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Debt and buybacks are about to trigger the next financial crisis

At first glance, any observer would consider suggestions that America is headed toward another financial crisis as ludicrous at best and certifiable at worst.

After all, the outlook for stocks on Wall Street has hardly looked more optimistic. It’s downright shining with glitter and enthusiasm.

Even a company like Tesla Inc (Nasdaq: TSLA), which has not posted any recognizable profits, keeps bouncing back every time it gets struck with a dose of market realism.

Then again, the “Tesla phenomenon” itself should be interpreted as a sign of what former Fed Chair Allan Greenspan described as “irrational exuberance”.

Therefore, a financial crisis might be closer than some stock valuations suggest.

Yet, a financial crisis is the only logical outcome, even if prospects for the stock market could hardly be better.

The problem is that the optimism derives from a single factor: lower taxes.

It’s only thanks to lower taxes that analysts—from all media outlets, as it happens—routinely describe the U.S. economy as “robust.”

And it’s largely thanks to the lower taxes that, in the first half of the year, many companies reported a strong jump in earnings. You’d be forgiven for having anything short of the most encouraging outlook for companies and the performance of stocks on Wall Street.

But therein lies the key to predicting and understanding why all this optimism is misplaced.

Investors have been blinded by the myth of a permanent bull market

For all of the fabulous earnings forecasts, there lurks in the background an alarming trend that investors are happy to ignore. That trend has a simple and short name: debt.

The U.S. government has more debt and will incur more debt because of those same tax cuts that are propping up stocks on Wall Street.

That fact alone should advise investors that perhaps the only purpose of the tax cuts was/is to have averted a financial crisis in 2018.

The other warning that’s being duly ignored is that the tax cuts have been paying for stock buybacks to the tune of $1.0 trillion. That’s almost 50% more than in 2017. (Source: “Stock buybacks could hit record $1T in 2018: Goldman Sachs”, CNBC, August 6, 2018.)