
The Reason Stock Buybacks Are a Problem - howard941
https://www.nakedcapitalism.com/2019/02/real-reason-stock-buybacks-problem.html
======
TimTheTinker
There was a TechCrunch article 2 years ago that lays out a convincing argument
that something/someone started siphoning value out of the US financial markets
--thus driving up prices for everything--sometime in the last 50 years. It
asks "Why so costly in the US?" but doesn't have any definite answers. Link
here: [https://techcrunch.com/2017/07/09/why-so-
costly/](https://techcrunch.com/2017/07/09/why-so-costly/)

I think TA offers some really good answers, all centering around market
deregulation beginning under Reagan in the early 1980s. Suddenly, corporations
had a lot more tools at their disposal to siphon off their value towards
shareholders and manipulate the market in the process.

... Which leaves me wondering, how long can the current bull market last in
the US if it's draining US corporations of their value?

~~~
pjc50
Re: "why so costly", the answer as to what phenomenon affects the US and UK
but not other western countries. It pretty much has to be
neoliberal/Reagan/Thatcherism; in particular, the suppression of wage growth
through anti-union measures and excessive privatisation.

Arguments around "drained value" would have to say where the value is being
_to_ ; real estate?

------
mikhailfranco
The instantaneous impact on the share price is just one aspect. The more
worrying effects are the priority claim that debt holds over equity, and the
future dynamics of cashflow v. interest rates.

    
    
      Bond interest payments are fixed and mandatory.
      Dividends are variable and discretionary.
    

If recession hits and cashflow falls, it becomes more difficult to pay the
interest coupon on the bonds. Or if rates rise, it becomes more expensive to
roll-over the debt at maturity. Hint - _rates have been rising at a time when
2019 revenue forecasts are falling._

The size of the problem is shown by the proportion of Investment Grade
corporate debt that is BBB-rated, just above junk. In a recession, those
companies may see reduced cashflow, and hence have their credit rating reduced
one notch to junk. Then many regulated investors (e.g. pension funds) may have
to sell the bonds, which reduces their price and increases their interest
rate, making it yet more expensive for the companies to rollover debt, or
increase debt to survive the recession. Hence a negative feedback loop leads
to a deeper recession.

Here's good explanation, with a chart showing the ballooning of BBB-rated debt
(note the axis is _trillions_ , with a 't'):

[https://www.zerohedge.com/news/2019-02-05/what-blows-
first](https://www.zerohedge.com/news/2019-02-05/what-blows-first)

------
benchaney
I did not find this argument particularly compelling. His analysis of why
stock buybacks are worse than paying dividends seems to miss the fact that the
buyback has an impact on the share price, so more than just the people who had
their stock bought back directly by the company will ultimately pay capital
gains tax on because of the buyback. If you account for this, the disparity
disappears.

