The stock market has surged lately and a lot of analysts credit it to stock buybacks by corporations. As the chart here shows, buybacks have reached dizzying heights. Corporations are purchasing their own stocks because corporate profits hit record levels last year and management can find no better use for the cash than to give it back to the owners through larger dividends or buybacks.
As I wrote recently, record corporate profits, the current level of optimism and the low yields on debt justify the current loftiness of the market. This is not a bubble, but most investors are wondering what will shoot down this high flying market? Corporations appear to be the last buyers standing because “mutual fund managers have the lowest cash levels in history and money market fund levels are lower now than in 2007 and near a record low from 2000 relative to the capitalization of the stock market.”
The conventional wisdom says that only multiple rate increases by the Fed will shock the market into a tailspin. So most analysts fixate on what the Fed will do next. But it’s unlikely that the Fed will raise interest rates in 2015 or 2016 because the economy is slowing. Economic growth comes from investment in capital goods industries, such as Caterpillar, not from consumer spending. That’s the Austrian business-cycle theory in a nutshell and, yes, it contradicts mainstream economics. If corporations were investing, profit rates would not be setting records and the real economy would be growing faster. But, as Zero Hedge noted, Caterpillar has suffered
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