Massive share repurchases

As of the end of this week, most earnings have been reported, and generally, the takeaways were positive. Earnings were up 5.2% year-over-year, better than the 3.4% expected. Additionally, more CEOs and CFOs cited a positive outlook and discussed the recession less, as had been the case over the prior year. Very importantly, buybacks (or share repurchases) were very prevalent. Overall, $181bn of buybacks were announced during the quarter, 16% higher than last year. Most notably, Apple announced $110 bn of buybacks planned for this year, helping the stock rally significantly post earnings. Goldman Sachs forecasts $925bn of buybacks for 2024 and over $1 trillion in 2025.

• While earnings were up a healthy 5.2% year-over-year, this does not account for inflation
• With inflation running at 3-4%, this means real earnings were up a little over 1%
• While this is still healthy growth, it is not as strong as the headline might suggest
• The buybacks are a bigger story in our view
• Companies buy back stock to decrease their share account, in effect increasing their earnings per share (EPS)
• Companies like to grow their EPS to help grow their stock price
• This is, however, not the same as organic business growth but more akin to financial engineering
• This also has the benefit of off-setting the dilution from stock-based compensation
• Regardless, this does drive share price as it provides a large amount of buy-side liquidity for stocks

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European economy recovering

In contrast to the US, the European economy has struggled over the last year, with most countries showing either flat or slightly declining growth. Europe’s largest economies, Germany and the UK, both experienced a decline in GDP last year, with the UK technically experiencing a recession with two quarters of negative growth at the end of the year. Q1 2024 data has been more positive, with most countries posting positive growth. This is despite the Bank of England and the European Central Bank keeping rates elevated and not cutting.

• Relative to the US, Europe has experienced a more pronounced economic slowdown recently
• The structural reason behind this is that most consumer and corporate debt in the US is issued on a long-term and fixed basis
• Consumers who locked in low-interest-rate mortgages pre-2022 have not been as affected by the interest rate hikes
• In Europe, however, most consumer credit products are variable rate, meaning their interest rates follow the interest rate markets
• Consumers in Europe have been more affected by higher rates as their mortgage payments have increased
• That said, the rebound in economic activity last quarter shows that the economy has been able to withstand the higher rates
• It is yet another data point supporting the higher-for-longer thesis we have discussed over the last year or so

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Japanese yen dives

Depending on how you measure it, Japan is the 3rd or 4th largest economy in the world. Since the beginning of the year, through the end of April, its currency, the yen (JPY) has fallen by ~15% From 140 JPY/USD to ~160 JPY/USD, a very fast and significant move. As we have discussed in the past, this is good for Japanese exporters, as their goods become relatively cheaper abroad, but bad for domestic consumers as imports are more expensive (inflationary). Last week, the Ministry of Finance (the equivalent of the Treasury) intervened to prop up the yen by selling USD and buying JPY. They were able to drive the exchange rate back to ~152 JPY/USD. As of this writing, it is back up to ~156 JPY/USD.

• What we are witnessing in Japan some refer to as the “end game”
• It began with an epic once-in-a-lifetime bubble collapse in the late 80s
• Their federal government has been running consistent fiscal deficits ever since
• This coincided with ultra-easy monetary policy, including what we refer to as Quantitative Easing (the Central Bank (BoJ) buying its government debt and other fixed-income securities)
• As the debt/GDP ratio continued to climb, the BoJ also bought Japanese Government Debt (JGBs) to keep interest rates manageable
• Today, the BoJ owns ~50% of the outstanding JGBs
• In effect, they are monetizing their debt (i.e., the Central Bank lends to the Federal Government)
• They now find themselves in a position where their devalued currency threatens domestic inflation, and so they must intervene
• With a debt/GDP ratio of 260%, they cannot allow for rates to rise, so they must then sell domestic USD reserves (Treasuries) and buy JPY
• This puts pressure on US yields and feeds into the narrative of moving away from USD as the global reserve currency
• Some also view Japan as a guideline for what we may expect to happen in the US

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