We have talked about stock buybacks and their eventual negative impact on this forum before. The Atlantic has a fairly good expose on the subject matter from a different angle Stock Buybacks Are Killing the American Economy
The article asks a simple question. Despite corporate profits being at the highest levels on record, at 12% of GDP, the underlying economic picture continues to deteriorate. Where did the money go?
The answer is as simple as it is surprising: Much of it went to stock buybacks—more than $6.9 trillion of them since 2004, according to data compiled by Mustafa Erdem Sakinç of The Academic-Industry Research Network. Over the past decade, the companies that make up the S&P 500 have spent an astounding 54 percent of profits on stock buybacks. Last year alone, U.S. corporations spent about $700 billion, or roughly 4 percent of GDP, to prop up their share prices by repurchasing their own stock.
Here is the scariest part. Not only was this money more or less wasted, this money was also borrowed away from future growth…..in the form of QE and zero interest rates. And the result? Overpriced and highly speculative stock market that is set to fall as soon as this “buyback” stimulus is withdrawn.
Finally, keep in mind that most corporations behave as individual investors would. They always buyback at the top while hoarding cash at the bottom. As was evident during the 2006-2010 period. That is not a good omen for the future.
