One of these days it would be fun to write a treatise on economics. It probably wouldn’t need to be any longer than 50 pages; just leave out the mountains of garbage masquerading as knowledge in contemporary economic theory and concentrate on the few straightforward, analytically powerful economic postulates that time and time again have demonstrated their real-world utility. SLL has commented on corporate share buybacks and dividend payouts, most recently in “Cat Food Dinners,” 5/15/22. The blogosphere and even the MSM have taken note, but there has been little connecting of dots. Here is a representative take from Rick Rieder of asset manager BlackRock:
Now, there is nothing wrong with stock buybacks and dividends per se, and indeed they can contribute to a very sensible corporate capital allocation strategy. But should this use of capital crowd out long-term capital expenditure (investment) in a firm’s core business, or begin to threaten its credit quality, then it can become concerning. And this is what we are seeing today.
The statement fails to note the main driver behind buybacks and dividends: ultra-low interest rates. Corporations are returning money to shareholders because after six years of QE and interest rate repression, the expected return on productive investment has equilibrated with the ultra-low cost of funds. Buybacks and dividends are not crowding out productive investment. The world is drowning in productive investment, funded by cheap debt, and consequently gluts in all sorts of goods and services overhang the global economy. The oil patch is Exhibit A, but there are plenty of others. Corporations are returning money because they can’t find anything better to do with it. Since shareholders and equity markets seem to like it, some of them are even borrowing at ultra-low rates and channelling borrowed money back to shareholders. Of course, the buybacks are coming at what SLL believes is very close to the top of the equity market, so the corporations are assuming equity market risk (see “When Stock Buybacks Go Horribly Wrong,” SLL, 5/28/15), but hasn’t that been the point of central bank policy the last six years: to force us all to become equity market risk-takers?
I just read that “Dark Pools” and “Alternate Trading Systems” are being utilized. Being naïve and uninformed, I had not heard of these items. Any comment,reference, and elaboration would be appreciated.
http://wallstreetonparade.com/2015/06/a-closer-look-at-goldman-sachs-stance-on-share-buybacks/
I have a general idea about both terms, but I think your best bet for full understanding would be to go to the website zero hedge.com and put both terms in their search box. I’m pretty sure you will get plenty of information, better than I could give you. It also has a glossary tab. For Alternate Trading Systems, you may also want to delve into High Frequency Trading.
Thank you for your promptness and help.
Thank you for all your comments.