest value since Q3 2008.” (“Corporate Share Buybacks: How timely are they?”, Mish’s Global Economic Trend Analysis)
Companies are buying back their own shares hand-over-fist; nearly $400 billion in 2012 alone. Is it any wonder why stocks have surpassed their 2007 peak? The buyback craze is entirely attributable to Fed policy. Corporate kingpins clearly believe that Bernanke will continue to support the markets with as much liquidity as needed to keep equities in the stratosphere. This is also why margin debt has exploded in the last 12 months. Check this out from this week’s Wall Street Journal:
“Investors ramped up their borrowing against brokerage accounts in April, taking margin debt to its highest-ever level. Investors borrowed $384.4 billion against their investments in April, a 1.3% gain from the previous month, and a 29% rise from the same month last year, according to the New York Stock Exchange.
That exceeds the record high of $381.4 billion in debt held against investments, known as margin debt, from June 2007.
The rising level of debt is seen as a measure of investor confidence, as investors are more willing to take out debt against investments when shares are rising.” (NYSE: Margin Debt Hits Record High in April”, Wall Street Journal)
So, there’s your 15% year-to-date stock-market rally in a nutshell: $400 billion in stock buybacks, $400 billion in margin debt, and a whopping $85 billion per month subsidy via Bernanke’s bond buying bonanza. Is it any wonder why stocks, bonds, CLOs, CDOs, MBSs, junk bonds, and every other dodgy financial asset is pumped up like birthday piñata while the real economy is still stuck in the doldrums?
The fact is, there’s no transmission mechanism to move liquidity from the financial system to the economy, mainly because households and consumers refuse to borrow. As the credit report suggests, most people are not feeling flush enough to resume their pre-Lehman borrowing binge. In fact, a number of surveys indicate that most people will never return to their old ways. Those days are over. Unfortunately, less borrowing means higher unemployment, anemic business investment and sluggish growth. Monetary policy alone cannot fix this situation because–as British economist John Maynard Keynes noted more than 60 years ago–monetary easing in a liquidity trap is like “pushing on a string”. It doesn’t increase demand, lower unemployment or even boost inflation because the money doesn’t get to the people who will spend it and increase economic activity. That’s why QE has been such a spectacular flop, because adding to base money (bank reserves) has not increased the amount of money in circulation. All it’s done is pump up asset prices which merely makes rich speculators even richer.
