For this week’s main message I’ll point to two of the developments that are influencing our present macro thesis, then share some key highlights from our latest messaging.

Toward the lead-in to last year’s blink-on-an-eye bear market in equities, I, on numerous occasions, pointed out that the bull market at the time was largely characterized by the fact that the only meaningful net buyers of stocks were the underlying companies themselves.

Here’s the chart I featured at the time (orange line = share buybacks):

“Already this year, U.S. companies have authorized $504 billion of share repurchases, according to Goldman Sachs Group data through May 7, the most during that period in at least 22 years. The pace of announcements trounces even the 2018 bonanza that followed the sweeping tax overhaul of late 2017.”

“U.S. companies also ramped up dividend spending in the first quarter, data from S&P Dow Jones Indices show, increasing their payments by an aggregate $20.3 billion on an annualized basis. That marks the largest quarterly increase since 2012.”

Now, if you’re of the mind that stocks should just go up, always and forever, you’re loving this news!

If, however, you’re a macro-driven, big picture thinker/investor, you’re pausing right here and recognizing that the Fed not only saved markets (and egregious risk-takers) from hell last year, they did such a good job of it that that brief three-week brush with terror did virtually nothing in terms of quelling what is typically a late-stage hubris that has companies willing to spend their balance sheets (lever them up even) on what amounts to an outright smoke-and-mirror pumping of their own stock prices. 

Speaking of their balance sheets, here’s more from that WSJ article:

“The increased desire among companies to spend comes as the U.S. economy is edging toward normalcy, and as executives are deciding how to deploy the cash hoard they amassed last year. Cash holdings among S&P 500 companies topped $1.89 trillion at the end of last year, according to S&P Dow Jones Indices, an all-time high and a nearly 25% increase from the end of 2019.

Many issued record-breaking amounts of debt to help bolster their balance sheets, too.”

And here’s the thing, on 1/1/2020 U.S. corporate debt (loans and issued securities) totaled $10.1 trillion. Today it’s $11.1 trillion. I.e., better than half of that present $1.89 trillion of cash on balance sheets can be attributed to newly added debt. And while the data do show a pickup in capex spending (business expansion), the fact that buybacks so far this year eclipse anything seen in the past two decades says, again, that companies are willing to impair — and/or opt not to repair — their balance sheets for the sole purpose of boosting their respective share prices.

Which brings me back to the issues around lack of capacity (i.e., that half-trillion [share buybacks] not going toward increasing production) that, when combined with outright deglobalization, and its attendant geopolitical tensions, leads to an arguably more inflationary environment going forward.

And speaking of “deglobalization”, we’re seeing it presently in the international flow of funds data as well. 

The following chart tracks the sources of purchases of U.S. treasury debt. 

Note that non-U.S. actors (pink bars) are presently net sellers (compare that to their strong willingness to buy the huge issuance during and after the ’08 crisis). The fact that the Fed (blue bars) represents far and away the largest current buyer supports in spades our weak-dollar (inflation) thesis.

Yes indeed! It is way different this time!