President-Elect Trump may have just unwittingly sowed an equity market draw-down
which will send even more protesters into the streets of America. Donald Trump's
stated economic policies are clearly pro-growth and if he manages to implement
his pro-business, anti-regulation agenda, in the longer term they have the
potential to surpass the bold and successful initiatives of Ronald Reagan.
However, in the near term he has already unknowingly just shot himself in the
foot.
To understand this we need to look at some charts from the FRED system which
we unearthed in trying to understand what the future presently entails for
corporate stock buybacks and dividend payouts. Shown in the chart below we
see how Corporate CEO / CFO's have increased their debt loads by historically
unprecedented levels of 20-30% Y-o-Y since just after the GFC (Great Financial
Crisis). You will notice that in the last year that rate of growth has gone
negative.
The next chart we found astounding regarding the degree of correlation of the
above corporate debt growth (primarily being used for buybacks and dividend
payouts) compared to the movement of the S&P 500 on a Quarterly Y-o-Y
change basis. There can be little doubt about what has been sustaining the
artificial levels of US equity markets!
You will also notice that recently this correlation has begun to falter, as
equities diverged staying positive from the falling rate of debt growth.
To put this into perspective our analysis indicated that corporate cashflows
(EBITDA) and debt levels had now reached a level where they were potentially
impacting corporate credit & lending ratings. As you would suspect, corporations
as a consequence have began to slow their rate of buybacks (shown below).
Swiss National Bank (A Likely Proxy) Temporarily to the Rescue
The question is; what allowed US equities to continuing rise? We sense this
can best be answered by showing how mysteriously, at the same time as the above
divergence, we witnessed the Swiss National Bank buying US stocks. The SNB
acquired to almost the exact level required to keep markets temporarily levitated. Obviously
nothing more than a coincidence and certainly not something that anyone might
suspect they could be potentially acting as a proxy for the US Federal Reserve
or US Treasury?
Enter President-Elect Donald Trump
But now we have a new President and the political pressures on the Federal
Reserve to keep markets from falling prior to the US Presidential
& Congressional election are over. Based on President-Elect Trump's campaign
rhetoric, Janet Yellen knows she is likely not to have her term renewed in
2018 and knows the Fed's historical independence may in fact be exposed.
IMMEDIATELY on Trump's victory we have witnessed A Global Bond debacle as
yields have shot skyward. Suddenly corporate borrowing has become even more
expensive and most importantly, perceived low-risk Treasury yields are now
the same or slightly higher than stock yields! Investors have been forced
to buy US equity stocks (other than the FANGs & NOSH) for the dividends
in a yield hungry world controlled by policies of Financial Repression.
Courtesy of ZeroHedge.com
This dramatic post election development may be the "spanner" in the corporate
stock buyback program that many have been anticipated, but were unsure what
exactly would trigger it.
Trump's aggressive $1
Trillion Infrastructure Plan may have released the "inflation genie" based
on his vowed spending and tax cut programs.
Bottom Line
With bond prices having removed $1 Trillion globally the expectations and
pressures are now for the equity market correlation to more closely align with
bond values.
Courtesy of ZeroHedge.com
Expect the correction of an over-valued US Equity market to be summarily and
quickly blamed by the liberal media on the new Trump Administration before
it has even taken office.
