How Corporations Have Been Masking Economic Reality

Take a close look and try to figure out what’s wrong with this picture

This is a chart of the S&P 500 from 2008 to the present. Its story is clear: the market plummeted during the financial crisis of 2008 and began recovering in 2009, upon which a great bull market emerged, one that continues to this day. The market may have been more or less flat in 2015, but it regained steam the following year--an election year--after which the Trump Rally propelled stocks to even greater heights.

The chart illustrates an unshakeable confidence in the American economy. A collective expression of faith in the nation’s potential to achieve prosperity.  We’re headed toward great times, with great returns, and ever-increasing economic growth. Everyone’s investing, and as a result, the stock market has soared to levels never seen before. The chart clearly show this, and most importantly, the majority of financial experts and media agrees.

Take it from Fed Chair Janet Yellen:

"Would I say there will never, ever be another financial crisis? ... Probably that would be going too far. But I do think we're much safer, and I hope that it will not be in our lifetimes, and I don't believe it will be."

The health of the US markets and economy is in great shape. And we can be reasonably optimistic in expecting it to remain this way, possibly throughout our “lifetime.”

Then we come across statements such as this one from Credit Suisse strategist, Andrew Garthwaite:

“One of the major features of the US equity market since the low in 2009 is that the US corporate sector has bought 18% of market cap, while institutions have sold 7% of market cap.”

This means that the tremendous rise you see in the stock market has only “ONE BUYER”--the companies themselves BUYING BACK THEIR OWN STOCK.

Where’s the massive public confidence--the one that our chart clearly shows? The truth is, that it isn’t there. It was never there. What you see is a mirage. And the majority of the American public bought the illusion.

Here’s a more realistic picture:

Despite the massive buybacks, note that “households” in general have been hesitant to risk any money in the markets--perhaps they never truly recovered from the traumatic losses sustained during the 2008 financial crisis. And as far as institutions go, they appear to have been selling at a fierce pace.

Here’s another angle (from Real Investment Advice):

To be clear, we are witnessing an unprecedented moment in the US equities markets: the greatest corporate buy-back spree in history.

It gets worse. The majority of these corporate stock purchases from 2009 to the present are DEBT-FUNDED.

So what exactly is going on...and why? Stock buybacks are one of the four horsemen summoned by corporations to create the illusion of profitability while obscuring the underlying weakness of the overall economy. The other three are labor suppression, wage reduction, and productivity increases.

So when businesses don’t do well--meaning that they haven’t generated any real or significant revenue--company execs can still benefit from the profitability illusion created by stock buybacks. This sheds a new light on the old saying “the market is always right.” In this case, the “real” market is the non-transparent dynamics underlying market prices, whereas the prices we see--the “market” as we know it--has been transformed into an “alternative fact.”

In the end, such tricks will reach an endpoint.

There’s a limit to the costs a business can cut, wages a business can reduce or suppress, and employees a business can terminate. Eventually, the hollow space between real revenue and illusory profits will collapse under the weight of its own deceptive mechanisms. It’s too bad that a large majority of Americans are not in a position to see this collapse before it happens. For those who are already largely invested in gold and silver, such an implosion would be immaterial.

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