The economic policies of the Obama Administration and monetary policies of the Federal Reserve have created the largest and most dangerous asset bubble in U.S. history. At the end of fiscal year 2016, U.S. household assets were worth a record high 482.72% of nominal GDP – more than 2 1/2 standard deviations above the long-term average of 377.41%.
With Obama as President, the U.S. has experienced the slowest GDP growth over an eight year period since the Great Depression. Since Obama took office, America’s average year-over-year nominal GDP growth has been only 2.82% – less than half of the 1961-2016 median of 6.02% and 1961-2008 median of 6.77%!
Obama’s wasteful and destructive economic stimulus, tax increases, and wealth redistribution together with his out-of-control military spending, excessive regulations, and the disastrous nightmare of Obamacare – have created a dangerous environment where executives are encouraged to seek instant gratification at the expense of real growth and the creation of real jobs. With the help of the Federal Reserve lowering interest rates to near zero and leaving them there throughout Obama’s entire term as President, corporate debt issuance has soared to record highs – with most of the funds spent on share buybacks. This has fueled phony/fake EPS growth and artificially high share prices – triggering huge bonuses for management even as net income remains flat.
If Hillary Clinton became President, she would seek to solve this problem by banning share buybacks, which would only make matters much worse. Normally, in a world of healthy economic/monetary policies and an unimpeded free market, companies with excess cash flow are incentivized to repurchase stock when their valuations are artificially low. During a market sell-off/crash when investors are panic selling into an illiquid market, share buybacks can actually benefit shareholders by supporting share prices and providing a floor. Afterwards, when markets stabilize and valuation multiples normalize – a company’s share price will reach higher levels than before as a result of its shares outstanding being reduced at a lower multiple.
To the contrary, when a company issues debt to repurchase stock at an artificially high multiple, it is destroying value for long-term shareholders. As the Federal Reserve raises interest rates and America’s asset bubble bursts, many companies that are currently issuing debt to buyback stock at artificially high multiples, will end up severely diluting shareholders to pay off debt – at a fraction of current share prices. There will be many shareholder lawsuits against companies that wasted capital on buybacks that could have been allocated towards R&D, CAPEX, and other more productive investments to build value for long-term shareholders and boost real economic growth.
Currently, U.S. GDP is $4.95 trillion below the level needed to justify current household asset values.
Unless Donald Trump is elected President, it will take 8.21 years for the U.S. economy to grow into current household asset values. In other words, America’s asset bubble has borrowed from 8.21 years of future economic growth – and if Hillary Clinton is elected President, Americans will see no real increase in the value of their stock market and Real Estate holdings until year 2025!
In the short-term, expect to see a lot of volatility – beginning with a major post-election Obama crash! A short-term stock market crash is unavoidable and will happen regardless of who wins the election. We expect Trump to win the election and the media to blame the crash on him!