Courtesy of ZeroHedge. View original post here.
Spoiler alert: it's not the Fed, even though the portfolio rebalancing channel courtesy of a $4.5 trillion Fed balance sheet certainly assured that the artificially inflated bubble in stocks, as a result of the Fed's own purchases of bonds, is unlike anything seen before (and to all those debating whether the bubble is in bonds or stocks, here is the answer: it is in both).
The answer, according to Goldman's David Kostin is the following: "From a strategic perspective, buybacks have been the largest source of overall US equity demand in recent years."
In other words, not only has the Fed made a mockery of fundamentals, the resulting ZIRP tsunami means that corporations can issue nearly-unlimited debt to yield chasing "advisors" managing other people's money, and use it to buyback vast amounts of stock, which brings us to the latest aberation of the New Abnormal: the "Pull the S&P up by the Bootstaps" market, in which the only relevant question is which company can buyback the most of its own stock.
Some further observations on the only thing that matters for equity demand in a world in which the Fed is, for the time being, sidelined:
Since the start of 4Q, a sector-neutral basket of 50 stocks with the highest buyback yields has outpaced the S&P 500.
And sure enough, with the market once again rewarding stock buybacks…
… companies will focus exclusively on stock repurchases in lieu of actual growth-promoting capital allocation such as CapEx (as predicted in April 2012):
We forecast S&P 500 cash spent on repurchases will rise by 18% in 2015 following a 26% jump in 2014.
Putting this number in the context of the recent "fire and brimstone" announcement by the BOJ:
We estimate the incremental demand for US equities from the combined re-allocation of Japan pension assets will total $70 billion. For context, we forecast share buybacks by S&P 500 firms will total $707 billion in 2015, or 10x as much as the overall Japan pension fund re-balancing.
In other words, what the BOJ does to the market will be a tiny fraction of the impact the latest and greatest cost-indescriminate buyer – corporations buying back their own stock – will impart on equities.
And here is what happens to CapEx as a result:
… capex growth will decelerate by 200 bp to 6% as global growth concerns and a 25% plunge in crude oil prices since June have brought investment plans under review. The Energy sector accounts for roughly onethird of aggregate S&P 500 capex.
We have said it for years, and finally even Goldman admits it: the days of Capex growth are over:
There is more bad news: because while stock buybacks mean even more artificial growth for risk assets, the collapse in CapEx, especially among energy companies, means that GDP in 2015 is about to drop off a ledge, polar vortex 2.0 notwithstanding.
Behold: 0% (or negative) growth in Real Private Fixed Investment Oil & Gas Structures & Machinery, a direct – and quite substantial – input factor into the GDP calculation.
But who needs growth when the Chief Executives of America's largest corporations are about to trickle down their record, stock-buybacks driven bonuses for yet another year.
