There are two things that make it very clear that the next major crash of markets in the US will be caused by a bubble currently caused by a buyback bonanza. One, the real danger of this practice has not been properly appreciated by mainstream media. Two, it has reached a scale (or size) that can be described as much too big to fail. In 2018, buybacks, a mechanism that transfers profits to stockholders by using a significant portion of a company’s profits to buy back its own stock—and thereby increasing the value of the shares by simulating what under normal circumstances would be excited by demand for the stock—rose to a mind-boggling $806.4 billion. Warning! Warning! Warning!
We have entered a new stage of corporate cannibalism.
What this means should be evident to you. We had a world-historical crash not too long ago caused by a housing bubble. We have by no means left the shadow of that crash, which should have sent the stock market and the banking sector to the grave. But it didn’t because the state—via bailouts and, most importantly, by transferring useless corporate paper to the public’s balance sheet (this is called Quantitative Easing, and it cost US taxpayers $4 trillion)—kept it alive. As to how any of this has anything to do with the virtues of capitalism is a complete mystery to me. Whatever happened to creative destruction? It turns out much of orthodox economic thinking is nothing but talk. The stock market and banks are the welfare kings. This is not even an exaggeration. And lord knows I wish it was.
Anyway, we now have a market bubble caused by buybacks. They are inflating stock values like nobody’s business. If a triggering event (such as the crash of plane badly manufactured by a corporation that’s in the middle of a buyback frenzy) unites all of the bad information in a market, then you will have a crash the like of which the world has never seen before.
#SinceGOPTaxCuts, the law has benefited large corporations while workers have been left behind. A vast majority of corporate tax benefits have been used to enrich investors & buyback stock instead of hire or raise wages. #GOPTaxLaw https://t.co/FTKJyit0xf
— Steny Hoyer (@LeaderHoyer) March 27, 2019
To make matters worse, the crash will happen while Trump is president (that speaks for itself). To make matters even worse, the US’s public purse has been considerably vitiated by the Tax Cut and Jobs Act, a law that sent billions directly to buybacks. To make matters beyond worse, China, which bailed out the world economy with massive fiscal spending on shovel-ready projects (such as building the infrastructure for high-speed trains), can be expected to use the next crash as an opportunity to end the 20-year transition from capitalism’s North American moment to its Chinese one (this transition is called Chimerica).
Now here is the really bad news—news that should cost you some sleep. If China and other countries do not (in the next crash) buy (as they did in the last crash) American debt (Treasury bonds) out of, one, a sense of the US’s Trump-diminished global position, and, two, a real fear of a debt super-inflated by the US government’s dramatic loss of tax revenue and inevitable absorption of massive amounts of bad paper from a moribund (but still politically effective) market, there will be no other recourse for the US than to make a hard turn to the left (socialism in the form of the Green New Deal) or go to war in a big way. My bet is on the latter, because the former will be perceived by the elite as a much larger danger to current power arrangements than the latter.
Dion Rabouin of Axios writes:
S&P Dow Jones Indices announced Monday that companies bought back $806.4 billion worth of their own shares, including $223 billion in just the fourth quarter in 2018. It was short of the $1 trillion Goldman Sachs predicted in August, but still an all-time record.
Of that record total, Apple bought back $10.1 billion worth of its own stock in Q4 and $74.2 billion for the year, more than a third of the entire S&P 500 total. The closest company to that total was Oracle, which spent $29.3 billion.
Ladies and gentlemen, now is a good time to listen to Kenny Loggins’s “Danger Zone.” We have certainly entered it in the second half of Trump’s presidency.
