In Page 45, it shows that share buybacks are increasing at a pretty impressive rate or had been maintained at pretty impressive rate. Corporations have a lot of money in their balance sheet. What are they going to use it for? With increased dividends, that forces that taxpayer to pay taxes on it. They can buy their own shares back. That is a very tax efficient way to reward shareholders because it improves earnings and the shares are likely to go up. They can use the cash for mergers and acquisitions and buy a competitor, eliminate some sales and marketing people and some administrative people, but I think all of those are the tools that companies are using their cash more. So I think, I feel pretty solid on the idea that the earnings are going to increase 8% this year and that multiples will increase modestly.
As far as being worried about the market and the bulls cycle, usually the market keeps going for as long as 29 months on average after the first Fed rate hike. So, it usually takes more — Edson Gould the famous strategist in the 60’s said it took three steps for the Fed before the market stumble. Page 47 shows that the market is usually a leading indicator on the economy and usually leads the economy by seven months before it turn down. Page 48 shows the various parameters and what they usually look at before a recession is about to take place and what you see here is that virtually none of the indicators are in the position when it’s worth forecasting pending recession anytime soon.
In terms of our fiscal condition, Obama, I don’t think has made as much of this as it probably could have but no matter what we raise taxes to, they still seem to come in a 15-20% of GDP. Our government spending is less than Europe. Europe is a much more socialist place than we are. They spend 45 – 55% of GDP on various government programs. We spend less than 40. So we are exhibiting remarkable fiscal discipline in comparison to our European counterparts. What is really amazing to me is that the US 10-Year Treasury now yielding about 2% has a higher yield than the 10-Year Bonds of all of our major economic competitors.
Now you would think in Europe when they are spending so much money on government programs, their balance sheets don’t look as good as ours in many cases. They would have higher yields. Now why is this the case? Higher yields overall so low and why is the United States yield above those of places like Japan where the debt of GDP ratio twice high. And the reason is, there is so much liquidity out there. There are so many people with so much money — crude, those cash reserves during the recovery — and they are looking for a place to go to it and they are a little apprehensive about the equity markets right here because they argue that the US market has done well for a number of years and the situation in Europe and Japan isn’t too great and they are worried about China so they are looking for a place to park their money. And they are parking their money in treasuries and that is keeping the yields low and that is one of the reasons why I think you are going to make money in the high yield market in Surprise No. 9.
In the Federal Budget Outlook, we made major strides here on Page 53. Budget Deficit is at 2.80 of GDP down from 10%. The thing we have to worry about is what would happen if interest rates rose? Right now, we are only fine-paying about $360 billion to service our $17 trillion in debt. if interest rates were to normalize, it will repay 4% on average rather than 2. That would be a big hit to the budget deficit.
