Who would have believed when the Great Financial Crisis was winding down five years ago that the feather merchants, unrepentant as always and eager to make up for lost time, would be right back at it, erecting an even bigger, shakier house of cards? A recent Wall Street Journal headline offers a hint of their success so far: “With Rates Low, Firms Near Borrowing Record.” Fresh evidence that epic malinvestment is more robust than ever would be scary enough by itself. But to make matters worse, Wall Street and the news media, if not the American public, continue to treat the architects of the next crash with fawning deference and respect, hanging on Janet Yellen’s every word as though the patronizing blather she spews each week to “manage our expectations” were somehow of great import.
Same Old Story
To underscore the point, the stock market erupted into the usual, embarrassing histrionics on Friday when the Fed’s latest double-speak hit the tape. This, despite the fact that the Open Market Committee’s latest minutes did little more than reaffirm that the Masters of the Universe plan only to perpetuate the status quo. Interest rates will have to be raised at some point , we were reminded yet again, but the economy is not quite strong enough for it yet.
Give the Fed and its shiftless, benighted lackeys in the news media credit for holding our attention with such drivel for as long as they have. It is a tricky balancing act, to be sure, since it requires the banksters to aggressively promote the lie that the economy is just a few widgets shy of a boom even though a majority of Americans polled on the subject believe the Great Recession never ended. The reason this stark paradox can persist is not difficult to fathom: The stock market is trading at record highs. How bad can things be, many are surely wondering, if stocks seem only to move higher and higher?
Buybacks Drive Bull
Never mind that a key component of the market’s strength lies in the steady buyback of shares by exchange-listed companies themselves. And why not? They are able to borrow nearly unlimited sums for this purpose at little or no cost, and therefore to keep earnings on an upward slope without the effort it would take to actually grow a business. This ostensibly virtuous cycle is Wall Street’s version of a perpetual motion machine, and it has spawned bond-related borrowing in the U.S. approaching $1 trillion so far this year. Keep in mind that U.S. corporations are already running a cash surplus of $2 trillion, so it’s not as though they need the money. The result is malinvestment on a colossal scale, and if you think it will end other than badly, then I’ve got a bridge to sell you. Hard-core deflationist that I am, my prediction is that the $2 trillion will never be “actualized.” Ultimately, it is a daisy change of hyper-leveraged collateral, no more a repository of wealth than inflated home values.
Do not imagine for a moment that when this gargantuan gas-bag of economic hubris springs a leak and starts to deflate, the exalted Ms. Yellen and her cronies will know what to do. They are just winging it now, hoping to muddle along until the economy picks up steam. How much more mileage can they get from that story? In the meantime, the spinmeisters can count on a credulous, economically ignorant press to fail to notice that the recovery at this point amounts to a fading boom in car leases and the creation of 200,000 McJobs each month. If that translates to GDP growth of 2.9%, the latest revised figure for Q2, then perhaps the genuine prosperity that has eluded American workers for decades really is no more than a couple of widgets away.
About Rick AckermanRick's professional background includes 12 years as a market maker on the floor of the Pacific Coast Exchange, three as an investigator with renowned San Francisco private eye Hal Lipset, seven as a reporter and newspaper editor, three as a columnist for the Sunday San Francisco Examiner, and two decades as a contributor to publications ranging from Barron’s to The Antiquarian Bookman to Fleet Street Letter and Utne Reader. His detailed strategies for stocks, options, and indexes have appeared since the early 1990s in Black Box Forecasts, a newsletter he founded that originally was geared to professional option traders.
