Saturday, February 20, 2016
The Rigged Market System Redux: Stock Buybacks At Epidemic Levels and Slowing Growth
Greg Ip's recent (Jan. 29) WSJ expose of business buybacks of its own shares merits commendation for exposing an underlying source of continued slow growth, and system gaming. As he noted in his piece:
"Companies are splashing out staggering sums to buy each other's or their own stock while maintaining a tight grip on capital expansion."
He points to a scandalous increase in stock buybacks by U.S. firms since 2009. adding that it attests to a "troubling malaise in the global economy. Nearly seven years into an expansion risk aversion remains pervasive."
Ip adds that if this continues the world is in for "an era of growing worker dissatisfaction and political upheaval".
Well, think about it. Sitting on over $1.4 trillion in capital and plowing most into stock buybacks, to inflate P/E ratios, why the hell would these business buzzards invest in more plant, more jobs? They wouldn't, hence reinforcing the premise of William Wolman and Anne Colamosca in their 1997 work, 'The Judas Economy: The Triumph of Capital And The Betrayal of Work'. The authors made a point of noting the modern Neoliberal state had no interest in human labor, paying it properly, or re-investing. It is only invested in its own aggrandizement and proliferation at the expense of citizens.
Thus, stock buybacks represent yet another symptom of the rigged economy which the Neoliberal elitists are doing their damndest to try to defend against Sen. Sanders' pointed attacks. The latest canard being he is a "single issue" candidate, missing the point that Wall Street Neoliberalism is what underpins the whole perverted system - from elections, to underpaid labor, to overpriced health care, to crumbling roads and bridges. Indeed, only an ignorant or blind person would not be able to see the thread of Wall Street's speculators running through all of these.
Back to the stock buybacks. Mr. Ip observes that since 2009, U.S. firms - entrenched in their own myopic interests- boosted capital investment by only 43%, dividends by 67% and stock buybacks by a whopping 194%. This according to Jason Thomas of Carlyle Group. In addition, rather than investing in new plants for new jobs, businesses have squandered $2 trillion on mergers and acquisitions - a third more than the previous annual record in 2006. This is what has directly led to a distortion in the economy and the failure to grow more decent paying jobs.
Ip does try to justify some of the business risk aversion by asserting it is a reaction to increased government regulations, especially on the banking system - which is then more leery of lending. For example banks are being required to hold more capital and liquid assets, and also penalties have "been increased for wrong doing". Well, excuse the hell out of me, but banks should be forced to hold more capital, and should be penalized for wrongdoing! To me this is just a dodge to get businesses off the hook.
The reality is American business has become self-invested and fat off its own capital and no longer willing to invest in the American worker. Also, sitting on over a trillion they're not exactly bleeding capital nor do they need a lot of bank loans. They are just plain selfish and interested only in their own expansion.
Stock buybacks help them by inflating their share prices without the need to really improve a product or service. Hence, it's all smoke and mirrors and BS. Columnist Jonathan Clements in an Oct. 26, 2014 piece in the WSJ Section of the Denver Post, observed:
"Many companies were big buyers of their own stock before the 2007-09 market decline, only to scuttle their buyback programs during the market crash. In recent years with share prices up sharply they have begun to voraciously buy back."
And why not, because they are then reaping the bounty of their own high share prices? Buy backs also make management's stock options more valuable - so what better way to compensate the Street's honchos? Strangely, all this has selectively blinded investors to the lack of dividends. As Robert Arnott, quoted by Clements, stated:
"Dividends are reliable, You cut them at your own peril - but you can cut a buyback and hardly anyone notices."
And then we beheld this in the The Wall Street Journal (Sept. 22, p. C2):
"U.S. companies are increasingly using the bond market for the benefit of shareholders, a move that is starting to raise alarm among some debt investors.
Proceeds from some of the largest bond sales, including those from Microsoft Corp., Qualcomm Inc. and Oracle Corp., were earmarked for share repurchases...
Buybacks can boost stock prices by reducing the number of shares available. Some analysts warn that the tactic risks eroding corporate financial health by diverting cash that can be used to fund debt repayments and make investments that can boost corporate earnings power over time."
Thus, share buybacks are in fact undermining corporate health for short term gain, even as they fuel the ongoing equity asset bubble to absurd proportion.
To her credit, as the WSJ piece noted, Hillary Clinton called for "greater disclosure of buybacks amid concerns they come at the expense of longer term investment"
This ought to be a given. But Bernie Sanders solution to this racket would pack an even bigger punch: imagine imposing on each and every share buyback a 50 cent transaction tax. In no time you'd have more than enough of the $70b needed to fund Bernie's free public college tuition proposal. Make the bastards earn their increase in share prices, i.e. by superior products and services, instead of gaming the system.