Corporate stock buybacks, if you take the charm out of it, is a form of cheap, corporate credit created for the sole purpose of inflating bubbles.
Legalised in 1982, it allowed companies to spend the majority of their investments on market manipulation, according to Financial Times global business columnist and Makers And Takers author Rana Foroohar.
That’s how long it has been going
Mankind tends to quantify everything, for that is our approach. It makes us ponder, analyse and compare. As we look into the past, comparing this ongoing global health crisis with austerity’s in 2008/09, evidence shows us little was learned.
But, as a wise one once said, to state where we are now you must always analyse where we were at the start. Calling things by its proper name tends to help as well.
Even if endless words account for the many opinions on this, one thing the majority of people do share is finance has been governed by laissez-faire for quite some time.
Let’s go back in time
We’re in the late 1960s, early 1970s. Your haircut touched icon status and, according to rock ‘n’ roll stars, if you remember it, you weren’t there. The world was changing on all fronts.
The US economy was no different. “It had been 20 years or so of post-war prosperity,” Foroohar explains in an interview for The Real News in 2018.
On the global stage the US had the whole game for itself, as it had since the Second World War, with Europe on its knees and emerging markets yet to sprout.
“By the 1970s that was starting to change,” Foroohar states, guiding us through a period in which politicians had to make decisions regarding a slowdown in US growth – what to prioritise, how to fund a war and other things we can all remember.
But decisions are accompanied by votes – or not. For that reason it was decided the ball would be thrown to the financial markets in what became an already 40-year-old process of deregulation in the financial world.
“It is never enough to stress there was no silver bullet,” Foroohar explains, as almost everyone had their finger on the trigger, pushed by Washington which, in a revolving manner, was being pushed back and forth by Wall Street in a game it was happy to play.
What is stock buyback?
“Stock buybacks are when a company goes into the open market and buys its own shares, which artificially pushes the price of shares up because it reduces the number of shares on the market,” Foroohar explains. “Before 1982 this was considered financial market manipulation (…), how can you be allowed to, you know, really artificially change the price of your shares without doing anything really underlying in the real economy?”
After 1982 stock buybacks were legalised, with the size of the asset base on Wall Street rising, rising and ever rising as corporations embarked on a spree of share buybacks, paying out executive compensation – in shares, of course – spending less money on staff training, factory repairs, investment in new technology, and so on.
And so on
But why should we care when 97 per cent of money is debt in reality, created out of thin air by the push of a button inside a commercial bank? After all, everything is credit, right?
Many traders in the markets will tell you when buybacks are down 50% they are no longer a force, and were driving stock prices up – that cheap, corporate credit used for funneling, perhaps, the most hated bull market in recent times.
Many traders will also tell us no-one has traded in similar market conditions before – this isn’t 1930, 1987, 2001 or 2009 if and when we look at the bond market, leverage, central bank role, ETFs and so on.
And so on until even the average person who knows nothing about financial markets asks themselves what would happen if the big buyer of this artificial, inflated bubble got out? Hadn’t the markets found a bottom already?
Are we depending on global death-toll statistics or is something else going on here? With the rise of a cashless society on the horizon, will paper money disappear? The word cashless spreads like a virus itself, leading to fears of full capital control by governments.
Is this health and economic crisis the excuse world governments were looking for? History tells us opportunity tends to play its role.
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