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.”
“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.”
“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.”
“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.”
Michael Lebowitz, CFA is an Investment Analyst and Portfolio Manager for RIA Advisors. specializing in macroeconomic research, valuations, asset allocation, and risk management. RIA Contributing Editor and Research Director. CFA is an Investment Analyst and Portfolio Manager; Co-founder of 720 Global Research.
Real Investment Advice is powered by RIA Advisors, an investment advisory firm located in Houston, Texas with over $1 billion in assets under management. As a team of certified and experienced professionals, we seek to provide our clients with educational services and the necessary information and tools to educate you in the field of finance, investing and economics. To this end, you can use the Real Investment Advice Platform to avail yourself of various video, audio and proprietary collections of information at your leisure to learn and gather the necessary information that you may need in the fields of investment news, investment opinion, financial news, financial opinion, economic news and economic opinion, finance, investing and economics. Utilizing the functionality and tools provided by Real Investment Advice, you can access this information in a variety of ways, including via video and audio programming, audio and visual media content streaming services, downloadable audio-visual media, uploaded, posted or tagged third-party videos, receiving or viewing audio and video clips, blogs, podcasts, and YouTube videos, all of which are accessible on the Real Investment Advice media platform and/or various Internet and communications links that are accessible via the Real Investment Advice Platform and allow for the broadcasting, transmission and streaming of the information and audio-visual content to your media devices and other communications platforms for your viewing and listening pleasure. All of these tools and sources of information are made available to you so that you can utilize the same to make the right financial, economic and investment decisions.
RIA Advisors offers multiple custodial arrangements, either directly of through wholly owned subsidiaries, with Fidelity, TD Ameritrade, Charles Schwab and Interactive Brokers.
Coverage of global markets, bond markets, equity markets, commodities and economic news.