By David Stockman
So now the third immense financial bubble of this century has been fully inflated. And there are abundant signs that what we really have is a Great Immoderation—–a baleful, not beneficent, development that can be laid exactly at the door step of the central bank.
Specifically, yesterday’s abysmal data on the soaring wholesale sales/inventory ratio (I/S ratio) is not only a sharp stick in the eye to the “escape velocity” chatter that emerged in last year’s second half for the fifth year running; it also offers crucial insight into a issue that the Fed and its partisans incessantly gum about but never get right. Namely, the matter of monetary policy transmission—or the pathways through which the Fed’s interest rate manipulations, balance sheet expansions and verbal guidance work their way into the wider financial system and macro-economy.
The long and short of it is this. The credit channel of monetary policy transmission has long been over and done because the US economy has reached a condition of peak debt. But since the posse of Keynesians who inhabit the Eccles Building refuse to acknowledge this cardinal fact and persist in pushing on a string of massive monetary stimulus, a new channel of policy transmission has been carved out of what was once a healthy financial and business system in the US.
Call that new transmission channel the “C-suite in bull market heat”. The obvious but never acknowledged fact of business life in today’s central bank dominated world is that top corporate executives no longer really manage their companies’ organizations and operations; they mostly manage corporate stock prices and their own option based incentive programs.
If you want some evidence, just consider the facts I cited Monday about the disposition of net profits by the S&P 500 companies. During the LTM period ending in Q3 2014, they generated $945 billion of net income and flushed fully $895 billion, or 95% of that total, back into the Wall Street casino in the form of stock buybacks and dividends.
In light of those stunning numbers, don’t you think CEOs have stock prices and option values constantly on their brains? Yes, they do. Otherwise you can’t explain the next number either. By the end of the current quarter, CEOs and boards will have flushed the staggering sum of $4 trillion in dividends and stock repurchases back into the market or 85% of the earnings of the 500 largest companies domiciled in America since the March 2009 bottom.
(For the rest of the article, click the link.)
