Why I Think the Stock Market Cannot Crash in 2018

But the crash-insurance policy is a one-time deal. And then what?

The 85% of S&P 500 companies that have reported earnings so far disclosed they’d bought back $158 billion of their own shares in Q1, according to the Wall Street Journal. The quarterly record of $164 billion was set in Q1 2016. If the current rate applies to all S&P 500 companies, they repurchased over $180 billion of their own shares in Q1, thus setting a new record:

At this trend, including a couple of slower quarters, S&P 500 companies are likely to buy back between $650 billion and $700 billion of their owns shares in 2018. This would handily beat the prior annual record of $572 billion in 2007. Here are the top buyback spenders in Q1:

  • Apple (AAPL): $22.8 billion
  • Amgen (AMGN): $10.7 billion
  • Bank of America (BAC): $4.9 billion
  • JPMorgan Chase (JPM): $4.7 billion
  • Oracle (ORCL): $4 billion
  • Microsoft (MSFT): $3.8 billion
  • Phillips 66 (PSX): $3.5 billion
  • Wells Fargo (WFC): $3.34 billion
  • Boeing (BA): $3 billion
  • Citigroup (C): $2.9 billion

Buybacks pump up share prices in several ways. One is the pandemic hype and media razzmatazz around the announcements which cause investors and algos to pile into those shares and create buying pressure. Since May 1, when Apple announced mega-buybacks of $100 billion in the future, its shares have surged 11%. The magic words.

Other companies with big share buyback programs have also fared well: Microsoft shares are up 14% year-to-date. And if buybacks don’t push up shares, at least they keep them from falling: Amgen shares are flat year-to-date.

Shares of the 20 biggest buyback spenders in Q1 are up over 5% on average year-to-date, according to the Wall Street Journal, though the S&P 500 has edged up only 2%.

Share buybacks also prop up prices because they create buying pressure by the company itself when it finally does buy the shares. This is the only entity in the market that doesn’t want to buy low. It wants to buy high since it’s trying to manipulate up its own shares. By design, it provides the relentless bid in a market that might want to sell off. The amounts are huge.

In addition, share buybacks change the math of earnings per share by reducing the number of shares outstanding. The same earnings will get spread over fewer shares, thus, increasing earnings per share even if net earnings remained flat or declined. Share buybacks also counteract the dilution effects of stock-based compensation.

Share buybacks have been a godsend in this environment of rising interest rates, sky-high valuations, the QE Unwind with which the Fed is bleeding liquidity out of the market, and antsy investors.

In the first quarter, investors pulled $29.4 billion out of US stock mutual funds and exchanged-traded funds, the most since the sell-off in early 2016, according to a BofAML report, cited by the Wall Street Journal. Retail investors, after the phenomenal Trump spike, have lost their enthusiasm.

A large portion of these buybacks are now funded by corporations’ “overseas” cash. This cash accumulated in overseas entities as a result of profits that thus dodged the old US tax law. This “cash,” while registered overseas, has actually been invested in US Treasuries, US corporate bonds, and other investments in the US and elsewhere. Share repurchases were among the things companies could not do with this “overseas” cash without triggering 39% income tax. Now they can, under the reduced rates of the new tax regime.

Alas, the tax regime was changed under the pretext of encouraging US companies to invest this money in their operations in the US to grow in the US, hire people in the US, and crank up the US economy. Everyone knew this was a pretext for a corporate tax cut that would free companies to do what they’d done during the last “repatriation holiday” in 2004: Buy back their own shares, increase dividends, and jack up executive compensation packages. Ironically, companies that had “brought back” the most cash, ended up laying off the most employees.

With this kind of corporate buying pressure in the market, it’s very hard for shares to crash no matter what else is going on – such as during the record buyback-year 2007 the housing bust, a budding mortgage crisis, and big visible cracks in the banks. In 2018 too, companies will pile into the market at every dip and buy as high as possible. And they’ll be able to prevent their shares from crashing.

This has already played out during the sell-offs this year, when corporate buybacks surged on days when everyone was selling. And it stopped the sell-offs.

Other companies won’t be able to do that and their shares might get thrown under the bus. But the mega-caps such as Apple and Microsoft, solidly lined up behind the buyback binge, will help prop up the broader market. Overall, the S&P 500 may zig-zag lower in 2018, and even share buybacks may not be able to stop it, but it’s unlikely the overall market can crash this year no matter what happens.

But this “overseas” cash is a one-time trove of money. Once it’s used up, it’s gone. Then what?

Then share buybacks will have to be funded by cash flows and borrowing. Cash flows aren’t nearly enough to maintain this buyback pace, and borrowing is getting increasingly expensive, and corporations are already burdened by a record amount of debt. The Fed’s QE Unwind, which is currently ramping up, will drain up to $600 billion a year in liquidity out of the market in 2019 and later years, when share buybacks funded by “overseas” cash, which were able to counteract the early effects of the Fed’s liquidity drain, will begin to fade out. This gradual transition is one of several reasons why I think that in the near future this market cannot crash — say, a 50% decline over a relatively short period of time — but that it will instead zig-zag lower, and that this process could last many years before the excesses have been wrung out of the market.

And these are getting to be serious amounts. Read… Fed’s QE Unwind Accelerates Sharply 
 

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  149 comments for “Why I Think the Stock Market Cannot Crash in 2018

  1. alex in san jose AKA digital Detroit
    May 13, 2018 at 6:13 pm

    About half of ’18 is gone already, so a crash in ’18 would have to be in the next 6 months.

    I remember the 07 crash being preceded by the slowly slumping economy of 06. However it’s measured, we’ve not been in a slumping economy, but actually under something people have called the “Trump bump”, a bit upwards (which I think is simply due to the election being over with, and if it’d gone the other way the “Hillary Hill” would have been bigger}.

    So I’d except to see a year of “blah” before things get crashy again.

    • May 13, 2018 at 11:48 pm

      There was no crash in 2007. The stock market peaked in late 2007. It then began to decline some. The crash came in 2008 (Lehman) and early 2009.

      • Gershon
        May 14, 2018 at 1:34 am

        Janet Yellen has assured us there will be no new financial crisis “in our time.” So you see, Mr. Richter, a crash is quite simply inconceivable, given the uncanny prescience of the Fed’s economic prognostication to date.

        /sarc

        • May 14, 2018 at 8:18 am

          The next crisis – and there will be one – won’t be a financial crisis involving the big banks in the US. There may be a financial crisis in a another country, or some other kind of crisis in the US or elsewhere that could be rough on the markets, but a mirror image of what happened in 2008-9 isn’t going to happen over the next few years for the simple reason that a lot has changed since, and it’s not the same world anymore, and US banks have changed too, and history doesn’t repeat.

        • Rates
          May 14, 2018 at 12:01 pm

          Maybe Wolf has a view into the derivatives books of the big banks, and let’s be honest, he doesn’t. But if there’s a crisis, I am sure quite a few big US banks will be involved in some way. It’s true that they may not be the instigator of the crisis but they’ll get pulled along anyway through the counterparty chain.

          Remember that big profits come through big risks. That is probably the only immutable economic/financial law. How are the banks producing big returns with low risks? Portfolio insurance, CDS, etc, etc? We know how those played out last time.

      • d
        May 14, 2018 at 6:11 am

        “t. Overall, the S&P 500 may zig-zag lower in 2018, and even share buybacks may not be able to stop it, but it’s unlikely the overall market can crash this year no matter what happens”

        We wold both like to see that.

        However YOU should know by now, young as you are.

        Never . Put “Market crash”, and any denial negative, in the same sentence or frame. Its simply begging for trouble.

        • May 14, 2018 at 8:47 am

          True, I was “begging for trouble.” But I didn’t say “never.” I said in “2018.” In future years (2019?), that “overseas” cash is going to peter out. That’s the insurance policy I was talking about. It will run out gradually, not all on one day. It will become less effective as the “overseas” money stash gets smaller and gets spent in smaller amounts.

        • d
          May 14, 2018 at 4:56 pm

          There are only 5.5 trading months left ( less in reality as decisions are made in October regarding the setup until January late).

          However there are to many nasty variables out there currently.

          The big ones frequently go off Sept/Oct

      • TJ Martin
        May 14, 2018 at 10:48 am

        ” ..it’s not the same world anymore, and US banks have changed too, and history doesn’t repeat ”

        Golly .. that sounds frighteningly all too familiar and disturbing as you exit the financial world entering into my realm of expertise . Which is to say on this you are in error .

        A factual / philosophical / historical unequivocally verifiable correction ;

        ALL Human and therefore financial History continually repeats itself .. with minor variations and updated twists perhaps .. but still the SSDD scenario raising its ugly head over and over again with a consistency that defies logic unless one recognizes the fact that one of mankind’s major failings .. especially modern mankind is its propensity to continually ignore the history it is destined to repeat should it be ignored .

      • alex in san jose AKA digital Detroit
        May 14, 2018 at 6:48 pm

        I was selling on Ebay in 07 and my sales went from $6k a month or so, to $1500 a month. People were no longer being paid $50k a year to live in their houses and they no longer felt like spending money on my stuff. This was mid-07.

        I’m not really aware of when the Lehman etc stuff happened. That was for millionaires with solid gold toilets.

  2. ZeroBrain
    May 13, 2018 at 6:23 pm

    Thanks for laying out a clear prediction on a definite timetable that is actionable investing-wise. A lot of financial bloggers are apprehensive about laying out a case that will eventually be (dis)proven.

  3. j.w. carpenter
    May 13, 2018 at 6:47 pm

    This stock buy/back is not new, but believe its possible impact; do not believe the Fed, it is likely to be too reserved and do damage by fall 2018- early 2019 as it raises rates too much. As a result The politics of the BY-elections may be the shock of the year. Trump must by careful how he plays future events since there are many trap doors opening, not the least of which involve voter/ consumers, who have high debt levels.

  4. Pete Stubben
    May 13, 2018 at 6:57 pm

    As in ’16 maybe stocks could even go higher in Q-3 & Q-4 Wolf, if this rounded top actually becomes a base for the ’18 market, assuming of course increasingly better earmings & ‘peace in our time’. U never know… PJS

  5. Thomas Molitor
    May 13, 2018 at 6:57 pm

    What percentage of the buybacks are funded by profits and what percentage by debt?

    • worldblee
      May 13, 2018 at 7:45 pm

      I don’t know the percentage funded by debt, but we do know the percentage of profits that go into buybacks:

      “Some 92 percent of corporate profits in recent years have been spent on stock buyback programs and dividend payouts. That leaves only about 8 percent available to be re-invested in new means of production and hiring. Corporate America’s financial managers are turning financialized companies into debt-ridden corporate shells.”

      http://michael-hudson.com/2018/05/creating-wealth-through-debt-the-wests-finance-capitalist-road/

      • mickey
        May 14, 2018 at 10:53 am

        check out tangible net worth of several of the esteemed blue chip companies. It has been in decline for more than a few years.

        stock option plan comp expense is not found in the P&L but as a direct charge to S/E.

        Balance Sheets have been deteriorating for at least 8 years.
        If you do your own work on it, at some point the light will come on and you will see the fraud.

    • May 13, 2018 at 11:52 pm

      Much of it is now funded by this “overseas” cash. Actual cash flows from operations are way too small and haven’t been enough in years to fund dividends and share buybacks and investments. Debt has been used to make up the difference, hence the record debt levels. But the big thing now — and the NEW thing — is the “overseas” cash flowing into share buybacks.

      • Giulio
        May 14, 2018 at 8:50 am

        In a statment above you said “The next crisis – and there will be one – won’t be a financial crisis involving the big banks in the US”.

        IF the banks dont crash then what could, or what could trigger the next crisis? Is it the banks have been protected and better regulated or they wont make the same gamble?

        Would the nexy crisis be a internal civil wat, or war abroad? COuld you for see the biggest money maker in the last ten years: tech?

        Im also writing live and direct from San Francisco, I just dont see how the amount of money be made and invested in tech can continue. Would a national recession, based upon the fact the land in between California and New York is always on shaking economic grounds, effect tech and all teh billions pumped into advertisement?

        If 200o was tech, 2008 was housing, 2019-?

        • JZ
          May 14, 2018 at 9:28 am

          DEEPLY systemic. NOT a single sector, or industry. Think about credits at the country level, and currency level like Venezuela and Argentina or Asia in 1998. After 00 and 08, the risk has shifted from wound in the arm and leg into disease in the heart and brain. NO obvious symptoms and hard to identify but when it hits, it is end of life or chronically decay.
          Think about entire country is run like 2000 tech, huge amount of effort put into something that is NOT productive and the end result is wealth transfer, NOT wealth creation.

        • Valuationguy
          May 14, 2018 at 12:31 pm

          Giulio,
          What Wolf is saying is that the U.S. banks are NOT going to be the source…..and he is likely very correct, as the European banks (and the Chinese shadow banks) are in much more troubling circumstances that U.S. banks due to impending (or ongoing) currency issues.

          Just look and see how FAST Argentina’s currency has melted down and understand what could happen to the Euro should the proposed Italian gov’t political coalition (which is Euro-skeptical) move forward with an alternate currency (as was floated as a trial balloon over the weekend). All of the trillions in U.S. dollar-denominated liabilities of the European banks would shoot through the roof if the Euro fell just a fraction of what the Argentine peso experienced in DAYS….immediately triggering a liquidity crisis in Europe.

          Investors overseas would predictably accelerate the two-year long shift of assets into the U.S. to preserve their buying power…further pushing up the Dollar versus the Euro…feeding the fire.

          The ECB is nearly helpless to prevent it without defaulitng or losing control of interest rates due to already pushing up against limits set by the national gov’ts within the EU…in part due to its using up its ammo to buy 70% of EU gov’t debt issuance per its interventions over the past 8 years (i.e. Quantitative Easing).

          There is no mechanism that allows the system to self-correct when the central banks are interfering….so a collapse/uncontrolled reset is inevitable (ala slow pressure cooker….until the lid blows off)

        • d
          May 14, 2018 at 4:58 pm

          2019 = China?

          china is a when.

        • Lee
          May 14, 2018 at 5:57 pm

          The trigger is going to be all those entities that have gone short the US$.

          It has already started in a few countries. Just wait until the US$ recovers what it lost last year and then puts on another 10% on top of that.

          Then you’ll see the real fireworks.

      • mickey
        May 14, 2018 at 10:55 am

        hence, the deteioration of company balance sheets-which few notice–its there right out there in the open for the world to see. Its just not discussed by wall street and we should understand why.

      • May 15, 2018 at 10:32 am

        By ‘overseas’ cash I assume you mean the corporate profits repatriated through the tax cut laws. In fact the money never ‘went’ anywhere, but it was no longer available for “overseas” lending, hence the jump in LIBOR. This money provided a source of collateral which might be used to buy NYSE stocks, and that flow is gone or somewhat curtailed. Not sure how ‘new’ this is. The ECB hasn’t much choice. LIBOR sets the tone, and a contracting global credit supply is not a harbinger of growth. It was that moment when the global bankers decided that they had to raise rates to attract investment which exposed the chimera of global economic cooperation, although it remains to be seen who is on Powell’s speed dial. Not Yellen that’s for sure.

        • May 15, 2018 at 11:15 am

          I heard LIBOR was to be replaced? Perhaps it’s getting too hot for those bankers.

        • May 15, 2018 at 2:09 pm

          While Libor is crucial in setting interest rates on floating rate loans and notes, the underlying interbank lending market has been shriveling since the Financial Crisis since banks have chosen other funding options than lending to each other (this helps prevent contagion). And so now, Libor is just a manipulated theoretical value whose usefulness, after plenty of scandals, has expired.

          Here are details of the US dollar Libor replacement, which became active on April 1. It also tells the story (with a chart) of why dollar Libor has to die:

          https://wolfstreet.com/2018/04/03/dollar-libor-replacement-rate-sofr/

        • May 15, 2018 at 2:44 pm

          Thanks Wolf, this makes is very clear.

  6. Lee
    May 13, 2018 at 7:03 pm

    “….and corporations are already burdened by a record amount of debt.”

    What was that provision in the tax that related to limiting the amount of interest a company could write-off against its income?

    Do you think that will have any effect on buybacks or the use of debt by companies to continue buybacks?

    • Suzie Alcatrez
      May 13, 2018 at 8:01 pm

      Won’t effect at all as companies with up to $25 million in average annual revenue keep the full deduction.

  7. Trinacria
    May 13, 2018 at 7:22 pm

    Amazing, a company buys back shares thereby reducing the number of shares outstanding by either giving up an asset (cash) or taking on more debt. Somehow, this process sends the shares up (in many cases) when the company “could” be worse off by taking on too much debt. Again, Amazing! 2008-09 was papered over, so when this thing finally blows I have a feeling it will be known a Great Depression 2.0 and the panhandlers will be fighting for sidewalk space at corners and intersections. Tent cities will mushroom along with crime. Beelzebub is having a great time! This is what happens when a society loses gratitude. So deeply sad.

    • Petunia
      May 14, 2018 at 8:06 am

      Unfortunately, some of those bought back shares go into the profit sharing accounts and 401Ks of the rank and file. Many companies pay their bonuses in stock, this is especially true in tech and financial firms. This is another way they keep the share prices higher, by coercing the employees to invest in the company stock. When the market or the company takes a hit, the employees both lose their jobs and their nest egg.

      • d
        May 14, 2018 at 4:47 pm

        “Many companies pay their bonuses in stock, this is especially true in tech and financial firms. This is another way they keep the share prices higher, by coercing the employees to invest in the company stock. When the market or the company takes a hit, the employees both lose their jobs and their nest egg.”

        HP as has been discussed here before is an excellent example of what really happens.

        Company buys back Stock, Bonuses get paid in Stock, then the company buys that Stock back in the market. Rinse repeat.

        After over a decade of Share buybacks, there was more HP Stock in the market, than at the start of the buyback program, due to the executive, milking the company, through its share buyback program.

        Low level Employees may be coerced into holding stock issued as bonuses by the executive. The Executive rarely holds much of it when such a value extraction system is in operation.

  8. Debt Free
    May 13, 2018 at 7:36 pm

    In saner times, share buybacks were illegal and considered a form of market manipulation.

    • van_down_by_river
      May 13, 2018 at 8:27 pm

      Manipulation is considered a net positive now. It may have been controversial when stock manipulation was made legal during the Regan administration but now we can see stock manipulation as a net positive because stock prices have gone higher and, as Ben Bernanke made clear, higher (inflated) stock and housing prices are great for everyone. So everyone’s life has improved due to the wonderful and innovative policy of asset manipulation.

      • Frederick
        May 14, 2018 at 1:36 am

        Reagan

      • Debt Free
        May 14, 2018 at 10:20 am

        Brought to you by members of the Ayn Rand cult.

    • Setarcos
      May 14, 2018 at 12:08 pm

      Some of what we see can be frustrating, but making share buy backs illegal is not saner. How about stock splits, stock dividends, intial issuance amounts, ongoing issuance, etc. ? Who would agree to have a lord deciding how to simply allocate his/her resources?

      If the power to dictate fairness is ever complete, everything will be unfair (except for those who do the dictating). Capitalism may suck, but those without it risk their lives to benefit from it.

      • Ed
        May 14, 2018 at 1:35 pm

        Th issue with share buybacks is that managers can raise the p/e artificially and temporarily. The supposed danger is that they might load up on debt (risk!) in order to inflate their pay. Many senior managers get most or even practically all their pay in stock.

        This supposed danger seems credible to me.

      • Debt Free
        May 14, 2018 at 6:33 pm

        If they want to repurchase shares, they should go private first. No public company should engage in financial engineering.

      • Trinacria
        May 14, 2018 at 7:47 pm

        I’m in favor of capitalism. Only problem is we haven’t had true capitalism, especially in recent times. When you allow for lobbying that essentially purchases the politicians, there can be no capitalism. When the 2015 Omnibus Bill (Omnibus is a horrible word in the political world – means the taxpayers/citizens get screwed) allows banks to basically invest in derivatives with clients’ FDIC insured funds, all bets are off. This is crony capitalism on stilts – which is not capitalism at all. This is just one egregious example. So, honest citizens don’t have a fighting chance. This is why knuckleheads like Bernie Sanders get traction. It is all stacked against the honest hard working citizen who tries to work hard and minds his own business. America started with the best of intentions and models, but has degenerated over the generations and now faces ugly times. As an immigrant, this is not the country I came to as a little boy in late 1950’s. A country that discourages savings and encourages consumption has sold it’s soul to Beelzebub …simple as that.

        • May 15, 2018 at 2:47 am

          We seem to be on the same page, Trinacria. It is true that America is not what it was, by a long shot and yes, we do not have capitalism, we have oligarchy, a complete distorion of the Constitution’s aspirations.

          Do have hope that eventually things with change for the better.

          What is required to solve our many major issues is a complete revision of the system itself, a NEW ECONOMY if you like, discarding all this false and fraudulent neo- keynesian claptrap. In my view this will be forced upon us following the next imminent financial earthquake of which 2008 was merely the first seismic foretaste.

    • May 14, 2018 at 5:49 pm

      I have been watching home depots debt for the last three to four years and it has nearly doubled from 15 billion to 27 billion dollars. I see interest expenses creeping up from 900 million to 1.057 billion . I wonder if it will affect there earnings when interest rates start to climb and they have to roll over some of this debt ???? I know they have been buying back millions of shares also .

      • Debt Free
        May 14, 2018 at 6:51 pm

        Right, share repurchases also transfer ownership of companies from equity owners to creditors, which is a whole other issue. Creditors are much less forgiving of a company’s misfortunes when it runs into problems. Interest must be paid on time, dividends are optional given the circumstances.

  9. Alex
    May 13, 2018 at 7:58 pm

    But why is the Russell 2000 staying near all time highs when these companies probably don’t have overseas cash?

    • van_down_by_river
      May 13, 2018 at 8:37 pm

      Central bank liquidity.

      This tiny and temporary tightening by the Fed has not put even a tiny dent in the unprecedented, gargantuan pile of cash created (and still being created) by central banks.

      Also, you have been getting goods shipped to you from overseas for years and have given only dollars in return – what do you expect people holding those dollars to purchase? Clearly the value of the dollar is going to zero, there are millions of people, around the world, eager to get any tangible asset they can for their trash cash. Compared to getting stuck holding worthless dollars the Russell 2000 looks pretty good.

      I expect stocks to continue much higher without pause simply because there are too many dollars chasing too few assets. Assets continue to rocket higher because of supply and demand.

      • Ed
        May 14, 2018 at 1:38 pm

        Yes. Excess capital and 10 years of training that says buy the dips.

    • May 14, 2018 at 12:10 am

      Why is Tesla still at $300?

      • Alex
        May 14, 2018 at 7:37 am

        Fanboy company. Is it 401K buy-the-market indexing?

      • Lee
        May 14, 2018 at 8:19 am

        Because people are idiots…………

        Just another WEBVAN…….

      • Joe Banks
        May 14, 2018 at 8:42 am

        He had a fair question Wolf and you blew him off

        • May 14, 2018 at 8:52 am

          No I didn’t blow Alex off. I agreed with him. There is a lot of nutty pricing in the markets still, that’s what he said, and that’s what I said, in different ways. There is no logical fundamental answer for those prices. That’s what the Tesla reference means.

      • JZ
        May 14, 2018 at 9:42 am

        Telsla’s clean energy is a money losing religion backed by government. We all know what religion can do to people and what people will do for religion. And this is government backed religion.

        • RD Blakeslee
          May 14, 2018 at 12:57 pm

          Not just money losing. We have people sitting in trees, losing part of their lifetime, dedicated to this religion:
          http://www.roanoke.com/business/news/mountain-valley-pipeline-protesters-continue-tree-top-vigil-in-w/article_9ecf70d0-fab9-507b-9846-7dbb6e9550b5.html

        • Trinacria
          May 14, 2018 at 4:45 pm

          I hope that all the poor unfortunate folks that DIED in the – seems like many now – Tesla fiery crashes,had true religion and spirituality in their lives for when they met their maker !!! Unfortunately, it has been my experience in talking with people over the ages that when such folks believe in stuff like this, it does indeed become their “religion” at the expense of many other things in life. So, when they did die, I sincerely hope they did NOT go to the god of Tesla….otherwise it would be a long lonely eternity. Sad, but I now see this as a country that has lost its soul. I believe it was Carl Jung who said that the solution to most of our problems lies in the spirit.

        • alex in san jose AKA digital Detroit
          May 14, 2018 at 7:01 pm

          Trinacria – Yep, AI’s gonna be driving all the cars, right. If I had the eyesight, I’d be in truck driving school right now.

          The latest Tesla crash was into the rear end of a fire truck that was stopped at an intersection, at 60MPH.

      • Debt Free
        May 14, 2018 at 10:29 am

        Because I burned incense and prayed in my Elon Musk shrine for 3 hours yesterday, obviously. :-)

      • Valuationguy
        May 14, 2018 at 4:35 pm

        Because of the ever present threat of political intervention…..aka the California State Utilities regulators MANDATING solar panels on every new construction home over a certain price in the state…..which Tesla’s money sink (insider-bailout) Solar City acquisition MIGHT actually benefit from.

        Additionally….the billions in space program contract that are being pushed Musk’s way….via SpaceX….by politicians.

        I fully agree with you that Tesla’s probably a ZERO (even if they shut down the car production operation entirely to reduce cash burn) …..but when he can engineer a 20% gain from some kooky media stunt….a lot of dreamers will still follow his pipedream.

        • Lee
          May 14, 2018 at 6:03 pm

          How much are solar panels in the USA?

          It seems to me that from some of the articles I read that they are really expensive.

          Here in Oz a 6kW system with inverter and installation will cost around $A5000 with the government subsidy or about US$3800.

      • Debt Free
        May 14, 2018 at 6:44 pm

        It isn’t anymore. :-)

      • garsan
        May 14, 2018 at 8:45 pm

        Because there are idiots that drink the Cool Aid that the company serves. Normal market Phase[nifty 50,Tech Stocks in 90’s ect.]

  10. van_down_by_river
    May 13, 2018 at 7:59 pm

    I believe the fiscal stimulus baton, of tax cuts and repatriated overseas profits, will be handed off to the Fed with monetary stimulus. The Fed will come up with some excuse, as they always have, to cut rates and resume QE. I suspect this policy reversal could occur as soon as August but certainly no later then Summer of 2019. When this occurs it will be off to the races for assets as the wealthy of the world scramble to sell off their remaining reserves of crashing fiat currencies.

    The S&P has been doubling every three or four years for the last 9 years. Expect S&P 500 to hit 6000 by 2021 and it will easily surpass 10,000 by 2025 as the benchmark used to measure its value (the U.S. dollar) continues to fall through the floor – a hot potato no one will want to touch.

    The good news is the younger generation has been forced into debt/rent servitude, Boomers own them. Picture the Boomers reclining on hammocks being fed grapes by attractive young adult debt slaves. So good to be part of the generation that changed the world (and brought indentured servitude back).

    • May 13, 2018 at 11:57 pm

      Without crash and without credit freeze, the Fed will continue to raise rates and unwind QE. As long as markets don’t blow up, the Fed is encouraged to proceed on its path. This Fed has turned hawkish in late 2016, and it hasn’t missed a beat since.

      • d
        May 14, 2018 at 6:14 am

      • nick kelly
        May 14, 2018 at 10:01 am

        Oil price or even shortage (ME war ) could be a big wild card. It’s got to 70 pretty quick and there is yack of a hundred.
        If it gets there, it will likely trigger the recession that has to happen anyway. as interest on the debt mountain slowly rises.

        There isn’t room in the middle- class budget for higher interest rates AND a fifty percent increase in the price of gas.

        PS: there is talk in Canada of maybe the government taking a smaller slice of the pump price. It irks that after adding four separate taxes, beginning with the 10 % Federal Excise Tax,
        Carbon Tax etc., then comes the GST not just on the original price but on the taxes: a tax on a tax.

        But talk of a lower gas tax makes Greenies upset.

    • Cynic
      May 14, 2018 at 2:55 am

      The ‘Boomers v Millennials’ meme has been invented to manipulate the public and to obscure what is really happening.

      There is, of course, a grain of truth in it, but best not to fall for it.

      Any narrative that sets one generalised group (class, race, generation) against another is to be regarded with reserve – just think, whom does it benefit?

      • van_down_by_river
        May 14, 2018 at 12:07 pm

        Ben Bernanke (a Boomer) stated explicitly that he inflated assets so that people who hold assets (Boomers) will be made wealthy.

        So the people who own most of society’s assets were made wealthy without doing any productive work. Money can be created by fiat but wealth cannot. The wealth gained by boomers who own everything comes by siphoning off the fruits of the labor of those who need to buy the assets at these inflated prices.

        Generational theft is real and Boomer greed is unlike anything witnessed in this country’s history. Older generations have always cared about the well being of the generations coming up, now we only care how much we can squeeze out of them.

        The typical house purchased by a working class neighborhood of Wallingford Seattle sold for 14,000 in 1969. Now 50 years later a typical house in this neighborhood sells for 1,600,000 – more then 100X gain (in nominal terms) in 50 years. Housing in this typical boomer neighborhood increased 4X since Bernanke implemented his asset inflation policy. So young people are locked out of housing and forced to pay boomers through the nose as rent slaves unable to raise families. Does the average boomer give a damn – hell no!

        To the typical boomer Bernanke is hailed as a hero who made it rain. To the typical young person Bernanke left them without hope.

        • alex in san jose AKA digital Detroit
          May 14, 2018 at 7:09 pm

          Boomers built a world where you get paid money for having money. And where if you don’t have money, well …

        • Lord Koos
          May 14, 2018 at 7:43 pm

          I also reject this idea — there are many millions of boomers who are struggling. The inter-generational war meme is actively promoted by the likes of Peter Thiel. I lived in Seattle for many years, and know of what you speak, however most of the USA does not resemble Seattle.

        • garsan
          May 14, 2018 at 9:05 pm

          I don’t think the typical Boomer even knows who The banks water boy, Bernanke is.The typical boomer is not that much better of because of the bank bail outs but in a lot of cases has his kids and grand kids milking him or her. IMHO

  11. DK
    May 13, 2018 at 8:47 pm

    Great news. I just need it to last another few months. 3 more years would be stellar. I doubt I can be that lucky. The length of this business cycle may become a record setter. It’s getting pretty old.

  12. Bach
    May 13, 2018 at 8:49 pm

    “This gradual transition is one of several reasons why I think that in the near future this market cannot crash — say, a 50% decline over a relatively short period of time”

    I haven’t heard anyone credible mention a 50% decline. Yet, you’re forgetting that if yields on US treasuries spike, then foreigners may liquidate US stocks to get a risk free rate in US bonds.

    The Euro-dollars system (dollars held abroad) seems also to be wobbling and if the US dollar continues to appreciate then emerging markets may go into crisis mode due to dollar shortages. In which case, selling US stocks to get dollars would be a logical course. Of course this is probably small potatoes compared to the hundreds of billions of buybacks.

    We’ll likely have some downward turbulence through the summer then up to all new highs on the S&P by year’s end. This was pretty obvious considering that the FED will begin cutting again next year.

    The stock market will party until the bond market takes away the keys.

    • May 14, 2018 at 12:07 am

      50%-plus crashes are not uncommon in my lifetime. No one believed they could happen. And they happened. There were two of them over the past 18 years. Given how overvalued everything is, a 50% crash is a theoretical possibility, in line with the past two events, except it cannot happen at this time because of the buybacks and the liquidity in the market.

      The bond market is already “taking away the keys,” but very gradually.

      • nick kelly
        May 14, 2018 at 9:01 pm

        How gradual are the rate hikes in percentage terms? I mean in the last year? They were and are historically low but haven’t they increased a lot since the low point?

        Second: how much of the liquidity will want to stay aboard on the down- elevator? Won’t it flee to bonds, especially with one well-known name predicting 4 Fed bumps this year and 4 percent on the ten year in 2019?

        Sure there is liquidity but will it jump in to save the upcoming reality checks on Tesla and Amazon? The latter has a PE of 500 or so and Apple just made more in three months (Q1) than Amazon has in its entire life. Amazon sells billions to make millions.

        If someone ten years ago had predicted a warehouse and delivery outfit being the ‘next big thing’ everyone would have laughed. And as far as profit goes it still is laughable. The physical delivery of stuff can NEVER justify a PE that would be extreme for a software outfit that can scale up without moving from HO. The only thing that is different about Amazon is the hook- up with the Internet, or Dot Com.2
        But although you can deliver software on the Internet, you can’t deliver stuff.

        Like everyone else I don’t know when the correction will happen but
        I don’t think it will be gradual.

  13. Bobber
    May 13, 2018 at 9:33 pm

    Google has a monopoly on search. Apple has a monopoly on high-end smartphones, Microsoft has a monopoly on computer operating systems and core application software, and Facebook has a monopoly on social. These are all cash cows that will be buying back their stock forever if government doesn’t get its head out and start enforcing anti-trust.

    These companies buy out any competitor that signals any hint of competition, and they buy them early to avoid anti-trust issues. Some of the big tech buy 20 or more small companies year, but they pay big prices. But when you buy out 20 or 30 small companies, its no different than buying one big one, so the government should step in and put an end to it. It’s damaging to competition and ultimately the consumer and workers.

    At this point, Amazon is the only one that has to fight for its business through flawless execution.

    • Rates
      May 13, 2018 at 10:37 pm

      Google and Facebook are unofficial apparatuses of the government. Why would the government put a stop to it? They are not like the old monopolies like Standard Oil, etc. Google and Facebook will very critical in controlling the masses when the country goes to hell.

      When the Youtube shooting happened, the FBI was on location within 3 minutes. Funnily enough, the day after that fact was scrubbed clean.

    • MC01
      May 14, 2018 at 2:33 am

      Apple has no monopoly on high end smartphones. Just look at prices for high end products from LG, Samsung and Huawei. Same as Apple.
      What it has is a de facto monopoly on non-Android smartphones, especially given the alteratives (such as the long awaited Mozilla OS) have either turned into disappointments or resounding failures and are little supported by app developers, or not at all.
      In short if you, like me, cannot get along with Android it’s either Apple or smoke signals, which aren’t exactly reliable on rainy days such as this.

      A company with R&D the size of Samsung or Huawei could easily come up with an OS alternative to both iOS and Android, possibly as good or better than both, but there would still be the problem of app support.
      A bit like Linux: a great idea but it isn’t supported by many developers for simple financial reasons creating a loop limiting its spread.

      • RD Blakeslee
        May 14, 2018 at 1:05 pm

        Google has no monopoly on searches either; DuckDuckGo offers a search I have found to be comprehensive without tracking you.

    • Petunia
      May 14, 2018 at 7:53 am

      I actually think the market breakdown will come from tech. Google is an especially good example because the technology is ancient now. They are a very centralized system with a rather low limit, in the low billions, on the number of records they can index. The next cool thing will scale up and be distributed, no more cloud.

      • Justme
        May 14, 2018 at 1:36 pm

        Good point. The cloud is very centralized at the moment. With more symmetric bandwidth up/down there is no reason why much of cloud services can be a user-run distributed system. In terms of software, big companies like TenCent (WeChat etc) already run on openstack.org, which is open source (FOSS) cloud software.

      • Rates
        May 14, 2018 at 3:15 pm

        BS. Google rebuilt their cloud infrastructure back in 2007/2008.

        Why don’t you read their white papers instead of speculating? Those white papers have been verified by other companies. Through what? Well they use Google’s open sourced technology too. One example is Kubernetes. Google has close to 2 million servers at any one time, so how can they be a centralized system?

        Why do people who are no longer working in tech continue to post things like this? Google’s tech stack has moved beyond most companies’ with the exception of Facebook.

        This is why it’s better to hire H1Bs. Most Muricans are hopeless.

        • Petunia
          May 14, 2018 at 4:49 pm

          Regardless of the number of servers, theirs is only one database, segmented for sure, but still one database. One pie split into slices is still one pie. I would assume that an H1B would be aware of the principle.

          The cloud, any cloud, is a centralized system by definition. Just saying!

        • Rates
          May 15, 2018 at 4:56 pm

          Yeah, but haven’t you heard of replication? That’s an old technique. There are multiple copies of the database all over, spread out through multiple regions for both redundancy and performance. That means there are multiple masters as well.

          What you haven’t said is why that model will not scale or has reached its limit.

    • JZ
      May 14, 2018 at 10:14 am

      My personal take is that I am using MAC and linux to replace microsoft. I do NOT want google to track me. I do NOT use facebook. I do buy Apple since they are the only HONEST company making money for what they build as opposed to others like giving you something for “free” and sell “you” and “your privacy”.
      What’s difficult to kill is facebook, because if you kill it, another one will pop up. That’s the nature of social. People flock to one place. But others, I am NOT sure they can stay in monopoly.

    • alex in san jose AKA digital Detroit
      May 14, 2018 at 7:15 pm

      Bobber – Amazon? Flawless execution?? What are you smoking, my friend?

      I have Amazon Prime and I love it, and I’ve bought a ton of stuff on Amazon and will buy more (my tiny hamlet of a mere million people can’t seem to supply things like vacuum cleaner bags, smart-wool socks, etc.) but I’ve got to tell you, Amazon has a huge failure rate.

      Their ace in the hole is the know how to fail gracefully. With Prime you’ve got pretty much no-questions-asked returns. This has saved me many, many times. I’ve had things simply never arrive, and when push comes to shove, I call them on the phone and talk to the nice Indian guy, and get my refund.

      I’ve also had products that were simply broken when they arrived, and also I’ve had to do returns in the process of learning that you should never, ever, ever, guy clothes or smartphones on Amazon.

      You know who has nearly “flawless execution”? Ebay.

  14. raxadian
    May 13, 2018 at 9:53 pm

    2019 will be a worse year than this it seems.

  15. OutLookingIn
    May 13, 2018 at 11:09 pm

    “excesses wrung out”?

    Wall street running wild with buybacks using capital held offshore.
    The Fed “normalizing” by shrinking their balance sheet.
    Meanwhile, the government is burning through $400 billion per quarter.
    That is $1.2 trillion this year in new Treasury bond issuance.
    Sounds crazy or what? Something has got to give.
    Everyone will be multi-billonaires just like in Zimbabwe.
    Got your wheel barrow ready, to carry the cash for a loaf of bread?

    • juanfo
      May 14, 2018 at 1:10 pm

      Maybe time to stock up on wheel barrows or better yet start an artisan wheel barrow factory in the shed. I swear when this all gives, the ox cart men will be kings.

  16. Maximus Minimus
    May 13, 2018 at 11:11 pm

    Another trend of the recent decade or so was a continued privatization of public companies. With fewer companies on the stock market, thus fewer investment options, is this the co-contributor in keeping the stock market aloft?

    • Bobber
      May 14, 2018 at 5:28 pm

      That wouldn’t be a problem if there weren’t so many near monopolies and two competitor industries. We’d have new businesses generated all the time.

  17. Debt Free
    May 13, 2018 at 11:33 pm

    While John Hussman is expecting a 60+% decline in the markets from these levels, he doesn’t put a firm date on anything. He always phrases it as “by the completion of this market cycle.” You have to think of an investment as a stream of cash flows out in the future, and what you pay for it will affect your returns. An investment in US equities made now can expect negative total returns 10-12 years out, with interim lows 60+% lower at some point during that period.

    • van_down_by_river
      May 13, 2018 at 11:59 pm

      The big decline in stocks is just around the corner – and it always will be.

      The talking heads on CNBC are right about one thing, as long as investors keep hoping and expecting a correction to happen it will not occur.

      Also, am I wrong to assume the Federal Reserve put is still in play? Does anyone really believe the would not intervene if stocks were to drop as much as 15%? I have gone 100% into stocks, I can’t afford to keep getting destroyed by inflation – the Fed has my back. I expect my money to double in a couple years. Feels good to be on the winning team for once.

      • May 14, 2018 at 12:23 am

        The Fed doesn’t give one iota about your stocks or my stocks. And the Fed doesn’t have your back at all. The Fed has its own priorities, and you’re not it, and I’m not it either :-]

        And the Fed’s priorities change. Now it is aiming to LOWER asset prices (raise yields, spreads, and risk premiums). That’s its stated policy. Stocks went down 10% in February, and the few Fed heads who commented on it said it was “small potatoes” (Dudley).

        The Fed worries about the banks, not stocks. When credit freezes up or when banks begin to totter, the Fed gets nervous. Stocks, meh.

        • Max Power
          May 14, 2018 at 6:43 am

          Right, and people forget that despite the almighty Fed, stocks still experienced two ~50% crashes in the past 18 years.

          My gut feel says recession takes place appx. 1 to 1.5 years from now. Top of the business cycle will probably be Q4 2018, give or take a quarter. Expect equities to lose 35-45% in value within 2 years. Real Estate 15-25% US average down within 3 years.

        • davce
          May 14, 2018 at 7:04 am

          but the fed also worries about the economy and employment, tight? Its not all about the banks

        • May 14, 2018 at 8:57 am

          Yes, they’re worried about the cost of employment, that it’s rising and may soon be rising too fast…

          That’s one of the reasons they’re tightening.

        • KPL
          May 14, 2018 at 8:43 am

          “The Fed worries about the banks, not stocks.”

          That was not true in 2010 to 2016. Each time the stock market tanked during this period out came the Fed talking heads with either more QE or no interest rate hike (e.g. Bullard low in Oct 2014), QE2, Operation twist, QE3, Brexit etc.

          It is only since Trump that the Fed has been sticking to what it has been saying on rate hikes. And in the last decade the only time it has stood pat with market falling has been in Feb 2018.

          Right now it does look like the Fed will raise rates. That the Fed has tried to ensure that it does not derail the stock market (communicating, increasing ever so slowly) just shows how important stock market is for the Fed.

        • May 14, 2018 at 12:30 pm

          Take your clue from the 1970s, end of a bad president, a bad war, and a bad economic policy (guns AND butter), and a bad stock market. This is not a market driven by speculation, this is liquidity driven, and based on global monetary cooperation which is heading down the loo. The 70s were for speculators, but not in stocks, but in gold, RE, and collectibles. It was also a bad time for employment and if the numbers today were such outright lies it would be now too.

      • Cynic
        May 14, 2018 at 3:00 am

        Try to be on the survival team, not the ‘winning’ one: you will think more clearly and not be lured into bubbles and manipulations which benefit others – who do not give a fig about you.

        100% in stocks – in anything – is very dangerous.

        Have ‘several strings to your bow’ as the sensible old saying goes.

    • Memento mori
      May 13, 2018 at 11:59 pm

      Hussman, very smart guy but I cant remember for how long he has been predicting a market crash…eventually he migth be right but his fund hasnt had a stellar performance for some time. Time is of the essence in investing, any prediction can come true given enough time.

  18. Yes
    May 13, 2018 at 11:58 pm

    Good article once again.

    I wonder what the accumulated effect will be of the FED reducing its balance sheet, the huge borrowing need of the federal government, not to forget state and municipal borrowing combined with the selling of treasuries bt the “buyback cororations”. In my eyes it adds up to a huuge amount of treasuries seeking buyers. Ok, US rates are higher compared to for example Europe, but despite this I wonder wether the market for treasuries is nearing its saturation point, especially if FED is staying its current course.

    Yes, I think Wolf is head on correct about the tax cut amplified buyback frenzy keeping stocks up for quite a while, the lnly thing that would spoil the party is war against Tehran. That would cause its cks to drop like a stone, oil and gold to go through the roof.

    • Realist
      May 14, 2018 at 12:00 am

      Stocks not its cks …

    • Kent
      May 14, 2018 at 5:27 am

      The Fed’s primary dealer banks are required by law to purchase any treasuries that don’t have buyers in the market. And they always will have the cash to do so. The system is designed so that there will always be a buyer for treasuries. That cannot be a concern.

  19. Debt Free
    May 14, 2018 at 12:33 am

    No matter which valuation measure you look at, whether it be Shiller’s CAPE 10, Tobin’s Q, or Hussman’s preferred market cap/gross value added, all are flashing warning signs. I plead ignorance on how much longer they can manipulate markets, so I am content to take a defensive strategy. To anyone who has significant exposure to risk assets, I would paraphrase Dirty Harry, “Do you feel lucky, punk?”

    • van_down_by_river
      May 14, 2018 at 2:04 am

      I’m feeling lucky. My entire net worth (except a small position in GLD) is in the stock market and I sleep well now that I’m out of cash. I would have purchased real estate but with only about 900k in savings I’m priced out of the housing market and most REITs seem to badly underperform real estate. Cash is risky, stocks seem to be the safest choice available to pikers like myself.

      I see S&P 500 futures are up strong again, I believe that makes 6 days in a row and up almost 6% in just a week and a half – so yeah I’m feeling lucky.

    • Tony the Tiger
      May 14, 2018 at 3:20 am

      The central banks are riding a tiger: without QE, all pensions funds wil be in serious trouble and Baby Boomers will change the government to get QE up and running again.

      As long as people all over the world believe in the US Dollar and other fiat currencies they can manipulate the markets forever: issue fiat, buy financial assets to keep asset prices up.

      The central banks could end up buying real estate, machinery or even Red Bull cans to keep the economy busy. Why not?

  20. William Smith
    May 14, 2018 at 1:45 am

    I note that if companies are using their stashed overseas loot to buy back their stocks on the US markets, aren’t they repatriating funds back into the US economy by default? Maybe this increases liquidity somehow which is what the powers that be want to happen so there is less chance of credit freezing up due to unwinding QE etc. So apart from the market manipulation aspect, there might be some positive benefit. Or maybe I’m missing something. Certainly those overseas loot storage facilities won’t like the outflows from their coffers and it will have implications on their funding models.

    • May 14, 2018 at 8:28 am

      They’re selling US Treasuries and US corporate bonds and other US and non-US assets they “hold overseas,” and they’re selling them to investors in the US and elsewhere, and they’re using the proceeds to buy back their own shares from investors in the US and around the world. Overall, globally it’s a zero-sum game. But the mix shifts: selling pressure in the asset classes they hold and are selling, and buying pressure in their own shares.

      A lot of “cash” they hold are short-term US Treasuries. They count as “cash equivalent.” They sell those mostly to US investors (primary holder of Treasuries). But demand isn’t huge, and so prices have fallen and yields are way up. The 6-month yield is now 2.06%.

  21. Patrick
    May 14, 2018 at 2:08 am

    $180B of buybacks in Q1 yet US markets entered a correction that they’re ‘still’ in (i.e. a market doesn’t exit a correction until it regains the previous high). A Fed that will be unwinding (maybe) to the tune of $50B mo (or $150B a quarter) by October. 30yr/fixed rate mortgages almost on rails to hit 5.25% by or before end of year. While I’m not entirely sure a crash is in the cards for 2018, I’d say the odds very much favor a technical market recession.

    Investors have repeated the mantra, “Don’t fight the Fed” ad nauseum while the central bank was Buying. Now the Fed’s Selling so maybe it’s only a matter of time before those same ‘investors’ stop fighting the Fed.

    • van_down_by_river
      May 14, 2018 at 12:20 pm

      There is a “quiet period” (I believe 90 days) prior to reporting earnings that company’s cannot buy back (manipulate) their stock. I believe the February crash may have occurred during one of those quiet period windows so companies may have been temporarily helpless to fight the decline. They appear to be back in the game now – looks like VIX will soon be back below 9.

  22. Mark
    May 14, 2018 at 3:13 am

    Wow Wolf, you’re getting bullish on US equities now?

    I agree with you that stocks will very likely not “crash” in 2018. I also agree stocks are richly valued, but there is definitely more runway to go higher over the next 1-2 years.

    A US recession is going to require an inversion of the yield curve, plus 6-18 more months to start. With the 10-2 spread a little north of 40 basis points now, by my reading of the tea leaves, a recession is 12 months away at a minimum. A recession will eventually happen, but not this year.

    I think the next rip higher in US equities will be when the market realizes that the Fed will be very reluctant to invert the yield curve by raising the Fed Funds rate more than one more time. Once the Fed inverts the curve by raising the FFR or the bond market does it at the long end, that’s my cue to start heading for the exits. Until then, enjoy the ride.

    • May 14, 2018 at 8:13 am

      Please don’t read me wrong: I said stocks “cannot crash” but will likely zig-zag lower for a long time. That’s not “bullish.” That’s pretty bearish :-]

      • Michael
        May 15, 2018 at 7:41 pm

        Yes I agree with this. The stock mark “crash” has already in process. A controlled decline it is.

        • May 15, 2018 at 11:36 pm

          This gradual decline also matches the steady loss of growth we have experienced over the last 20 years.

          We are not growing our economies anymore and the more debt which is piled on, the less growth we get until soon $1 of debt will produce negative growth, then where do we go from here? That is, of course, if you believe in the efficacy of GDP calculations as a true reflection of economic returns.

          I believe that this effect is as much to do with “Energy Returned on Energy Invested” (EROEI) as the issuing of greater amounts of debt.

          The stock market over time, as always, is reflecting the general economic conditions regardless of the false statistics published every day.

    • Lee
      May 14, 2018 at 8:26 am

      “A US recession is going to require an inversion of the yield curve”

      Really?

      With all the CB QE over the past the yield curve has lost any ability to predict anything.

      Add in all the shorts at various points along the curve and it goes from meaningless to absurdity.

    • May 14, 2018 at 9:23 am

      Very sensible observations. I too watch the 2-10s and 30s and agree that even 2 rate rises could cause inversion and like you, predict that the Fed will ease off this year. Still more to run in equities – he says -crossing fingers and wincing at the boss in the kitchen!

    • Valuationguy
      May 15, 2018 at 8:57 am

      Rising interest rates are going to be GOOD for stocks….at least for a time (I give the U.S. stock rally another good two years….and the rally is going to be a lot stronger than people can believe….climbing the wall of worry). Historically….this has a lot more support than the argument that high interest rates are bad for stocks.

      Primary cause of the rally in U.S. stocks is that it catches even more of a wind from the unwinding of the bond markets (which is 4x the size of global equity markets….and that isn’t counting the ‘zero sum’ derivatives markets which dwarf both) as rates rise and bonds sink underwater.

      As rates rise pensions are going to become increasingly desperate for return (as they foolishly invested in a lot of highly leveraged low-interest rate bonds in the past five years….and not all of them were short-term)…which trends toward a higher mix of equities. (Real estate gets hit like bonds by higher interest rates…plus add in higher property taxes by increasingly shakey municipalities…aka Chicago style).)

      Then of course you have the currency issues (strong dollar) driving international money flows to the U.S. as well.

  23. May 14, 2018 at 3:56 am

    If the plunge protection team fell asleep the major market indexes would trip all the circuit breakers on the downside in about ten minutes flat. Corporations buying back their shares today are paying 500 to 600 percent above fair market valuations.

    Share buybacks = Chapter 11 bankruptcy

  24. May 14, 2018 at 4:12 am

    Good argument for a stabilish S&P500, 2018 and I can’t fault your logic, Wolf.

    However, what about the risk of a credit crisis fueled by a currency crisis especially in EMs. Would this not impact the stock markets?

    I am watching the dollar with baited breath as I am sure movements here will indicate a nearer crisis rather than later.

    • May 14, 2018 at 8:11 am

      Oh sure. This and other issues can and will impact the market, and as I said, there will be sell-offs, but a “crash” is something BIG and nasty that takes time to recover from, not a market that is down 10% (correction) or down (20%+ bear market).

      There are “flash crashes” that are over in minutes or hours, but they’re not a real crash either.

      • May 14, 2018 at 9:19 am

        Here’s some fun I saw the other day:

        The Crash Prediction
        (This is copied from the Palisade Research Blogg)
        Look at the resemblance between the events leading up to the Great Crash of 1929 and today.

        Read this passage:

        “The crash of 2018 marked the end of a long stock market boom fed by several years of easy credit. Because inflation was low for most of the 2000s, the Fed did not bother to curb the speculation by rising rates and when it did, the rise was too little too late. The signals for an upcoming recession broke the highly valued stock market in 2018. Actually, for example the dividends grew even in the last quarter of 2018 but the faith for the future of the market was broken and the investors panicked…”

        1929 has been changed for 2018 – that’s all. It’s like Mark Twain said, “history doesn’t repeat – but it sure does rhyme.”

        But I take your points about crashes v corrections v daily movements. If I knew what tomorrow would bring I really would have made it!

        • Petunia
          May 14, 2018 at 7:13 pm

          Nothing bad will happen until after the US elections in November. After that I expect interest rates will fall again or at least stop rising.

        • d
          May 14, 2018 at 9:21 pm

          “Nothing bad will happen until after the US elections in November.”

          Unless china decides to upset the P45 apple cart going into the midterm which they may do instead of waiting for 20 20 to do it.

          Never say Never.

  25. Sneaky Pete
    May 14, 2018 at 6:53 am

    As inflation kicks in due to the beginning of the new commodity cycle, the equity markets should do very well on a nominal basis even as liquidity and other such accommodations are removed. Venezuelan stocks have done amazingly well. Of course on an inflation adjusted basis you’ll still get killed in equities–both there and here. Gold and Silver in Bolivars have been best. That’s probably what will work best here as well for the next 8 years or so.

  26. Gary Schurman
    May 14, 2018 at 7:38 am

    One thing that we have to remember is that other than a temporary increase in demand for shares buybacks do not add value as the increase in EPS is entirely offset by the resources (excess cash [decrease in an asset] , additional debt [increase in a liability], etc.) expended to repurchase those shares.

  27. Paulo
    May 14, 2018 at 7:55 am

    Interesting article and stats. However, what stood out for me was that it stands in its own bubble; as if there are no extraneous or geo-political forces operating outside the subject. I will just list a few which might……
    * Iran/Israel conflict proceeds as apparently scripted, with unintended consequences spiking oil prices.
    * NK does not give up nukes already existing (would you?)
    *Mueller and mid-terms……
    *China/US trade impasse
    *Iran sanctions and EU not going along

    etc etc etc

    I believe this whole stock bubble is a very very fragile house of cards with printed money, debts up the ying yang (technical term :-), and no basis in reality.

    But what do I know? :-) We got out of Dodge years ago and never regretted it. From the outside looking in it fosters up a vision for me; a dance band playing on the Titanic and people saying, “Just one more before….”.

    I still like what GW said, oh so long ago.
    “There’s an old saying in Tennessee – I know it’s in Texas, probably in Tennessee – that says, fool me once, shame on – shame on you. Fool me – you can’t get fooled again.” – September 17, 2002

    I’ll bet you thought it was going to be about ‘this sucker could go down’. :-)

    regards

    • RD Blakeslee
      May 14, 2018 at 2:30 pm

      Never was “in Dodge”, but Wolf’s insights are very helpful for useful info to steer my microeconomy.

      Thanks, Wolf.

    • nick kelly
      May 15, 2018 at 6:28 am

      The thesis seems to be that because the market can buy itself, often with borrowed money (see slowly disappearing IBM) an admitted bubble will deflate slowly.
      All the fund managers will report losses to their clients for years (while still taking their management fees) but the clients will accept this because it will happen slowly.

  28. Setarcos
    May 14, 2018 at 9:02 am

    Always heard that buying your own stock is reasonable when it’s undervalued, i.e. a better use of capital than other alternatives. Guess this was just a line fed to the little people ( like me.)

    At these high levels, it sounds like a circular and self-reinforcing strategy that creates nothing that is real (except wealth for those who know when to take their chips off the table). Feels like check kiting to me.

    With capital becoming more expensive, it would seem this buy-back strategy dies once the overseas cash runs out …and then the share price fall also gets magnified? Why would an insider not be selling now?

    • Max Power
      May 14, 2018 at 11:44 am

      I think making sure executives’ stock options are in the money trumps reasonableness.

  29. Bobber
    May 14, 2018 at 9:49 am

    But would corporations attempt to defend their stock on the way down? The buyback programs generate a lot of criticism from investors when stocks are dropping. It doesn’t look good when you buy your own stock at $50, then it’s $40 next quarter.

  30. ZEVKO
    May 14, 2018 at 9:57 am

    WFC with the so called buy backs is up a tiny 2 % for the year, so would not exactly call that a roaring gain.

  31. Debt Free
    May 14, 2018 at 10:14 am

    The last crash stopped almost to the day when the government suspended mark-to-market accounting for bank assets. Fraud is pervasive throughout the system now.

  32. Gunther
    May 14, 2018 at 11:42 am

    Where did all the interest rate derivatives go? Few years back that was a big concern and now derivatives disappeared fom reporting.D id they disappear from official reporting too or did they expire without trouble??

  33. Tamara
    May 14, 2018 at 12:31 pm

    “Companies will need to refinance an estimated $4 trillion of bonds over the next five years, about two-thirds of their outstanding debt… This has investors concerned because (rising) rates means it will cost more to pay for unprecedented amounts of (corporate) borrowing, which could push balance sheets towards a tipping point.” ~ Bloomberg

    And I assume that this does not take into account the supposed $1 quadrillion or more in interest-sensitive derivatives. What could possibly go wrong?

    Based on what I’ve read so far, the recent tax legislation was mostly about helping to keep the U.S. equity markets inflated in 2018 with corporate inflows of their foreign-based capital. But as Wolf pointed out, after that peters out what will the Fed think of next? I guess that’s anyone’s guess. But as for me, I had no idea that they would do what they did regarding huge amounts of QE, so I have no idea what those bird-brains will come up with next, but I’m sure I won’t like it.

    “The tungsten filament of an incandescent light bulb burns brightest right before it goes out.” – author unknown, but probably an electrical engineer having a minor in economics along with a twisted sense for humor.

    “You can only blow so much hot air into a balloon before it eventually pops.” (author unknown)

    “Massive corporate buybacks does not a healthy economy make.” ~ Tamara

    • May 14, 2018 at 12:51 pm

      Here, here, Tamara, you are bang on the button!

    • nick kelly
      May 15, 2018 at 8:27 pm

      Please don’t blame the absurd so- called ‘tax cut’ on the Fed.

      The Fed’s main problem is out of control fiscal policy, i,e. spending, which it has said it can no longer balance with the monetary tools it has.

      The reason there is no tax cut is because it is borrowed, not paid for with a reduction in spending. We have long since passed the point where it could ‘pay for itself’ in increased economic activity.

      The ‘laughter curve’ was fun back then…now the joke’s over.

      There is a lot of Fed bashing around, but the money manager of a spend thrift wanna- be rock star has a tough job.

      How does an economy 22 trillion in the hole merit more debt called a tax cut?

      • d
        May 15, 2018 at 9:31 pm

        “How does an economy 22 trillion in the hole merit more debt called a tax cut?”

        As long as the vast majority of the debt is onshore/Held by nationals, and you can still keep making the VIG, size is not an issue.

        Where P 45 and his loonie cronys may have made a mistake, is, can they keep making the VIG, FROM INCOME.

        When you have to borrow to make the VIG you have a BIG problem. Greece, Argentina, Etc.

  34. lenert
    May 14, 2018 at 12:40 pm

    Buybacks are inflationary?

  35. Kasadour
    May 14, 2018 at 12:42 pm

    I think anything can and often does happen. Cannot is a big word. The likelihood may or may not be that it will “crash” and arguments for either scenario can be made. But to say something cannot happen is going out on a limb. Respectfully, IMO.

  36. Gandalf
    May 14, 2018 at 5:18 pm

    Underlying stewing disruptive external geopolitical and internal political can always explode to disrupt the economy and the stock markets.

    I remember in January 1973 when the stock markets hit a high – the SP 500 reached its peak of 120 in that month. (and yes, I was just a kid then, but already I was reading and following the news intensely through newspapers, Newsweek, and TV news). Everything seemed good – the GDP growth was great, unemployment was low at 4% or so, Nixon announced the signing of the Paris Peace Accords and “Peace with Honor” later that month. The national mood was all warm and fuzzy and happy.

    Then, in October 1973, the Yom Kippur War broke out, the Nixon for the first time ever decided to commit the U.S. to massively and openly backing Israel in its struggle against the Arabs, and directly air-lifted the latest in smart bomb technology and other weapons from the US military arsenal to Israel to drive back the Egyptian forces who were pushing through the Sinai.

    The Arabs got together to punish the Western countries who had supported Israel, and the Oil Embargo of 1973 resulted, which shot the price of oil up from $3 a barrel to $12 a barrel. As the world was heavily dependent on oil from the Middle East at that time, world economies went into a tailspin, a caustic mix of inflation and recession at the same time was the main result of the Oil Embargo – Stagflation.

    And, of course, Nixon had this niggling thing going on called Watergate and a Special Prosecutor hounding him, which culminated in the firing of Archibald Cox in the Saturday Night Massacre, and this also happened in October of 1973.

    So, after hitting that high point in January of 1973, the stock market went into a deep dive, with the SP 500 dropping some 50% before bottoming out in the low 60s in October 1974.

    History doesn’t always repeat itself, but it sure does rhyme an awful lot.

  37. Prairies
    May 14, 2018 at 5:27 pm

    The market may not “crash” this year, but the beginning of the decline will be marked as January 2018. S&P, along with the DOW both have not been able to regain the market cap they lost 4 months ago. These share buy backs only calm the fire, they don’t put it out and they don’t remove the doubt in the minds of the investors.

    Interest rates will continue to climb as the governments around the globe ignore inflation on everyday purchases that debt slaves around the globe are forced to pay for. It may not look like 1929 in 2019 but it might feel like it for the nations under water. Then the cancer will spread.

  38. WSKJ
    May 14, 2018 at 5:27 pm

    That’s a reasonable, straightforward thesis (i.e., that we should expect no major market correction in 2018), and a gutsy call, Wolf. We could add that studies have shown that corrections are fewer in election years.

    The questions we would like to answer are, when do we get the big correction (yes, about 50 % is about right, according to several lines of thought, inc. Wolf, above), and could it possibly happen incrementally ?

    Emotions are always present in the marketplace, and they come to the fore in correction, sometimes driving retreats into screaming routs (= crashes).

    As a Commenter above has listed, barring initiation by the practices/genius strategies of central banks, other big banks, and/or big corporations, there are unforeseen events that may trigger panic, inc.: armed aggression escalating to warfare outside areas where it is already endemic.

    I will add here: cyber warfare that succeeds in shutting down much of our electronic interconnectedness. (If we can’t get our internet, and Wolfstreet has disappeared, it’s scary business. And they say that the power grid etc. could go down in such an event.)

    In short, some major shock to the system.

    Timeframe ? I think it’s fair to say that the consensus at Wolfstreet is that the apparent wealth effect was mostly apparent; valuations of much of our economy are out of whack; and debt is excessive. So when ?

    My reading of tea leaves had indicated economic contraction, stabilization, sobering, from the crash, until 2020. Then the beginning of a new period of expansion. The gunpowder green was good, but it looks as if the goodness did not extend to quality divination. I can only blame the central banks for distorting the cycle. (BTW, what kind of tea are you drinking, Wolf ?)

    I pulled back, i.e. sold some shares from the IRA stock holdings, several years ago. All-out liquidation is probably not a good strategy for most of us most of the time. Lightening up sometimes is. In the meanwhile, I look at my piles of pocket change with fondness: base metals, as well as precious, have value. Known weight, not susceptible to electronic black-outs. Images from an earlier time, when trust was the coin of the realm.*

    *Yes, a sad thing when the copper penny was alloyed. I have not thought about what kind of backyard smelter gets you to refined pure metals from our new (since 1982) pennies, but someone has thought that through, I’m betting. Metallurgists ?

    Thx all.

  39. Gandalf
    May 14, 2018 at 8:08 pm

    WSKJ,

    Yes, a cyber attack by Iran on our banking system has already occurred, as pointed out in the movie documentary “Zero Days”, about the Stuxnet virus. After Iran figured out what had happened (Kaspersky was at the forefront of unraveling the trail of damage left by the Stuxnet virus, btw), they started up their own cyberattack unit and launched a limited attack on an American bank, just as a warning shot to the U.S. – “don’t screw with us again, we can do the same to you and worse”

    My reading of the Middle East is that it is unraveling again, and this time, it could lead to great damage to the U.S. as a major world power. Sooner or later, also, it seems inevitable that there will be a nuclear arms race between Iran, Saudi Arabia, and perhaps Egypt and Turkey.

    The Ancient history of Israel is that the previous two versions of Israel (which has always been surrounded by a multitude of competing ethnic groups and cultures and religions, located as it is at the intersection of three major continents), were brought down by hyper-religious extremist leaders, Zedekiah and then the Zealots/Simon bar Kokhba, who basically pissed off a major regional power that then proceeded to destroy the state.

    Modern Israel is merely the v. 3.0 iteration, and nothing has changed. Israel today celebrates their devoted new Presidential ally, but one has to be careful of what you wish for – you might get it, in spades, and far more than what you thought was in the bargain.

    The Middle East has always been a cauldron of instability, and I wish we could keep the United States out of its wars, but that doesn’t seem likely now.

  40. Pl’n’l
    May 14, 2018 at 8:15 pm

    The Fed Put is not dead. It is only taking a nap. Any sign of real market jitters, and the Fed comes back into QE with both barrels. The Moral Hazard path has been chosen. There is no turning back now.

    • Patrick
      May 15, 2018 at 3:03 am

      Completely agree. I don’t see the Fed allowing markets to crash in any meaningful way. The Dollar & other currencies OTOH will eventually be what crashes in value.

      Until then I expect to start seeing increasingly large oscillations between the Fed trying to prop up markets at the expense of the USD and vice-versa. Hint: They’ll finally choose to save Markets; no different than every other currency inflating country has to date.

  41. jon
    May 15, 2018 at 12:55 pm

    I don’t see stock market crashing in 2018.
    Quite a bit of tail wind for stock market at this time… consumer confidence all time high, historical low unemployment rate, good corporate earnings, relatively low interest, very low corporate tax rate, 100s of billions of stock buybacks etc etc.

    • May 15, 2018 at 3:00 pm

      They didn’t see it in 1929 either:

      Look at the resemblance between the events leading up to the Great Crash of 1929 and today.

      Read this passage:

      “The crash of 2018 marked the end of a long stock market boom fed by several years of easy credit. Because inflation was low for most of the 2000s, the Fed did not bother to curb the speculation by rising rates and when it did, the rise was too little too late. The signals for an upcoming recession broke the highly valued stock market in 2018. Actually, for example the dividends grew even in the last quarter of 2018 but the faith for the future of the market was broken and the investors panicked…”

      1929 has been changed for 2018 – that’s all. It’s like Mark Twain said, “history doesn’t repeat – but it sure does rhyme.”

  42. R cohn
    May 15, 2018 at 1:23 pm

    Most of repatriated cash and most of the buybacks comes from 25 companies.Almost all of the money held overseas comes from 2 industries,Tech and pharma.Many of the big pharma stocks have not benefitted from buybacks.
    To get a prospective on the inefficiencies of buybacks look at the retail industry.Many of these stocks have traded down 75% despite massive stock buybacks.Stocks like AAPL May benefit from buybacks because of their multiple to cash flow.But others like Msft are trading at much higher multiples and are less attractive for buybacks

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