Registered Investment Adviser Caleb Lawrence
The major averages enter the final hour about even after recovering their early losses. Since Monday the Standard and Poors 500 Index has fallen 82 points or 3.1% while the NASDAQ has given up 167 points or 2.3%, as the major averages look to close another bruising week.
With the Trump debt funded tax cut that is largely a windfall for the 10% and corporations in the books. We begin to see the expected results. Like the previous 2 republican tax cuts that promised mana from heaven in the form of repatriated corporate profits that would drive direct investment, employment, economic growth, and hatch magic unicorns. What we got was by and large debt funded corporate buybacks that helped to goose the markets and drive valuations to record highs along with various forms of debt, public, private, and corporate. Along comes Goldman Sachs with a report, and lo and behold they project 23% growth in share buybacks to an all-time record 650 billion in 2018. A record 171 billion in buybacks has already been announced. Based on market performance apparently it isn’t enough to keep the party going. Other highlights from the report include. Capex or business spending is expected to grow 11% to $690 billion. Aside from reducing the number of shares outstanding buybacks goose the earnings per share by virtue of the fact that there are less shares to spread the earnings amongst. This in turn reduces the share price valuation level making the company more attractive than it really is. This type of activity used to be patently illegal back in the 80’s because it is in fact blatant share price manipulation. Given that your average corporate executive’s compensation is very tied to the share price the incentive to goose it by all means available is great, even if it means loading up the company with record amounts of debt as many have done. Following the recent round of headlines cheering the small bonuses that will be paid to the 90% following the tax cuts Goldman Sachs went on to note that buybacks exceed worker bonuses by a ratio of 63 to 1 so it was essentially window dressing. More income and wealth inequality to add to our already all-time record high Gini Coefficient of .81. The historical record is replete with examples of what happens under these circumstances and it isn’t pretty. At some point the debt laden American populace is going to rise up and demand real change and a more equitable distribution of the pie.
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