Since the financial crisis, central banks have injected trillions of dollars into the global economy. Their goal: to offset the natural downturn from slowing demographic trends and the crushing debt loads of the greatest credit bubble in history.
The Federal Reserve alone has created $4 trillion in QE since late 2008. They tried to solve an unprecedented debt crisis by adding more debt.
A toddler can tell you how backwards that is!
It’s killed investors looking for safe, long-term yields, while empowering Wall Street and hedge funds to lever up at low costs, and bet the casino on never-ending Fed stimulus.
Likewise, corporations buy back their own stocks to increase their earnings per share. It’s bogus accountant voodoo magic. It’s got nothing to do with fundamentals like growing your business. What a novel concept!
And yet, this is the world we live in today: a world in which governments buy back their own bonds, corporations buy back their own stocks, and Wall Street lives on speculation rather than real lending and investment.
As the Fed and other central banks bought trillions of their own bonds, they drove down interest rates to encourage more borrowing and spending.
But as it turns out, they were a little late to the party!
Consumers and businesses had already over-spent and over-borrowed in the great bubble boom leading up to the financial crisis.
As David Stockman puts it, we had already reached peak debt and excess capacity by 2007. Since we can’t go any higher, there’s just one direction left: building up financial bubbles, then deflation when they inevitably burst. It’s happened every single time in history!
I’m sure Lacy Hunt would agree! He has the most astute understanding of economic history of anyone I know. Both he and Stockman are speaking at our Irrational Economic Summit next week (which you can tune in via live streaming if you didn’t get a seat for the event).
But despite this peak debt, central banks can create more free money at no credit rating limitations. And the largest, most credit-worthy corporations can borrow at near-zero long-term rates easier than we mere consumers or small businesses can, especially after the great recession.
So, these corporations buy back their own stocks to increase earnings per share, even if such earnings are slowing. Even if earnings remain the same, if you reduce the numbers of shares outstanding – bam! More earnings per share! All it takes is rigging the system.
Stock options further incentivize the top executives to do this. If the stock goes up, they benefit, whether they expand the business or not.
What a sweet deal! Why didn’t we think of this before!?
Probably because, decades ago, this mal-practice was quasi-illegal. Corporations used to be prosecuted for this downright manipulation of their stock prices. But not now, when the Fed needs anything to keep this out-of-control bubble going and consumer and investor confidence rising so Humpty Dumpty doesn’t fall again.
These guys will look like idiots in a few years. They’ve bought their own stocks near the top of this bubble, and increased their debt burdens at the worst time in history. They’re not setting themselves up to win, as the challenging downturn ahead will quickly determine which companies survive, and which thrive – just like the 1930s.
The only time the Fed did QE to a substantial degree was during World War II when we had to raise a boatload of money to support a war during a time of rising inflation.
That was a true emergency effort worth taking the risk for. We won the war and moved into one of the greatest peace-time booms in history. We had booming demographics and demand. We paid the high debt ratios and QE off rapidly.
This is not such a worthy effort. And such a recovery won’t happen this time around. We have slowing demographics through the next several years, and a weaker boom to follow.
It was one thing to use QE for a short period to keep the banking system from overreacting and breaking down.
It’s another to make it a long-term policy that perverts everything our free market’s been based on since the Industrial Revolution – the economy won’t be able to rebalance as it’s meant to!
So, let’s add it up…
The Fed creates near $4 trillion in free money to stimulate the economy by buying their own bonds and pushing down longer term yields to near zero risk-free rates…
As a direct effect, corporations buy back their own stocks to the tune of $2.3 trillion…
The oil frackers and other high-risk ventures borrow money at super-low rates to take greater and greater risks for another $1 trillion mal-investment…
And in late August, the first 10% crash in stocks that bubbled up dramatically as a result of QE, sees over $2 trillion of wealth disappear in one week!
HALF of the QE lost in ONE WEEK. Think about that.
Does it sound like the Fed’s $4 trillion bet will pay off? Does this sound like a plan to you?
I think stocks alone will lose $7 to $10 trillion in the years ahead. Don’t even ask me about real estate and junk bonds.
And don’t get me going on China. What they’ve done is much, much worse. Talk about excessive debt and overinvestment!
Every credit and financial asset bubble in history has crashed. Some in a few years. Some a matter of months.
Get safe now on any bounces in the market. The great crash has already begun.
Harry
Follow me on Twitter @harrydentjr
