Image source: Pixabay
 

The Government and Fed must preserve their power and benefits for the rulers. When there is a perceived crisis (real or imaginary), they immediately swoop in like Mighty Mouse to save the day, instituting (emergency) policies. They don’t want unhappy citizens storming the palace.

They might save today, but they have no regard for tomorrow, leaving the adverse consequences for future generations to fix.

Never Fear – Big Brother Looking After You

Our society has moved from Thomas Jefferson’s vision, “The policy of American government is to leave its citizens free, neither restraining them nor aiding them in their pursuits” to Bill Bonner’s reality, “Politicians do not see things when it pays to be blind.”

Richard J. Maybury explains the process:

“What is politics? It is a candidate standing before a crowd and thundering, ‘If you elect me, I will give you EVERYTHING you want, and you WON’T NEED TO PAY FOR IT! I will force the evil rich person standing next to you to pay!’ …. And the crowd cheers….”

Stirring up political hate, class envy and preying on voters’ emotions seems to be the snake oil of choice. Neither party appears interested in solving problems; instead, they prefer to continue to offer terrible, politically-directed knee-jerk policies, with little regard for the future.

All we hear is more free stuff, tax cuts, and subsidies; using tax dollars to buy votes. I’m NOT seeing any real solutions addressing the cause of our major problems. The politicos will leave their mess for the next generation. The only choice is picking your poison and how long it will take. Future generations are getting screwed.

A Plank In My Political Platform

We’re bombarded with “class envy and corporate greed” directed toward the “evil rich person standing next to you.” While tax increases might transfer wealth, with the effect of slowing down the economy, the politicos are missing a major point in addressing one form of greed.

A corporation exists for making a profit for the shareholders. It also benefits society by creating jobs, competition, and encouraging innovation. Corporate executives are charged with maximizing shareholder return, while preserving the health of the corporation for the long term. Corporate executives are well paid when profits and the stock price is climbing.

In a free market, stock prices are based on supply and demand. It’s illegal for corporations to manipulate the price of their stock. Earnings should be reported according to legal accounting guidelines in a timely manner, and the market determines the price of their stock.

Enter government meddling…. Historically stock buybacks were considered a form of stock price manipulation. That changed in 1982 when the SEC, not Congress, changed the rules.

Harvard Business Review (HBR) explains some real dangers:

“Stock buybacks made as open-market repurchases make no contribution to the productive capabilities of the firm. Indeed, these distributions to shareholders, which generally come on top of dividends, disrupt the growth dynamic that links the productivity and pay of the labor force. The results are increased income inequity, employment instability, and anemic productivity.

Buybacks’ drain on corporate treasuries has been massive. The 465 companies in the S&P 500 Index in January 2019 that were publicly listed between 2009 and 2018 spent, over that decade, $4.3 trillion on buybacks, equal to 52% of net income, and another $3.3 trillion on dividends, an additional 39% of net income.”

Rewarding greed

“…. Why have U.S. companies done these massive buybacks? With the majority of their compensation coming from stock options and stock awards, senior corporate executives have used open-market repurchases to manipulate their companies’ stock prices to their own benefit and that of others who are in the business of timing the buying and selling of publicly listed shares.

Buybacks enrich…investment bankers and hedge-fund managers as well as senior corporate executives — at the expense of employees, as well as continuing shareholders.

In contrast to buybacks, dividends provide a yield to all shareholders for, as the name says, holding shares. Excessive dividend payouts, however, can undercut investment in productive capabilities in the same way that buybacks can. Those intent on holding a company’s shares should therefore want it to restrict dividend payments to amounts that do not impair reinvestment in the capabilities necessary to sustain the corporation as a going concern.”
 

Theory versus practice

Many believe companies buy back their stock when they feel it is “undervalued” in the market. The idea was to buy low, and sell it back at a higher price when the market realized its true value.

HBR explains the opposite happened; companies were buying back stock at all-time high – not because it was a good value; but rather to manipulate share count for their personal benefit. This also benefits the Wall Street casino banks that own the Federal Reserve.

In 2023 Reuters told us, “2023 should be the first fiscal year with at least $1 trillion in completed S&P 500 company buybacks….”

Fed’s knee-jerk = bad consequences

The Fed’s easy money policy enabled companies to borrow cheap money to buy back their stock for the benefit of their executives and Wall Street.

In 2015 we found a Zerohedge study which concluded:

“Virtually every single dollar raised through issuance of debt has been used for one thing – to buy back stock!”

To be sure,…this is not to say that companies haven’t used their own organic cash creation, declining as it may be, for other purposes such as spending on CapEx and M&A, but…several trillion in fungible debt has had just one simple use – to boost stock prices, and to make management teams richer, while letting bondholders managing other people’s money foot the bill for record high management bonuses and stock prices.”

HBR continues:

“Making matters worse, the proportion of buybacks funded by corporate bonds reached as high as 30% in both 2016 and 2017. …. The International Monetary Fund’s Global Financial Stability Report,…highlights ‘debt-funded payouts’ as a form of financial risk-taking by U.S. companies that ‘can considerably weaken a firm’s credit quality.’

It can make sense for a company to leverage retained earnings with debt to finance investment in productive capabilities that may eventually yield product revenues and corporate profits. Taking on debt to finance buybacks, however, is bad management, given that no revenue-generating investments are made that can allow the company to pay off the debt.”

Friend Chuck Butler, explaining the difference between personal and corporate debt, warned us:

“But with Corporations it’s different; they are HUGE compared to mom and pops. The problems they face will be mitigated by their ability to announce bankruptcy, leaving stockholders and creditors holding the bag when they walk away from the mess.

Bankruptcies in the U.S. are piling up as I write. We recently saw an all-time record number of bankruptcies filed in one day! Ask yourself how did that happen? ….

These corporations had multiple years of free stuff; easy credit, no-cost loans, and plenty of cash…. And what did they do? Did they expand their businesses? Did they buy new machines, or assets to improve their business? No…. They got loans for zero cost, and they spent the money on stock buybacks and dividends.

Now the loans are coming due, and guess what? The loans aren’t zero credit (free) any longer…. The Corporations look at their balance sheet, and decide, it’s time to fold…. That’s it in a nutshell, folks.

Of course, they are going to be screaming, the government is taking their free money away. I’m not taking any bets on the Fed and politicians standing firm in the face of the corporate outrage.”

Generational Theft 2.0

Thomas Jefferson said, “I sincerely believe… that the principle of spending money to be paid by posterity under the name of funding is but swindling futurity on a large scale.”

Currently our government debt, plus unfunded promises (now over $250 trillion) is generational theft, one generation borrowing and spending, leaving the bill for future generations to pay.

Corporate stock buybacks, particularly with borrowed money, is also generational theft!

Executives, and their Wall Street counterparts, put their greed ahead of shareholders and the long-term health of the company.

Future profits will be used to pay off debt which added ZERO value to the company. That reduces the return for the next generation of shareholders.

One greedy example; GE spent $24 billion on stock buybacks. Their stock price dropped and the buyback loss was estimated around $18 billion. Meanwhile, reports estimated their pension fund was underfunded by $29 billion. Their president’s severance package was around $200 million.

Young people today understand that government Social Security and Medicare promises cannot be kept. Many are frantically trying to save via a 401k program for any hope of retirement. I’d suggest being very conservative with any stock projections. Profits may increase, but cash flow is already heavily allocated, much will be used to pay for the sins of those before them.

My policy for any politician willing to listen?

One plank in my financial plan would be to make corporate share buybacks illegal, it has clearly shown to be stock price manipulation for the benefit of the few, while harming many. The law won’t fix the Fed, but it will help address one of the adverse consequences of their knee-jerk interest rate decisions, helping to insure a better future for our children and grandchildren.

Wall Street owns Congress. Will they do what is right or pay homage to their donors?
 

On The Lighter Side…

I’m glad the political conventions are over. For the next several months we will see the hate, lies and charges whipped up to a political frenzy. I fear the rhetoric will not stop after the election. People need to calm down.

I’m sending this to production early because last Saturday I was scheduled to fly back to AZ for a week of tests, doctor visits, etc. I have to connect in Dallas which is always a challenge, changing terminals. I’ve learned the best flights are described as “uneventful.” Fingers crossed on that one.

Temperatures in southern Indiana have started to cool, and it’s projected to be below triple digits in AZ. Hoping for reasonable weather and a safe, on-time, flight home. If all goes well, I should be back in Indiana for Labor Day.

Grandson Brock celebrated his 15th birthday last week. Had a fun party.

My computer screen saver is my photo file. Just before I left for his party, a picture popped up of his first birthday. We put a small cake in front of him which he grabbed, much to everyone’s delight. He had cake in his hair, everywhere. First birthdays are special. Where the heck did the time go, seems like yesterday?
 

Quote of the Week…

“Youth is not entirely a time of life; it is a state of mind. Nobody grows old by merely living a number of years. People grow old by deserting their ideals.

You are as young as your faith, and as old as your doubts; as young as your self-confidence, as old as your fear; as young as your hope as old as your despair.”

— General Douglas McArthur
 

And Finally…

Good friend Phil C. shares ten commandments for seniors:

• Talk to yourself. There are times you need expert advice.
• “In style” are clothes that still fit.
• You don’t need anger management. You need people to stop irritating you.
• Your people skills are fine. It’s your tolerance for idiots that needs work.
• The biggest lie you tell yourself is, “I don’t need to write it down, I’ll remember it!”
• “On time” means when you get there.
• You’ve noticed people your age look much older than you are.
• Aging has slowed you down, but it hasn’t shut you up.
• “One for the road” means peeing before you leave the house.

And my favorite:

• You still haven’t learned to act your age, and hope you never will.

More By This Author: