Stock Buybacks Enrich Management (Bad Stewards)

Dimon, Iger, Cook, Nadella, Pichai, Fink … they’re not founders like Gates or Bezos. They’re not investors like Buffett or Dalio. They’re management. And now they’re billionaires. And all their captains and lesser brethren are centimillionaires. And all their lieutenants and subalterns are decamillionaires.

And everyone is perfectly fine with this. No one even notices that this is happening or that it’s different or that it’s a sea change in how we organize wealth in our society. It’s not good or bad or deserved or undeserved. It just IS. This is our Zeitgeist.

This Is Water
One day we will recognize the defining Zeitgeist of the Obama/Trump years for what it is: an unparalleled transfer of wealth to the managerial class.

It’s the triumph of the manager over the steward. The triumph of the manager over the entrepreneur. The triumph of the manager over the founder. The triumph of the manager over ALL.

Comment

If TXN is the poster child of financialization, where are the owners? Who should be voting against all this bullshit? Where’s the corporate raider coming in to unlock shareholder value.

Here’s a quick google search.

Mutual fund holders 51.33%
Other institutional 37.52%
Individual stakeholders 0.55%

The finance industry is having it’s own “god is dead and we have killed him” moment.

Many speculate what the end game of “passive” investing looks like.

This is a preview.

But that’s what everyone in finance does. Don’t look at individual investments, build a portfolio. Hurray indexing. Hurray diversification. Hurray diversified portfolio across asset classes because you can’t make alpha without private information.

Are you investing in a way that supports more of this shit? Then going to your favorite forum “let’s ban buybacks”.

open eyes
clear hearts

Don’t buy TXN stock(directly or indirectly).

Question for Ben: Is there any TXN under your management?

What’s Missing From the Trump Economic Boom

Growth and productivity are up, but investment is a soft spot, and neither right nor left has good answers.

Yet if many workers still feel not entirely secure, there’s a reason: investment. Several policy improvements of the Trump era have buoyed business investment compared with the recent past. But America is nowhere near reversing long-run declines in business investment that continue to stress many households notwithstanding the good economic times.

A suggestive exploration of the problem emerges in a recent report released by Mr. Trump’s erstwhile rival Sen. Marco Rubio. It describes an American economy that somehow has forgotten how to invest.

Net private fixed investment (expenditures on equipment, machinery or property minus depreciation) averaged around 8% of gross domestic product between 1947 and 1990, with significant spikes during booms—it hit 10% of GDP under Ronald Reagan. It has lagged since then, however. As of late 2018, amid another burst of GDP growth, net investment was barely half the Reagan level.

The low net-investment baseline Mr. Trump inherited (from Republican and Democratic predecessors alike) doesn’t fully explain today’s shortfall. Despite faster growth, investment has not accelerated under Mr. Trump as much as during past periods of economic strength. Net investment grew by

  • 8% in 2006,
  • 10.9% in 1998 and
  • 16.7% in 1984

—the peaks of those business cycles. Mr. Trump managed investment growth of only 6.9% in 2018 and the rate is drifting downward again, not least thanks to Mr. Trump’s antitrade policies.

The cause of this is not a lack of cash in corporate America. Since 2000, nonfinancial firms have become net creditors in most years rather than net debtors. This is astounding. For most of our history the sole purpose of a nonbanking company was to receive capital from others so as to invest productively. Now on aggregate they distribute capital to others so that those guys can invest somewhere else. This phenomenon underlies the recent trend toward aggressive share buybacks.

This long-term downward trend in business investment raises a question about how well America will sustain its recent productivity gains. Absent sustained productivity growth, voters will be right to question the potential longevity of the current boom. Without parsing earnings press releases, employees can tell when their companies seem to have a plan to invest in long-term growth. A sense of directionless management can contribute to a gnawing unease about job security. This can produce unpredictable political consequences, whatever the GDP data say.

What to do about this is open to debate. The Rubio report’s ruminations about poor market incentives for longer-term investment are fine so far as they go, although its complaint about shareholder short-termism is partly belied by two of the corporate success stories it cites. Tesla and Amazon are conspicuous net debtors that continue to invest heavily back into their businesses. It can be done, and investors will tolerate it.

The 2017 tax reform and Mr. Trump’s mammoth deregulation drive are necessary conditions for an investment revival, as the recent investment uptick shows. But comparing recent trends with the historical norm, it’s clear these policies are not sufficient to restore the level of investment America needs. Can Mr. Trump figure out what is? Since he’s a longtime businessman you’d think so, except that his business experience lies exclusively in real estate and marketing—one of which features low productivity and the other low fixed-asset investment.

Nor do Democrats have any more of a clue. The common refrain from the left, with many melodic variations, is that if the private economy won’t invest in productivity enhancements, the government must.

Did these folks sleep through the past decade? With business not investing, government already has become the “investor of first resort” via its own deficit spending. The result has been a mix of social-welfare blowouts driven by political short-termism (indistinguishable, in productivity terms, from the worst charges laid against shareholders) and such crackerjack business plans as Solyndra.

Politicians continue casting about for productivity solutions. The danger is that 2020 becomes merely another contest to decide whom voters distrust the least to deliver one.

Booming Buybacks Aren’t Likely to Wane Despite Market Volatility

Repurchases of blockbuster stock amounts during two recent pullbacks signal firms didn’t see market declines as worrying

Companies spend billions repurchasing shares because less stock outstanding helps make their profits appear stronger by boosting per-share earnings—a gauge investors typically use to justify a company’s stock price. Some investors counter that buybacks don’t actually add to a company’s net profit, and the capital could be used on other things.

Apple Inc., Oracle Corp. and Cisco Systems Inc. were the biggest buyers of their own stock in 2018, repurchasing a total of $126 billion of shares, according to S&P Dow Jones Indices. In April, the iPhone maker said it would add $75 billion to its buyback program.

“We’re in the fortunate position of generating more cash than we need to run our business and invest confidently in our future,” Apple Chief Executive Tim Cook said during the company’s earnings call last month.

Some analysts say companies’ willingness to buy back shares has been among the factors driving the latest stages of the 10-year bull market. And companies repurchasing shares during a downturn could help buoy markets.

.. “It takes capital from companies that are buying back their own equity and then moves that capital back to an investor so it can be redeployed into a company that’s growing,” said Scott Colyer, chief executive and chief investment officer at Advisors Asset Management. “Companies tend to amp up their buybacks when their stock price drops, which provides some support in the marketplace.”
.. Some analysts are concerned that technology companies accounted for too big a slice of the buyback pie. Last year, the top 20 companies repurchasing stock in the S&P 500—many of which were tech firms—accounted for 42% of all buybacks, compared with a 32% share in 2017, data from S&P Dow Jones Indices showed.

“The presumption is that 2020 will be a good year for buybacks, but that’s based on expectations that the economy remains strong and we don’t have a trade war,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. “Even though next year is supposed to be a great year for earnings and cash flow, we’re not there yet.”

Washington presents one potential hurdle for companies repurchasing stock. Democratic presidential candidates have signaled that they want to restrict how much stock U.S. companies can buy back, arguing that buybacks enrich shareholders at the expense of workers.

The Stock Buyback Panic

Repurchases reallocate under-utilized capital to more efficient purposes.

Stock buybacks are the latest bipartisan piñata, whacked by politicians on the left and right who misunderstand capital markets. A refresher course is in order lest Congress stampede and undermine the investment needed for growth.

Repurchasing shares is simply one way a company can return cash to owners if it lacks better ideas for investment. Tax reform increased corporate cash flow by cutting tax rates and letting companies repatriate their cash held overseas by paying a one-time tax rate of 15.5%.

Using Federal Reserve data, Dan Clifton of Strategas Research Partners estimates that companies repatriated $730 billion in 2018. CEOs have deployed that for multiple purposes including new investment, debt reduction, pension contributions, employee bonuses, wage and dividend increases and stock repurchases.

This is a policy success. Mr. Clifton calculates that capital expenditures by S&P 500 companies grew about $75 billion in 2018, the fourth-biggest annual gain since 1991. Average wages are growing by at least 3.4% year over

.. The Senators complain that “when corporations direct resources to buy back shares on this scale, they restrain their capacity to reinvest.” But the money doesn’t fall into a black hole. An investor who sells stock into a buyback will save or reinvest the proceeds. Walmart gives shareholders cash, and capital markets redirect it to some other useful end.

Banning buybacks won’t create better investment options inside companies. Instead CEOs may spend more on corporate jets or pet projects with marginal economic returns. They could let cash pile up. They could raise dividends, which would also move cash toward better investments. But Messrs. Schumer and Sanders likewise want to “seriously consider policies to limit the payout of dividends, perhaps through the tax code.”

Elizabeth Warren isn’t out to get capitalism. She’s out to save it.

The heart of the Accountable Capitalism Act is a requirement that companies with more than $1 billion in revenue obtain a corporate charter at the federal level, rather than basing themselves in the most loosely regulated state they can find. (Sorry, Delaware.)

This new charter is meant to address an epidemic of bad corporate behavior, especially the tendency of top executives to value profits over wider well-being. It would obligate executives to consider the interests of all corporate stakeholders — including employees, customers and communities — not just shareholders. It would require that at least 40 percent of company board members be elected by employees, an idea known as co-determination. The bill also contains provisions curbing stock buybacks, which tend to benefit only shareholders, and unilateral political expenditures.

.. it’s a distinct break from the neoliberal capitalism of the recent Democratic Party.

In the 1980s, Milton Friedman enshrined the idea of shareholder value maximization, which told businesses that their sole purpose was to maximize profit for their owners. Rather than pushing back against this obviously selfish, wealth-favoring theory, Democrats got on board. Sure, this framing might need a tweak here, a bit of regulation there, or the carrot of a tax break or two. But super-efficient big businesses would keep the broader economy chugging along for everyone — self-interest would mean we’d all win.

.. some 80 percent of stock market value is owned by 10 percent of the population, little of that benefit trickles down to the rest.

.. All that said, the Accountable Capitalism Act still relies on a fundamental belief that capitalism is good, even as a new generation of Democrats wants to upend that system altogether. On the left, winner-take-all competition — which Warren professes to “love,” by the way — is more and more seen as the root of our country’s ills, not something to preserve. A new wave of socialist candidates are loudly making that case.

.. But Warren isn’t out to get capitalism. She’s out to save it. The senator clearly believes that markets can create wealth.

Crushing it for whom, Mr. Kudlow?

Last week, one of President Trump’s top economic advisers, Larry Kudlow, argued the U.S. economy is “crushing it,” posting boom-like numbers in key areas, all thanks to the leadership of the president.

Evaluating such claims usually begins with assessing whether the president should get credit for an economy he inherited in year eight of a solid expansion. But the fact that Trump is claiming credit for trends that were largely ongoing before he took office is one of the few ways in which he is not much different from former presidents.

.. Who is actually getting ahead in the Trump economy?

.. . In contrast, corporate profits and equity markets truly are crushing it, both on a pre- and especially, given the large business tax cuts, a post-tax basis.

.. There is also no evidence of an investment boom, suggesting the recent, above-trend growth in GDP is Keynes, not Laffer — meaning the deficit spending is providing a temporary boost but will not have lasting, positive impacts for long-term economic growth.

.. Starting with wages, since Trump took office, the real hourly wage for the 82 percent of the workforce that is blue collar in factories and non-managers in services is up half-a-percent, an extra 11 cents per hour.

.. the growth of mid-level pay has picked up a bit, as we’d expect with such low unemployment. But inflation, largely driven by higher energy costs, has also sped up, canceling out any real gains.

.. If energy prices come down and unemployment continues to fall, real wage growth for mid-wage workers will improve. But the magnitude of their gains will likely be nothing close to the administration’s claim that the tax cut would add at least $4,000 to annual earnings within a few years of the legislation.

.. In President Barack Obama’s second term, real annual wage growth for mid-wage workers was about 1 percent, so call that the baseline.

.. Sticking with the tax cut, its proponents main claim was the big corporate cuts would generate more business investment, which would lead to faster productivity growth, which would position us for higher paying jobs. So far, every link in that chain is broken.

.. Business investment is growing, as we’d expect in an economy operating close to full capacity. But its growth rate is not faster now than at various points earlier in the expansion.

.. There has been a modest uptick in investment in structures (such as plants, offices, wells, mine shafts, warehouses) in the first half of 2018, but, as economist Dean Baker has shown, the growth in such investment was due to higher energy prices generating increased investment in mining for oil and natural gas.

.. While mining investment has increased by 36.7 percent over the last year, it rose by 47.3 percent from the second quarter of 2009 to the second quarter of 2010, when the Obama administration was still enforcing environmental laws. In both cases, the key factor was rising world oil prices.

.. It takes time to plan investments, so it is too soon to conclude the tax cuts have not made a difference. But none of the surveys of companies’ investment plans show any plans to ratchet up capital spending

.. What is clear is firms are using their tax windfalls to boost share prices through buybacks, which, along with strong corporate profits, are fueling a historical bull market for stocks.

.. instead of borrowing $2 trillion to finance the regressive tax cut, Congress could have put more money in the pockets of working Americans and made investments for our economic future.

.. First, we should have expanded the Earned Income Tax Credit to compensate for decades of stagnant wage growth. The Brown-Khanna plan, calling for a $1.4 trillion EITC expansion, would have provided working families making up to $75,000 with up to $8,000 more in take home pay.

.. the best way to raise pay for ordinary Americans is to do so directly as opposed to pretending it will come through the largesse of executives and shareholders.

.. Second, we should have put billions to expand the National Science Foundation’s Advanced Technological Education program, linking employers to technical schools to develop credentials that respond to the needs of our cutting-edge industries.

.. Third, we should have provided hiring incentives for anchor companies to create jobs in places left behind such as Paintsville, Ky., or Flint, Mich. If a company is willing to hire in places where people do not have enough access to high-wage jobs, then they should get support for doing so.

.. Fourth, we should have invested in bringing high speed Internet to every corner of America. Providing fiber broadband to every corner of the United States is the modern equivalent of rural electrification.

.. Larry Kudlow’s right: The Trump administration is crushing it for its donor base, which is in turn handsomely rewarding them.

.. But it has done nothing for the forgotten Americans and nothing to make sure America is a winner in the 21st century. We do not need more sugar highs for those already doing well. We need to give lasting pay raises to those struggling to pay the bills and then focus on the forward-looking investments that will finally reconnect GDP growth to broadly shared prosperity.