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Companies Use Borrowed Billions to Buy Back Stock, Not to Invest (bloomberg.com)
322 points by JumpCrisscross 13 days ago | hide | past | web | favorite | 331 comments
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> "What’s all but vanished is the correlation between how much companies borrow and how much they invest."

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.


It seems C-level execs across industries believe buying back stock with profit/debt to unlock performance bonuses is a win-win.

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.


- Apple is spending more than ever on research and development.

- 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.

https://www.imore.com/apple-spending-record-amount-research-...


It’s actually pretty impressive that they’re spending that much on R&D and still manage to make the next product worse than the previous one.

Most of it is likely going to unannounced products like the rumored Apple car and and the rumored AR product.

I really don't understand how Apple hasn't used it's cash pile to buy Tesla. It seems like a pretty dam good fit.

> I really don't understand how Apple hasn't used it's cash pile to buy Tesla.

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.


Apple raising prices on their phones so 1k was probably an irrational choice. It's amazing how they are repeating history of the first time jobs was ejected from apple and they reduced innovation and were on the way to death until he came back and saved them with nextstep.

I wonder about this too. Although Apple rarely makes big acquisitions. Elon’s not the kind of guy who will cede away control and Apple loves control. Plus Apple’s chief “Taste person” and chief designer have left so it’s no longer a product company. It’s a squeeze the Juice kind of company.

I’m bearish on Apple too.


Tesla has miserable margins, by Apple's standards.

I'm not sure if the US is the same as the UK, but here there are tax incentives [1] to classify, or interpret as much engineering time as possible as R&D.

[1] https://www.gov.uk/guidance/corporation-tax-research-and-dev...


As hiring pools get bigger, the pressure to "just fill seats" increases to strong diminishing returns on investment. 5x R&D spending means probably more like 2x R&D output, with a lot more noise in the design and development processes that create opportunities for bad ideas to filter through all the way to production.

R&D won't be the next product, it'll be probably minimum 5 years out, and up to 20-25.

It's both.

Apple may be spending a lot on research but they've recently become too obsessed with mobile profits over holistic prosumer experience. I don't think I'm the only heavy Apple user considering leaving the reservation if they choose to focus on mobile consumption above everything else. If they don't fix the MPro[1], I've lost one of the major reasons I use Apple products at all, I thought the agreement was I pay Apple a nice fat 30% profit margin and in return they ensure I'm using the hands-down best computing devices on the market.

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)


Just bought an Airport Express second hand to extend a Time Capsule network around a big concrete wall.

Impressed by the design and functionality of the thing, really just plug and move on.

Whoever decided to discontinue Apple WiFi should be kicked


Yes, I got a Time Capsule with a nice fat spinning disc, and used its USB port to chain a 4TB HD to it, and have a 6TB networked Plex setup, which was relatively easy to set up and gets me strong dual signal everywhere in my 3 story house. Really impressive tech. The capsule has taken some abuse too and still works. Before that I had an Extreme with basically the same results minus Plex.

It’s not a closed system. So you end up with servicing a not so big product

That's where you want to consider second order effects. The type of person who's buying an Apple Wifi router is probably spending a lot of money on Apple products, it's part of the "long tail". They might be the people most likely to evangelize their products. It keeps expertise about wifi inside of Apple. Getting rid of it seems like a move made by an executive who had to "do something" to look impressive. Apple isn't a cash-poor company that needs to ditch every product that's not part of their core offering. And the Airport wasn't a failed product line, it was a beloved one.

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.


“they've recently become too obsessed with mobile profits over holistic prosumer experience”

“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.


How much comes from iPhone sales and how much from iPhone app sales?

Say you can get debt at 3% interest. The same money could get 4-7% yearly average return in safe investments over a 7-15 year time frame.

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.


Anyone with collateral can go into debt at 3%(ish) interest. I've never heard of anyone getting a sizable loan for longer than overnight at that rate without collateral. If there is a counterexample please share it. And if a person defaults on a collateralized debt, well, they lose, and usually badly. Margin calls are one of the nastier examples, but foreclosures also come to mind. Even a safe investment like US Treasury bonds can trigger a margin call if, for example, interest rates rise and reduce the market value of the bond enough to fall below margin requirements.

Most vanilla corporate bonds are unsecured and offer nothing more than a promise not to give anyone else security over the corporate assets and an unsecured debt claim.

Then you must have been bearish for 6 years. Which simply means you’re wrong.

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


Apple is not overvalued. It's P/E is actually very low considering the amount of cash for R&D and the potential for growth they have at hand. Currently it's bound by a lack on entrepreneurial imagination on part of its execs but has a sure future nonetheless.

More importantly it’s a question of who is better equipped to deploy capital - executives or investors? Intuitively it feels like the stock market was supposed to operate with buybacks and dividends. I invest money in exchange for shares. That money is deployed. Profits made. And slowly returned back to the investor. The investor deploys it elsewhere and the cycle begins.

https://www.bloomberg.com/opinion/articles/2019-06-24/would-...


So what about leveraged buybacks?

They are a rebalancing between the portions of the business funded/owned by debt and by equity claims where the portion funded by equity claims has grown significantly out of balance as a result of interest rates (and thus discount rates) falling substantially.

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 company can't sell shares it doesn't own. Think of it like a startup founder borrowing to buy out someone else's equity. If interest rates are near zero, it may make sense to borrow cheaply now to buy back stock that the company can then sell later when it actually needs an influx of capital (presumably when interest rates are higher and the stock has risen a bit). It's essentially a financial bet on the company's future prospects.

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.


A way the wealthy can rig the economy: 1) Right now, the richest 10% own 84% of all stocks 2) Public companies take out huge loans in corporate bonds 3) Do stock buy back to raise the price of stock 4) The wealthy shift into privately companies with a bigger precentage of their wealth 5) Workers with their 401k are trapped in public companies, brecause of Accredited Investor laws, they can't invest in private companies. 6) Workers with their 401k are left with only public companies. The companies are forever heldback by servicing that debt. 6) Workers lose out of stock price gains.

If you are confident in this scenario, then rollover your 401k into an IRA, enable options trading, and buy puts or short the companies that you believe took on too much debt.

No need to be an accredited investor.


This is not a good idea because with shorts you need to time the market correctly... Irrational markets can survive for years and shorts cost premiums, especially those with a distant expiry date. If you're not a stock analyst with inside info, you will not be able to get the timing right.

If you are concerned about timing it right, or macro-economic swings, simply purchase a corresponding long position in an index fund / S&P 500. Options do cost premiums, but shorts typically do not. You can however even recover the option premium with a similar strategy by selling a matching option on the index.

You can construct a trade that will make you money assuming your assumption is correct (that that company will underperform the market).


another reason is that they do not find good uses of capital so they give it back to shareholders to deploy elsewhere.

you could just be out of good ideas


Perhaps. But that's not a sustainable business model. Numerous like-companies out of ideas? Then plenty of C level, leadership, and management is overpaid. The fact that they benefit for these stock buybacks only makes matters worse.

It's not literally "out of ideas". It's that your ideas don't require all that much money to implement compared to the amount of money coming in. Ideas for improving efficiency might pay for themselves quite quickly, putting you further in the hole. A nice problem to have. Maybe shareholders should benefit?

(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.)


Sure, shareholders should benefit in cases where too much money is coming in. However, isn’t the problem that the “money coming in” in this case is debt, not profit?

Oh, I don't know but I can speculate.

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.


I look at it this way: There are exactly two sources of funding for companies, equity and debt. As debt gets cheaper (interest rates going down), debt funding becomes more attractive relative to equity. So naturally, companies will shift more of their funding towards debt. It's not inherently a bad thing, but there are two issues:

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.


This sounds similar to the housing bubble. That is, the psychology is "It'll be fine. Everyone is doing it." But few are looking at the next possible what ifs.

If that's the case, this can only end badly.


If your ideas don't require all that much money then they are easy and obvious. Again, if the "barrier to entry" (to such ideas) is that low then that's not a sustainable business model. Unless. You are confident your "competition" isn't really trying to compete either.

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.


> But that's not a sustainable business model.

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.


Yes and no. What I feel you're describing is a Ponzi Scheme. Sure you're maximizing value for the current shareholders, but someone is going to be left holding the bag. What about __those__ shareholders? You're no longer maximizing for them. In fact, if you're not disclosing your plan to slide down and into oblivion then wouldn't that be fraud?

Who decides this is the goal? Do all corporations have this as their ultimate goal?

It is their legal obligation.

https://www.litigationandtrial.com/2010/09/articles/series/s...

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.


> 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.


This is the standard/traditional theory of business, right? No one person decided it, it's just a theory about a capitalist markets. This theory is cited as one of the main guiding principles in corporate ethics as well.

https://www.accountingtools.com/articles/2019/1/25/sharehold...


Nobody specifically but it's not the wrong goal. Remember that "zombie companies" that don't make sense anymore but the state won't let die is a typical sign of a sclerotic Communist economy. At some point the existence of a company has to be a means not an end, so what is the end? Shareholder value. Because that's what ultimately means a company had positive return on investment and that is the closest signal we have to "doing something useful".

> Remember, preserving the corporation is not the goal; maximizing value to the shareholders is the goal.

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.


> Preserving the the company is generally quite important in order to maximize value.

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.


If maximizing value to the shareholders is the goal, companies should dissolve and pay out the proceeds as dividends.

That's not how business works.

- Corporate tax vs. individual tax - Deferred tax assets - Sum-of-the-parts valuations - Internal project NPVs > NPV of investments available to an investor


That may maximize the immediate value to shareholders, but the real goal is to maximize all discounted future cash flows.

The entire purpose of a company is to return value to shareholders. Due to our current tax law, buybacks are a much better way to do that than dividends.

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).


Or the definition of "good" is so stringent that it's hard to satisfy so you just give it back.

there is also a term called bleeding the pig... where you load up a company with a lot of debt and eventually the company goes bankrupt... guess who doesn't lose out though. buybacks are taxed at a capital gains tax rate, whereas dividends are subject to ordinary income tax.

In the USA, dividends on stock one has held for more than a year is taxed as long term capital gains.

The tax advantage of buybacks is they allow the shareholder to choose when the taxes are incurred, not how they’re taxed.


> ... whereas dividends are subject to ordinary income tax.

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.

* https://www.fool.ca/13-steps-to-financial-freedom/step-8-the...

* https://www.investopedia.com/terms/d/dividendtaxcredit.asp

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.


Right, but this means, for Canadians, dividends paid by non-Canadian corps are taxed as regular income. Stocks to do buybacks instead of dividends are more valuable to us.

Are there that many companies bleeding the pig? Possible. But how likely?

I can see a third answer for why but is for a more extreme version of buybacks - going private. If they feel that they are getting far too much quarterly earnings short-termism as opposed to long term vision.

Not investing is a wise decision when there is nothing available at a reasonable price.

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.


Also in mature markets where the amount of innovation you can get is tiny compared to the amount of money you need to invest to get it.

Or, when a better investment opportunity is on the horizon. If an economic recession serious enough to affect good companies is looming, and if some savvy people with capital know it coming by the data or instinct, they might hold off their investment until the time comes so that the can "invest" or acquire those good companies at a better term.

There is record private equity dry powder right now. Money is on the sidelines waiting for asset prices to come down and investors are only buying recession safe assets.

If that were the case, why wouldn't the companies just hold onto the cash, wait for the recession, then use the cash reserves to buy back their stock on the cheap?

I was answering to the comment (paywalled by the article), and I believe a few companies do hold onto the cash when they see the opportunity, but probably not many would have the gut or the data.

It may also be that you realize that your shareholders know better how to invest the money than you do.

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 third answer is that debt is risky. Economy crashes? You're toast. Stock market crashes? You're toast.

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.


Not really. Debt at low interest rates is pretty low risk. The first rule of investment is to deploy your capital where you will realize the best returns. If you can make 6% and have borrowed at 3% then paying down your debts would be foolish.

I think this works as long as you have income to pay off the debt and actually are paying off the debt. But isn't it a problem when:

- 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.


this is literally a ponzi scheme and a tax avoidance scheme rolled up into one. I wouldn't be surprised if money is being laundered in this scheme as well. borrow a billion dollars and buy back a billion and 100 million dollars in shares, who's going to notice the 100 million that got slipped in?

Can you explain who should notice the 100 million and won’t? I’m not following.

Capital has been cheap for some time now, since the economic crash in 2008. It has only been since ~2016 that the Federal Funds Rate has lifted above half a percent [0]. And although the rates have recently been increased (Rate recently fell 1/4 of a percent but is still just above 2%), we are still seeing very low rates. Because capital has been relatively easy to acquire for this time I wonder if this is a more a consequence of the obvious but high cost investments already drying up.

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 [1]. With the us inflation rate hovering between 1.5 and 3 percent [2], 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.

-0, https://tradingeconomics.com/united-states/interest-rate

-1, https://www.investopedia.com/ask/answers/040815/what-situati...

-2, https://www.usinflationcalculator.com/inflation/current-infl...


It sounds like a self-fulfilling prophecy. Businesses return value to shareholders, because they see limited or no opportunity to expand demand. However, 70% of GDP is consumer spending. The benefit of buybacks is largely lost on the middle class, as the top 10% holds 80% of the total market capitalization. [0]

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.

[0] https://www.washingtonpost.com/posteverything/wp/2017/03/02/...


Its not in any one businesses self interest to be philanthropic by paying their workers more or slashing their prices to drive up the available consumption of the working class.

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.


> Its not in any one businesses self interest to be philanthropic by paying their workers more or slashing their prices to drive up the available consumption of the working class.

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.


This sounds like the old "the collapse of capitalism is imminent" narrative that socialists have been peddling for about 100 years.

> 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.


So many comments here along the lines of "So what, they're making an efficient use of capital." That's missing the point. So much of the argument behind the 2017 tax cuts and the Fed's low interest rates was that they would spur real investment (that is, investment which increases productive capacity or improves productivity) that would benefit everyone, mainly through jobs. If all this extra money is just resulting in a more tax-efficient way for companies to give money to their shareholders, which in reality is a small slice of the populace, highly skewed towards the wealthy, it's certainly worth it to call bullshit that these governmental moves that everyone ends up paying for only end up benefiting the wealthy.

> So much of the argument behind the 2017 tax cuts and the Fed's low interest rates was that they would spur real investment (that is, investment which increases productive capacity or improves productivity) that would benefit everyone, mainly through jobs.

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?


Much of the money isn't going to other investments. It goes to savings. The top 1% save ~40% of their income. The bottom 90% save 4% of their income. 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. 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. Your option 2) isn't some foolish strategy, it's literally what is happening. Some of the money goes to investments and the rest seeks to hedge against the risk of those investments.

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.


> Much of the money isn't going to other investments. It goes to savings.

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.


While investment and savings aren't opposites, they also aren't guaranteed to be linked, at least if by investment you mean "increase in productive capacity" rather than an accounting identity in some macroeconomic models.

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.


Buying existing assets only results in asset inflation if you lack a free market.

Otherwise, buying existing assets (such as houses) will increase the price which will trigger increased production of that asset.


Investment doesn't increase the size of the economy if it doesn't result in increased spending. Spending money on a product or service is the only way to grow the economy.

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.


> Investment doesn't increase the size of the economy if it doesn't result in increased spending. Spending money on a product or service is the only way to grow the economy.

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.


I would normally buy this argument, however the data in the featured article indicates that increases to bank balance sheets through corporate lending simply return to the bank via savings rates for the wealthy.

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.


>> This is nonsense. Saving in a bank expands the bank's ability to lend.

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'.


Bank lending is not tied in any way to the amount of deposits they have on hand:

https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...


>saved money leave the money supply.

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)


"Saving in a bank expands the bank's ability to lend." Lending in modern banks is fractional reserve, they only have a fraction of what they send out in loans, there is literally no law or anything preventing them from typing on a computer and making way more loans than they have money.

> Much of the money isn't going to other investments. It goes to savings.

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.


Savings being equal to investment isn't a material fact, it's an assumption built into some macroeconomic models. In order for savings to turn into an asset that increases production capacity (which is what we hope it's for), someone has to spend the money on building a new asset (or improving an existing one).

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?


> Savings being equal to investment isn't a material fact, it's an assumption built into some macroeconomic models. In order for savings to turn into an asset that increases production capacity (which is what we hope it's for), someone has to spend the money on building a new asset (or improving an existing one).

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.


Supply and demand balance out. The wheel spins slower if the money flows so disproportionately to the supply side that it lowers demand.

> 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.

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.

https://www.bloomberg.com/opinion/articles/2018-04-09/where-...


> 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.

Actually the relevant concept is the marginal utility of wealth:

https://www.economicshelp.org/blog/12309/concepts/diminishin...


As other commentators pointed out: Savings and investments are two sides of the same coin here. The money which is used for saving will be invested somewhere - even if the person who owns it just keeps it in an account on the bank.

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.


If you buy shares from anyone, either they were comfortable with their previous asset allocation (and will therefore seek to re-invest that money in some other stock), they were selling shares to rebalance their portfolio, or they were selling shares as part of their planned selling to fund their retirement or meet the obligations of their pension payouts (in which case that money will be spent in the economy).

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.)


I think it is a bit more complicated than that. The bottom 90% keep a big chunk of what little savings they have in cash or cash equivalents. The top 1% invest most of their savings in treasuries (investing in federal spending) or equities (businesses) or other investments (real estate, etc). This is why many believe it is sensible to reduce taxes for the wealthy; perhaps they will continue to invest the savings in private businesses.

Non-rich spending stimulates the economy more than rich investing. The rich are out of ideas to invest. The non rich spending more would give the rich new ideas to better invest the money they already do.

There are more complex analyses, but the above one gets the job done.


The counterpoint is that there are critical public infrastructure and welfare projects that could be funded by taxing the wealthy more (possibly in exchange for taxing the poorer less). Cutting taxes on wealthy seems to trigger recessions and depressions due to drying up aggregate demand for goods and services.

> Instead, they save to hedge against and profit from recessions.

You are arguing that non-governmental investment/stimulus in the depths of a recession is a bad thing?


There's a famous quote:

> 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.


If you had a heart, you may care about the financial outcomes for other people. And if you had any sense, you would realize balancing economic inequality remains precarious and our current levels are closest to the period right before the depression.

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.


I'm in complete agreement with you, but we're on a forum with many people who have had great financial success and definitely benefit short-term from the tax policies. That's the reality of the community.

I would add that I'm one of the people who's benefited. There seems to be an unspoken belief that progressives are only those who have lost economically. I've gone from an ivy-league education to a 6-figure salary out of college to self-funding a profitable business making $4M/year. I'm also in my mid 20s.

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.


Your savings go into a bank, which loans it out to people who spend it.

Banks don't loan out deposits, their ability to make loans isn't dependent upon savings:

https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...


people like his employees who get a loan to pay for their new car.

Yes. Nobody borrows money and sits on the cash, they take loans to spend it.

In fact, due to fractional reserve banking, a multiple of the amount put into a savings account is loaned out and spent!


In your mid-20s, putting excess savings in a bank is probably not the ideal asset allocation.

Oh but it is going in a wonderful investment: consolidation of elite power.

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.


Do you have any evidence supporting your "obvious" answer? Can you explain why investors have pumped $15 trillion into bonds with negative yields if there are so many good investment opportunities around?

Because yield is only meaningful when considered in a context with risk, and many investing agents are risk averse enough to include a large amount of low-yield low-risk investments in their investment mixture.

Ergo, the only investments left worth making (>0% yield) are high risk. Treasuries and “safe” bonds are close enough to 0 that I round down for the purpose of this comment.

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])?


Pretty much. Information availability has made the investing ecosystem efficient enough that pretty much anything worth doing gets funded, and it's hard to find unfunded things that are worth doing. Where do you invest in such a scenario? Well, in a broad mixture of structurally unrelated high-risk investments that have acceptable yield, with a fat anchor of very low risk, very low yield investments.

Alphabet does make risky bets, they spin off new companies constantly, and on their last earnings report lost about $1 billion/quarter on it.


What do you think happens to the money invested in bond offerings?

Well this is about companies borrowing money, so in this case returns to investors. Those investors then pay taxes in whatever country they reside in, and use a fraction of what remains to look for new investments.

As the article points out, money is moving around but that’s it.


Imagine what would happen if investors didn’t buy bonds?

Isn’t this the logic behind trickle down economics? Is that theory so uncontroversial now that it speaks for itself?

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/ ?


"Trickle down" economics is a strawman that mischaracterizes supply side economics:

https://www.youtube.com/watch?v=VlWCnA7TbNU


I am unfortunately not in a position to watch a 100min lecture at the moment. The Wikipedia entry for trickle down economics mentions it originated as a joke:

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?


It's not really a strawman, it's just what people call it when they want to make fun of what people claim to be supply side economics. Whether or not the people who practice it or came up with it call it trickle down is completely irrelevant to discussing "trickle down" economics.

Wasn't that already the original assumption?

Help rich entity; rich entity will help the rest of the economy?


Everyone helps the economy. Making it rich vs poor is kind of absurd.

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:

https://slatestarcodex.com/2019/07/29/against-against-billio...


> 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.

See: Softbank


The disconnect would be between a gov. agency freeing money for national companies, and investors who can invest in whatever they want, including investing in other countries and bribing the gov. to free more money.

As you point out investors are not stupid, but why should they be trusted to do the right thing for everyone else ?


They shouldn't, which is why the corporate tax rate should be raised.

There are a ton of things to spending all this money on.

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.


The linked article seems to provide statistics indicating that it's not working. So I believe #2.

It didn't even address the point. It analysed what companies were doing, not what the recipients of the money were doing.

Oh, so the idea is that buying back stock is effectively just transferring money to investors?

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.


>Do we have any reason to think that's not working?

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?

https://www.washingtonpost.com/business/2019/05/31/trump-tax...

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 know,.they could pay employees more, or provide vetter benefits. The evidence it's not working is that there is no inflation except in stocks and real estate.

Employers aren’t going to pay more until employees start asking for more. Employees don’t ask for more because labor isn’t an efficient market like stocks or real estate. Employees tend to set their asking prices too low because they lack up to date pricing information. Outside of unionized labor and government, employers deliberately conceal salary information and make it difficult to do a valuation of a job based on comparable positions.

I don’t see how this can change unless the information gap between employers and employees is eliminated.


If you raise corporate tax, then companies will be incentivized to pay higher wages. Because either the IRS will take the money and burn it, or they can do something useful with it.

Corporations won't spontaneously pay more for labor any more than they would spontaneously pay more for parts or raw materials. If a corporation chooses to spend more on expenses, then it will tend to spend on things that increase its value. Those things may include spending more on advertising to bring in new business or moving to a fancier office to impresses new clients. Paying more for labor, however, is like paying more for electricity; it doesn't add any value.

Divide your first bullet-point into two: invest in humans or invest in non-humans.

You're talking past the point. The ultimate selling point which the OP was emphasizing is an increase in jobs. Investing in automation, which is literally how many companies used the freed up tax reserves, is a net decrease in labor demand and therefore a net decrease in jobs, so the argument that this is increasing labor demand is BS.

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.


> creating 50 jobs that automate away 1000 jobs is a net loss of 950 jobs

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.


It has always been the case, throughout human history, that advances in technology have reduced the need for some jobs. Given that, the goal should not be to prevent it from happening; you can't in any sustainable way. Rather, making sure that there are other things for the people that would have held those jobs should be the goal. New jobs, reducing the need for jobs altogether, or something else.

But standing in the way of progress telling it to stop is never going to be a realistic solution.


No one is saying that. The evidence shows that companies are spending on automation, so the argument that tax cuts for corporations are going to lead to an increase in labor are dubious at best and utter nonsense at worst.

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.


Say a company buys back 2 billion in stock, rather than investing it in new equipment. Does that reduce the amount of money invested in the economy? The answer depends on what the investors who sold do with that money. If they invest it somewhere else, then the company's decision doesn't reduce the amount invested in the economy.

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?


Much of the money isn't going to startups. It goes to savings. The top 1% save ~40% of their income. The bottom 90% save 4% of their income. 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.

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.

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.


When you say 'save', what do you mean? They aren't putting it in a mattress in their house... they are 'saving' it in investments that fund the economy.

There's a quote from It's a Wonderful Life that I always think of in this context:

"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.


Money does sit idle. It's used to hedge against recessions and acquire assets when their price is the lowest. Have you ever heard of liquidity?

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.


The money they're talking about isn't peoples income, it's companies buying stock. The people they buy it from turn around and invest it elsewhere. Likewise, the "40%" saved isn't sitting in a vault somewhere, it's also invested.

Unless that company is also sitting on billions in cash reserves.

Even cash reserves end up loaned to others. Unless the company puts it under a mattress. Those reserves typically end up I low risk short term bonds and the like. Low risk, but not just sitting.

The only 'saved money actually doing nothing' scenario I can think if is when it gets deposited in a bank who then turns around and hold those funds at the central bank because they have nothing else to do with it. Central banks in many currencies these days offer negative deposit rates to discourage that behaviour and thus to the extent it happens it tends to only be over a very short period of time.

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.


Not literal cash, it's in accounts, accounts that pay interest, interest earned from investment

Or in shell companies in the Cayman's waiting for the next payroll tax holiday.

Maybe that should be the focus of attention vs stock buybacks.

> 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.

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.


I don't understand what you mean, because you say "the best way to spur economic growth is to give money to people who will spend it quickly". That is "trickle down economics" as I understand what people mean by the phrase, and I agree(?) that it makes no sense. Broken windows, etc.

Trickle down is associated with supply side economics; giving money for people to spend means increasing aggregate demand, which is the opposite.

"Giving money for people to spend", what does that mean though? You write a note on it? "Plz spend on chzburger, kthxbye"

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.


If that's the policy goal would it not be much easier to just build programs to support startups and entrepreneurs?

Take the converse construction. "Let's raise taxes on companies and wealthy individuals so the government can get into the winner-picking business of investing in startups and entrepreneurs." I would personally object to that policy.

It doesn't have to be "winner picking" you could have some policy like subsidizing private sector business loans for small business, coupled with additional small business tax breaks (maybe payroll tax breaks as well?). This would accomplish the goal of encouraging small businessess without the government having to evaluate small businesses on their merits.

That's basically a planned market and those do not work without a perfect government that has total access over all information in the economy. Such a government will probably never exist.

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.


The government will also intrinsically allocate money based on political considerations, which are not necessarily congruent with practical ones.

What? How does what I commented at all resemble a planned market?

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.


Well I guess that depends on how successful you imagine the government would be at running such a program.

If it is in the US, my intuition is that it wouldn't be very good.


So here's the issuing with buying back, it creates an artificial demand on the stock. As we know, demand increases price, so the price of the stock goes up. In order words becomes inflated. People's 401k, pension are invested in those stocks. Meanwhile, the folks CEO/Boards behind the buybacks cash out! The price of the stock doesn't reflect the real value in normal conditions. When the music stops, folks with 401k, pensions invested in those will be the ones losing big time!

This is not correct. Companies conducting buybacks do so at a low rate over a long period of time exactly to avoid having the impact that you're describing. Companies buy their shares back at the market price, and the normal transaction volume of a large companies shares dwarf the size of buybacks it may be conducting.

This is my understanding as well, but is there any law to this effect?

Why would there be a specific law covering this situation? It's an obvious violation of fiduciary responsibility to buy back shares in an inefficient, price-elevating fashion.

> it's certainly worth it to call bullshit that these governmental moves that everyone ends up paying for only end up benefiting the wealthy

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.)


Every share they buy back is being disposed of by someone else, who is paying tax on their gain. The tax rate across all of the payees won’t be as high as it would be with a dividend, but it’s definitely not a tax free event.

Buybacks and special dividends are economically equivalent. Buybacks allows individual investors to either sell or hold.

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).


What are the investors going to do with that money? Any answer other than "put it under a mattress" would lead to either consumption growth or investment growth. Even if they are putting it under a mattress, that would just lead to consumption or investment growth at a future date.

No, it can lead to asset growth (look at stock market and real estate returns) without any increase in consumption or investment.

I think you misunderstood the main point of @whatshisface.

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.


That doesn’t necessarily create jobs or trickle down. If billionaire A buys stock in billionaire B’s company that provides an automated web service, money may change hands but the workers may not see any difference in salary. Maybe they need to spin up a few additional cloud instances to handle a new business area, but that won’t meaningfully impact Amazon’s workload.

Or suppose they buy a painting from another billionaire for $20 million - did that really create any jobs or middle-class wealth?


What's the alternative? The company that has decided it's not worth using the money just creates a pile of unused cash or starts spreading into new businesses to get better returns on it.

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.


The alternative is to not do the tax cuts.

Or target the tax cuts at the poor who will spend it on goods and services.

44% of people already don't pay any federal income tax. I wouldn't call it a tax cut to give someone already paying zero (or less) an even greater share of the treasury.

Alternative is you tax the profits at a higher tax rate (i.e. what the tax rate was before the tax cuts) and use the tax revenues to fund things that benefit the general public at large...

My bad I may have misread this thread to be about buybacks/dividends not taxation. I'm not against high taxes but with any level of taxation some companies are going to run into the problem of not having a useful way to use their money besides giving it back to investors (unless taxes are such that no company can succeed)

The alternative is taxing the living shit out of companies and giving it to people. Because that is how you grow the economy, by making sure people have money to spend on things.

But we live under capitalism so giving money to people is out of the question. Money is for billionaires and shareholders.


I don't trust anyone who says tax "companies" rather than "the rich". It's like universal income. If you're talking about taxing someone other than the rich, you are talking about taxing people who can't afford it. If you're talking about giving money to someone other than the poor, you're talking about giving money to people who don't need it. Not everything that is counter-intuitive is a deep insight.

Ah OK, taxing the living shit out of companies or the investors and giving that money to people who spend it immediately seems to me to have nothing to do with companies using their profits on buybacks or dividends. Even with more taxes, some companies are going to do well enough to have made more money than they know what to do with, and sometimes returning money to the investors is probably their best option.

Honest question: don't pension funds also own a big part of the shareholder pie?

Correct.

If they are buying it from investors what do you think the investors are doing with that money then?

That borrowed billion doesn’t just then disappear into the ether. It gets reinvested.


idk how this is a surprise. Companies have been going based on speculation. Using buyback they are skyrocketting their value, which is why this used to be illegal. And tax cuts cannot be used as a justification for adding more departments, because tax cuts are uncertain year to year, so best to base your business on known variables. So they take the tax cuts and then create more value. How could you expect them to do anything else?

Maybe the educated folks on HN couldnt expect anything else.

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.


It's debatable whether most people believed it. It was an argument bandied and a bunch of politicians passed a law. It was not put up to a popular vote (like you would see with Propositions in California).

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.

https://www.cbsnews.com/news/2019-taxes-most-say-new-tax-law...


US corporate debt markets are fairly mature, so the investment and cash influx events are decoupled. It’s not like modern large companies get paid on Mondays and allocate capital by Tuesday.

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.


Could all this stock buyback cause an acceleration into the company merger trend (or the opposite)?

When you go to McDonald's and see the picture of the burger on their over head menu does it look like a reheated microwave Patty or a juicy burger?

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.


A majority of Americans hold stock via retirement plans and such. Unfortunately the government systematically preventa many people from investing their money

It was obvious then and should be even more obvious now that it was bs, just like saying reducing taxes gives the govt more tax over time because the economy grows. This is used as an excuse but it's been shown yet again this is not what happens in reality.

Bastiat warned centuries ago about the dangers of nominal money.

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.


Unemployment is down to 3.7% I believe. So a benefit has probably been more jobs.

Is 401k really something that only small % of the populace has?

Any given increase in average investment yields translates into a much smaller percentage increase in total income for most workers with 401Ks than it provides to people whose primary income stream is investment income.

You mean like people who saved in their 401(k) for 30 years and are now living off it?

People who are living exclusively on 401k income are, by far, a minority of people with 401k’s, yes.

why does it have to be exclusively 401k?

Because people whose support comes from other sources have the income-boosting effects of anything that bumps investment yields reduced in proportion to their non-investment sources of income.

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.


I think you're failing to see the larger picture.

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.


It seems like he is seeing the bigger picture.

The other reason this is a smart move for companies is that it gives them another tool for the upcoming recession that they can leverage to raise capital, should they need it.

As this is a direct response to my comment, I don't have the ability to downvote this, but everytime I read "fake news" these days I translate that to "this news that I disagree with that doesn't conform to my world view, so I'm just going to regurgitate the BS phrase 'fake news' without actually pointing out what is factually false."

Fake news, click-bait, misleading, agenda driven reporting; call it what you like. I did provide extra information to contextualize why I called it that, not sure why you are so mad.

We need progressive corporate taxation.

Do we? Ideally corporate tax would be 0%, and the people actually pocketing cash out of the company entirely would be taxed.

You mean embezzlement should be taxed

Yeah, we know.

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.


Yes the key is to stop taxing capital gains and dividends at different rates. Interestingly here in Australia any company tax paid is passed through to the shareholders as a tax credit. This not only encourages companies to pay tax, but it encourages companies to pay dividends rather than buy back shares.

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.


In the US, long term capital gains and qualified dividends (which is most of them) are already taxed at the same rate.

Interest paid, though, is not. Which gives debt a tax edge over equity.

But banks are taxed on their net interest margin at the corporate tax rate. Its the same argument as for the 'dividend tax credit' system which Australia has and the UK had 20+ years ago (which used to be called 'Advance Corporation Tax'), ie tax capital returns only once and in the hands of the investor not the payer where possible.

Good to see. There is still the issue of double taxation.

And? The investors receive these billions in cash for the stock they sell, and they'll invest in other companies directly, instead of having that megaholding company do acquisitions.

> The investors receive these billions in cash for the stock they sell, and they'll invest in other companies directly, instead of having that megaholding company do acquisitions.

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?


> 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.


> 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." [0]

[0] https://www.bis.org/review/r150417b.pdf


Most investors have a target asset allocation (so much % in stocks, bonds, cash/equivalents) and will seek to restore that allocation when they temporarily have too much cash and too little stock [as a result of selling some of theirs to the company].

In the 21st century, I am increasingly convinced one of the biggest problems with capitalism is that entities with large amounts of cash (corporations or individuals) are just sloshing it around pointlessly instead of investing it in actually beneficial things. Maybe central banks should try the forbidden “helicopter money”. I'm sure the average person would actually spend money they get on improving their lives.

Don't be deceived by the appearence of cash. IT is not paper money that makes goods and services exist: burning a bill of paper does not impoverish society, and neither does putting it under the mattress.

Buying your own stock is like returning money to shareholders. It's effectively a dividend, by raising the stock price by the same amount they use to buy back stock.

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.


the aggregate value of the outstanding stock should go up by $1 billion

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
There are 200 outstanding shares, so each share is worth $1.

The company spends its $100 in cash to buy back 100 shares. So now its asset list is:

  1) $100 in other assets
But there are now only 100 shares outstanding so each one is still worth $1.

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

This is correct. To clarify even further, the best way to think about this is that a shareholder now owns a bigger share of the company. So even if there isn’t growth, the amount of cash flow your share(s) represent has still gone up.

(Just wanted to clarify that the benefit is independent of the ticker price subsequently increasing)


Love your example, but to throw this aspect in, the market doesn’t always “value” companies the same way.

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.


> 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.

Which means that your company just gambles its money at the stock market by betting on its own price.


harryh's argument can be modified to work regardless of how the market is valuing the company. Cash is easy for accountants to measure. Some other assets, such as the reputation of the company's products, are hard to measure even when they account for most of the company's market value (as in the case of Apple, Inc, whose stock price is currently about 9 times higher than its book value). So assume there is $100 of easily-measured cash. Don't consider the other assets; don't try to measure them; don't pay any attention to the attempts of the accountants to measure them (i.e., don't pay any attention to the company's book value). Assume the market values the company at $200. I.e., the company's market capitalization (stock price times shares issued) is $200. The argument continues by assuming or pointing out that investors are rational and that the SEC and the financial-accounting profession operate to give investors accurate information about how much cash the company has, so the market will value the company after the buy back at around $100.

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.


A company is not just worth its assets. All potential future valuations should be included (and some say the stock price reflects this).

Ya, when I said "other assets" I was perhaps being overly succinct. I didn't just mean the value of equipment, IP, or whatever, but also the intangible value assigned by the market that is an estimate of the companies future earnings.

Enterprise value is probably what you're looking for

Yes indeed.

This completely ignores demand which pushes the stock price up in the short-term, and with less shares outstanding, each share has a larger % of the company. i.e. if you buy 50% of a companies outstanding shares, there's no way you're going to be able to acquire the last 50% at the same price and is why when most acquisitions are announced they are purchased at a premium over their current valuation/share price.

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.


I think the idea is that because there is money going out the door in a buyback, rational investors should value the stock that much lower. And this lowered valuation should balance exactly with the price increase due to increased demand. Not sure it works out like that in practice though.

Investors don't get to value shares, they get to sell them and Buy Backs increases the demand for shares which pushes the stock price up in the short-term at least.

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.


When exactly does this pushing up of the stock price occur? When the buyback is announced? When it is actually executed? Sometime in between?

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!


> When exactly does this pushing up of the stock price occur? When the buyback is announced? When it is actually executed? Sometime in between?

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.


Except that companies seem to be bad a timing share buybacks [1]

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.

[1] http://www.barelkarsan.com/2010/12/buybacks-in-style-at-wron...


> Buying your own stock is like returning money to shareholders.

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".


This doesn't account for low information investors, though.

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 like a dividend but better. It’s tax efficient and now the company has more shares it can deploy if it needs to raise capital in the future. Moreover, it sends a signal to the market that the company believes it’s stock price will continue to rise in the future.

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.


now the company has more shares it can deploy if it needs to raise capital in the future

Er, no. That's not how it works. Companies can create new shares out of nothing anytime they want.


The company can only create new shares if it has unissued capital. Granted this is kind of a arbitrary legal restriction, so it doesn’t really matter.

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 can create new shares out of nothing anytime they want.

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."


Consider the "they" in my "anytime they want" to be the shareholders. My point was that if the shareholders want to use stock for things like employee compensation or an acquisition they don't have to buy this stock from the market. They just make new shares.

This is subject to corporate charter/bylaws and, usually, the 20% rule.

Yes, there are some limits on companies ability to do this but they're generally not especially relevant for the types of things companies use their own stock for (stock based compensation, acquisitions)

> It’s tax efficient [...] 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.

One follows from the other. It's because it allows a tax dodge.


The Democrats usually complain that the money should be used to increase salaries or whatever. Which is fine, I guess. But it’s not about a tax dodge (or at least that’s not the main point).

Well they company say's its like a dividend but with out guaranteed result - what it does do is theoretically increase the share price and may allow executives to trigger bonus schemes.

I preferer the money - id make an exception for discount control on investment trusts though.


It’s significantly more tax efficient to receive stock buybacks (CG deferred until you sell) than even qualified dividends (taxed immediately). That’s why companies do buybacks.

But its not a guarantee of "receiving" any thing the company makes vague promises which may or may not actually result in a gain to me, its also ignoring the time value of money.

There are I think better and more transparent ways of returning $ to investors.


> But its not a guarantee of "receiving" any thing the company makes vague promises which may or may not actually result in a gain to me, its also ignoring the time value of money.

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.


No as a shareholder in a buy back I don't get the money directly to me (like I would with a special dividend) - I may or may not get a capital increase which is not the same thing.

Your confusing a tender offer at over par with a generic buyback.


Stock value can decline.

Once the corporate buy back stops the buying pressure it no longer contributes to its price. The buy backs will end simply because eventually they will not be able to raise the money even with using junk bonds.

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