"Since 2004, companies have spent nearly $7 trillion purchasing their own stock -- often at inflated prices, according to data from Mustafa Erdem Sakinc of the Academic-Industry Research Network. That amounts to about 54 percent of all profits from Standard & Poor's 500-stock index companies between 2003 and 2012, according to William Lazonick, a professor of economics at the University of Massachusetts Lowell."
You can see the game that's being played here. Mom and Pop investors are getting fleeced again. They've been lending trillions of dollars to corporate CEOs (via bond purchases) who've taken the money, split it up among themselves and their wealthy shareholder buddies, (through buybacks and dividends neither of which add a thing to a company's productive capacity) and made out like bandits. This, in essence, is how stock buybacks work. Ordinary working people stick their life savings into bonds (because they were told "Stocks are risky, but bonds are safe.") that offer a slightly better return than ultra-safe, low-yield government debt (US Treasuries) and, in doing so, provide lavish rewards for scheming executives who use it to shower themselves and their cut-throat shareholders with windfall profits that will never be repaid. When analysts talk about "liquidity issues" in the bond market, what they really mean is that they've already divvied up the money between themselves and you'll be lucky if you ever see a dime of it back. Sound familiar?
Of course, it does. The same thing happened before the Crash of '08. Now we are reaching the end of the credit cycle which could produce the same result. According to one analyst:
"There's been worrying deterioration in the overall global demand picture with the continuation of EM (Emerging Markets) FX (Currency Markets) onslaught, deterioration in credit metrics with rising leverage in the US as well as outflows in credit funds in conjunction with significant widening in credit spreads...The goldilocks period of ...low rates volatility-stable carry trade environment of the last couple of years is likely coming to an end." ("Credit: Magical Thinking," Macronomics)
In other words, the good times are behind us while hard times are just ahead. And while the end of the credit cycle doesn't always signal a stock market crash, the massive buildup of leverage in unproductive financial assets like buybacks suggest that equities are in line for a serious whooping. Here's more from Bloomberg:
"Credit traders have an uncanny knack for sounding alarm bells well before stocks realize there's a problem. This time may be no different. Investors yanked $1.1 billion from U.S. investment-grade bond funds last week, the biggest withdrawal since 2013, according to data compiled by Wells Fargo & Co...
"'Credit is the warning signal that everyone's been looking for,' said Jim Bianco, founder of Bianco Research LLC in Chicago. 'That is something that's been a very good leading indicator for the past 15 years.'"
Bond buyers are less interested in piling into notes that yield a historically low 3.4 percent at a time when companies are increasingly using the proceeds for acquisitions, share buybacks and dividend payments. Also, the Federal Reserve is moving to raise interest rates for the first time since 2006, possibly as soon as next month, ending an era of unprecedented easy-money policies that have suppressed borrowing costs...
"'Unlike the credit market, the equity market well into 2008 was very complacent about the subprime crisis that led to a full blown financial crisis,' the analysts wrote...
"So if you're very excited about buying stocks right now, just beware of the credit traders out there who are sending some pretty big warning signs." ("U.S. Credit Traders Send Warning Signal to Rest of World Markets," Bloomberg)
It's worth noting that the above article was written on August 14, a week before the stock market blew up. But credit was "flashing red" long before stock traders ever took notice.
But that's beside the point. Whether the troubles started with China or the credit markets, probably doesn't matter. What matters is that the system about to be put-to-the-test once again because the appropriate safeguards haven't been put in place, because bubbles are unwinding, and because the policymakers who were supposed to monitor and regulate the system decided that they were more interested in shifting wealth to their voracious colleagues on Wall Street than building a strong foundation for a healthy economy. That's why a simple correction could turn into something much worse.