Up The Down Staircase

I'm not a fan of David Stockman, to say the least. But recent punditry on the subject of interest rates, asset prices, and bubbles led me to the obvious question: is it true, as it appears, and in the data; that corporations (that is to say, their capital allocators) are executing share repurchases in excess? Which is to say, as I have said more than a few times, that the growth in share prices is the result of intrinsically lowered returns on real investment? Which is to say, further, that the Masters of the Universe CxO types simply aren't generating any return?

So, of course, I went wandering on the innterTubes asking for the value of corporate repurchases. Alas, a Stockman piece came up first. Ever more alas, since he uses the data to make his usual wrongheaded conclusion. He hasn't actually learned much since his defense of Voodoo Economics.

Self-evidently, the corporate form of business organization is designed such that some considerable portion of net earnings should be returned to their owners each year. But a 95% rate of distribution is a giant aberration. Were this outcome to occur on the undisturbed free market, for example, it would signal an economy that is dead in the water and that participating companies face a dearth of opportunities to reinvest profits in future growth.

And, of course, that's exactly what's been going on. As the science and engineering geeks figured out some time ago, we're in the post-discovery age, of marginal incrementalism (kind of like, very unique). With real interest earnable near zero, then share prices (and bond prices, to be clear) go up to meet this rate. Or, as Vinny in those mob movies used to say, "who's gonna give ya a better deal, huh?" Lots of Chinese and Germans and such thought that Florida and Costa del Sol real estate was a sure thing. Not.

Or, as another pundit put it:

Corporate CEOs, with their massive share-buyback programs are in effect investing in the stock market rather than in expanding business opportunities at their companies. Either they expect higher returns from the market, or lower returns in their business, or some combination of both. Given their questionable track record in timing the market, this may be a cause for concern.

It's one thing, although wholly foolhardy, to pay Goodell $44 million to "oversee" the behavior of his employers, since it's just football. Quite another for the Masters of the Universe to get paid such sums and not actually do anything.