If you’re looking at the stock market today, there is a recession coming. A lot of people are going to lose a lot of money.
The reason is the tax cut.
This view runs counter to Wall Street. Most “analysts” insist the tax cut is the best thing since sliced bread and that it’s going to spur massive investment in the economy and keep things growing for years.
But I look at what Apple Inc. (NASDAQ:AAPL) is doing with its tax cut. It is handing that money back to shareholders. Spending $100 billion on your own stock puts no one to work. It means you don’t know what else to do with it.
This should be surprise no one. It’s what corporate CEOs predicted last year in a Bank of America Corp (NYSE:BAC) survey. They said they would pay down debt, buy back stock, and buy one another. That is precisely what is happening, according to TrimTabs.
Business Invests for Profit
Businesses don’t invest because they have cash. They invest because they see opportunity. Investors are the same way. We keep a cash cushion against a market fall, and we increase that cushion when we see stock prices rising above fundamentals.
Or we go to the dog track. The top of a market always brings asset bubbles. Whether it’s fine art, the best apartments, internet stocks or Bitcoin, money chases its own tail when there is too much of it. Then the economy falls, that money is lost, and capital supplies readjust.
What would spur more housing construction isn’t more money in the hands of home builders. It’s more money in the hands of millennial buyers. What every business wants to supply is demand. If you don’t see a way to make money with new money, you hand the money back.
There are huge opportunities in Africa, South Asia and China because consumers there have more money to spend. Most have never had money before, like the first-generation homeowners I grew up with on Long Island, in the 1960s. Such people love to spend, and they make for good markets.
No One Is Fooled
Most wealthy Americans aren’t fooled by the tax cut. A recent JPMorgan Chase & Co. (NYSE:JPM) survey found 75% of “ultra-high worth investors” expect to see a recession in the next two years.
Consumers aren’t fooled. Economic growth isn’t rising. Most of what we’re seeing is a buildup of inventory. Personal consumption rose just 1.1% in the first quarter and represented just one-third of economic growth.
Even the Weekly Standard expects growth to start tailing off, citing the Congressional Budget Office, from 3.3% growth this year to 2.4% next year and 1.9% in 2020. By that time, the national debt will be up to 100% of GDP, and within three years after that, interest payments on the debt will cost more than the military.
Stock prices tend to look ahead, and they’re signaling trouble. Small wonder the Dow Jones Industrial Average peaked in January and is now down 10%.
If an economic policy is a good thing, you don’t have to sell it door to door. People feel it in their wallets, in their living conditions, and in their futures.
Former Federal Reserve chair Ben Bernanke got the nickname “Helicopter Ben” after a 2002 speech suggesting a deflationary recession could be stopped by tossing money out of helicopters. Unfortunately, when given the chance in 2008, he could only drop money on bankers. Milton Friedman, who coined the helicopter term, was suggesting a broad-based tax cut to spur demand.
That might make sense in a recession. But we won’t be able to throw the party then because we just threw it.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance, The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this story.
