Here’s Your ‘Plunge Protection Team’ (No Conspiracy Theories Necessary)

There’s a difference between questioning the sustainability or relative desirability of a given strategy and persisting in the fantasy that an inherently absurd dynamic cannot remain viable long enough to bankrupt those who bet on its failure.

Of course that distinction doesn’t matter for people whose financial well being depends not on markets but rather on churning out click bait 50+ times a day. For those folks, being perpetually wrong about markets doesn’t matter because after all, being right about markets isn’t a prerequisite for making money talking about markets.

To be sure, we have a decidedly cynical editorial line and we’re just as persistent as the next guy when it comes to pointing out inherently ridiculous market dynamics. But we’d like to think our take is measured enough to help keep us on the right side of “blogger laughing stock”, a line some folks crossed about half a decade ago, never to return.

When it comes to absurd dynamics, debt funded buybacks are somewhere near the top of the list. As SocGen’s Andrew Lapthorne put it last year, “borrowing money to buy back your elevated shares is clearly nonsense.”

Right. And equally nonsensical is plowing a tax windfall into buybacks at a time when a whole lot of people think the very same tax plan that created that windfall is likely to contribute to an acceleration of an end cycle dynamic by virtue of the fact that said tax cuts are deficit funded and when considered in conjunction with increased government spending, are destined to balloon the deficit, exacerbating a potentially dangerous shift in the Treasury supply/demand picture at the worst possible time.

TRUMP IS STILL CONCERNED ABOUT U.S. BUDGET DEFICITS: SANDERS

what? can you not tell?

— Heisenberg Report (@heisenbergrpt) March 16, 2018

But just because the buyback bonanza is in many respects inherently absurd, and just because a market that’s propped up on those same buybacks (i.e. the biggest source of demand for U.S. equities is the corporate bid) is by definition unstable, doesn’t mean that it won’t continue to work when it comes to buoying equities. Again, saying something is stupid and contending that the stupidity will end tomorrow in a devastating crash are two different things – you’d think the doomsday crowd would have learned that after being dead ass wrong about stocks for a decade, but again, they don’t actually manage other people’s money, so why should they care, right?

Well as you look ahead to the rest of 2018, it’s worth noting (again) that on Goldman’s estimates, buybacks are set to increase some 23% to $650 billion:

And as we noted weeks ago, that’s a lowball estimate compared to JPMorgan’s forecast, which sees a whopping ~$850 billion in share repurchases going forward.

You might recall that in the wake of the market turmoil that sent global stocks tumbling into correction territory last month, Goldman’s buyback desk had its most active two weeks in history – even as the pullback coincided with the blackout period.

Well you might also recall that during the equity rout, CTAs and risk parity were forced to offload some $200 billion in equity exposure. Here’s the chart on that from BofAML:

Given that, it’s worth noting that in his latest piece, JPMorgan’s Marko Kolanovic reminds clients that one difference between now and the pullback that coincided with the August 2015 Chinese yuan devaluation is the size of the corporate bid. Specifically, he references the systematic deleveraging shown in the chart above on the way to observing the following:

This year, we expect $800bn of buybacks vs. ~$600bn in 2015. The difference ($200bn) on its own, equates to all the value of all recent systematic strategies’ selling. And while systematic strategies will buy back most of what they sold, buybacks will not reverse.

There you go. That’s a pretty compelling technical which you should take note of irrespective of whether you think it’s “healthy” that the market depends overwhelmingly on what amounts to financial engineering.

Circling back to the point about Goldman and the buyback desk during the correction, have a look at this chart from a new note:

There’s your “plunge protection” right there. “Good” old corporate management teams emboldened by deficit-funded tax cuts.

No conspiracy theory about Janet Yellen playing futures trader from her living room necessary.

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