THE WOLF STREET REPORT

The Biggest Risk for Stocks: The moment share buybacks get slashed.

A stock market that is so uniquely dependent on corporations buying back their own shares in record amounts is in a very fragile position because share buybacks have a history of suddenly getting slashed when times get tough. And then, who’ll be the buyers? (11 minutes)

Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate “beer money.” I appreciate it immensely. Click on the beer mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

 

  73 comments for “THE WOLF STREET REPORT

  1. Sporkfed
    Apr 14, 2019 at 8:04 pm

    Performance bonuses must be met.

    • Trinacria
      Apr 14, 2019 at 8:24 pm

      If I recall, weren’t share buybacks a cause of the 1929 market crash?! Shares purchased before the 1929 crash – assuming they were held by that buyer- did not recover until 1954; again, if memory serves me correctly. This is so short sited with potentially very devastating consequences. It will threaten the retirement of boomers, and wipe out younger generations. Finally, this type of crash could be a national security problem. Other than that, they are wonderful (sarc) !

      • Old dog
        Apr 14, 2019 at 10:40 pm

        “The stock prices have reached what looks like a permanently high plateau.”

        Irving Fisher, October 21,1929

        “Security values in most instances are not inflated.”

        Irving Fisher, October 23,1929

        The Great Depression started in late 1929 and lasted between 10 and 20 years, depending on where one was and his line of work.

      • Apr 15, 2019 at 10:59 am

        Share Buybacks = Chapter 11 Bankruptcy

        When you pay 6 to 10 times what the true value of your shares are really worth when it comes time to file for chapter 11 everyone will remember those share buybacks.

      • Wisdom Seeker
        Apr 15, 2019 at 3:06 pm

        Re “Shares purchased before the 1929 crash – assuming they were held by that buyer- did not recover until 1954”

        This widely quoted information is so seriously incorrect as to be treated as an urban legend. First, it only applies to the Dow Jones Industrial Average. Second, very few shares changed hands right at the peak of the 1929 bubble, and for every one that did, someone was able to sit on a large profit. Third, the quote entirely fails to account for dividend yields, which at the time were in the range of 3-7% per year – much higher than today. A hypothetical Dow Index investor (there were no index funds at the time) would have received enough in dividends to recover the 1929 bubble valuation (including deflation/inflation) by the late 1930s, not the 1950s.

        Finally, the real disaster in 1929 wasn’t the stock market crash and its effect on the wealthy stock-owning elites, although there were certainly some tragic suicides by those driven to bankruptcy. The real disaster was the ensuing depression and massive wave of unemployment and starvation. While a few wealthy stock investors lost everything, most muddled through – but millions of poor people had their lives destroyed for ~5-10 years.

  2. Fernando Arzola
    Apr 14, 2019 at 8:52 pm

    Is ” in your face” fraud, greed and corruption…
    They called this ” capitalism” nowadays…
    History shows that this kind of things only change through some type of revolutionary event…
    Aa long as they as the masses remain ignorant, the looting will continue…

  3. raxadian
    Apr 14, 2019 at 9:05 pm

    If the way the 1929 crash happened can be blamed on a single man, that man was
    George Leslie Harrison. He can’t be blamed by the crash itself because it was due to happen but he was definitely responsible on how it happened.

    He wanted to end the rampant speculation that led inter alia to the stock market boom of the late 1920s.

    And he got his chance when he got appointed as president of the Federal Reserve Bank of New York in 1928.

    Yet he is rarely mentioned about when the 1929 crash comes about.

    That said it it wasn’t him, it would have been someone else.

    • Trinacria
      Apr 14, 2019 at 9:31 pm

      thank you for the Harrison reference. I had never heard of him. Looked him up briefly, will have to do more digging as not much pops up readily. I did note that he was a law school graduate….generally not good to put lawyers in charge of financial and economic matters.

      • yngso
        Apr 15, 2019 at 10:46 am

        Fat forward to today, the reason the central banks WANT the crash and engineer it is that they want to buy everything on the cheap and own and control the economy completely. The BOJ has pioneered this, and the SNB and others have been buying stocks.

        • Apr 15, 2019 at 11:21 am

          They do what they do when markets crash, print money and give it to their friends in order to by assets on the cheap. In the first GD they came for the family farm, in the next GD they will get the family home.

    • Harrold
      Apr 15, 2019 at 10:30 am

      The 1929 crash was inevitable.

      • raxadian
        Apr 16, 2019 at 6:20 am

        Again he is to blame for HOW it happened, not for it happening.

        George Leslie Harrison could have made the crash softer since a lot of average joes had bought stock by taking debt, but he didn’t care about that.

    • Gandalf
      Apr 16, 2019 at 6:32 pm

      If Ben Bernanke is the opposite of George Harrison, then we are still to learn what the next 30 years hold for us in this Brave New World of ZIRP, QE, MMT, and debt out the wazoo, and soon, double and triple wazoo.

      The Great Depression was merely the culmination of a long history of debt and bust cycles that had occurred regularly in the US every 20 years since its founding as a nation. And it was the last and worst of the financial panics of this country.

      And so, as I’ve posted before, what happened afterwards, the fifty years from 1932 to 1982, were really the EXCEPTION rather than the rule in the reality of American economic history

      Most all the strict financial regulations instituted because of the hard lessons and suffering from the Great Depression have been undone since 1982.

      One of the first financial wrecks to happen almost immediately was the Keating Savings and Loan crisis, which ended with a taxpayer bailout.

      De-regulation and the “Greed is Good” mentality does indeed work great to free the power of ambition and entrepreneurship in a capitalist economy. It worked enough to make many Americans remember the Reagan years fondly. I see that clearly for sure

      But as should have become obvious from the GFC of 2008-2009, nothing has changed in the fundamental economic equations regarding debt, risk, and the potential for great financial gains versus great financial disaster. Loosen the financial regulations and you increase both risk and reward, gains and financial disasters

      Bad and unsustainable debt always blows up.

      Bernanke, intent on NOT becoming the next George Harrison, instead has only postponed the harsh lessons forced upon the US by Harrison.

      How this is going to play out is yet to be determined, but it’s really a juggler on a high wire act at this point

  4. Cyclops
    Apr 14, 2019 at 9:28 pm

    CEOs often sell their stock holdings from bonus at stock buybacks!

    Meaning CEOs prefer to sell their corporate stocks at inflated stock prices ignoring what is the best for their companies, employees and share holders.

    The game of money chasing for CEOs will doom the future of companies in the stock market!

  5. timbers
    Apr 14, 2019 at 9:30 pm

    The solution is obvious: Negative Interest Rates (NIRP). Does anyone seriously believe Super Ultra Dove Deluxe Powell won’t reach for that his his “tool box”?

    • Rcohn
      Apr 14, 2019 at 11:27 pm

      Yes.
      Please name any country with negative interest and a substantial trade deficit

      • Fernando
        Apr 15, 2019 at 1:41 am

        If share buybacks end, the rich will have to get a job…

        Poor babies…

        No more living off daddy’s trust fund…

      • Bankers
        Apr 15, 2019 at 5:23 pm

        There are a couple outside Eurozone at, or just above, zero with substantial deficits though, and Sweden is trending into trade defict territory now at negative rates.

    • Apr 15, 2019 at 12:11 am

      timbers,

      The banks HATE NIRP. And the Fed works for the banks. So draw your own conclusion.

      In terms of stocks, NIRP has done very little. Look at EU stocks. Most indices in NIRP countries are still well below their peaks from years ago. Japan’s Nikkei is still down 45% or so from 1989. Look at European bank stocks. Crushed, crushed, crushed. US bank stocks would crash if the Fed imposed NIRP.

      The ECB imposed NIRP to bail out southern Eurozone sovereign debt (Italy and Spain mostly), not corporate debt or banks. Southern Eurozone sovereign debt is an entirely different story than corporate debt and stocks in the US. And bailing out southern Eurozone sovereign debt is the only thing NIRP has accomplished.

      • Bankers
        Apr 15, 2019 at 8:58 am

        Thinking on my feet so excusee :

        Banks say they hate NIRP, at a structural level of returns on lending they cannot drop interest charged below a certain level and make profit, they also know lending at low rates is susceptible to rises in interest, that those would leave that lending exposed. They also know an economy that is not productive or already missalocated, that cannot be flogged or enticed. Sovereign spending, investment in sovereign debt for that planned economy, becomes a freebie cash cow.

        Banks say they hate NIRP, like someone hates climbing into a liferaft from a luxury yacht, like it is all the fault of the guy who didn’t strain the fuel. Look at what the whole Eurozone and their banks were faced with though, absolute contagion at sovereign, private and political level. The Eurozone, the banks themselves, would have litterally imploded if the money supply was not put into overdrive via QE and low rates. It would have, and might still. Look at how the banks and sovereigns rearranged to sure up, reform, and wind down. They hate it, they hate each other for it, they individually like to make out that they were the sound ones, that they would have been the champions once interbank had shut down, once true values had been discovered. That is their nature, and they do not mind making out that they are hard done by also, such a reputation for being responsible for the downturn is not welcomed. I don’t think anyone much feels they are really being punished though.

        QE, TLTRO, and low interest are a bailout of the whole Eurosystem, banks, remaining economy and politics included. It is an ultimate restructuring, and the US may yet go that way, I hope not.

        I know this is contrarian to some of your own views, and it is not to argue really because interpretation at this level is subjective enough due to how any perspective is built up, and what information or opinion it is founded on.

        If banks see the possibility of losing more than their shirts, see the destruction of the national economy and their place in it as likely, and see a way to walk out of it something like intact or at least with the ability to move out of the way with what they are able to, they will complain the whole way and then dissappear leaving nothing of value behind but a pile of debt and a command economy being dictated to by those who decide they can still make some kind of use of that debt pile by adding to it to gather public support of some kind.

        Don’t think the US is possible exception to directions like this, that is how the guard is dropped – the dynamic of profitability at a global scale is changing, is becoming more competitive, more hostile. I think the US is as much a leader as adaptive, so should remain on top in relative terms, but it cannot afford to let down the guard is all, unless of a planned socialistic reality is anyone’s idea, or only remaining choice.

        • Apr 15, 2019 at 11:52 am

          Bankers,

          In 2019, the Fed will PAY the banks about $40 billion in interest on excess reserves.

          That is pure profit for the banks on a risk-free deal. This is because the Fed’s IOER rate is 2.4%. Under NIRP, this would go negative, and the banks would have to PAY the Fed (as they do in the Eurozone).

          The banks are also buying US Treasury bills and earn 2.4%+ on them.

          US banks sit on $12.6 trillion (with a T) in deposits. A lot of these deposits don’t pay any interest or only a small amount of interest. In essence, banks borrow this money nearly for free from depositors. So in Q4, for all US banks combined, the average cost of funding (FDIC tracks this) was 0.91%.

          In other words, under the current system, the banks borrow many trillions of dollars at an average cost of 0.91% and can invest them risk free at 2.4%. They can also extend loans, such as credit cards, and make a lot more by taking on more risk. This is a SWEET deal for the banks.

          Eurozone banks are getting bludgeoned by NIRP. Just look at them — look at the bank stocks, look at bank earnings.

          While Eurozone banks can borrow cheaply (TLTRO), they cannot make a good spread investing risk-free because all short-term risk-free or near-risk-free assets have a negative yield. They have to buy Italian government bonds (2-year yield = 0.5%, very risky) to make a tiny spread on a risky investment. It’s a terrible deal, and it increases the bank’s riskiness and makes them more vulnerable to collapse if something goes wrong with Italian debt (the “doom loop”).

          The ECB is now under pressure from the banks to back off NIRP and it is considering some measures.

          But the ECB has decided that it is also charged with keeping the Eurozone together. That’s what Draghi’s “whatever it takes” comment in 2012 was all about. These countries don’t control their own currencies. NIRP was designed to bail out weak countries’ government debt in order to keep them in the euro. That was its purpose. The rest was pretense and decoration. And the ECB must to use pretense because its only official mandate is to keep inflation “near but below 2%.” It does not have a mandate to do “whatever it takes” to keep Italy in the Eurozone. But that is what it is doing. Everything the ECB has done in recent years was to keep the Eurozone together.

          An economy is not helped by NIRP. NIRP kills the private-sector retirement system (usually handled by insurance companies) in European countries, and there has already been a lot of handwringing about it. Long periods of NIRP are very detrimental to the financial infrastructure.

          But NIRP helps over-indebted governments that don’t control the currency (Italy, etc.). And that’s the only reason NIRP in Europe exists.

          The Fed is not in the same boat as the ECB because the US controls its own currency. And the Fed is fully away of the damage that NIRP has done – and in many pronouncements has stuck to its rule of “zero lower bound” – meaning it will get close to zero but not below.

        • Bankers
          Apr 15, 2019 at 1:02 pm

          Yes and no maybe …. the interest on excess reserves is paid by returns on treasuries which are on the asset side of the fed for those reserves. So you can imagine an economy that cannot be reflated and government spending is taken as route because it is the borrower of last resort. It will want rates lower to lower service costs, plus at this point investing in dollars (treasuries) might not be of great appetite – so rates are held low to give incentive, negative to force. The US might end up looking like any other declining economy trying to fund own spending if it took a socialist or monetarist route. Really low rates are a trap that encourage still lower rates as exit, then negative or QE which is I guess is as close to MMT as you are going to get without direct fed purchase of treasuries. Charles Hugh Smith just posted along these lines also, and the case of Switzerland or others with NIRP says owning own currency is no guarantee.

          I don’t know exactly what direction the US will be taking though, so many variables of all kinds.

      • Apr 15, 2019 at 11:31 am

        You have to wonder about the bond between the new highly politicized Fed, and their charters banks. RRPO throws a wide net, and is definitely a tool of financial repression. Then a few years ago the Fed ‘arranged’ for some US majors to take DBs derivative holdings. Then of course some like Goldman are not even banks. Now they are being set up as GSEs for the shadow banking system, which the Fed is not regulating. While the Fed guarantees their viability (reserves) they also undermine their business, so investors say, yeah the banks are safe, buy the banks, at the same time they can’t make any money?? They are empty businesses with the full backing of the USG?

  6. Ididsa
    Apr 14, 2019 at 11:05 pm

    Not being sarcastic: After the fiasco with the Fed over a mere 20% correction and with this ultra-pro corporate Administration who cares nothing about the actual economy, but only what the economy can do for the stock market, won’t the Administration just continue to badger the weak Fed until it slashes rates to zero. This would free up the debt constraint issue as it applies to funding buybacks and enable a whole new round of buybacks.

    The Administration appears to have absolutely no concern about devaluing the dollar…..

    After the fiasco in December, it seems that there is absolutely no limit to the level of monetary corruption when it comes to enabling the financial asset bubbles to continue into perpetuity…..

  7. Jack2
    Apr 14, 2019 at 11:36 pm

    Thank you for that Wolf, very informative as always. I think you said that when a company buys back its own shares, those shares essentially disappear (I’m paraphrasing). Can’t that company re-issue shares in the future should the need arise to raise capital?

    • Apr 15, 2019 at 12:03 am

      Yes, but that’s a complicated process that requires prior announcement (secondary offer) and often causes shares to fall. Once the share price is already low, this option dilutes existing shareholders so much that shares plunge, and usually this is not an option. Other companies (e.g. Tesla) or fairly recent IPOs with skyhigh stock prices can do this, and often do this (follow-on offering), but they also do not buy back their own shares.

      • yngso
        Apr 15, 2019 at 11:02 am

        Overhyped Tesla could of course not damage its inflated share price, so it issued bonds when it needed more cash to burn. I suppose that’s the way companies go when they need cash. Then they at least postpone the risk event.

  8. J.M.Keynes
    Apr 15, 2019 at 1:27 am

    – Given the giant size of the buy back programs I am wondering whether companies even care about their own future. “Apres nous le deluge” seems to be the motto these days.

    • Apr 15, 2019 at 11:05 am

      None of them obviously care or none of the corporations would be buying back shares at the highest valuations dating all the way back to 1873.

      • DawnsEarlyLight
        Apr 15, 2019 at 1:42 pm

        Laundering gives us the cleanest dirty shirt! Don’t mind the ‘wrinkles’.

    • Apr 15, 2019 at 10:10 pm

      Companies are tools – they care about their future just like a car cares what direction it’s headed.
      The drivers of these companies – board of trustees, CEO and top management, care very much for their own futures.

  9. SocalJim
    Apr 15, 2019 at 1:39 am

    Personally, I think stagflation will eventually appear and kill the market. People will face rising prices without wage increases … they will have less money to spend on discretionary items after paying for basics. Just a matter of time.

    • Rowen
      Apr 15, 2019 at 2:17 am

      It’s the stated goal of the White House for the stock market to rise, so one can say that market manipulation on the upside is patriotism?

    • nicko2
      Apr 15, 2019 at 2:36 am

      How does stagflation happen when the rest of the global economy is still growing (albeit at a slightly slower pace)? The dollar is stable, oil is up…. The world just needs to survive the last 19 months of the trump admin.

      • yngso
        Apr 15, 2019 at 11:07 am

        This is about sooo much more than one Prez. Take a harder look at the numbers and tendencies!

    • Endeavor
      Apr 15, 2019 at 7:21 am

      SocalJim, just like the industrial Midwest.

    • economicminor
      Apr 15, 2019 at 9:47 am

      Socaljim, I think the US has had Stagflation for some time now. Much of what people buy has gone up. Health Care, prescriptions, housing, taxes, building products, lots of things while wages have not kept up.. This may be mild Stagflation and I can imagine that it could get worse but in the end I think our biggest worry is the eventual deflation when all the over priced assets crash.

      It is also possible that due to the Boomers retiring in droves, that demand for many consumables will drop due to demographics. Add in the next recession and we are probably facing a deflationary future and the Stagflation of our past and present will look more like the good ole times.

      • yngso
        Apr 15, 2019 at 11:12 am

        You don’t need a lot of stagflation now for it to really hurt, with the low wage growth. Besides, with health care costs. rents etc rising, the increases aren’t small.

      • SocalJim
        Apr 15, 2019 at 1:15 pm

        Much of the deflation was being exported from China. The trade wars may curtail this. That is my base case. I expect inflation rising faster than wages.

        • economicminor
          Apr 15, 2019 at 10:08 pm

          Hard to imagine much more inflation when so many are stretched to the max.. What is it? 75% of all house holds in the US live pay check to pay check..

          That sure doesn’t leave much room for any inflation. Prices rising will be met with diminished demand due to the constraints of incomes and existing debts..

  10. Jack
    Apr 15, 2019 at 4:22 am

    If there is one economic report you should listen to “ IT IS THIS ONE!”.

    an advanced Nation can Not survive if it lets its Bankers determine its policy.

    A viable Economy is produced by “ Real product or service “ Not imaginary BS”

    Once you allow the real service or product to be diluted and over- financialized you end up with selling CRAP to your customers.

    You can go all the way to reduce the value your customers are getting a shabby product and call it progress or evolution or what you may , but you can’t cheat everyone in the long term.

    Companies like GM have tried that over and over again, but the ideas that you can diversify out of your CORE product is a Fancy ( let’s add here to please Wolfie! :). ) BULL SHIT that the likes of ( Neutron Jack) have tried and tried but here we are and look at GM’s history of bailout to understand the Falsity of removing your core product from the lineup and sell ( dreams) to the gullible.

    If you’re a US voter I implore you to Vote!
    Make sure that you Understand that the destiny of your Nation is on line!

    Understand that you’re about to go under BIG TIME, if you still believe in your adopted country DO VOTE .

    But don’t vote for the Democrats Nor the Republicans. Vote for the Locals who really represents you , your community and the longevity and viability of your country are on line.

    Don’t let the politics in your country turn to a farcical episode again.

    Educate your immediate relations, Neighbors , work colleagues… etc.

    We are at a turning point. miss it at your peril.

    • yngso
      Apr 15, 2019 at 11:28 am

      I think you have a good point, vote for the locals you know are good. Ignore the national level until those good locals come up there, and vote for them if they’re still good. The good ones aren’t the many who promise, but the few who dare tell the truth.

  11. Kevin
    Apr 15, 2019 at 5:06 am

    Wolf,

    Is there a restriction (and if not, shouldn’t there be) that corporations cannot repurchase their stock if their pension funds are not fully funded?
    The numbers for GE and Sears suggest (I don’t have the exact figures) that they were buying in their shares while their pensions were seriously underfunded.

    • Apr 15, 2019 at 9:31 am

      There is no link between buyback rules (there are some rules) and the funding of pension obligations.

      • yngso
        Apr 15, 2019 at 11:30 am

        There should be…

        • JZ
          Apr 15, 2019 at 2:55 pm

          Let the corporations do what ever they want, the key thing is that if they screw up, workers will riot and burn CEO’s houses. What happens now is that corporations are NOT allowed to die or pay for their sins. No matter how you regulate them, the CEO and polititodans will find ways to loot the profits as long as they do NOT have to pay for their sins. When things go wrong, there are 1 million reasons. When things go right, there is usually just one thing is done right. End the FED, let everybody be responsible for their behavior. That’s what needed.

  12. Iamafan
    Apr 15, 2019 at 5:41 am

    For the world reserve currency to even start talking NIRP would probably hasten its end.
    People will just think of something else for their savings.

    • yngso
      Apr 15, 2019 at 11:37 am

      Maybe that’s why the Fed isn’t talking about it very much. One thing is to say that all things are possible. It’s quite another to do them.

  13. Iamafan
    Apr 15, 2019 at 5:57 am

    While this half of the story deals with the not so nice effects when corporate stock buybacks end, one has to wonder how corporate bonds and debt will fair? The debt is sky high and ratings going lower.

    • Apr 15, 2019 at 9:33 am

      Credit agencies see share buybacks by highly indebted companies as credit negative. When a highly indebted company ends its share buybacks, it’s perceived as a step in the right direction from a credit point of view.

      • yngso
        Apr 15, 2019 at 11:44 am

        Bbbut, but, but, share buybacks have become the whole raison d’etre for Corps. Making and doing stuff is no fun in a softening economy. When debt stops the financial engineering voodoo party, what is there left to live for?

  14. Willy
    Apr 15, 2019 at 6:27 am

    A debt jubilee will happen. All personal, business, and government debt will be cancelled. A giant reset. The Romans did it, the Greeks before them, and more recently the British. After the British did this they had 400 years of growth, and became an empire.
    Bye bye, international bankers and bond holders.
    Push the giant reset.

    • Apr 15, 2019 at 9:38 am

      This “debt jubilee” stuff is total nonsense and people need to stop posting it here.

      These debts are ASSETS for investors. They would be wiped out. Banks would be wiped out. Governments would have zero to spend, and ALL the services they provide would collapse. Pensions would be wiped out. The economy would collapse. The financial system would collapse… It’s just plain nonsense.

      However, there are processes for shedding debts. In the US it’s called bankruptcy. Inflation is another process of shedding debts.

      • yngso
        Apr 15, 2019 at 11:58 am

        That was for Willy.
        Another great”futurist” is cycle guy Harry Dent. He envisions stagnation and deflation in the developed world.
        I think I’ve already reached far above my very low paygrade, so I’ll leave it there…

        • Wendy
          Apr 15, 2019 at 1:08 pm

          I used to follow Dent very closely, to the point of modeling my portfolio on his Demographic Trends. When you put your own money on the line, you are quick to notice that the advice may be wrong when your net worth drops. Dent is a bookseller, and an orator, but his financial advice has been wrong well over 50% of the time. Dent at one point started his own mutual fund (Dent AIM) based on his predictions, and the performance sucked. As Yogi Berra said, predictions are hard, especially about the future. Having been dented financially by Dent, I can at least laugh out loud at his current predictions, and enjoy him for what he is.

      • Setarcos
        Apr 15, 2019 at 12:03 pm

        “This “debt jubilee” stuff is total nonsense …”

        Totally agree, however the concept, with regards to student loans, is being heavily promoted by people who seek the highest office. In that case, the asset is now held by “we the people”.

        The banks were asked last week by the Chair of the House Financial Services committee what they were doing about the “problem”. So if the highest ranking member on that committee doesn’t understand (or is willing to pretend not to understand) not sure how many people actually do understand.

        Moral hazard trap is being held out like a carrot.

        • Apr 15, 2019 at 6:43 pm

          Setarcos,

          Yes, student loans are a huge mess. Bankruptcy is form of debt forgiveness, but student loans are not eligible for being discharged in bankruptcy. So I can see the pressures to change that. But taxpayers being the one on the hook for most student loans, all the incentives are twisted and there are no checks and balances once student loans can be discharged in bankruptcy. That’s why this rule exists.

          The problem with student loans is that they involve three parties: the student, the recipients of this money (the university, the student housing industry, the suppliers to students, such as Apple, and the like), and the taxpayers.

          1. The student wants to get an education.

          2. The recipients are the beneficiaries of the student loans but they have no risk, and their incentive is to charge as much as possible because the government will provide.

          3. The taxpayer guarantees it all but has no say in it.

          This tripartite setup is at the core of the problem. I think the beneficiaries need to have skin in the game, particularly the universities. Student-loan defaults should be in part (say, 50%) charged back to the universities. This way, universities would have an inventive to make sure students don’t borrow more than they can afford to pay back with the degrees they expect to get. And if universities fail to provide a useful education that leads to sufficient income, they will have to eat some of the losses of the student loans.

    • yngso
      Apr 15, 2019 at 11:52 am

      Yes, but along with a total redo of the economy and monetary system. I think Steve Keen has the best and clearest ideas regarding this. This won’t happen any time soon though. Now that I’ve attracted the ire of the Wolf, I must quickly expand a bit below his resonse to you.

  15. Iamafan
    Apr 15, 2019 at 6:46 am

    Wolf, congratulations to you for this awesome clear podcast. I like you angrier :-)

    • Wendy
      Apr 15, 2019 at 1:16 pm

      Yes, feel free to use curse words for emphasis. I, like you, sometimes cringe about what is printed as news by reporters who drink the Cool-Aid rather than doing independent thinking or research. You also have to realize that some of these reporters are still battling acne.

      I have found, like you, that with age comes wisdom, and grumpiness. Carry on, Wolf.

  16. vinyl1
    Apr 15, 2019 at 8:50 am

    If S&P 500 companies with operating profits get into trouble because of debt, they can simply sell the stock the bought back, or make a secondary offering. The stock might plummet like a stone, but the company will survive.

    And if they can’t refinance their debt, that’s exactly what they’ll do. Nobody wants to go bankrupt if they don’t have to. If the lenders took over operations, the first thing they’d do is kick out the existing management. You can bet the existing management will do anything to avoid that. They will tell the stockholders that they’re sorry, but this is necessary for the good of the company….and for the management.

    • Saltcreep
      Apr 15, 2019 at 1:22 pm

      A lot of the bought back shares have probably already been redistributed to management as part of their compensation packages…

      I would be interested to see some stats relating to how many of the companies engaging in buybacks over a longer time period actually end up with significantly lower counts of shares outstanding. I imagine a decent number of them don’t significantly reduce shares outstanding, but use the buyback programs to recycle the shares back and forth between treasury and the private accounts of senior managers.

  17. IdahoPotato
    Apr 15, 2019 at 9:21 am

    If someone hordes clothes, furniture, food or empty Tupperware containers, they are considered hoarders who need counseling and help from mental health professionals.

    When corporations and their shareholders are obsessed with making and hoarding money by any means possible, they are considered worthy of adulation.

    I don’t understand it at all.

    • Bankers
      Apr 15, 2019 at 9:49 am

      The second one is generally theft or greed of some kind, a perfectly understandable human trait.

      Displays of insecurity on the other hand are taken as a lack of faith in humanity which is detrimental to the moral of society, and so are punished by further humiliation.

  18. Somewhere
    Apr 15, 2019 at 10:22 am

    If Lyft has no cash for corporate buybacks, then I’d assume it’s stock will go down the tubes. Repeat and rinse for Uber.

  19. Drew
    Apr 15, 2019 at 10:37 am

    Wolf,

    You’re really coming into your own with these podcasts, great work! Thank you for your clear and concise views on the state of the stock market and economy as a whole. I’m millennial investor and the information you have shared is invaluable. Easily the best financial site on the internet.

    Again, thank you.

  20. Apr 15, 2019 at 11:34 am

    Any congressional bill to impose limits on share buybacks will be vetoed, until such time

    • DawnsEarlyLight
      Apr 15, 2019 at 1:52 pm

      Who doesn’t love a company that washes its own ‘laundry’?

  21. Nat
    Apr 15, 2019 at 2:19 pm

    Dumb question: isn’t there a certain % of a company required to be part of the available float for the company to be listed on the NYSE? I mean I know the market caps of the S&P companies are often up in the hundreds of billions … but we are talking about trillions of dollars of buy-backs. At some point doesn’t the total number of publicly traded shares for high-by-back-companies drop below a threshold % of the company publicly available for trading and then these companies would get involuntarily de-listed if they tried to press on with more buy-backs?

    If that is possible, it probably wouldn’t happen before something else like excessive corporate debt and downgrade risks would cause a massive slowdown in buy-backs. That said, while a more distant and less likely block, wouldn’t “running out of shares” in this manner also serve as a potential end to relentless buy-backs eventually if nothing else stops them?

  22. yngso
    Apr 15, 2019 at 6:26 pm

    I can’t quite let this go: I think that both the visions of Harry Dent and Steve Keen make a lot of sense. Decades of delevering will need to happen. HD sees a period of great difficulty for the world in the second half of the century. Only after something like that we humans are ready to try new ways, like what SK suggests.

    • Bankers
      Apr 16, 2019 at 7:39 am

      It’s hard enough to try to figure out what is going on now, let alone what the world will look like in decades. To apply a hypothesis of what the future will be to current circumstance is even more confusing, and in fact it would be easy enough to fabricate or imagine anything for own purpose. That is why the more classically minded economists insist on trying to reduce the way finance and political economy are enacted to the most transparent and individually responsible level possible, because that way there is no supertheme or overpowering authority distorting what might be a much better repartitioned economy where people can discern the activity that relates to them with least distortion, so allowing a more resilient local structuring of that society. A battle of ideals and ethics maybe – if the construct is ethical now, we might not need an ideal solution in future, but if we believe there is an ideal future solution then it becomes self fulfilling (though untested) as current ethic (or lack of), gets ignored or excused.

      Mankind’s adventure in own destiny, but he likes to know where he is and relies on where he is coming from for any reference.

  23. Noble1
    Apr 18, 2019 at 7:01 pm

    May I be so bold to state: A high probability that the S&P 500 & DJIA along with the Nasdaq top is in or very close to being right now in what I claim to be a proregressive wave B zig-zag ……….. In an attempt to remain decorous , I’ll call the current wave B’s proregressive rallies a “lollipop” rally rather than the usual term …….

    And if I may I’ll also be so bold to state , a high probability peak in an expanded flat wave B proregressive rally in the TSX , and a wave 2 proregressive top in a regressive W-5 in WTI Crude . Proregressive W-4 peak was in October 2018 ……….. And North America is currently in an early recession which is on the edge of transitioning into a full recession . In my humble opinion ……….

    Happy Easter !

  24. Noble1
    Apr 19, 2019 at 2:40 pm

    On another note : In your video at 7 min 35 seconds you mentioned that Goldman Sachs makes huge money off of share buybacks .

    However, concerning the enormous volume of share buybacks as you have pointed out ,Goldman Sachs isn’t performing well these days ,especially since early 2018 .

    Their stock chart indicates a potential ending diagonal(rising wedge) from late 2008 early 2009 to early 2018 with an overthrow in 2018 . In classic TA parlance it appears price has bounced back towards a H&S(early 2017 & late 2018) neckline . I believe vigilance should be of utmost importance currently .

    https://www.cnbc.com/2019/04/15/goldman-sachs-slashes-compensation-for-employees-as-revenue-drops.html

    Quote :
    “Some people might delight in Goldman’s (ticker: GS) difficulties, but schadenfreude is likely to be fleeting. When skilled traders struggle as the unsophisticated triumph, market tumult often follows.”

    “Goldman’s trading revenue fell 18% in the first quarter, compared with the year-ago period, and the bank wasn’t alone. JPMorgan Chase (JPM), the Street’s other trading powerhouse, reported a 17% trading-revenue decline that reflected the difficulty of making money in a low-volatility market.”

    We understand the metrics of share buybacks ,however, you omitted pointing out how insiders tend to act throughout these share buybacks . They issue themselves stock options and exercise their stock options and dump shares in the public market as they pump the share price of their corporations through share buybacks . An unfortunate legal pump and dump scheme at the expense of investors/share holders .

    Quote:
    Letter on Stock Buybacks and Insiders’ Cashouts
    Posted by Robert J. Jackson, Jr., U.S. Securities and Exchange Commission, on Friday, March 8, 2019

    Robert J. Jackson, Jr. is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on a letter by Commissioner Jackson to Senator Chris Van Hollen. The views expressed in the post are those of Commissioner Jackson and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff. ”

    Quote:
    “We show that, when executives unload significant amounts of stock upon announcing a buyback, they often benefit from short-term price pops at the expense of long-term investors. ”

    Quote:
    “II. Stock Buybacks and Executives’ Incentives
    Another important question often raised about this research is the relationship between insider cashouts and post-buyback performance. The evidence you requested in your letter points to a troubling trend. When insiders sell upon announcing a buyback, long-term performance is worse. This raises the concern that insiders’ stock-based pay gives them incentives to pursue buybacks that maximize their pay-but do not make sense for long-term investors.”

    Quote :
    ” The evidence your letter requested shows that insiders can use buybacks as a chance to cash out at high stock prices-at the expense of long-term investors. Yet SEC rules give a safe harbor to firms whose insiders sell when a buyback is announced. In a world where stock-based pay gives executives powerful incentives to seek opportunities to sell their shares, SEC rules on buybacks should do more to protect ordinary investors who save for the long run.”

    https://corpgov.law.harvard.edu/2019/03/08/letter-on-stock-buybacks-and-insiders-cashouts/

    https://www.forbes.com/sites/greatspeculations/2018/05/20/buybacks-the-new-magic-beans/#777921922dc2

    Quote:
    “It’s about the cycle,” notes Bartolini. “Companies have capital to return to shareholders at the top of the economic cycle.”

    https://www.institutionalinvestor.com/article/b1dfj9g9mfnqxb/Share-Buybacks-May-Be-Bad-Just-Not-for-the-Reasons-You-Think

    It’s a nice way to artificially increase earnings per share on paper ………

    Thank you for sharing your input ,much obliged ………………

Leave a Reply

Your email address will not be published. Required fields are marked *