By Ramin Mazaheri for the Saker Blog
High-finance-dissident site ZeroHedge retweeted this: “Everything that is wrong with America, in one image.”
Indeed, but it’s old news: not adding strings to Quantitative Easing totally untethered Western stocks from market fundamentals.
That certainly shouldn’t be old news to The New York Times, who addressed this same issue with Everything Is Awful. So Why Is the Stock Market Booming? They incredibly concluded their high-finance-non-dissident propaganda by scaring us into nihilistically worshipping the elite magician/shaman’s sleight of hand: “It is, in other words, an unusual time in which we can only hope that stock investors know something that millions of people facing a catastrophic economic situation don’t.” Thus, the journalists at the US paper of record is incapable (read: unwilling) of providing an answer to the question they posed.
The answer to all that is wrong with the Western stock market – not just in the US – is simple: corporate stock buybacks, which increase prices by fabricating false demand via reducing stock supply.
Ultimately, it’s the same old story some – but not The New York Times – have talked about for over a decade: QE, the purported remedy to the 2008 crisis, has not been invested into the real economy but re-inflated 1%-er asset classes. Stock buybacks by corporations are useless, one-time lifts to a stock price, as opposed to productive long-term investments in research & development, infrastructure, savings, worker happiness & safety, etc., but this is what has provided the “economic recovery” that has been relentlessly insisted upon by the Mainstream Media.
That’s funny, but 17 million jobless Americans in 15 days aren’t laughing.
Finally connecting stocks to reality would mean Western-capitalism suicide
The only genuine hope for stockholders is that CEOs prove to be incapable en masse: given the total revenue stoppages caused by the corona overreaction, and the total inability to predict when revenue will return to normal, and the widespread concern that banks will not lend money to even middling risks in the near future, any CEO who uses their company’s cash reserves (if they have any) for stock buybacks better be planning that their next job is retirement. But not all CEOs are two months from opening their golden parachutes: 75% of announced buyback programs have reportedly been cancelled already.
So where’s the prop to stock prices, huh?
Buybacks exceeded $2 trillion in the past three years, and $4 trillion in the past decade. This was funded by taxpayer QE and purchased overwhelmingly by non-financial corporations – households and pension fund purchases of stocks have, contrarily, dropped since 2009.
Again, where’s the demand, i.e. the buyer, now?
That should put a frog in the throat of anyone relying on their 401k. But only a headline-skimmer wouldn’t have already known that a major corporation’s earnings per share has been totally disconnected from revenue growth and profitability for years.
So it’s not that there’s no more QE, obviously, it’s that the corona shutdown has created such a terrible economic outlook that QE can’t be wasted on stock buybacks anymore. I guess it’s a sort of progress… but not for the average household and their plummeted pension plan.
I don’t want to crush your 401k dreams so quickly: Maybe CEO’s will continue stock buybacks, as stock options have become a majority of their compensation, after all? Promoting short-term, societally-harming corporate planning is the logical conclusion when you hate central planning, nationalisations and vanguard parties which are trained in a modern ideology with moral bases such as Mao’s, “Serve the people”.
We’d be negligent not to mention ZIRP (Zero Interest Rate Policies) whenever we talk about QE, as the two are inextricably linked: were savings rates not forced to be so very low, then corporations and investors wouldn’t be so starved for yield (profit), and then they might have saved some of their taxpayer QE if they could have received a normal 2-3% yield. If they had actually saved for the tough and unpredictable times, then so many corporations wouldn’t be defaulting by January 2021… but many will be. Instead, self-interested CEO’s of the S&P 500 have issued $2.5 trillion in debt to fund $2.7 trillion in risky buybacks over the past five years. But any CEO who is asking for a loan now in order to fund stock buybacks is certainly going to be fired for negligence.
With 1 out of 6 US corporations already zombies and many of the others already cash-poor, it’s not as if corporations aren’t rushing to take on more debt right today. But, crucially, cash now is for saving – for surviving the corona lockdown and the certainly arduous post-corona recovery – not for stock buybacks or dividends, but neither is it for hiring, investment, expansion and wage increases.
The latter part will make the real economy recovery harder: evil sets into motion many negative cycles, after all. The corona overreaction – because non-socialist-inspired societies do not have the means nor willingness to control the economic outcomes provoked by such lockdowns – is pricking these bubbles and setting into motion these various forms of multilayered economic chaos.
Stock market busts will not increase worker rights or change 1%er behavior
There’s a lot of chatter about how workers are now emboldened to demand more wages, but it’s nonsense: once the lockdown is over wages will fall due to the enormous job competition. People are not dying of corona en masse, after all (despite the claims of the MSM Cassandras) and all these non-dead will want work – they will accept lower wages to do so. So this will not be a pressure on corporate profitability and stock prices.
There’s also a lot of chatter about how corona is going to force corporations to bring supply chains closer to home, thus reversing globalisation, but that’s typically pandering capitalist-politician blather which will surely be forgotten by September 2021 at the latest. No cost increases there.
A genuine corporate problem are the many parts of your supply chain which will go bankrupt due to the corona lockdown overreaction – now that will pressure corporate margins.
The banning of stock buybacks (for only one year) for those corporations who get stimulus money has been a headline concession to pacify an angry 99% which is finally getting an answer to, “But where did all that QE go?” But this is obviously inadequate. As always in capitalism, boom-to-bust the pie only gets smaller: companies with clout who get QE won’t be able to buy back their own stock – instead, they will buy up smaller, weaker, corona-bankrupted competitors.
And why should lazy, easy-money-taking corporations be concerned, anyway? For example, in the past thee years US airlines have wasted $19 billion in stock buybacks, but rather than going bankrupt (you know, like in capitalism) they are getting $78 billion ($46 billion in direct lending, $32 billion in payroll grants) in the $2 trillion US bailout. And they are getting this bailout without even being nationalised for public taxpayer compensation (you know, like in socialism).
No buybacks for one year for some corporations? The stock-heavy 1% can ride that out until business as usual resumes. Yes, the US pension system is based around the 401k, but 84% of all stocks are owned by just 10% of the population. “In the U.S., the richest 0.1% control a bigger share of the pie than at any time since 1929”, and that was a sub-headline from December 2019 – don’t worry for them during this crazy April across the West.
What’s never publicised is how Western QE has allowed them to debt entrap that large part of the developing world which is run by local neo-imperial clients: The same holds for their stock exchanges. Western QE falsely inflated developing-world stock markets, and now they are left holding dollar-denominated loans for more stocks but with soon-to-be-crushed currencies. Did you think that modern stocks were excluded from the principles of capitalism-imperialism?
It’s indeed a ‘new world’, but capitalism is predatory and never ‘brave’
The simple logic is that while socialism is based on equality in distribution, capitalism is based around individual profit. Starting in 1980 the West chose to hyper-financialise their economy (i.e. rely on debt entrapment, compound interest and magical Ponzi schemes) in order to end the democratic power industrialisation naturally gives workers. But phony profits reached their end in 2008 – this caused the G20 central banks to QE-collude in a historical process chronologically documented by Nomi Prins in her recent book Collusion, which I socialistically re-interpreted to call “bankocracy” in a 10-part series earlier this year (which was considered boring but now looks rather prescient, no?).
Thus the choice is simple: either stock markets go back to reflecting profitability and capitalist fundamentals, or Western central banks socialise stock markets… which is an inherent contradiction, and thus unsustainable and certainly not “free-market, no-government-intervention capitalism”.
Correctly grasping all these corporate/stock pressures I have listed, we now have the unprecedented, days-old, stunning reversal of the Fed to start buying corporate junk debt for the first time ever. This huge change requires another article of its own. But stock prices could theoretically be protected if the US government assumes all of the risk/debt/profit-drags which stock issuers have been dumb enough to create. It is indeed a whole new world… but not really: I merely have to pull out my frayed, 2008 T-shirt emblazoned with “Where’s MY bailout?”
But that decision does not make this article outdated nor negate the truthfulness of this article – I hope this article helped explain why such a historic move (forcing taxpayers to assume corporate bonds which are essentially junk (or falsely priced one notch above, via more collusion)) was deemed necessary by the 1%. The ramifications of that will be huge, but people should immediately and resoundingly cry, “Where’s MY bailout!”
But if you are looking for confirmation that everything is fine in the machinations of NYC-based high finance you can always return to The New York Times: “The analysts who project corporate earnings are, in the aggregate, forecasting a relatively mild hit. They expect the companies that make up the S&P 500 to experience only an 8.5 percent decline in earnings in 2020, with revenue falling a mere 0.1 percent, according to FactSet.”
This tiny decline in revenue obviously doesn’t pass the common sense test of a 14-year old. The New York Times’ editorial line never changes: “A crisis in NYC-based capitalism? What crisis?”
So don’t worry – stocks will keep going up. Also: a V-shaped recovery is certain, the Spanish Flu of 1918 ain’t got nuthin’ on Covid-19, and those Easter eggs your kids found yesterday were hidden by the Easter Bunny.
Corona contrarianism? How about some corona common sense? Here is my list of articles published regarding the corona crisis, and I hope you will find them useful in your leftist struggle!
A day’s diary from a US CEO during the Corona crisis (satire) March 23, 2020
If Germany rejects Corona bonds they must quit the Eurozone – March 30, 2020
Ramin Mazaheri is the chief correspondent in Paris for Press TV and has lived in France since 2009. He has been a daily newspaper reporter in the US, and has reported from Iran, Cuba, Egypt, Tunisia, South Korea and elsewhere. He is the author of the books ‘I’ll Ruin Everything You Are: Ending Western Propaganda on Red China’ and the upcoming ‘Socialism’s Ignored Success: Iranian Islamic Socialism’.