It’s funny how an election can change the way a man sees the world. Before the election, Donald Trump thought that stocks were dangerously inflated. In an interview on CNBC, he said “I hope I’m wrong, but I think we’re in a big, fat, juicy bubble.”
See the difference? So when Trump was running for office, stocks were headed for another thundering crash. But now that he’s president, Happy Days Are Here Again. The question is: Which Trump do we believe? Are stocks in a bubble or not?
..it is no surprise that most of the S and P 500’s 17.1% annualized price gain since the bottom in 2009 has come as a result of valuation rather than real earnings growth or inflation. Justin Sibears of money manager Newfound Research calculated that a larger portion of the current bull market’s returns have come from valuation gains than any since the 1920s bubble. Perhaps not coincidentally, the Shiller price-to-earnings ratio is at the same level as observed in July 1929.” (“Economy Up, Stocks Down? Don’t Be Surprised”, Wall Street Journal)
Read that clip over again. So not only are stocks inflated to 1929-levels but, also, the bulk of corporate earnings is currently coming from higher stock prices. In other words, fatcat CEOs are making more dough jacking their share prices via stock buybacks than they are by selling widgets or providing services. It’s crazy. What was it that John Maynard Keynes said? He said:
“The cyclically adjusted P/E (CAPE), a valuation measure created by economist Robert Shiller now stands over 27 and has been exceeded only in the 1929 mania, the 2000 tech mania and the 2007 housing and stock bubble,” Alan Newman wrote in his Stock Market Crosscurrents letter at the end of November.
Newman said even if the market’s earnings increase by 10 percent under Trump’s policies “we’re still dealing with the same picture, overvaluation on a very grand scale.” (“Market indicator hits extreme levels last seen before plunges in 1929, 2000 and 2008”, CNBC)
Look at the economy. Business investment has been abysmal, wages and incomes have either flatlined or dropped outright, personal consumption has remained weak throughout, bank lending is still well-below 2007 levels, and GDP has been stuck in the 2 percent doldrums for the entire eight years. There are actually fewer people working now than in 2007 and 95% of all new hires are crappy, part-time, service sector jobs that don’t even pay a living wage.
For eight years, the Fed has kept interest rates below the rate of inflation which means the Fed provides a small subsidy on every dollar that’s borrowed. This ‘underpricing of money’ creates a powerful incentive to borrow, but borrowing is pointless if there are no investment opportunities. And when growth is slow and wages are flat, consumption stays weak which reduces demand. Companies don’t invest in their businesses when demand is weak, because there’s no one to buy their extra widgets. So why borrow more money and pile on more red ink?
Ah, but that’s where the magic of financial engineering comes in, because even if demand is weak, companies can always borrow money at ridiculously cheap rates and repurchase their own shares. That pushes up stock prices, rewards shareholders, and allows cheery CEOs to walk away with a bundle. And the whole shebang can be carried off even when the economy is in the shitter.
And we’re not talking chump change here either. According to the WSJ: Companies “have been purchasing their own shares furiously. Companies in the S and P 500 have spent more than $2.5 trillion on share buybacks in the five years through 2016’s third quarter, according to FactSet. In the third quarter of 2016 alone buyback champs Apple Inc. and General Electric Co. repurchased $11.5 billion worth of their shares combined.”(Wall Street Journal)
It’s a buyback feeding frenzy and it’s going to get a lot worse under Trump because now we’re adding irrational exuberance to the mix of cheap money and financial engineering. So now we’re talking about some serious blowoff bubblemaking, the likes of which can take down the entire fragile economy.
Check out this blurb from the PBS News Hour: The Dow Jones Industrial Average has risen “from just over 18,000 on Election Day to breaking 21,000 this week. In fact, it jumped by 1,000 points in just 24 days.”
Trump has promised the investor class unlimited accommodation, more treats and less rules for Wall Street. He’s promised behemoth tax cuts, massive government spending, and fewer regulations. He’s transformed a heady “easy money-poorly regulated” environment into the Wild, Wild West where anything goes and the sky’s the limit. He’s going to dump $1 trillion into fiscal stimulus to rev up consumer spending and beef up corporate profits. He’s going to allow tax cheats to bring $2 trillion in corporate profits back into the country to accelerate stock buybacks and stretch prices to the limit. He’s going to slash corporate tax rates and fatten the bottom line for America’s biggest businesses. And he’s going to gut Dodd-Frank, the “onerous” regulations that were put in place following the 2008 financial implosion, to prevent another economy-decimating cataclysm.
But how does all this square with the astute observations made by Candidate Trump? Is this is the same Donald Trump who, before the election, said that conditions were so perilous that the country was headed for a “very massive recession” and that “it’s a terrible time right now” to invest in the stock market? Is this the Donald Trump who said “I think we’re in a big, fat, juicy bubble”? Is this the Donald Trump who said, “if you raise interest rates even a little bit, (everything’s) going to come crashing down?”
MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at firstname.lastname@example.org.