Stock Market Highs

A cura di Walter Snyder, Swiss Financial Consulting

The S&P and Nasdaq have hit record highs thanks to share buybacks and despite signs of a slowing economy that momentarily thrives on debt. Just how much debt there is in the US can be seen on the debt clock (https://www.usdebtclock.org/ ). This website gives figures in real time. The US federal debt is now over $ 22.5 trillion while the duration of corporate debt has risen to eight years, a record, and a total amount of $15.5 trillion, which could cause a crisis if financial conditions tightened. This may be the real reason why the Fed will probably cut rates by 25 bps on 31st July or even 50 bps.

The fact is that corporate share buybacks mean that companies have been spending less money on R&D (Research and Development), M&A (Mergers and Acquisitions) and capex (Capital Expenditure). Shareholders are happy when they see the share prices of their investments increase while executives become much richer as they can sell the shares that they receive as part of their compensation at ever higher prices. The mechanism basically is that executives divert profits to share buybacks and in addition make more debt for the company through issuing bonds, the proceeds of which are earmarked for share buybacks as well. The result is that companies are not well prepared for a recession.

Even with GDP 2Q growth coming in at 2.1%, down from 3.2% in 1Q, the need for a rate cut stems from the Fed`s thinking that sooner is better than later. What is interesting is that there are conflicting views on the state of the economy. Some observers note that there are several warning signs, like lower levels of freight delivery, while others see little cause for alarm. Warning signs and  the slowness of economic growth, with exception for the stimulus provided by the Trump tax reduction, are indications that all is not well.

The slump in housing construction and the fact that consumer debt has reached very high levels would indicate that there is not much room for more growth. Credit card debt is over $1 trillion and student loan debt is $1.6 trillion. With federal debt increasing at more than $1 trillion per annum, it is clear that the Treasury will be soaking up a lot more available capital. In the event that the market cannot meet the Treasury`s needs, the Fed can always come to the rescue and monetize more of the debt. Investors should be wary of future developments as extremely low volatility is usually followed by stormy weather and prepare for the Ray Dalio paradigm change and the John Mauldin great reset.

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