Firstly, was the estimate from Howard Silverblatt of S&P Dow Jones Indices that U.S. S&P 500 companies bought back circa $800 billion in stock last year, a new high for any calendar year.
OK, many of you may not see this as a complete waste of capital in the way I do. Others may think there’s nothing wrong with pumping up the value of your stock, and hence your own stock-based renumeration. OK, you may say, why not? I mean if the cash is just going to sit on the books earning nothing then surely this is just efficient capital management?
Except in many cases, and this is where the second report comes in, it’s not exactly “cash” but moreover debt that is paying for the buybacks.
You see many corporates, according to the Institute of International Finance (IIF), are loaded up to the gills in debt at unprecedented levels. Now the same non-financial corporates which are buying back their own stock also happen to have 50 percent more debt than they had in 2008. In fact over $15 trillion worth of corporate debt.
Anyone out there adding up the inevitable consequences of exhibit A added to exhibit B?
This explains the absolute panic of the last quarter of 2018 when companies feared a prescriptive ongoing rate-hike scenario from the Federal Reserve. It explains how the market wobble was very little to do with jobs data or inflation, the Federal Reserve’s Beige Book or PMIs (Purchasing Managers’ Index).
It was about someone out there spotting that this giant debt-inspired buyback “Ponzi” would soon be exposed if rates got anywhere near historic norms. That, my friends is something you should really worry about whether or not Theresa May brings home the Brexit baby or not.
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