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Cboe - Market News Story

Opinion | Party Like It's 1929

Steven Orr      1/10/2020 1:30:59 PM

President Trump touted:

It seems every day we see the market making new highs. The president continues to tout job numbers. Back on the campaign trail, he said we would be sick of winning.

I, for one, am not “sick of winning.”

Winning At What Cost?

But, at what cost? The U.S. National deficit hit an all-time high. 2019 closed out with a $984 billion shortfall with 2020 predicted to be over $1 trillion.

Average U.S. consumer credit card debt is already back to 2009 levels and rising: 

Consumer debt is over $14 trillion now surpassing the Q3 levels back in 2008 of $12.68 Trillion.

More Debt

  • Mortgage Debt is $9.4 trillion
  • Auto Debt is over $1.3 trillion
  • Student Loan Debt is at $1.48 trillion
  • Credit Card debt is now over $1.03 trillion.

All while interest rates are at historic lows.

Where's The Growth?

Usually, this would all be ok if the US GDP was growing over 3-5%. But it isn’t. We are struggling with 2%. 

Ok, well maybe corporate profits are up? Eh, not really. The Wall Street Journal reported that "something is amiss. Look at pretax profit domestic profits as measured by the Bureau of Economic Analysis, and it is easy to be bearish. Profits are down 13% in five years, the biggest drop outside a recession since World War II." 

Baby Got Buyback

But, guess what is fueling the rally. Stock Buybacks! Don’t take my word for it –– read the Harvard Business Review take on it: 

"In 2018 alone, with corporate profits bolstered by the Tax Cuts and Jobs Act of 2017, companies in the S&P 500 Index did a combined $806 billion in buybacks, about $200 billion more than the previous record set in 2007. The $370 billion in repurchases which these companies did in the first half of 2019 is on pace for total annual buybacks that are second only to 2018."

'Open-Market Repurchases'

What is going on? It is called “open-market repurchases.” They are taking the cash savings from the Tax Cuts and Jobs Act of 2017 and buying stock in their own company.

Harvard economists William Lazonick, Mustafa Erdem Sakinc, and Matt Hopkins called for a ban on it saying, “But it is stock buybacks, however, funded, that undermine the quest for equitable and stable economic growth. Buybacks done as open-market repurchases should be banned."

I agree, and I am not Harvard educated.

But...Until then, party like Gatsby!