The mispricing of assets across world markets has reached epidemic proportions.
Stock prices have made strong advances over the past several years, yet market analysts see further gains, arguing that the selloffs of August 2015 and early 2016 represent a healthy correction.
But this rise in stock values has been underpinned by financial engineering and liquidity – setting the stage for a global financial crisis rivaling 2008 and early 2009.
The conditions for a crisis are now firmly established: overvaluation of financial assets; significant leverage; persistent low-growth and deflation; excessive risk taking reliant on central banks for liquidity, and the suppression of volatility.
For example, U. S. stock buybacks have reached 2007 levels and are running at around $500 billion annually. When dividends are included, companies are returning around $1 trillion annually to shareholders, close to 90% of earnings. Additional factors affecting share prices are mergers and acquisitions activity and also activist hedge funds, which have forced returns of capital or corporate restructures.
The major driver of stock prices is liquidity, in the form of zero interest rates and quantitative easing.
To be sure, stronger earnings have supported stocks. But on average, 70% to 80% of the improvement has come from cost-cutting, not revenue growth. Since mid-2014, corporate profit margins have stagnated and may even be declining.
This post was published at David Stockmans Contra Corner on February 25, 2016.
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