When a Boom Economy Goes BOOM

The U.S. jobs report is showing the lowest unemployment rate in 50 years. Corporate coffers are brimming with cash just as the U.S. federal corporate tax has dropped from 35% all the way down to 21%. The stock market is still flying. Home prices have surpassed their highest levels ever. How far up is up? What could possibly go wrong? Go wrong? Go wrong?

Big U.S. companies have been slorping hundreds and hundreds of billions of dollars at the lowest interest rates in recent memory. “Negative interest” is the formal term when borrowing rate is at or less than the inflationary rise. And “negative interest” is what those exceptionally rich corporations, those able to access such astounding rates, have been paying for a decade. The Federal Reserve is telling us that the era of “negative interest” is over, that corporate America is over-leveraged (over-borrowed). Debt. Debt. Debt. Tick. Tick. Tick.

The last time we had this much debt floating in our system, it was heavily targeted at a highly over-valued real estate market where people were able to buy homes with little or no equity based on sub-prime-rate mortgages, not too far removed from the current notion of “negative interest.” Loans to homebuyers were priced so low that homebuyers could afford to buy homes at these excessive list prices… the net monthly cost was still low. Now the over-valuation just might be the stock market itself. Corporations. And if that hits a nasty wall, triggering another recession, you will have another decline in share prices and home prices as well as well as a spate of layoffs to reflect that economic downturn.

It would be one thing if American corporations were using all this wondrous cheap debt and massive tax cuts to invest in growth. Modernization. A huge effort to create of high-level jobs. But that did not happen, is not happening and is unlikely to happen. Shareholders are getting amazing dividends plus the rather dramatic benefit of buying back their own shares in the open marketplace (so that their retained shares literally own a larger of their companies).

A few folks are making a lot of money, and some pretty well-paying jobs are going begging. But there are a lot of lower paying jobs in the gig and part time world. Not so many in those upper reaches of super-skilled workers. Oh, and Carrier has shifted jobs to Mexico in spite of Trump’s efforts to the contrary… and coal mines continue to close as demand for coal continues to drop notwithstanding blowing away emissions regulations. What’s going on? What can we expect?

Writing for the June 8^th The Washington Post, Steven Pearlstein, Robinson Professor of Public Affairs at George Mason University, issues a stark warning: “Welcome to the Buyback Economy. Today’s economic boom is driven not by any great burst of innovation or growth in productivity. Rather, it is driven by another round of financial engineering that converts equity into debt. It sacrifices future growth for present consumption. And it redistributes even more of the nation’s wealth to corporate executives, wealthy investors and Wall Street financiers.

“Corporate executives and directors are apparently bereft of ideas and the confidence to make long-term investments. Rather than using record profits, and record amounts of borrowed money, to invest in new plants and equipment, develop new products, improve service, lower prices or raise the wages and skills of their employees, they are ‘returning’ that money to shareholders. Corporate America, in effect, has transformed itself into one giant leveraged buyout.

“Consider Apple, the world’s most valuable enterprise. As a result of a $100 billion share buyback announced last month, Apple will have returned $210 billion to shareholders since 2012. How much is $210 billion? As Robin Wigglesworth of the Financial Times reminded his Twitter followers, that’s enough to buy up the bottom 480 companies of the S&P 500…

“And Apple is not alone. Last year, public companies spent more than $800 billion buying back their own shares and, thanks to all the cash freed up by the recent tax bill, Goldman Sachs estimates that share buybacks will surge to $1.2 trillion this year. That comes at a time when share prices are at an all-time high — so companies are buying at the top — and when a growing global economy offers the best opportunity to expand into new products and new markets. This is nothing short of corporate malpractice.

“The best recent research on the folly of buybacks is by two professors at Europe’s top business school, INSEAD. Looking at the 60 percent of companies that have bought back their stock between 2010 and 2015, Robert Ayres and Michael Olenick calculated that the firms, as a group, spent more than 100 percent of their net profits on dividends and share repurchases. They also found that the more a company spent on buybacks, relatively speaking, the less good it did for the stock price.

“At the 535 firms that spent the least, relatively speaking, on stock repurchases (less than 5  percent of the company’s market value), market value grew by an average of 248 percent. These companies included Facebook, Amazon.com, Google, Netflix and Washington-based Danaher, all of which mainly used the buybacks as compensation for employees. (Amazon chief executive Jeffrey P. Bezos owns The Washington Post.)

“By contrast, the 64 firms that spent the most repurchasing shares (the equivalent of 100 percent of market value) saw an average 22 percent decline in the firm’s market value. These include Sears, J.C. Penney, Hewlett-Packard, Macy’s, Xerox and Viacom, for all of which the primary purpose of the buybacks was to prop up the stock price in the face of disappointing operating results.”

So let’s see. Corporate America does not have enough faith to invest in innovation. Companies are not investing in updating their plants and equipment? They’re figuring out different ways to transfer all that new wealth to shareholders in hard dollar value ways. Even if the lessons we have learned suggest that this is not a good expenditure for longer-term value? Hard for a scorpion to learn how not to sting. And to pay for that tax cut, the federal government is figuring out how to reduce Social Security, Medicaid, Medicare, social safety nets, supporting the Affordable Car Act and any other program that doesn’t directly benefit corporate America. So workers have to reach deeper into their pockets to pay for what the government is taking away.

We know that there are economic cycles. We also know that governments with solid financial checks and balances, like Canada, do not have major recession and depressions. We know that administration is cutting those solid checks and balances as “bad for business.” And it does not seem that corporate American learning anything from the last great recession about over-leveraging. So sooner or later… more likely sooner… it will be time to pay the same piper… again… for the same mistakes. Hold on. The ride is going to get pretty rough in the not-too-distant future.

I’m Peter Dekom, and I guess implementing under-thought slogans about what stimulates growth and jobs is like trying to fool Mother Nature… and we know where that leads.