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Why stock buybacks are such a mistake

A lot’s driving this bubble we’ve been in since 2009, but good fundamental trends and things like demographics and technology are not among them.

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The biggest inflator of our current bubble has been the $13 trillion worth of quantitative easing (QE) courtesy of central banks. Thanks to their significant gift to all but retail investors like you and me, speculation has become the norm.

With higher cash flow and cheaper borrowing rates — all in a slow-growth economy — companies quickly learned that the best way to increase their earnings per share (EPS) was to shrink the number of shares available.

Just look at this.

© Harry Dent

In 2018, Trump added the massive tax cuts to the stimulus plan. That created even more direct cash flow to corporations, who responded with record stock buybacks of $806 billion last year, which was a 56 percent increase over 2017. JP Morgan expects we’ll see about as many buybacks this year. The 2019 number is an estimate. Regardless, it’s insanity.

Since 2009, corporations have done more than 90 percent of net buying in the stock market. As The New York Times accurately describes it, “This stock market rally has everything except [individual] investors.”

Institutional buyers — aka the smarter money — have been net sellers.

Individual investors — you and me — have been neutral while foreign buyers have been only slightly involved in stock purchases.

Rather, the dizzying gains the U.S. stock market has enjoyed are a result of $5.6 trillion worth of stock buybacks over the last decade!

That’s an average of $500 billion per year. It’s no wonder democratic politicians like Senator Tammy Baldwin have introduced a bill to ban open-market stock buybacks. Senators Bernie Sanders and Chuck Schumer are on this bandwagon as well, as Rodney has mentioned before.

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The stark disconnection between markets and the economy

All this while U.S. GDP between 2007 and 2018 only reached a cumulative 19 percent. That’s lower than GDP during the Great Depression, which came in at 20 percent, cumulatively, between 1929 and 1940.

The financial asset bubble is, in fact, even greater than the one we enjoyed in the 1990s when the internet was moving mainstream on an S-Curve (as we predicted) and the Baby Boom spending cycle was at its strongest (as we also predicted).

It all just goes to show that this 21st-century market bubble is built on nothing but B.S. And it’s risen so high on all the resultant methane, that the inevitable crash will be mind-numbingly devastating.

Imagine the nightmare the CEOs, CFOs, and boards of executives — stockholders of these companies — face when they realize that they soaked up more than 40 percent of their cash buying back their own stocks at the highest prices and valuations in history.

What the hell are they going to do when they desperately need that cash to survive the greatest economic shakeout since the 1930s?

They’re not going to be laughing all the way to the bank. They’ll be crying, many crawling on their hands and knees.

And their shareholders are going to be pissed!

Who’s the dumb money now? It’s not the shoeshine boys and housewives.

While this bubble experiences its last hurrah in an extreme blow-off rally into the end of this year, make sure you’re taking advantage of the Dark Window opportunities. We’re in the final stretch of this low-growth, stimulus-driven, something-for-nothing, gravy-train ride.

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(Featured image by welcomia via Shutterstock)

DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.

Harry S. Dent Jr. studied economics in college in the 1970s, receiving his MBA from Harvard Business School, where he was a Baker Scholar and was elected to the Century Club for leadership excellence. Harry grew to find the study of economics vague and inconclusive and became so disillusioned by the state of his chosen profession that he turned his back on it. Instead, he threw himself into the burgeoning new science of finance which married economic research and market research. Identifying and studying demographic trends, business cycles, consumers’ purchasing power and many other trends empowered Harry to forecast economic and market changes. Over the last three decades, he’s spoken to executives, financial advisors and investors around the world. He’s appeared on “Good Morning America,” PBS, CNBC and CNN/FN. He’s been featured in Barron’s, Investor’s Business Daily, Entrepreneur, Fortune, Success, U.S. News and World Report, Business Week, The Wall Street Journal, American Demographics and Omni. He is a regular guest on Fox Business’s “America’s Nightly Scorecard.” Harry has also written numerous best-selling books over the years, such as The Great Boom Ahead, The Roaring 2000s, the Roaring 2000s Investors and The Demographic Cliff.In his most recent book The Sale of a Lifetime: How the Great Bubble Burst of 2017 Can Make You Rich (2016), Harry looks at the upcoming economic crisis and reveals how it could be the single greatest chance to build wealth we’ll ever see and how we can capitalize on such a unique and historical opportunity. He explains how many of the richest Americans in history have used this same kind of opportunity to quickly accumulate incredible amounts of money, in a short period of time.

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