Our guess is that the real squawking from investors won’t begin until mid-2019. That’s about the time corporate America becomes acutely aware that pumping gobs of borrowed money into grossly overvalued stocks was an act of financial suicide.
Just look to General Electric, IBM, and Citigroup for an early indication of the forthcoming catastrophe. For instance, over the last decade GE spent $46 billion buying back its shares. In 2016 and 2017 alone, at a time of mushrooming debt, GE pumped $24 billion into share buybacks.
GE wasted $46 billion on buying back its shares – with nothing to show for it except a collapsing share price. This was an astonishing misallocation of capital – very likely the company will eventually have issue new shares to prop up its equity, at prices far below the prices it paid for buying them back. [PT]
Over this time, the price of these shares dropped from about $30 to $16. And even with Thursday’s 7.3 percent boost, on word of a surprise JPMorgan upgrade, GE shares trade at $7.20. In other words, shares GE bought back during the early part of 2016 have lost 75 percent of their value. What to make of it?
The 2008 financial crisis helped clarify how faux capitalism works in America. That when the big corporations and the big banks get in trouble, the people on top quickly absolve culpability while appropriating public funds from their friends at the Treasury for the purpose of private bailouts. This, in effect, socializes the losses across bottom rungs of society and concentrates profits across the top.
No doubt, the aftermath of the great corporate stock buyback craze of 2009 to 2017 will be a text book example of faux capitalism in action. First, massive financial bailouts will be disseminated to crony banks and corporations with purpose and intent. Then, a colossal river of monetary liquidity from the Fed will be diverted into credit markets, and into direct stock purchases of government preferred corporations.
Bailout progression – it continues until it cannot continue anymore, i.e., until the “running out of other people’s money” moment arrives. [PT]
The size and scope of these fiscal and monetary bailouts will utterly dwarf the TARP, ZIRP, and QE policies of the last crisis. Assuming this doesn’t blow up the Treasury’s balance sheet, or vaporize what’s left of the dollar’s value, a certain end effect will take shape. The middle class will be reduced to a notch or two above poverty, and wealth will be further concentrated into fewer and fewer hands.
We don’t like it. We don’t agree with it. But we can’t stop it. This is the world we live in. A world where justice has been debased and rectitude has been sullied.
http://www.zerohedge.com/news/2018-12-15/how-faux-capitalism-works-america?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+zerohedge%2Ffeed+%28zero+hedge+-+on+a+long+enough+timeline%2C+the+survival+rate+for+everyone+drops+to+zero%29
Realist - Everybody in America is soft, and hates conflict. The cure for this, both in politics and social life, is the same -- hardihood. Give them raw truth.
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