Wishes Granted…Unfortunately

El clavo que sobresale siempre recibe un martillazo
(The nail that sticks out always gets hit by a hammer)

It will be said that the historic disparity between the real economy, which is slipping fast, and the fantastically expensive market, is the Fed’s fault. Would that it were true. We could have run the suits out of the country long ago,  letting reality prevail, causing a small market adjustment instead of facing an inevitable ferocious crash. Trouble is, it’s our fault. We the people asked for it. No market hiccups, please. Find a way to keep it going, we say.

Makes me think of the demand a newly retired lady recently made of her advisor: “I spent a lifetime eating hamburger, young man. Now I want you to see to it that I eat steak!”

Sure. The advisor is stuck with what the market will give him. The Fed, on the other hand, can print money. So, the advisor and his client may bitch about money printing, but anything that might cause a pause in the elevation of the lady’s retirement account is unacceptable. Fed members are bureaucrats. They like their jobs. No way are they going to piss this lady off, so they print money and hold interest rates down in order to pump up the economy.

But the exercise fails because demand is weak. You can’t get people to buy if they don’t feel they can. Consumers are loaded with debt, fatigued, and, per the polls, glum about the future. Jobs that pay a living wage are not available, and they know it.

So, instead of boosting economic activity, which could improve corporate earnings, producing tangible, lasting growth for the market, the cheap money is being borrowed by corporate America so that Corporate CEOs, in an audacious act of self dealing, can have the company buy back stock at expensive prices in order to keep the move going and be able to exercise their stock options profitably.

Nothing new about this ruse. It produces a bounce for a year or two, but eventually the real economy weighs too heavily, and a crash follows. The CEOs retire to their homes in the Hamptons and unwitting retirees and 401k investors get squadoosh.

S&P companies have spent more than $2 trillion on buybacks since 2009. By any measure, this is a mania, which has now gone stratospheric, with announced buybacks of $104.3 billion in planned purchases in February, running at almost twice the $55 billion bought a year earlier (TrimTabs Investment Research) and an average of more than $5 billion of buybacks each day.

Eventually, buybacks will reveal the reality: companies cannot find ways to invest in their companies to produce significant profits. That’s when the real economy puts the kibosh on the market.

 Apple, by the way, is the winner in the buyback sweepstakes. It is true that they have been extremely profitable, but I fail to see the value of borrowing money to buy their own expensive stock.

The FOMC gave the market some comfort a couple of hours ago. Using her typical bureaucratspeak, Fed Chairperson Janet Yellen gave assurances that she wasn’t going to not raise rates unless she maybe had to, and even then, she might, or might not.

The retired lady and her advisor can rest easy for another month. And that is what she and every other investor wants, even if it’s phony. So, don’t blame the Fed members for wanting to keep their jobs.

Cheers,

Rod

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