Carl Icahn warns that trouble is coming to the financial markets.
In a new video titled “Danger Ahead,” the billionaire Wall Street veteran lays out the major problems coming out of both Washington and Wall Street to argue that what’s coming next will be “very dangerous and could be disastrous.”
For the financial markets and the economy, the core problem is the Federal Reserve and it’s ultra-easy, zero-interest rate policy. While Icahn credit the Fed for using policy tools to get us out of the last crisis, he also argues that it was the Fed that got us into that crisis to begin with.
Icahn observed that while low rates are intended to boost business investment, in reality it actually led corporate managers to employ financial engineering and accounting shenanigans to boost earnings per share.
Icahn offers a very straightforward and chilling summary of what he believes to be an unsustainable and fragile set of circumstances that are propping up the stock market. And in the end we’re left wondering if we could repeat what we saw during the financial crisis. Or worse.
Below is a summary of Icahn’s warning about the stock market.
'What they're doing with the money is almost perverse,' Icahn said.
Rather than using cheap financing to invest in business and equipment, Icahn observed that companies are engaging in financial engineering in their efforts to boost earnings and ultimately their stock prices.
Instead of investing for growth, companies will just use money to buy other companies to create the perception of growing earnings.
Icahn says it's like taking steroids. Everyone's happy to see an athlete jump high. But that type of earnings growth is not sustainable.
Now companies like Apple can and should buy back stock because they're sitting on hundreds of billions of dollars in cash and not a lot of debt.
It's a problem when companies with little earnings and lots of debt buy back stock. And yet everyone looks at earnings go up quarter to quarter and your stock goes jumping up.
What is going to happen in that market, and who is going to buy your stocks when those earnings are coming down?
The Fed's balance sheet has mushroomed. This is money that's flooded the markets and crowded out the investor class.
All of this money in the risky high yield bond market has helped fuel a boom in mergers and acquisitions.
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