Authored by Lance Roberts via RealInvestmentAdvice.com,
If you’re a frequent reader, you’ve noticed that we often find fault with the one-sided manner in which the mainstream media reports on economic topics and the asset markets. Of chief concern to us, the cheerleading for the markets and the economy fails to provide readers with the other side of the story.
The fact is the economy and financial markets have been propelled higher since the financial crisis of 2008 by historically low interest rates, large fiscal deficits and a massive expansion of the Federal Reserve’s (Fed) balance sheet. We agree the monetary and fiscal policy prescriptions helped at the time, but we believe the ultimate consequences of these actions have yet to be felt.
We have written volumes on this topic. We thought it appropriate to share an article published by the “mainstream” Washington Post. The Buyback Economy and the Next Big Bubble, by Steven Pearlstein, was published June 10, 2018. This “must-read” article focuses on many of our concerns such as stock buybacks, high debt levels, ETF’s and, importantly, Pearlstein’s assertion that:
“Today’s economic boom is driven not by any great burst of innovation or growth in productivity.”
To be honest, we could not have written it better ourselves, and we thank Mr. Pearlstein for providing the other side of the story.
Following are a few important paragraphs from Mr. Pearlstein’s article. Beneath each of these are links to articles that elaborate on these points.
Buybacks/Productivity
“And once again, they are diverting capital from productive long-term investment to further inflate a financial bubble — this one in corporate stocks and bonds — that, when it bursts, will send the economy into another recession.”
“Welcome to the Buyback Economy. Today’s economic boom is driven not by any great burst of innovation or growth in productivity. Rather, it is driven by another round of financial engineering that converts equity into debt. It sacrifices future growth for present consumption. And it redistributes even more of the nation’s wealth to corporate executives, wealthy investors and Wall Street financiers.”
Short-Term Pain, Long-Term Gain
Corporate Debt
“The most significant and troubling aspect of this buyback boom, however, is that despite record corporate profits and cash flow, at least a third of the shares are being repurchased with borrowed money, bringing the corporate debt to an all-time high, not only in an absolute sense but also in relation to profits, assets and the overall size of the economy.”
The Coming Collision of Debt & Rates
How Corporate Debt Confirms the Everything Bubble
Debt
“For the bigger reality is that the global economy is now awash in debt — not just corporate debt but also record amounts of government debt, household debt and investor debt — at a time when interest rates are rising from historically low levels.”
Margin Debt and Valuations
“Finally, there is the debt that investors large and small take on to buy stocks, bonds, derivatives and other securities. That’s also at an all-time high.”
Courtesy Doug Short/Advisor Perspectives – Margin Debt and the Market
A Market Valuation that Defies Comparison
ETFs
“It’s hard to say what will cause this giant credit bubble to finally pop. A Turkish lira crisis. Oil prices topping $100 a barrel. A default on a large BBB bond. A rush to the exits by panicked ETF investors. Trying to figure out which is a fool’s errand. Pretending it won’t happen is folly.”
The Inconsistencies Lurking in ETFs – Judgement Awaits Part 2
Summary/Animated Video
We end with a short animated video that explains how debt has replaced the virtuous economic cycle. While simple, it will help put Mr. Pearlstein’s article and our links into perspective.
Just something to think about as you catch up on your weekend reading list.
Economy & Fed
- Why Immigration Is Pure Gravy For Finances by Caroline Baum via MarketWatch
- “Trade War” Sees Chinese Investments In US Plunge By 92% by Tyler Durden via ZeroHedge
- Is The Fed Rethinking It’s Balance Sheet Unwind by Mike Shedlock via The Maven
- The Phony Labor Shortage by Jeffrey Snider via Alhambra Partners
- America’s Debt Dependence Makes It An Easy Target by Brandon Smith via Alt-Market
- If You Like The Economy, You’re Republican by Ben Casselman & Jim Tankersley via NYT
- Economy Is NOT An Engine by IBD
- How Tariffs Could Sink The Market by Paul Whitfield via IBD
- Why Heads Are Exploding At The Fed by Peter Morici via MarketWatch
- Unhappy With China, Trump Takes Anger Out On U.S. by John Tamny via RCM
- The Real Cost Of A Trade War by Mukhisa Kituyi via Project Syndicate
- Universal Basic Income, What’s The Plural Of Apocolypse – by Wayne Crews via Forbes
- Will A Trade War Derail The Economy? by James Picerno via Capital Spectator
Markets
- The Greatest Short Squeeze In History by Tyler Durden via ZeroHedge
- Jim Mellon: This The Start Of A Major Correction by Shawn Langlois via MarketWatch
- Markets Ignore Rise Of Global Earnings Recession by Adem Tumerkan via Palisade-Research
- 5-Reasons To Own Gold by Simon Constable via Forbes
- What Walgreens May Mean For The Dow by Mark DeCambre via MarketWatch
- Active Managers Go “All In”…Again by Dana Lyons via The Lyons Share
- Implicit Dangers Of Passive Investing by Derek Bergen via Value Expectations
- The #1 Rule Of Investing by Charlie Bilello via Pension Partners
- Visualizing The Longest Bull Markets In History by Jeff Desjardins via Visual Capitalist
- The Trouble With Being A Bear by Brian Maher via The Daily Reckoning
- Investors Fret A Trade War, But Stay Invested by Peter Eavis via NYT
- Yes, This Bull Market Will End by Jared Dillian via MarketWatch
Most Read On RIA
- The Myth Of Buy And Hold Investing – Part III by L. Roberts, M. Lebowitz & J. Coumarianos
- The Drums Of “Trade” War by Lance Roberts
- Risk Happens Fast by Doug Kass
- Q1-Earnings Review & The Risk To Estimates by Lance Roberts
- Is Your Target Date Fund To Risky? by John Coumarianos
- How To Protect Your Senior Parents From Scams by Richard Rosso
Research / Interesting Reads
- Smart Money Gets Ready For Next Credit Event by Wolf Richter via Wolf Street
- Investing Without People by Howard Marks via OakTree Capital
- White Deaths Outnumber Births For 1st Time In History by Tyler Durden via ZeroHedge
- How Big Is Your Alpha? by Rob Arnott via Research Affiliates
- Will Re-Defaults Undermine Housing by Keith Jurow via Advisor Perspectives
- Are We In A Corporate Debt Bubble? by Susan Lund via Project Syndicate
- Don’t Rush To Take Social Security by Dan Caplinger via Motley Fool
- It Ain’t What You Don’t Know That Gets You In Trouble by Cliff Asness via AQR Capital Mgmt
“ The stock market is a device for transferring money from the impatient to the patient.” – Warren Buffett
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