I think the better question is: Under what condition(s) would not investing be a wise and sustainable business decision.
The first answer that comes to mind is: a monopoly. If you dominate your market you have little fear of competition over taking you. You don't need to invest.
The second answer that comes to mind: being a member of a cartel; where competition is feigned for appearances. Again, the need to invest is minimal as normal market forces have been subverted.
This kind of stupidity is why I'm bearish on Apple. Companies should never prioritize financial engineering over R&D imo.
The company & shareholders will eat the disastrous consequences of this asinine thinking when the market next adjusts 30-60% and everyone realizes they were wasting money buying back stock at all time highs.
- R&D account for 7.9% for its revenue this part quarter.
- Apple is now on pace to spend $16 billion in R&D in 2019 as it preps for life after iPhone dominance.
All you need to understand is that they haven't. Assuming Apple is still a sound and rational company pursuing a similar line of business, that should speak volumes to you.
I’m bearish on Apple too.
The Airport Extreme disappearing is another disappointment.
https://blog.pinboard.in/2016/10/benjamin_button_reviews_the... (not replacing my 2013 MPro until they fix all the issues with the current generation that I'm forced to use at work)
Impressed by the design and functionality of the thing, really just plug and move on.
Whoever decided to discontinue Apple WiFi should be kicked
I have a feeling it's more to do with not wanting to help technologically illiterate individuals set up their own wifi, who blame "Apple" when their wifi doesn't work. But of course that's just speculation. The Airport lineup was bar-none the best easy-setup home router on the market when it was pulled.
“For the first time since 2013, iPhone sales did not account for at least half of Apple’s revenue”
i’d say that AAPL has been focusing on services more than anything else lately.
Why wouldn't you aquire debt?
This is the same reason rich people get a mortgage even if you could afford to buy the house outright.
Best part is that debt is defaultable.
Apple does buybacks for “compensation”.
In reality I think they have these motivations:
1) they think their yield is higher than the market.
2) their company is not an investment fund, but you still want your cash deployed.
3) Steve wanted to have nothing to do with investors anymore
Because there are large parts of the market who don't invest across the capital structure (ie they only buy debt or only buy equity), this can still lead to better allocation of capital.
The market isn't perfect but if companies are really mortgaging their future to provide shareholder returns today, that would seem to be something easily noticed when analyzing the company's financials... thus weighing on future profitability and acting as a counterforce to the boost from the buyback.
No need to be an accredited investor.
You can construct a trade that will make you money assuming your assumption is correct (that that company will underperform the market).
you could just be out of good ideas
(Side note: what does "sustainable" mean here? Usually that involves some kind of steady state, not growing indefinitely, which is always going to have limits.)
First, you'd hope they have profits, or they wouldn't be able to pay the bondholders? The question is, where do the company's future profits go?
I guess you could think of it as being a bit more like a bank? A bank provides a service to its depositors, holding their money and paying a little interest. A company does something similar for its bondholders, at higher risk than bank deposits but lower than stocks.
The company is for some reason deciding it wants to expand into the "provide a service to bondholders" business. It's a bit weird to talk about "providing bondholder value" but that's basically what they're doing, by staying in business, paying the interest, and rolling over the bonds. Stockholders get a one-time windfall when a company expands into this business, as the company for whatever reason doesn't actually need the cash.
It's a bit weird to borrow money from bondholders for this purpose, but you could think of it as doing things out of order. Instead of borrowing money to grow the business, they grow the business first, then borrow the money. Less risky that way!
You might also think of it this way: maybe some investors are looking for less risky investments. They would rather have bonds than stocks. Companies are responding to that.
Maybe we should be worried about companies being more bank-like? Life is uncertain. Why are they making guarantees they might not be able to keep? We've been this way before with banks chopping up mortgages to make "safe" investments.
One is that a new equilibrium will eventually be reached. At that point, buybacks will stop and it will hit EPS growth. I wonder if people are aware of what a huge chunk of EPS growth has been coming from buybacks in recent years. I fear the stock market may be in for a rude awakening when the buyback music stops.
The second issue is that debt has an expiry date whereas equity does not. Theoretically, the risk of not being able to roll over debt in a downturn should be reflected in the coupon a company has to pay on its debt.
We'll see whether corporate debt hasn't become too cheap already. We could once again be facing a situation where the effect of everyone having to do the same thing at the same time is not adequately priced in.
If that's the case, this can only end badly.
Sustainable means to stay in business. If you're not trying to fend off competition; if you're not trying to grow/expand; then you are waiting to die. Death =/= sustainable.
If a business doesn't have a sustainable business model, it should operate in a way that maximizes value to its shareholders as it goes through its end. Remember, preserving the corporation is not the goal; maximizing value to the shareholders is the goal.
Imagine you invested money into some enterprise that promised you a share of the profits it will attempt to gain. If that enterprise never actually attempted to turn a profit, it would effectively be fraud.
Now let's imagine they do give you a share of the profits, but the enterprise spends most of its income on frivolous and unnecessary expenses and therefore the profits are very small, that would still effectively be fraud.
Therefore, the provision is to maximize value. It is the basic responsibility of anyone running a public company. Of course this is all fuzzy and you do have a lot of leeway in justifying expenses/investments, but the principle remains.
And this is where the law can step in. The shareholders can unite and take action. Or the gov can atep in. For example, the state of NY is going after Exxon Mobile for fraud, as related to EM's lack of disclosure over their role in climate change.
Preserving the the company is generally quite important in order to maximize value.
The "maximizing value" provision doesn't imply "in the short term", unless for some reason all the value is only in the short term.
If this wasn't the case, no company could ever invest in anything, because that lowers the short-term value.
Of course in practice the short term is often given preference, but that's not because of the provision.
Often it is, but not always. If the market for the company's product is going away it may make sense to just ride things down to the end, milking as much as they can as they die.
Monetizing other value in the company may also be possible, of course. The corporation could be purchased, or its parts could be sold in liquidation. The point is that survival of the corporation is not an end in itself, it's only relevant insofar as its maximizes shareholder value.
- Corporate tax vs. individual tax
- Deferred tax assets
- Sum-of-the-parts valuations
- Internal project NPVs > NPV of investments available to an investor
Are you saying that a company should invest 100% back into itself? There are a few very successful companies that do that, but the vast majority do not. Most companies return value to shareholders regularly in the form of dividends (or buybacks).
The tax advantage of buybacks is they allow the shareholder to choose when the taxes are incurred, not how they’re taxed.
Not in Canada:
> Unlike many other countries, dividends from Canadian based companies are eligible for a somewhat convoluted set of calculations that can fondly be described as the dividend gross up and tax credit system. The basic rationale behind this system is that dividends are paid by corporations after the taxman has already taken his cut. Therefore, if dividend payments were fully taxed in the hands of the investor as well, it would equate to a double taxation.
It's slightly convoluted, but if you have investments in taxable accounts, then there's a bit of advantage in them than simply interest. Though capital gains in Canada is only taxed at half of one's marginal rate as well.
Berkshire Hathaway's cash position is evidence of exactly that. There's nothing good on sale right now. My own opinion of the state of the market is similar -- while I haven't been looking hard, I haven't found a solid value investment with a margin of safety in at least two years.
If, as a company, you feel that the thing you’ve been doing won’t be relevant in the future, you can either try to do new stuff, or give money back to shareholders so THEY can do new stuff.
The first rule of investment/saving is to nuke your debts. Stocks are, effectively, debts. This makes complete sense to me. It's a conservative (the unpolitical kind) approach.
- you're only paying the interest and rolling over the debt; that only works with declining interest rates
- your income goes down for whatever reason and you can no longer make the debt payments
- you think "I'll just sell the stock" I accumulated, but that may not be possible if the stock price is declining.
If your income goes down, your stock price is probably also declining at the same time, but you still have those debt payments to make.
Executives have always wanted to drive up metrics as it allows them to move forward in their work, so I would find it doubtful that they wouldn't want to build out their business further if they are able to (More sales is a sure way to make more profits in most cases). If the capital is there, and we know it is, then these business must not see enough demand to expand.
Many would say that buy-backs are a result of a company having excess capital and no sure investments . With the us inflation rate hovering between 1.5 and 3 percent , a loan at ~2.25 percent is close to free money.
I personally worry for the economy because of buy-backs. Not because I believe there is anything wrong with the practice, but because I think it indicates that business is general not going well enough to invest back into it.
Stock buybacks further reduce the economy's capacity for increasing consumer spending, since the wealthy need roughly the same number of dress shirts and food and washing machines as the rest of us. A marginal dollar isn't meaningful to someone who's already wealthy; they'll save that dollar. But give your average middle class American a dollar and it will lead to increased consumption. Large companies are facing an ever-diminishing base of consumer spending.
It would be the governments responsibility to right the ship, but considering whose lobbyists that have the pen of legislature and ear of congress good luck with that. Too many seats are non-competitive, the propaganda and distraction machines too effective, and the people too ignorant to collectivize.
Eventually the consequences of the constant shaving of productivity away from the workers into the Wall Street black magic money hole will destabilize the country. Not in a French Revolution kind of way, just the slow rotting death that leads to the bottom falling out a la the Soviet Union's collapse. Eventually the thread is drawn taught enough that bread stops showing up in the stores and nobody knows where it went because all the bread companies stopped manufacturing because the marginal returns from the poor by feeding them didn't justify the capital expenditure over playing books and offshoring profits.
Its not even some hypothetical far future happening. The water is already undrinkably contaminated with lead and nobody has the capital to fix it. Shops supplying the lifeblood food of towns just stop getting deliveries. The houses are just left abandoned, the roads rotting, the people just leave with no idea where they are going. Its not uniform, but no collapse ever is, but nobody accounts for it or really even seems to care.
Tragedy of the commons, I suppose. All large business want a slice of consumer spending, but if they don't support consumers, there is no consumer spending to capture.
> Eventually the thread is drawn taught enough that bread stops showing up in the stores and nobody knows where it went because all the bread companies stopped manufacturing because the marginal returns from the poor by feeding them didn't justify the capital expenditure over playing books and offshoring profits.
I hope things don't get that bad. I'm all for the idea of motivating people with money. Some inequality is a good thing. But too much inequality is a disservice to everybody: widespread food instability in the country with the highest number of guns per capita would be a national security crisis that even the wealthy could not ignore. I hope we act with some foresight. We have plenty of distance between here and that point. But I do wonder what level of inequality this country will sustain before things become slightly more egalitarian.
> Eventually the thread is drawn taught enough that bread stops showing up in the stores and nobody knows where it went because all the bread companies stopped manufacturing because the marginal returns from the poor by feeding them didn't justify the capital expenditure over playing books and offshoring profits.
Offshoring profits from what? The profits from not selling bread? Will all the "bread companies" suddenly turn into investment banks?
Let's say "bread companies" disappeared, what happens to the farmers? They all stop producing grain, while people are starving? What happens to the land, it's going to just sit idle for no reason? Why not just let all the starving people work the land that you own?
This scenario is possible, but it would require soviet-style mismanagement that only a central government can produce, for example by fixing the price for grain or setting a minimum wage for farm labor.
> Its not even some hypothetical far future happening. The water is already undrinkably contaminated with lead and nobody has the capital to fix it.
Oh, there's plenty of capital to go around, but nobody wants to put up the capital to fix it in the few areas where this is a problem.
> Shops supplying the lifeblood food of towns just stop getting deliveries. The houses are just left abandoned, the roads rotting, the people just leave with no idea where they are going. Its not uniform, but no collapse ever is, but nobody accounts for it or really even seems to care.
Yet, at the same time, urban centers are growing at massive rates. This is not a collapse, this is a structural change. It sure ain't pretty for those involved, but it's indeed not much of concern for those already living in an urban center, rising costs of living notwithstanding.
Sure. Do we have any reason to think that's not working? When an investor makes a successful investment, and the company becomes very profitable and has spare cash they can't find a productive use for, and give it back to the original investors...
...what do you think the investor is going to do with it?
1) Look for another good investment (something they have a track record for doing)
2) Pile the money up in a big pile and have a bonfire, as they literally have no other ideas for what to do with the money.
3) Something else?
1 is the obvious answer, yet you seem to be the answer must be 2 and can't possibly be 1, but you provide no reason to think so, the linked article provides no reason to think so, and you don't even seem to have realised 1 is a possible outcome.
Further, you seem to be implicitly assuming that a company management who are not professional investors and who don't think they can find a good use for the money will still do a better job of making investments than the firm's investors, who are. Is there a reason for this?
I really don't understand how people still push some version of trickle-down economics. Corporate buybacks are exactly this. Using taxpayer money to fund it only hurts the long term value of the economy.
This is nonsense. Saving in a bank expands the bank's ability to lend. Saving in treasury bonds finances government operations. Saving in the stock market provides the incentive for VCs to invest in startups. Saving in municipal or corporate bonds finances the leveraged operations of those entities, contributing to better long-term planning. Saving in gold at least turns the money over to someone else who will probably spend it on something more useful than gold. For the most part, saving is investment. Only in niche scenarios does saved money leave the money supply.
Increasing a bank's ability to lend doesn't mean they will necessarily do it; the reserve ratio is an upper bound.
Also, even when they do make a loan, it also doesn't mean it will necessarily go towards building or improving productive assets. Sometimes loans go towards buying existing assets (such as houses) in a way that might just result in asset inflation. (As in, for example, stock buybacks.)
The idea of a "global savings glut" is somewhat controversial but not obviously nonsense. We can't learn anything by defining it away.
Otherwise, buying existing assets (such as houses) will increase the price which will trigger increased production of that asset.
Investment often results in money effectively leaving the economy as its multiplier rates are much lower than giving the money to consumers who spend it quickly, usually to small businesses that spend the money quickly.
Outside of niche scenarios, investment opportunities only exist when there is a desire to spend money on a product or service, but no money is available to spend.
> Investment often results in money effectively leaving the economy as its multiplier rates are much lower than giving the money to consumers who spend it quickly, usually to small businesses that spend the money quickly.
A lower velocity of money is not the same thing as a reduction in the money supply.
Traditional models of money supply were built around agricultural and industrial uses of the money supply, and it's not inherently clear that the current model is yielding anything other than higher asset prices.
Haha, maybe 100 years ago when banking still worked like that this would be true. Nowadays bank deposits are probably almost entirely irrelevant for banks' lending capacity, as they just lever outstanding debt and whatever other non-transparent assets they can manage to slap a value on without breaking any laws.
Also, there is no mystery what happens with the wealth accumulated by the 0.1%. Piketty wrote an 800-page book about it. It's just moved abroad where it can not be taxed easily and mostly sits there idle to be passed on to next generations. One would have to be stuck very firmly in the Silicon Valley bubble to think much more than a tiny percentage of this wealth is used to be 're-invested in new enterprises'.
And in that situation, it marginally increases the value of everyone else's dollar, increasing the value of their investments.
You can't save money without directly or indirectly investing in something (https://en.wikipedia.org/wiki/Saving_identity)
Savings and investments are synonyms in this context. See, eg, the savings identity (https://en.wikipedia.org/wiki/Saving_identity). When Joe Millionaire "saves" some money, he does so by investing it. That's what the word means.
> The problem with giving money to the wealthy is that it doesn't go to startups, it leaves the economy and increases a number on someone's terminal.
That's not how money or investment works.
> The best way to spur economic growth is to give money to people who will spend it quickly
Very possibly, but we're discussing who will invest it, not spend it, and as you note, the rich invest more of their income.
In particular, asset inflation (price of land or stock going up) doesn't increase productive capacity in any material sense.
And, that's what's worrying. How do we measure increase in productive capacity without assuming savings = investment? Also, the consumer price index doesn't measure inflation of assets owned by businesses. Are we assuming the market is efficient at pricing investments when it's actually just inflating?
It seems like this is something economists are likely to worry about. Is there a literature on this?
Correct. I think the definition of savings in economics is wrong. I would suggest that the distinction between savings and investment is in with how much difficulty you can reverse your decision (that is, liquidity of the underlying asset). The boundary is fuzzy, but it is important to consider.
So for instance, if I buy a new production line for cars, I cannot easily sell it (for the same price). I am hoping that it was a good decision, because it's hard to reverse (if I see tomorrow, that people actually don't want cars, I cannot easily start to make tractors). That is a decision which is investment.
On the other hand, if I buy shares in a car company, and tomorrow I see that people don't want cars, I can change my mind, sell the shares, and buy some other company. This is savings, not investment.
The reason why the reversibility is important is because if you are an economic actor and make an irreversible decision (like purchasing/building a production line), then other actors in the economy, who have savings, gain a certain advantage - they can react to your decision. They can follow, or they can avoid your investment, depending on how it pans out.
This follows it's not always wise to invest, to make an irreversible decision. Sometimes it's better to wait - and that is saving. Therefore the distinction between savings and investment is actually very important for even macroeconomics. If you have an economy where everybody is waiting for good opportunity (saving), then there is no economic growth. They still can "formally" be investing (buying shares or other financial instruments from each other), but the irreversible (i.e. real) decisions do not get made.
Right, you're talking about the velocity of money (https://www.aier.org/article/what-money-velocity-and-why-doe...) which I find a fascinating concept.
It does feel like money is pooling, because as corporations buy back their stock, there is also less stock for others to buy. Since a lot of retirement vehicles in America rely on buying stock, specifically the S&P500, this can really be tricky. Many companies have resisted going public, get bought out by private equity, etc. Private companies are very hard to invest in, requiring a certain amount of wealth and connections. But I think this is why we're in a huge easy VC money startup economy. The money is looking for a place to be invested, and as some analysts say, TINA - there is no alternative, that is, they need to be invested, but the price of assets they can purchase is getting worryingly high.
Actually the relevant concept is the marginal utility of wealth:
The problem I see is that the money almost exclusively goes to startups. In the last 10 years the startup scene in the US has been doing very well - not in terms of profits but in terms of funding. This giant "pool of money" created by the FED however mostly benefits just a small part of the workforce: Notably the engineers, scientists, managers, lawyers, investment bankers, etc. in the startup hotspots: In cities like SF, NYC, Seattle, Houston, etc. This is a problem for society because while wages for some parts of the workforce keep growing other workers are left with stagnating wages.
It's only in the middle case (which I think is the most rare of the three) where the share buyback money ends up as savings. (And even there, it's likely in government bonds, lowering the cost of government borrowing when done in aggregate.)
There are more complex analyses, but the above one gets the job done.
You are arguing that non-governmental investment/stimulus in the depths of a recession is a bad thing?
> Socialism never took root in America because the poor see themselves not as an exploited proletariat but as temporarily embarrassed millionaires.
If you were aspiring to be the next Bezos or Gates, you too might be inclined to support tax policies that would benefit your future self.
Socialism isn't an absolute, it's a spectrum. Most people don't seem to care about the lack of privatized fire fighting as it existed in ancient Rome.
In my business, almost all of my employees are low-skill. I pay everyone at least a living wage and it's impossible to ignore the realities of their lives. When I make more money, it goes to our savings. When I give an employee a raise, they buy something they need immediately, like a new car or new clothes.
In fact, due to fractional reserve banking, a multiple of the amount put into a savings account is loaned out and spent!
When “gains every quarter” are the goal and the measure of “gains” is finance, if you own all the valuable assets up for trade in the finance market...
But that’s ridiculous!
Humans are not and never will be rational actors. They carry their childhood memes with them for life via their brains. Offer some science that refutes it if you got it, but the functional processes of literal reality trump our conscious gut and that’s a well debated fact of human behavior.
The narrative has always been “protect inherited power.”
We see Tonight show hosts, religious true believers, true believers in capitalism, etc stand up to protect the “torch” they’ve been handed. Symbolism above all else.
Finance is another source of illusory power that we have a habit of blindly bestowing on others for emotional feels, before utilitarian value. Not saying that’s good or bad, it’s just what I find to be a reasonable summarization.
What a shock! Tim Cook and the rest aren’t investing in r&d. But their era was corporate micromanagement. Business of financial economy. Not nation state building and rivalry, which flooded the economy with public investment dollars via high taxation.
Apple has ~$250 billion in cash on hand. Berkshire Hathaway has $122 billion. Alphabet has ~$100 billion. Where do you invest when all that is left is the roulette table (sidenote: Alphabet should be making risky bets: Alpha Bet [Alpha is investment return above benchmark])?
Alphabet does make risky bets, they spin off new companies constantly, and on their last earnings report lost about $1 billion/quarter on it.
As the article points out, money is moving around but that’s it.
Or is there a different step in this “giving rich people more money means it finds its way to poor people” s/rich people/investors/ s/poor people/jobs/ ?
The term "trickle-down" originated as a joke by humorist Will Rogers and today is often used to criticize economic policies which favor the wealthy or privileged while being framed as good for the average citizen.
However, it goes on to say:
David Stockman, who as Ronald Reagan's budget director championed Reagan's tax cuts at first, later became critical of them and told journalist William Greider that "supply-side economics" is the trickle-down idea:
With a quote by David Stockman:
”It's kind of hard to sell 'trickle down,' so the supply-side formula was the only way to get a tax policy that was really 'trickle down.' Supply-side is 'trickle-down' theory.”
— David Stockman, The Atlantic
I’m sure the video touches on this, but do you have a summary for why it’s a straw man mischaracterisation?
Help rich entity; rich entity will help the rest of the economy?
Inequality is not as bad as it is made out to be. With our current level of automation for goods and services consumed by the masses, a high degree of equality would already result in mass unemployment since only so many people are needed to operate the highly automated production that would benefit an equal society.
Inequality on the other hand creates a LOT of diversity in demand for goods and services and this in turn drives a lot of job creation.
You need a LOT of people to build a $350 million yacht for example. If no one could afford something like that, it wouldn't be built and those jobs would no longer exist.
Furthermore, besides helping the economy via investments and spending on things that only they can afford, they also help in philanthropic ways that no government would be capable of helping:
As you point out investors are not stupid, but why should they be trusted to do the right thing for everyone else ?
Overpopulation is the foundation of human suffering and is driving us to extinction. There's is a clear negative correlation between educated women and population growth. How about setting up some scholarship funds?
When we run out of oil, there will be a second dark age. The metals required to make steel and electronics will basically become inaccessible when we cannot afford to power the machines which excavate and transport the material. Not to mention the famines which will ensue when we can't fuel the trucks that supply remote settlements like Los Angeles with food. How about building out the infrastructure required to transition away from fossil fuels?
The plankton provide 2/3 of the oxygen we breathe and our industries are currently making vast areas of the ocean completely uninhabitable for them. How about protecting the photosynthesizing life in the sea that we all need to survive?
I mean, the instructions are written on the wall, in big, bold, red capital letters. Only a fool would throw his or her hands in the air and say that there's nothing else to do.
I guess that explains why I was confused by the parent comment.
I still do believe that giving money directly to social/governmental programs is more effective then giving it to the ultra-rich who may or may not have an incentive to spend it in a way that aligns with the country's interests, but that's a topic for another day.
Interesting way of shifting the burden of proof and reversing the null hypothesis but I will bite.
How about the non-partisan federal Congressional Research Service report?
Also from: http://nymag.com/intelligencer/2019/07/gdp-report-trump-tax-...
>In May, the Congressional Research Service (CRS) found no sign that the Trump tax cuts made any discernible contribution to growth, wages, or business investment. Corporations did not plow their windfalls into exceptionally productive and innovative ventures. Instead, they mostly threw their handouts onto the giant pile of cash they were already sitting on, and/or returned it to their (predominantly rich) shareholders.
>Now, it appears that the CRS analysis may have actually been a bit too kind to Trump’s signature legislation. The federal government’s latest report on economic growth suggests that business investment has been even weaker than previously thought. Initially, the Bureau of Economic Analysis (BEA) estimated that America’s gross domestic product expanded by 3 percent in 2018 (on a fourth-quarter-over-fourth-quarter basis). This week, the BEA revised that figure down to 2.5 percent — due, in part, to decelerating growth in business investment.
>Meanwhile, in its initial estimate for the second quarter of this year, the BEA found that GDP grew by 2.1 percent, while business investment declined. Corporations haven’t been growing the economy by ramping up investments in its productive capacity (a.k.a. growing the economy’s “supply side”).
>Consumers and the federal government have been doing so by spending more money on goods and services (a.k.a. increasing aggregate demand)
>Bottom line on Q2 GDP: Business investment was terrible. It came in at -0.6%, the worst since early 2016.
I don’t see how this can change unless the information gap between employers and employees is eliminated.
And yes, creating 50 jobs that automate away 1000 jobs is a net loss of 950 jobs. Even if those 50 happen to be in tech or other industries that you benefit from.
Keeping 950 jobs that are technologically uncompetitive is a good way to create a crisis down the road. Let's not confuse the investment and automation debates.
But standing in the way of progress telling it to stop is never going to be a realistic solution.
The best way to stimulate labor is to stimulate demand, aka giving money to the people who will spend. It's sickening to see people pretend that massive corporate tax cuts and middle-wage tax hikes are going to do anything other than reduce labor demand.
I don't believe private investors decide they'd rather buy a yacht than invest their money just because a company bought back shares. More likely, the share buyback just moved money from a mature company to growth stocks or startups, which is exactly what should happen in a healthy economy.
Put another way...should Dinosaur Oil Inc use their profits to build another refinery even when they don't think it makes financial sense...or should they buy back stock, make their investors happy, and then be in a more vulnerable position when the investors turn around and fund Shiny Solar Inc?
The best way to spur economic growth is to give money to people who will spend it quickly whether rich or poor. In general, it turns out most very wealthy people have little incentive to spend money quickly. Instead, they save to hedge against and profit from recessions.
"You're thinking of this place all wrong. As if I had the money back in a safe. The money's not here. Your money's in Joe's house...right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can. Now what are you going to do? Foreclose on them?"
The whole point of finance, the social purpose, is that it prevents everyone (rich or not so rich) with assets from letting them sit idle.
The whole point of finance is to maximize returns on investment. One strong strategy is to build liquidity before economic (or industry) downturns to cheaply acquire assets. This idleness happens at a much greater rate for the wealthy than the poor. And by poor, I mean the bottom 90% of society. They don't have the luxury of savings. This means it's of greater value to give them money because they spend it quickly . The economy doesn't grow when companies buy back stock, it grows when someone has enough money to pay for medical treatments or to buy a new car.
Of course it doesn't mean that investors/banks who receive the money reinvest it in the same country - if there is a dearth of opportunities in eg the US and Europe then this type of activity may result in increased investment in emerging markets.
This is plain incorrect. Spending on the value-less services and goods makes the economy as a whole poorer, and the more you spend the more you impoverish.
Or is it like you use body language? Giving money for people to spend is done like this, while giving money for people to save is done like this.
Every time someone buys an investment, they're buying it from someone who is cashing out, quite possibly to buy a cheeseburger. It makes no sense to call this a "trickle", of course, because it's not a small fraction of the money.
Remember you are talking about denying a CEO the ability to decide whether to invest or not invest in additional production capacity and instead assigning this task to the government. The CEO has more information about his own company than the government, which means that the government is not capable of making this decision. The government is also insulated from the consequences of making the wrong decision, if a company loses revenue or even shuts down the government is not directly affected.
I elaborated a little on an alternative proposal for increasing investment at https://news.ycombinator.com/item?id=20665196
I think the only thing similar to planned economy here is that you're shifting tax burden and resources invested from larger companies to smaller companies. The idea being that small companies are a beneficial resource because they contribute more directly and locally to their economies.
You could argue that this is a distortion but I think it's a long way from a planned economy.
If it is in the US, my intuition is that it wouldn't be very good.
If these companies made a large one-time dividend, would that be preferable to share buybacks?
On one hand, we have tax treatment. Dividends produce revenue now; share buybacks, only on the disposal of the shares. On the other hand...I don't see another hand. Share buybacks should be specially taxed at the corporate level.
Either way, companies returning money to shareholders is preferable to pursuing boondoggles. (I'd argue 100% of the buyback tax revenue fund basic research, but we know that's presently politically unrealistic.)
The majority of investors would usually prefer to hold at a given point in time (or at least would prefer a choice of when to realise their gain), so unless the sum is so big that a buyback is not practical, it is usually preferable from an investor perspective as it lowers average friction costs.
In some jurisdictions buybacks may also be more tax efficient for some investors than special dividends (and this may be especially true for senior executives who make the decision on which to do), but that's not the case everywhere or for all investors (some may have a tax preference for dividends).
If a company buys back shares from an existing investor (EI), EI now has cash and is likely to either spend that money (if they're a retiree selling shares for income) or reinvest that cash into some other investment. It's very unlikely that they're going to keep that new money in cash or a savings account.
Or suppose they buy a painting from another billionaire for $20 million - did that really create any jobs or middle-class wealth?
You can argue against the tax implications of buybacks vs dividends but either corporations give profits back to investors or they will just have to continue to grow bigger and bigger, which I think the same people hate even more than buybacks.
But we live under capitalism so giving money to people is out of the question. Money is for billionaires and shareholders.
That borrowed billion doesn’t just then disappear into the ether. It gets reinvested.
But most people believed the current Administrations reasoning, which was that the tax cut would benefit them by stimulating the economy (eg trickle down economics), which to educated people was obvious BS.
All we can really say about the beliefs of Americans is captured by a recent CBS News Poll:
> Far fewer think the middle class (31 percent) and homeowners (25 percent) have been helped. More Americans think those groups have been hurt rather than helped by the new law.
Companies can always sell more bonds or shares when they have a major investment coming, the stock / bond buybacks buy time, improve credit standing and create a cushion for that future investment event.
Of course it looks like a juicy burger even though you know full well that's not even remotely what you are going to get.
How would the tax cut pass if they didn't pass it off as a juicy burger full well knowing that they were going to give a microwaved burger instead.
Trickle down economics doesn't work.
If the companies borrow money and do nothing with it, they are not provoking scarcity of any kind, they are storing bits of a bank account still, doing nothing at all.
Yes, a lot of (especially the upper income segment) of the working class has some investments, particularly in retirement accounts; this doesn't mean they generally see the same income benefit as major capitalists from policies that boost investment yield.
Buybacks are the correct option for these companies, because otherwise they would be burning money on stupid projects or acquisitions. The money goes back to shareholders, via higher stock prices. They then need to put this somewhere, and many just buy more stock. Stock valuations rise(lowering expected returns), and this causes more sophisticated investors to leave the general public markets and look for opportunities elsewhere... resulting in the 'real investment' that you want. Large, established, public companies are NOT the right vehicle for this investment to happen through.
Also, you need to read through the fake news headlines a bit. The top 10 companies are responsible for a disproportionate amount of these buybacks. Smaller companies probably have ways to use the extra tax cut money. Apple may not have needed lower taxes, but pretending like all companies are in Apple's fortunate financial position, and hinging your argument on that is like arguing that lotties are the best use of money because you won the lottery.
Good arguments for taxing dividends, stock buybacks, and interest paid at the same rate. They're all paying for capital. The tax preference of debt creates a debt-heavy financial system.
Some countries prohibit stock buybacks. How's that working out?
To prohibit buybacks and make it stick, you also have to prohibit cross-ownership. The US used to do that, but only for utility companies. The Utility Holding Company Act (1935-2005) limited utility ownership structure to a tree depth of 3 with no backlinks. This allowed regulators to track where the money and ownership were.
The price of gold suggests even buy backs are coming to an end of their effectiveness. There is so much money now sloshing around that nobody has any idea what to do with it.
That's a really appealing supposition (seriously), in part because the inherent diversification spreads the risk. And there's also the factor that more cash in the shareholders' pockets could mean more job-producing economic demand generally, even if the shareholders just spent the money on yachts and mansions.
But there's an empirical question: Is that what actually happens in the real world — or do the shareholders just hoard the money, taking it out of circulation without either investing it or using it to create more demand?
Hoard as in like, under a mattress? No. Investors keep pretty much all of their money invested pretty much all of the time, or the banks that they store their money in do by proxy.
That's only true when banks actually lend. In the wake of the Great Recession, however, many banks drastically cut back on their lending — and to that extent they were no more than giant virtual mattresses into which their depositors' money was stuffed. As a Federal Reserve official said in 2015 about the Great Recession's aftermath: "... the sharper decline in outstanding bank loans to businesses that I mentioned earlier was likely a contributing factor to the slower economic recovery we have observed this time around." 
Like if they use $1 billion to buy back stock, the aggregate value of the outstanding stock should go up by $1 billion. Doesn't matter if they borrowed the money, the company retains the value.
Having a high company value must have some benefits to them in other ways. Perhaps even less negative news articles in the press, and an easier time hiring good employees, just to name two.
This isn't quite right. Look at it this way:
There is a company that has the following assets
1) $100 in cash
2) $100 in other assets
The company spends its $100 in cash to buy back 100 shares. So now its asset list is:
1) $100 in other assets
So why do a buyback if it doesn't raise the share price? Two reasons:
1) it returns cash to the shareholders who want it (those that sell the stock)
2) future gains in value will now accrue to fewer shares of outstanding stock
(Just wanted to clarify that the benefit is independent of the ticker price subsequently increasing)
Therefore, in your above example if the shares were actually being sold at $2 each, then the company is doing a disservice to the investors by buying the stock back.
However, if the stock is under pressure (below its “fair” price), say 50 cents in the above example, then by buying the stock back, you are creating true value for your investors.
Problem of course is that rarely do people running the company think this way.
Which means that your company just gambles its money at the stock market by betting on its own price.
One reason an investor might buy shares is to try to take over the company, i.e., end up with all of its shares. Well, it is well known that the people executing a takeover often depend on getting access to the target's cash and other easily-measured (and consequently easily-sold) assets to help pay for the takeover. Specifically, if the company has $100 in cash, the takeover artist can afford to pay approximately $100 more for the company than if it has $0 in cash. (Specifically, if the target has $100 in cash, the takeover artist can go to one of his friends and says, "Loan me $100 and I'll pay you back with the cash held by the company I am planning on buying.) So since market cap is approximately what it would cost to buy the whole company, it makes sense that a reduction in cash would cause a reduction in market cap of approximately the same amount.
Note that even investors who would never contemplate taking over a company can profit by selling their shares to someone who would and does, so they have the same incentive for valuing the company's cash as the takeover artist does: namely, the takeover artist can afford pay more for a company with cash, so the price paid by the takeover artist to the investor will be commensurately higher.
Now the fact that management decided to buy the company's shares rather than deploy the cash in some other way does send a signal to the market that management believes the company's stock is good value with the result that the price might end up at $103 instead of $100. We might call that a "second-order effect" of the buyback. Another second-order effect is that fact that if the market knows a buyback is in progess, they'll tend to hold out for a higher price. (In other words, a big purchase tends to drive up the price; the company will spread the buying out over time to try to limit that effect.) But these second-order effect are limited in magnitude; they are very unlikely to cause the price to end up at, e.g., $200.
It's a form of returning capital to shareholders popular in US companies which by-passes US double-taxation of dividends and is often preferred by shareholders as they're able to choose when to realize their capital gains at their optimal convenience and at a cheaper tax rate than regular income.
But they're typically performed when the company believes their share prices are undervalued and would like to acquire them at their perceived discount.
A lot of the valuation of public companies are speculative based on their future potential earnings so a loss of unused capital shouldn't affect it too much, it's also a signal that the company believes their shares are currently undervalued, so they believe their Buy Backs are acquiring them at a discount.
What if a company does buybacks on a predictable schedule over years?
It seems to me that if the pushing up is as predictable as you say it should be trivial to buy a bunch of shares right before the increase and sell them right after for an easy gain. You should get on that!
It depends on the size of the BuyBack and whether they're getting them at a discount, but it could go up at announcement as it could encourage other investors to buy shares early in expectation that the Buy Backs will push the price up, it will go up (depended on the size of Buy Back/Market Cap) during execution due to the increased demand.
> What if a company does buybacks on a predictable schedule over years?
They're only going to perform Buy Backs when they think they're at a low valuation, when they have a high valuation they'll prefer to give out dividends or employ other effective use of capital like M&A to manufacture growth.
> It seems to me that if the pushing up is as predictable as you say it should be trivial to buy a bunch of shares right before the increase and sell them right after for an easy gain. You should get on that!
You don't get to know exactly when Buy Backs occur, they'll announce that they intend to perform purchase a certain amount of Buy Backs over a specified period and in the next Financial results they'll disclose how many Buy Backs they purchased during the period.
Also your maths is slightly off. If the company uses $1bn to buy back stock, the company is now $1bn poorer. So whilst EPS etc will increase the assets per share may well decrease so I wouldn't necessarily expect the value of the outstanding stock to increase by $1 billion.
Right. Before, the shareholders have shares. Afterwards, they have shares and money. The total value has not changed at the moment of the operation (ignoring taxes, assuming infinity liquidity, that the information about the transaction was incorporated already in prices, etc.).
> It's effectively a dividend, by raising the stock price by the same amount they use to buy back stock.
It's effectively a dividend, but it's different in that the share price remains constant for a buyback and goes down for a dividend (again, in the ideal case).
With a dividend: Before, the shareholders have X shares. Afterwards, they have money and X shares (which have a price lower than before, to keep the total constant).
With a buyback: Before, the shareholders have X shares. Afterwards, they have money and Y shares (which have the same price as before, but there are less of them to keep the total constant).
> Like if they use $1 billion to buy back stock, the aggregate value of the outstanding stock should go up by $1 billion.
Nonsense. It's the other way around: the aggregate value of the outstanding stock should go down by $1 billion.
Where "should" applies only in the ideal case, sure, but there is no way at all to construct an argument where it "should go up by $1 billion".
To buyback stock the company has to make an offer that enough investors are willing to sell. Once investors start to do so at these higher prices, the stock price goes up.
To the low information investor, this looks to them like the stock is worth even more than it was before, because it made money for them (on paper, at least).
And what about index funds? Regardless of the number of buybacks, the index fund isn't going to sell. This would also cause the stock price to rise.
This idea that a stock buyback doesn't affect price only works in a market where everyone has perfect information. In real life this isn't the case.
It’s kind of strange that people hate on buybacks all the time (people like Elizabeth Warren), but no one gives a rat’s ass about dividends.
Er, no. That's not how it works. Companies can create new shares out of nothing anytime they want.
But the real issue is that shareholders will be informed when new shares are issued and no one likes dilution. I’m not 100% sure, but I believe existing shares held by the company can be sold without notification until a quarterly report.
Companies have a number of authorized shares and typically need shareholder approval to increase it. Sure, they typically set the number of authorized shares high enough to run into the problem with any frequency, they can't "create new shares out of nothing anytime they want."
One follows from the other. It's because it allows a tax dodge.
I preferer the money - id make an exception for discount control on investment trusts though.
There are I think better and more transparent ways of returning $ to investors.
I think you are confused. A buyback returns money to shareholders because the company has literally purchased the shares in exchange for money. Any other effects of a stock buyback are secondary. There's nothing vague about the promises, you're guaranteed to receive the money, and there's nothing to ignore with regard to the time value of money, because the shareholders immediately get money. Unless they decided not to sell, in which case, who cares? If they thought they would be better off taking the money they would have sold.
Your confusing a tender offer at over par with a generic buyback.