What is driving the US stock markets to such amazing gains? While some corporations have seen increases in sales and most have innovated to reduce costs, lessen waste, and maximize efficiency, I'll focus on some of the other means that have driven profits higher helping to push US equities into record territory.
- Declining % of profits going to Uncle Sam.
- Minimal wage growth and holding the line on new hires.
- Debt fueled stock buybacks and dividends at the expense of investment in mid and long term activities (R&D, cap-ex, exploration, etc.).
To represent the US market as broadly as possible, we'll use the Wilshire 5000 index, representing all 3600+ publicly traded US corporations (chart below vs. the 10yr Treasury rate).
First, profits - way up. The Wilshire 5000 vs. corporate profits (chart below).
But how have corporate after tax profits risen so fast?
Pay less in taxes on rising profits...since 2000, profits have risen in excess of 300% while tax revenues half that.
Of those rising profits, corporations are keeping far more and giving far less to uncle Sam. Under Eisenhower, 50% of profits went to the Fed to a low of 17% by the end of GW Bush's term. Perhaps a Republican Congress and Trump will get these tax revenues rescinded entirely?
Wages & Corporate Employees
The #1 cost to business is usually labor, so how about pay the rank and file employees less (chart below)? Dashed black lines represent old America where workers shared in the growth with growing wages (growing the capacity of the consumer base)...and in the solid black lines, the new America where wage growth has slowed to the lowest levels in US history despite record corporate profits.
But it's not just paying less, corporations also throttled back on hiring more employees...corporations consistently provided more US employment from 1970 until 2000...since 2000, not so much. Can't blame corporations for trying to save their way to prosperity and playing the game as it's legislated...but an economy without a growing base of consumers is a bit of a problem.
Corporate employment vs. Wilshire 5000...hmmm.
ZIRP = Buybacks and More Cheap Debt
When 2008 hit, private citizens and corporations simply couldn't / wouldn't take on any more debt. So the Federal Reserve made money free to corporations (enabling massive debt fueled buybacks) and amazing growth in Federal debt (ultimately a liability of the US taxpayers).
According to Reuters, half of the top 50 non-financial U.S. companies are now giving more money back to shareholders in buybacks and dividends than they make in profits - the first time that's happened outside of recessionary periods. This is coming at the expense of R&D and innovation. These include Apple (NASDAQ:AAPL), Intel (NASDAQ:INTC), IBM, Cisco (NASDAQ:CSCO), Home Depot (NYSE:HD), AT&T (NYSE:T), Boeing (NYSE:BA), Pfizer (NYSE:PFE), and so many more...detailed HERE.
Barron's notes, the result of the buybacks is that net equity issuance has been negative for the last several years and bears a striking resemblance to the period leading up to the 2008 financial crisis. The sheer level of buybacks is staggering. A Deutsche Bank report notes that Standard & Poor's 500 companies pay out two-thirds of their earnings through buybacks and dividends. FactSet further notes that those same companies spent $166.3 billion on share buybacks in the first quarter, a post-recession high and one only surpassed by $178.5 billion in the third quarter of 2007...detailed HERE.
Federal Public Debt per Full Time Employee
The chart below shows the growth in federal public debt owed per US full time employee. The average full time employee is now on the hook for $116 thousand (more than double the 2008 ratio). Otherwise, how would consumers continue consuming more if their incomes weren't rising and there weren't more employed among them (corporately or working full time)?
Finally, how full time jobs, federal debt (public), and the Federal Reserve's FFR % have progressed to push financial asset prices into the stratosphere. Since 2007, an increase of 181% in federal public debt and 85% reduction in the federal funds rate cost of borrowing has created a 2.1% increase in full time jobs. This was truly the last hurrah.
The impact of the Fed's extended period of zero interest rate policy was the creation of illusory gains. However, many analysts expect a market correction to an outright market collapse while the technicians and bulls out there expect the bullish activity has much farther to run and attribute this to positive economic activity.
As for me, I believe we are in deep trouble and the market is now a matter of national security...the federal funds rates will surely be pushed into negative territory and asset prices rise unbelievably. For those thinking this is a "free market", the further gains in the equity market will be shocking. Detailed domestically HERE and globally HERE.
The absolute disconnect of asset prices from economic activity is and will continue to be unlike anything we have seen. This is no more of a "free market" than shooting a cow in a pasture is "hunting". "Invest" accordingly, but know full well the ill gotten gains will one-day, someday, sooner than later, be entirely gone and we'll all know what it felt like to be Bernie Madoff clients.