Spoiler alert: it's not the Fed, even though the portfolio rebalancing channel courtesy of a $4.5 trillion Fed balance sheet certainly assured that the artificially inflated bubble in stocks, as a result of the Fed's own purchases of bonds, is unlike anything seen before (and to all those debating whether the bubble is in bonds or stocks, here is the answer: it is in both).
The answer, according to Goldman's David Kostin is the following: "From a strategic perspective, buybacks have been the largest source of overall US equity demand in recent years."
In other words, not only has the Fed made a mockery of fundamentals, the resulting ZIRP tsunami means that corporations can issue nearly-unlimited debt to yield chasing "advisors" managing other people's money, and use it to buyback vast amounts of stock, which brings us to the latest aberation of the New Abnormal: the "Pull the S&P up by the Bootstaps" market, in which the only relevant question is which company can buyback the most of its own stock.
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Some further observations on the only thing that matters for equity demand in a world in which the Fed is, for the time being, sidelined:
Since the start of 4Q, a sector-neutral basket of 50 stocks with the highest buyback yields has outpaced the S&P 500.
And sure enough, with the market once again rewarding stock buybacks...
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... companies will focus exclusively on stock repurchases in lieu of actual growth-promoting capital allocation such as CapEx (as predicted in April 2012 [10]):
We forecast S&P 500 cash spent on repurchases will rise by 18% in 2015 following a 26% jump in 2014.
Putting this number in the context of the recent "fire and brimstone" announcement by the BOJ:
We estimate the incremental demand for US equities from the combined re-allocation of Japan pension assets will total $70 billion. For context, we forecast share buybacks by S&P 500 firms will total $707 billion in 2015, or 10x as much as the overall Japan pension fund re-balancing.
In other words, what the BOJ does to the market will be a tiny fraction of the impact the latest and greatest cost-indescriminate buyer - corporations buying back their own stock - will impart on equities.
And here is what happens to CapEx as a result:
... capex growth will decelerate by 200 bp to 6% as global growth concerns and a 25% plunge in crude oil prices since June have brought investment plans under review. The Energy sector accounts for roughly onethird of aggregate S&P 500 capex.
We have said it for years, and finally even Goldman admits it: the days of Capex growth are over:
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There is more bad news: because whil stock buybacks mean even more artificial growth for risk assets, the collapse in CapEx, especially among energy companies, means that GDP in 2015 is about to drop off a ledge, polar vortex 2.0 notwithstanding.
Behold: 0% (or negative) growth in Real Private Fixed Investment Oil & Gas Structures & Machinery, a direct - and quite substantial - input factor into the GDP calculation.
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But who needs growth when the Chief Executives of America's largest corporations are about to trickle down their record, stock-buybacks driven bonuses for yet another year.
