Finance and stock markets: more and more, higher and higher!
Is the Federal Reserve kick-starting a cycle of interest rate hikes? Are the European Central Bank and Bank of Japan – also – imminently about to announce the end of their monetary creation? Never you mind, because no one will mention that the euphoria of financial markets and irrational stock market take-offs have had their last words. Is quantitative easing dead? No: long live new quantitative easing measures that are just companies buying back their own shares!
Desperate souls and other detractors of central banks need to tone it down a bit because the regular smashing of stock market records has been down to stock market manipulation much more than it has been down to conventional measures taken by the central banks to revive our economies after the shock of 2008. US companies have spent no less than 3,500 billion dollars buying back their own shares on the stock market since 2010. By adding 2,000 billion intended for their shareholders under the guise of dividends, these 5,500 billion dollars issued by US listed companies exceeds the Fed’s entire quantitative easing programme!! The sharp adjustment on the stock markets suffered this February was, in this respect, a fantastic opportunity that brought on an extra run on share buybacks at discount prices. Goldman Sachs’s buyback process indeed saw its best week at the same time that the stock markets were becoming dangerously unhinged. It’s a sign that the misfortune of speculators is the happiness – and wealth – of the companies seizing this opportunity to buy back their own shares at favourable rates.
In this respect, you can hedge your bets that the massive tax breaks decreed by the Trump administration will prove to be another godsend for these buybacks that will continue to happen at the expense of these companies’ investment in the real economy and research and development. It’s simple: the 500 companies on the S&P index have spent 170 billion in buybacks since last December. Take Cisco for example, who recently announced its intention to use 25 billion (about 14% of its stock market capitalisation) of its 70 billion in reserves to buy back its own shares.
Investors and speculators must not give into panic because – faced with central banks halting QE and despite certain inflationary pressures – the stock market take-offs still have some bright days ahead of them. Thanks to manipulation of the financial engine, which is never short of imaginative ideas.