As we mentioned in our posting "Political Economy" much of current stock market environment is being dictated by government actions in Washington DC. Like it or not smart investors do not fight the Federal Reserve or Government actions at the federal level, they just get on the ride and try to make money using the tools offered. Of course the issue is discovering that policy and which investments are the best to make money with that policy.
The key here is understanding that the Obama administration has spent and continues to spend federal dollars at a pace unequal to any other President in the past. All those deficit dollars must come from somewhere and much of it is bond buying by the Federal Reserve. The Federal Reserve is trying to keep interest rates low by keeping demand high for government debt and at the same time making stocks and financial instruments high and higher valued. So as the new Federal Chair Yellen has noted low rates are here for awhile. Further more as long as Obama is President and that is two years plus and is followed by a President with connections to Wall Street like Hillary Clinton one can expect the political economy to continue on for longer than two years. Not reforming the federal tax code is actually a plus for them and their contributors
The reason is simple in that the low rate environment is highly beneficial to large corporations such as Apple, Pfizer, Verizon, Wells Fargo, GM, Oracle, IBM, and the list goes on seemingly forever. These companies and many more are using low rates to buyback huge numbers of shares of stock each month. These buy backs are in the billions of dollars and each of the companies listed are buying back 5% and more of their shares each and every year. Stock buy backs mean less shares for investors driving up demand and prices. That is exactly the idea by the Federal Reserve to push up asset prices. If you are like many investors your holdings value have gone up considerably in the last three years. Elites and most notably financial elites are prospering the most. These financial elites are the very people contributing to Obama, Hillary Clinton, and Democrats keeping them in power. They might regale against them, but those in the know it is all for show.
Technology firms are prospering as well here due to demand for their products and those tech elites are also big liberal contributors. No matter what side of the political spectrum one is on getting on the stock buyback wagon is a no brainer here. Truth is most of these elites do not want the rip rap people to be in their moneyed paradise and have decided the best way to keep them happy and down on the plantation, so to speak, is to offer lots of cheap government goodies. Goodies like phones, welfare checks, food stamps and such. Assuming these goodies will keep them voting for Democrats and keep them from wanting more than just the minimum life. That minimum life satisfaction must be maintained since a no growth economy means few jobs and even more so few higher wage jobs. Just raise the minimum wage a bit keeping them happy with their low end job and as a bonus it also helps these big corporations from feeling any competition from small business start ups that might take away some of their declining business prospects since they can not compete wage wise. Using government to kill competitors is like rent seeking it just makes the rich, well richer.
Cash flow and profits at big corporations are also being encouraged by the current high federal tax rate and structure. High tax rates mean instead of paying out dividends corporations can use their cash to buy back shares using low interest debt. Simply put paying 3.5% for interest on debt to buy back stock is about what many corporations are paying out in dividend yield and interest costs are tax deductible so it is to the advantage to buy back stock by cutting corporate taxes too. Not to mention that the buy backs inflate stock prices and make investors happy. Elite investors who do not need the capital gains can just sit on the gains and smile. If anyone wonders why many on both sides of the political game are against restructuring the federal tax code this should explain why. Note that the corporations looking to change domiciles currently to escape the highest corporate tax rates of 35% here in the US are those companies using profits to hire new workers and invest in their business expansion. So the very companies wishing to hire people and expand are the very ones getting hurt by the current tax code and the Obama administration policies.
All this financial engineering is only helping the wealthy elites as noted above. The lower class is caught in a almost unescapable life of being poor due to the government incentive to do so. The middle class is getting taken with screwflation. That is wages that are not keeping up with inflation and there are few opportunities to advance. Slowly but surely the middle class is getting hollowed out and that is frankly being done by government policies that hinder them and only them.
If you are one of the blessed with assets that are appreciating in this environment or do have some money to invest we would suggest avoiding low rate government bonds of any kind. As we have mentioned earlier using ETF's and mutual funds highly concentrated in big corporations taking advantage of the current political economy is the wisest approach. MGV, which is the the value ETF for the biggest of the biggest corporations and VFIAX, which is the Vanguard 500 Index fund are good vehicles. May we also suggest PKW, which is the ETF for corporations buying back a minimum of 5% of their outstanding stock shares too. Go with the flow is the best investment in this environment. Much of the other assets available are not going to do as well.
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