That's pretty much the same justification given for supply side economics which failed in practice because it doesn't reflect the reality of how wealthy investors behave when they have long term capital gains. They don't suddenly decide to realize most of their gains and invest them in growing startups or risky markets.
That's pretty much the same justification given for supply side economics which failed in practice because it doesn't reflect the reality of how wealthy investors behave when they have long term capital gains. They don't suddenly decide to realize most of their gains and invest them in growing startups or risky markets.
While it's true growing companies need captial one of the reasons companies buy back their own stock is because they have more money than they know how to invest in growing their own business. They're not investing in growing their own business or growing other companies.
In contrast when workers have more disposable income they buy goods and services which increases demand. High demand does more to spur investment and attract competition than easy access to capital gains.
Healthy economic growth occurs when supply and demand are in balance. Paying workers a tiny fraction of the value they create leaving companies with huge profits they use to buy back their own stock is unhealthy. Huge profits are an unwarranted tax on consumers and employees. From my perspective that's basic finance.
You have to make up your mind. It seems that you don't want companies to invest in things that they don't know how to invest in - but then that you want them to do that anyway. In the 1960s and 70s, many companies 'conglomeratized' - which proved to be a poor business model. US competitiveness collapsed, the number of patents issue to US companies was halved. Peters and Watermann had to seek out 'excellent' companies as exceptions - when it should be the norm. Why do you want to go back to that?!
You appear to admit that supply side policies allowed for most of the US's largest companies to grow into world leading entities - but you categorize that as a failure? That makes so sense. Take away Apples, NVIDIAs, Micron, Google, Tesla, etc etc etc etc and you'll have a far smaller US economy. Is that what you want?
The context of this discussion is "ways of fighting inflation" and whether stock buy backs have a net positive or negative effect. The common justification for Supply Side Economics is that tax cuts would leave more capital available for private investment that would spur economic growth to make up for the lost tax revenue. That never happened. In that sense Supply Side Economics failed to deliver the results promised. It had virtually nothing to do with "allowed for most of the US's largest companies to grow into world leading entities".
The justification for stock buy backs is similarly weak. Simple logic and math reveals it doesn't provide any significant public benefit. It's a form of insider trading that serves wealthy investors. To the extent it exacerbates income and wealth inequality, it's inflationary.
We had high inflation in the 1970s - during the height of the age of conglomerates. New companies create more competition and that controls inflation. (That’s why the Canadian government is trying to get more companies to open supermarkets. ) You seem determined to be blind to the obvious.
As I understand it you are arguing that selling stock creates capital which new companies need. How does allowing companies to buy back their own stock create capital for new companies to create more competition?
Presumably it raises share prices giving investors access to more capital gains. Why should we expect investors to realize these capital gains and use them to invest in new companies that compete with their previous portfolio?
It’s simple. Company A decides to buy stock into treasury to reduce outstanding shares. An investor agrees to sell the stock to the company for cash for the agreed upon price. The sale occurs. The investor sees his cash balance increase, and the shares are no longer his. The funds are then available for reinvestment. The investors could be individuals, mutual funds, pension plans, endowments, or other companies- for example.
The benefit of the share repurchase is that the selling party can accept or refuse - whereas large one time dividend goes to all shareholders. Investors looking to have a large growth component in their portfolio can accept and use the proceeds for buying into IPOs. Venture funds generally want to get out of maturing companies to redeploy into new ventures before they go public. This is true for high net worth individuals. Famously, Micron Technology was funded in large part by a gentleman who made money my selling potatoes.
Share repurchases do not necessarily raise stock prices. Remember, the company is giving up cash - and the cash is often invested in marketable securities. Personally, I like the stock buybacks because it’s a sign the company is staying focused on core. Companies get into trouble when management starts to think the money belongs to them to invest in half a++ ideas that are not a good fit for the firm in question.
So some investors somewhere sell some of their stock which happens all the time for all sorts of reasons. Some fraction of such sales may or may not be made by venture funds which could then be put into new ventures. Yes it's possible, but that hardly makes stock buy backs a significant factor in creating new businesses and more competition that would not have happened otherwise thus lowering inflation.
What stock buy backs also do is allow company executives and boards acting as inside traders to extract more compensation from the companies they run. This potential for increased compensation diverts resources from the real world economy of producing goods and services people need to the expectation economy of shifting wealth from one group of investors and stakeholders to another.
The premise of our economic system is that businesses are rewarded for producing goods and services people need. When much of the population can't afford to buy the things they need, more businesses shift their attention to producing and marketing goods and services to people who can afford them. There's actually less competition for creating more affordable goods and services people need. I see this as another failure of supply-side economics and stock buy backs to create more widely shared prosperity and well being.
Here (in the System 360 initiative) IBM, as an exception, took a make-or-break chance in the transformative initiative. Had it failed, IBM would have been bankrupt. As stated, IBM would 'never again' undertake such a risk. This is why it's critical that capital be allowed to flow to new ventures - via a return to shareholders.
For the US, the proof of the pudding is that it's economic growth has clobbered that of other developed countries over the last four decades.
Executives are often rewarded for increasing dividends as well. All cash going back to owners increases the capital pool available for new investments. You are one who believe it's best to force capital in potato companies to be kept in potato companies - rather than creating companies that develop and make new products.
"The alarm over S&P 500 shareholder payouts reflects not only a misunderstanding of capital flows between those companies and their shareholders but also an exaggerated view of the S&P 500’s role in the nation’s economy. S&P 500 firms account for less than 50% of business profits and less than 20% of employment. To properly assess how net shareholder payouts by S&P 500 firms affect the long-term health of the U.S. economy overall, one must consider their effect on all companies. Capital flowing to S&P 500 shareholders does not go down the economic drain: Shareholders use much of the cash, we know, to invest in smaller public and private firms, supporting innovation and job growth throughout the economy.
The charge that S&P 500 shareholder payouts are starving the U.S. economy of investment does not stand up to the data. In this article, we examine that data, beginning with an analysis of capital expenditures and R&D investment in the S&P 500 over the past decade."
Thanks for the link on buy backs. I never believed buy backs were starving corporations of investment capital or cutting investment. Concentration and market power have allowed some of the biggest companies to raise prices with little fear of competition and report record profits. Anecdotally in the 6 years since the article was published, Boeing which was cited for its long term vision has failed badly to make the investments needed. Some other quotes:
>Make no mistake: The proportion of net income distributed to the shareholders of S&P 500 corporations is indeed high.
>Payout manipulation by corporate leaders could increase income inequality
[but the overall effect in 2018 was believed to be small]
>There’s no question that executives’ opportunistic use of payouts is troubling
The article also notes that the amount of capital made available is much smaller than it appears. About 11% of buy back capital flows in to smaller fortune 500 companies and my understanding suggests these companies generally are not starved for investment capital.
One might conclude from this article that the economic cost and benefits are complicated to determine. Over-simplified sound bites do not provide an accurate picture.
It's the self dealing aspect of unfair advantages that concerns me. Healthy economic activity should not rely on insider trading.
Also, the vast majority of the top US companies are 70% plus institutionally owned - i.e. mutual fund holdings, pensions, endowments. These institutions are sophisticated investors - and I do not believe they are allowing management to pull the wool over their eyes as you are suggesting.
Indexed or algorithm based investing plays a huge role in mutual fund holdings, pensions, and endowments. Your implication that there are skilled investment professionals and researchers who would reject equities based on evidence of self serving stock price manipulation by executives hasn't always proven accurate. It didn't protect us from the sub-prime mortgage meltdown of 2008. On the contrary, investment firms rationalized selling risky securities in part by believing the buyers were sophisticated investors.
From my perspective honesty, integrity, and fairness matter more to our economy and democracy than vague claims about capital flows. History suggests it's only a matter of time until unfair manipulation comes back to bite us.
I'm not here to oppose you. With respect to stock buy backs, we disagree about their relative merits. Enjoy!
The gushing propaganda is indeed that companies are not investing. In reality, the US has had a healthy capital market over the last four decades. If you look at the top companies in value in the US, 8 out of 20 are new from startups in the last 40 years. In Canada, it's 2 out of 20, in France and Germany - zero, Japan 1. This is why the US economy has far outstripped all the other major developed economies in growth since the start of the 1980s. It's like a forest - if you get more growth, you get more trees. Older trees stop growing, get diseased, and eventually die.
That's pretty much the same justification given for supply side economics which failed in practice because it doesn't reflect the reality of how wealthy investors behave when they have long term capital gains. They don't suddenly decide to realize most of their gains and invest them in growing startups or risky markets.
While it's true growing companies need captial one of the reasons companies buy back their own stock is because they have more money than they know how to invest in growing their own business. They're not investing in growing their own business or growing other companies.
In contrast when workers have more disposable income they buy goods and services which increases demand. High demand does more to spur investment and attract competition than easy access to capital gains.
Healthy economic growth occurs when supply and demand are in balance. Paying workers a tiny fraction of the value they create leaving companies with huge profits they use to buy back their own stock is unhealthy. Huge profits are an unwarranted tax on consumers and employees. From my perspective that's basic finance.
You have to make up your mind. It seems that you don't want companies to invest in things that they don't know how to invest in - but then that you want them to do that anyway. In the 1960s and 70s, many companies 'conglomeratized' - which proved to be a poor business model. US competitiveness collapsed, the number of patents issue to US companies was halved. Peters and Watermann had to seek out 'excellent' companies as exceptions - when it should be the norm. Why do you want to go back to that?!
You appear to admit that supply side policies allowed for most of the US's largest companies to grow into world leading entities - but you categorize that as a failure? That makes so sense. Take away Apples, NVIDIAs, Micron, Google, Tesla, etc etc etc etc and you'll have a far smaller US economy. Is that what you want?
The context of this discussion is "ways of fighting inflation" and whether stock buy backs have a net positive or negative effect. The common justification for Supply Side Economics is that tax cuts would leave more capital available for private investment that would spur economic growth to make up for the lost tax revenue. That never happened. In that sense Supply Side Economics failed to deliver the results promised. It had virtually nothing to do with "allowed for most of the US's largest companies to grow into world leading entities".
The justification for stock buy backs is similarly weak. Simple logic and math reveals it doesn't provide any significant public benefit. It's a form of insider trading that serves wealthy investors. To the extent it exacerbates income and wealth inequality, it's inflationary.
We had high inflation in the 1970s - during the height of the age of conglomerates. New companies create more competition and that controls inflation. (That’s why the Canadian government is trying to get more companies to open supermarkets. ) You seem determined to be blind to the obvious.
As I understand it you are arguing that selling stock creates capital which new companies need. How does allowing companies to buy back their own stock create capital for new companies to create more competition?
Presumably it raises share prices giving investors access to more capital gains. Why should we expect investors to realize these capital gains and use them to invest in new companies that compete with their previous portfolio?
It’s simple. Company A decides to buy stock into treasury to reduce outstanding shares. An investor agrees to sell the stock to the company for cash for the agreed upon price. The sale occurs. The investor sees his cash balance increase, and the shares are no longer his. The funds are then available for reinvestment. The investors could be individuals, mutual funds, pension plans, endowments, or other companies- for example.
The benefit of the share repurchase is that the selling party can accept or refuse - whereas large one time dividend goes to all shareholders. Investors looking to have a large growth component in their portfolio can accept and use the proceeds for buying into IPOs. Venture funds generally want to get out of maturing companies to redeploy into new ventures before they go public. This is true for high net worth individuals. Famously, Micron Technology was funded in large part by a gentleman who made money my selling potatoes.
Share repurchases do not necessarily raise stock prices. Remember, the company is giving up cash - and the cash is often invested in marketable securities. Personally, I like the stock buybacks because it’s a sign the company is staying focused on core. Companies get into trouble when management starts to think the money belongs to them to invest in half a++ ideas that are not a good fit for the firm in question.
So some investors somewhere sell some of their stock which happens all the time for all sorts of reasons. Some fraction of such sales may or may not be made by venture funds which could then be put into new ventures. Yes it's possible, but that hardly makes stock buy backs a significant factor in creating new businesses and more competition that would not have happened otherwise thus lowering inflation.
What stock buy backs also do is allow company executives and boards acting as inside traders to extract more compensation from the companies they run. This potential for increased compensation diverts resources from the real world economy of producing goods and services people need to the expectation economy of shifting wealth from one group of investors and stakeholders to another.
The premise of our economic system is that businesses are rewarded for producing goods and services people need. When much of the population can't afford to buy the things they need, more businesses shift their attention to producing and marketing goods and services to people who can afford them. There's actually less competition for creating more affordable goods and services people need. I see this as another failure of supply-side economics and stock buy backs to create more widely shared prosperity and well being.
This story is a good reminder of the challenges mature companies face in innovating.
https://spectrum.ieee.org/building-the-system360-mainframe-nearly-destroyed-ibm
Here (in the System 360 initiative) IBM, as an exception, took a make-or-break chance in the transformative initiative. Had it failed, IBM would have been bankrupt. As stated, IBM would 'never again' undertake such a risk. This is why it's critical that capital be allowed to flow to new ventures - via a return to shareholders.
For the US, the proof of the pudding is that it's economic growth has clobbered that of other developed countries over the last four decades.
https://economics.td.com/ca-falling-behind-standard-of-living-curve
Executives are often rewarded for increasing dividends as well. All cash going back to owners increases the capital pool available for new investments. You are one who believe it's best to force capital in potato companies to be kept in potato companies - rather than creating companies that develop and make new products.
This captures things well:
https://hbr.org/2018/03/are-buybacks-really-shortchanging-investment
"The alarm over S&P 500 shareholder payouts reflects not only a misunderstanding of capital flows between those companies and their shareholders but also an exaggerated view of the S&P 500’s role in the nation’s economy. S&P 500 firms account for less than 50% of business profits and less than 20% of employment. To properly assess how net shareholder payouts by S&P 500 firms affect the long-term health of the U.S. economy overall, one must consider their effect on all companies. Capital flowing to S&P 500 shareholders does not go down the economic drain: Shareholders use much of the cash, we know, to invest in smaller public and private firms, supporting innovation and job growth throughout the economy.
The charge that S&P 500 shareholder payouts are starving the U.S. economy of investment does not stand up to the data. In this article, we examine that data, beginning with an analysis of capital expenditures and R&D investment in the S&P 500 over the past decade."
Thanks for the link on buy backs. I never believed buy backs were starving corporations of investment capital or cutting investment. Concentration and market power have allowed some of the biggest companies to raise prices with little fear of competition and report record profits. Anecdotally in the 6 years since the article was published, Boeing which was cited for its long term vision has failed badly to make the investments needed. Some other quotes:
>Make no mistake: The proportion of net income distributed to the shareholders of S&P 500 corporations is indeed high.
>Payout manipulation by corporate leaders could increase income inequality
[but the overall effect in 2018 was believed to be small]
>There’s no question that executives’ opportunistic use of payouts is troubling
The article also notes that the amount of capital made available is much smaller than it appears. About 11% of buy back capital flows in to smaller fortune 500 companies and my understanding suggests these companies generally are not starved for investment capital.
One might conclude from this article that the economic cost and benefits are complicated to determine. Over-simplified sound bites do not provide an accurate picture.
It's the self dealing aspect of unfair advantages that concerns me. Healthy economic activity should not rely on insider trading.
Also, the vast majority of the top US companies are 70% plus institutionally owned - i.e. mutual fund holdings, pensions, endowments. These institutions are sophisticated investors - and I do not believe they are allowing management to pull the wool over their eyes as you are suggesting.
Indexed or algorithm based investing plays a huge role in mutual fund holdings, pensions, and endowments. Your implication that there are skilled investment professionals and researchers who would reject equities based on evidence of self serving stock price manipulation by executives hasn't always proven accurate. It didn't protect us from the sub-prime mortgage meltdown of 2008. On the contrary, investment firms rationalized selling risky securities in part by believing the buyers were sophisticated investors.
From my perspective honesty, integrity, and fairness matter more to our economy and democracy than vague claims about capital flows. History suggests it's only a matter of time until unfair manipulation comes back to bite us.
I'm not here to oppose you. With respect to stock buy backs, we disagree about their relative merits. Enjoy!
The gushing propaganda is indeed that companies are not investing. In reality, the US has had a healthy capital market over the last four decades. If you look at the top companies in value in the US, 8 out of 20 are new from startups in the last 40 years. In Canada, it's 2 out of 20, in France and Germany - zero, Japan 1. This is why the US economy has far outstripped all the other major developed economies in growth since the start of the 1980s. It's like a forest - if you get more growth, you get more trees. Older trees stop growing, get diseased, and eventually die.