October 20, 2015
Behind the Curtain

Hereís Michael Hudson at Naked Capitalism, explaining what all those job-creators are really up to:

Well, companies themselves have been causing this crisis as much as speculators, because companies like Amazon, like Google, or Apple, especially, have been borrowing money to buy their own stock. And corporate activists, stockholder activists, have told these companies, we want you to put us on the board because we want you to borrow at 1 percent to buy your stock yielding 5 percent. Youíll get rich in no time. So all of these stock buybacks by Apple and by other companies at high prices, all of a sudden yes, they can make that money in the short term. But their net worth is all of a sudden plunging. And so weíre in a classic debt deflation.

PERIES: Michael, explain how buybacks are actually causing this. I donít think ordinary people quite understand that.

HUDSON: Well, what they cause is the runup Ė companies are under pressure. The managers are paid according to how well they can make a stock price go up. And they think, why should we invest in long-term research and development or long-term developments when we can use the earnings we have just to buy our own stock, and thatíll push them up even without investing, without hiring, without producing more. We can make the stock go up by financial engineering. By using our earnings to buy [their own] stock.

So what you have is empty earnings. Youíve had stock prices going up without really corporate earnings going up. Although if you buy back your stock and you retire the shares, then earning the shares go up. And all of a sudden the whole world realizes that this is all financial engineering, doing it with mirrors, and itís not real. Thereís been no real gain in industrial profitability. Thereís just been a diversion of corporate income into the financial markets instead of tangible new investment in hiring.



Posted by Jerome Doolittle at October 20, 2015 03:05 PM
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This comment really only applies to Amazon. Google and Apple make huge amounts of money, in Apple's case the most profit that any company has ever made in history. Google is throwing all sorts of money at research, so much so that analysts are critical. And these two companies only have debt because they are taking advantage of historically low rates. They could pay off all their debt with the tsunami of cash that they hold, and have huge amounts left over. Amazon is another case, because the Bezos business model is to not make money, pretty much ever, but just gain market share. Apple makes more profit in a quarter than Amazon has ever made. The financial engineering really benefits the employees who are compensated in stock. So Amazon has to buy back stock like mad to make up for the massive amount of shares used for pay. But both Google and Apple actually trade at a much lower multiple than the stock market, which pretty much undermines the argument here.

Posted by: mike on October 21, 2015 3:32 PM
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