"That risk appears particularly acute in part because earnings, historically the strongest driver of stock-price gains, are in retreat and valuations are above long-term averages. Many companies are paying more in dividends than they are earning, a practice that analysts view as unsustainable for the long term...
"The problem: There is only so much that companies can raise their payouts to shareholders if their profits aren't keeping pace. And right now, U.S. corporations are struggling to boost profits..." (Dividends are what matter now, Wall Street Journal)
What does that mean in plain English? It means that Mom and Pop investors are increasingly rolling the dice with their meager retirement nest-eggs by moving their money from ultra-safe fixed-income investments (like US Treasuries) to volatile equities (that could crash in the blink of an eye) because the Fed's perennial low rates have prevented them from getting a decent return on their savings. Zero rates are the equivalent of putting a gun to Pop's head and frog-marching him back into the stock market. Does that make sense? Here's more from the same article:
"With dividends up and earnings down, companies are handing out an increasing amount of their earnings in such payouts to investors. During the second quarter, that measure was at its highest since 2009, according to SandP.
"'I tend to think that there will come a point when dividend growth will be slowed if earnings and sales don't improve,' said Sam Stovall, U.S. equity strategist at SandP Global Market Intelligence." (WSJ)
Good call, Sam. Companies can't keep boosting dividends if earnings continue to shrivel. And earnings WILL continue to shrivel unless the government increases its (deficit) spending enough to rev up growth. And that's not going to happen anytime soon, so don't hold your breath.
The only thing that's keeping this Ponzi scam afloat is the fact that companies are borrowing hundreds of billions of dollars in the bond market from yield-starved investors who honestly believe the CEOs are investing the money in their company's future. But that's not what they're doing. They're taking the money and putting it in their pockets so they can add another Lamborghini or Marc Chagall to their collection. That's where the dough is really going, into a big black hole created by our friends at the Federal Reserve.
And the same is true of stock buybacks, another swindle that persists due to the Fed's suicidal interest rate policy. The surge in buybacks during a period when the economy is dramatically under-performing, is due entirely to the ridiculous availability of credit at rock-bottom prices. So, even though consumers and households are not borrowing in numbers great enough to put the economy back on track, CEO's are piling on the debt to purchase their own shares thus destroying their own prospects for future growth. It's what you call corporate hara kiri. Take a look at this clip from an article at Barron's:
"Corporate debt is now near record levels, due in part to borrowing to buy back stock. It isn't a situation that can last.
"The bond market should be concerned about stock buybacks, but not because of their bullish effect on share prices. Instead, bondholders should be anxious about where the cash to pay for them comes from. It isn't widely appreciated that the money has been borrowed in the credit markets, and that the borrowers have taken on a large amount of debt to support the buybacks. That's cause for worry on several fronts.
"The first is simply that outstanding corporate debt is now at a record high. ... According to the Federal Reserve's flow of funds data, outstanding non-financial corporate debt is 45.3% of GDP. That nearly matches the level seen in the first quarter of 2009 (45.4%) and exceeds the prior peak of 44.9% achieved in the third quarter of 2001...
"In the first quarter, non-financial corporate borrowing hit $724 billion. That's the second-highest on record and is surpassed only by, again, the third quarter of 2007 with $807 billion. The similarities should give pause." (Stock Buybacks Are Driving Companies Into Debt, Barron's)
Of course, the Fed has all this data at its fingertips, but it persists with the same lethal policies in spite of it all because the objectives of its rich constituents far outweigh the dangers to the general public. That's just the nature of the beast.
It's beyond me how anyone can watch the way this treacherous, double-dealing organization works and not support the movement to see it dismantled once and for all.
End the Fed is more than an empty slogan, it's a fight for survival.
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