May 12, 2021 - 3:00pm
Build back better. That’s the order of the day, isn’t it? We need to bounce back from Covid by investing in a brighter future.
Unfortunately, for many big businesses it’s back to the bad habits of the previous decade. Instead of investing in productive endeavour, the corporates are using their spare cash to buy back their own shares.
According to new research from Goldman Sachs (as reported by the Financial Times and the Evening Standard), US companies have announced record levels of share buybacks — nearly $500 billion during the last four months.
That’s nice if you happen to own the corresponding stocks (because all that financially-engineered extra demand pushes up the value of your assets), but it’s not so good for the real economy. The last set of US employment figures were disappointing to say the least — but should we be surprised if major employers aren’t investing in job-creating activities?
During the darkest days of the Covid crisis, it took massive government intervention to stabilise the economy; but now that we’re emerging into the light we need big business to return the favour and invest in the recovery.
If it refuses to do so, what can government do about it? Tax reform is long overdue. The burden of taxation should fall more lightly on job-creating and productivity-enhancing investment and more heavily on useless speculation.
However, there’s a limit to what this can achieve — and not only because of the technical complexities. If a government goes too far in squeezing share buybacks and the like, then the capital behind such activity will shift to other parts of the world.
As always, the stick must be balanced by the carrot. As well as disincentivising the wrong sort of investment, government needs to attract the world’s spare cash into the right sort of investment.
Public funding of things like infrastructure and research is sometimes accused of ‘crowding-out’ private investment. However, in a global economy awash with surplus capital, it’s more a case of crowding-in private investment by using the capacities of the state to unlock opportunities that would otherwise remain out of reach.
Examples include building shared infrastructure that would be beyond the ability of any one company to provide; or funding the pure research that enables commercial R&D; or providing the technical education so that employers can find qualified candidates to fill new positions.
Building back better and levelling-up can be criticised as form of ‘pork barrel politics’ — i.e. buying votes in favoured regions. However, done properly, it isn’t just good for the locations that directly receive the investment, it benefits the whole economy by attracting capital away from share buybacks, property speculation and other asset bubbles.
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Subscribe“During the darkest days of the Covid crisis, it took massive government intervention to stabilise the economy;”
Yea, right, and it took locking down the West and forcing masks and stopping education for a year, and not diagnosing and treating cancer, and isolating everyone from everyone, and F** king up the place to ‘Fallow the Science’ and save the world by destroying it.
And one of the many ways the house was burnt down to get rid of the wasp nest was by producing trillions of $ out of thin air. (MMT). Naturally when the Governments fill the biggest Troughs ever seen with Hog chow, yell out the hog call, the Pigs will be snout down and eat every last bit.
All that money fled to equities and hard asserts and to China (and all the lands who actually made stuff wile we locked down) making the rich much, much richer. This inflating equities, and then eating them a second time by buying back stock with cheap debt, is pure billionaire greed, and it will be paid for by everyone!
Inflation is a tax on everyone who is not invested in appreciating assets, this tax is what will pay back the trillions, and the wealthy will not pay it – as they have appreciating assets.
The Government not only used covid to F* ck you in the A* s, but put sand in the vasaline to really make it sting.
producing trillions of $ out of thin air. (MMT)
I think those trillions have been borrowed, while MMT holds there is no need for the likes of the US government to do so, as they can simply create money by spending it, and destroy money through taxation.
They have been doing the share buyback thing for the last 10 years. At least, that’s my understanding.
The whole thing is a giant racket built on zero interest rates and endless supplies of free money.
Max Keiser on the Tim Pool podcast was very good on all this yesterday.
Way more than 10 years — in the US, almost 40
Buying back shares at today’s P/E ratios sounds like a really stupid idea even if money no longer has value. Buying future capacity and facility upgrades seems a wiser use of free money. Those improvements ought to lead to better earnings which then could lower the P/E and make the shares more attractive. But those efforts in the short term are costs to the business (lowered profit) but have long term benefit. Not sure government can do much about corporate stupidity, but shareholders should be concerned.
“That’s nice if you happen to own the corresponding stocks (because all that financially-engineered extra demand pushes up the value of your assets), but it’s not so good for the real economy.”
First off, the value of your assets does not go up because of “extra demand”. It goes up because there are fewer shares outstanding. That is, your share of the pizza gets larger because it’s cut into fewer slices. In essence, it’s nothing more than a form of returning capital to shareholders, like dividends.
Second, companies would almost always love to be able to reinvest in new profitable lines of business, but pretty often there are no good ways to do that in a given time frame. (Companies and individuals have zero obligations to engage in money-losing businesses.) Returning capital to shareholders is what they do when the company can’t profitably use the money otherwise in the near future.
Finally, share buybacks are utterly neutral with regard to benefiting the economy. The money isn’t destroyed any more than the assets of the company are; it’s simply now in the hands of different investors, who on average aren’t any more or less likely than the previous ones to spend it on consumer goods or services, or to use it altruistically. It’s essentially a bookkeeping move about who owns what number of what. Nothing more.
Share buy backs are also a way of reallocating capital for more “productive endeavour” in other companies.
Industrial policy and capital controls are due for a return in a big way — and that’s a good thing.
And why are share buybacks still legal? From the 1930s in the US they were recognized for what they were: stock manipulation. That changed due to a 1982 SEC ruling (10b-18) under Reagan which provided a “safe harbor” for companies in stock buybacks. As long as companies stick to specific parameters — such as not buying more than 25 percent of the stock’s average daily trading volume in a single day — they won’t be dinged for stock manipulation.
This ruling needs to be revoked immediately.
“That’s nice if you happen to own the corresponding stocks (because all that financially-engineered extra demand pushes up the value of your assets), but it’s not so good for the real economy.”
Of course it’s good for the economy. When a company buys back its own shares, what do you think the investors who sell shares do with the capital from the sale of their shares? They reinvest it in other companies.
The main objection to share buybacks isn’t that they are bad for the economy because they very clearly are not. The objection is that shareholders who don’t sell shares may see an increase in the value of their asset. And we all know that investors making money is a bad thing, right?
They very clearly are not bad for the economy? The wealthiest get richer, while the majority see their living standards stagnate or deteriorate. Some might see that as bad.
Yes they very clearly are not bad for the economy. If you had a company that needed capital you’d be very happy that it was available due to buybacks. What do you think happens to the capital investors get from buybacks? It’s redeployed in other businesses. Surely you are in favor of more than one company being able to access capital?
Stop worrying about someone making money. What we want is for all companies to have the access to capital they need.
Nothing to do with the fact Biden’s cheques makes so that you earn more money by sitting at home.
In 2008 Bush, followed by Obama, ‘rescued’ the economy by injecting cash directly into the banks thus abandoning homeowners & Main Street. The injected cash went right into equities and bypassed the greater economy. Many people suffered as a result.
In 2020 Trump, followed by Biden ‘rescued’ the economy by injecting cash directly to the people at the lowest level of the economy. That cash is flowing all through the economy and much is ending up lowering individual debt and eventually, through business activity, into equities.
Biden is overplaying the strategy and pushing inflation as all that newer cash is chasing after less available goods & services. Paying people to not work made some sense when businesses were closed, but is counter productive when there is more cash than the supply side can produce goods & services.
“Share buybacks expose the ingratitude of big business”
And since when has gratitude been a feature expected of big business?