Dear Friends,
It seems to me, if a business is the biggest buyer of it’s own stock, that business is admitting it has a problem. To take it a step further, if most businesses are the biggest buyers of their own stock, the economy has a real problem. Sadly this has been the case for the last few years in the US. Some claim buybacks are a valid means to return profit to shareholders, but in reality, it is a naked admission of failure. Stock buyback programs are an admission the business model is insufficient to produce profit from further investment in it’s core business. Logically then, buybacks on a massive scale are an admission the economy is not conducive to further investment in plant, equipment or personnel. Moreover, when a company doesn’t plow it’s profits into buybacks, but borrows money to do it, that is a symptom of a dire illness in that business in particular and the economy in general.
Buyback programs do help the executives at a corporation however. It enhances the bonuses of executives by artificially inflating the stock price. The new class likes stock buybacks because it allows them to siphon off more of the nascent profits for themselves. Of course the chief victims are really the shareholders themselves, because the stock price increase doesn’t reflect any actual change in the value of the company, and is not reflective of a rising demand for the products or services, but is a corrosion of actual value. The employees are damaged because their wages get downward pressure due to the lack of investment in the core business, which lowers demand for workers across the economy, and the customers interests are hurt by the lack of investment, when there is less innovation and availability of products to enhance their lives. The new class is the only beneficiary, but at a cost to the economy, wages, and investors.
The stock market as a whole is made to appear stronger than it really is. As the number of outstanding shares decrease the value as a percentage of a company increases. Sadly, buybacks can make the stock price increase, even as the total value of a company decreases. If the value of a company declines three percent in a given year, but the number of shares in that company decline at a rate of four percent, the company’s stock price will increase at one percent. The actual value of the investment will have declined but the stock valuation will not adequately reflect it. As more companies do this the actual value of the market as a whole decreases, even as the price of the market itself increases. Even a first grader would understand this is not sustainable. At some point reality must slap investors in the face.
The stock buyback programs are usually funded with borrowed money. This has been enabled by the Federal Reserve’s Zero Interest Rate Policy or ZIRP. This makes the stock buyback programs even more pernicious. While the CEOs and Vice Presidents get bigger and bigger bonuses, they put the company more and more in debt, further lowering the actual value of the company. It is like borrowing money against your home and squandering it by going out to eat at fancy restaurants. Clearly it is not responsible to borrow money to use on such frivolities. Borrowed money should be put into plant, equipment or product development, any other use of money borrowed against the shareholder’s value is irresponsible. Further, when a company borrows money against a corporation, the bondholders get in front of the shareholders! So once the chickens come home to roost the shareholders will be left penniless!
Those who are entrusted with protecting and growing the value of the actual business owners, shareholders, are instead lining their pockets and stealing their employer’s money. In a sane world they would be prosecuted for such fiduciary crimes, but in our world, a world run by and for the new class, there are no consequences for what is essentially embezzling. You or I would face long jail sentences for embezzling twenty bucks, while the executives get away with millions, taken directly from retirees and people who have forgone immediate gratification, to set some money aside.
Stock buyback programs will eventually blow up in the face of our economy, the stock markets and executives themselves. Buybacks inflate a bubble in stock price, a bubble that when it pops is more likely to explode than deflate, because the actual value underlying the investment will have been so diminished. However, as history has shown time and time again, the criminals will be held blameless and the victims will be vilified and left holding the bag. Unfortunately, there is little we can do to protect ourselves, the new class run our corporations, control the media, determine our culture and man the government from top to bottom. Our only recourse is to demand they be held accountable, because the only real power we have is political, and that is only if we stand enmasse.
Sincerely,
John Pepin
