2. Buying houses is an investment and is specifically carved out in the CPI. Consumption is Owner's Equivalent Rent, buying is not.
https://www.ft.com/content/a59c2a9d-5e0b-4cbc-b69e-a138de76a...
https://www.bloomberg.com/news/articles/2020-12-21/u-s-stock...
Stock and bond issuances are at all time highs.
Housing is an investment in the CPI because most people don’t buy houses as consumption. The CPI aims to create a basket of consumption for normal people. Rich people do consume houses, and their consumption leads to money circulating.
Should rich people be rich enough to buy houses willy-nilly? That’s a different question. Maybe they shouldn’t, to the current degree.
Kinda problematic when one large company doing buybacks dominates over thousands doing issuing reversing your entire narrative. Taking out bonds to give to shareholders is not something that helps main street.
[0]:https://www.barrons.com/articles/debt-fueled-stock-buybacks-...
Within ten years a film will come out about the next economic disaster and everyone will be saying "how could we be so stupid to allow firms to buy their own stock with debt?" much like the housing crisis.
why not? What's wrong with altering a company's capital structure to be more efficient?
Stocks have a cost (aka, cost of equity), just like debt. Sometimes, cost of equity is higher than cost of debt (aka, the interest rate). Sometimes, the cost of debt is higher than cost of equity. This is determined by the general market conditions and economic environment.
A company may find itself in a situation where the cost of equity is very high, and cost of debt is very low. In this case, it makes a lot of sense for the company to borrow to reduce the amount of outstanding equity on the market. There is an equalizing point, where the total cost of capital is lowest, and that is where the company's money source is most efficient.
There is absolutely nothing wrong with company buying back stocks, if this is the case. The only problem, really, is that buybacks gives capital gains for stockholders, and this is taxed lower than normal income. This is a question of taxation policy, not stock buybacks. Is it fair that capital gains are taxed less than earned income?
This, no shareholder controlled board would ever authorize taking out debt to pay dividends, unless there's some special circumstances for which this makes sense (i can't think of any atm).
The difference with buybacks using debt is that buybacks changes the capital structure. I suppose if the debt is artificially cheap (say, the gov't is forcing interest rates down to lower than what the market rate _would_ be), then it makes sense from a financial perspective, to borrow money, and pay (to the shareholders) the difference between the "real" market rate and the artificial rate. But this predicates that the real rate is much higher (transactional costs, and other overheads might easily dwarf this difference in rate).
Energy (oil & gas) companies certainly did last year. Those stocks are a little different than the broader market, in that investors in them generally aren't looking for appreciation in share price, they want consistently high dividends. Exxon is a good example of this.
Sorry, but this is nonsense. Increasing debt and giving the proceeds away to shareholders definitely alters the debt ratio of a company ... basic financial accounting concept.
you can try to convince people that buybacks are evil, and if enough concensus is reached, it will be outlawed.
The problem is that there's no good evidence that it's evil in the general case, and it's hard to convince large portions of shareholders that it is.
The pandemic has not hit Apple as hard as other industries, and they're taking advantage of low interest rates by issuing debt.
And there's nothing wrong with buying back stock. It's bad when managers use it to boost their personal compensation. That's not happening in Apple's case; they are just returning capital to investors because Apple is doing well and is sitting on a huge balance sheet.
Why not just show me the increased consumption? Show me these increased workers. Show me the raises.
CPI is up 1.5%, due directly to Congress, not the Fed. Unemployment is at 10%. The money supply is up 25%. The velocity of the M2 is down 21%. Straight into assets.
There's nothing wrong with using debt to buyback stock because the environment is corrupted. That's the problem. Fix the environment.
Stock prices only directly impact companies when they actually sell stock. So, propping up the market has zero long term impact as the value of future cash flows is unchanged. It’s simple a handoff of money from the government to people selling stocks over a short period.
It’s popular because it keeps highly leveraged investments viable.
AMC is the most public example, where they dumped their at the market offering into retail investors. But there's hundreds of other examples.
Big caps: CCL, TSLA both with multi billion at the markets with little dilution thanks to stock price being propped.
Small caps: Literally hundreds of names, check DilutionTracker on Twitter.
The parent post is correct in that an increase in the stock price in the secondary market has a material impact on the prospects of the company, especially if it's struggling. Raising money isn't the only mechanism, employee retention is another. In this sense, Soros' positive reflexivity has some merit.
In terms of stock issuances that’s surprisingly nuanced. Delta Airlines for example has 2.7% fewer outstanding shares in Dec 31 2020 vs Dec 31 2019.
But these do affect consumption.
1) Stonks going up means that companies have more capital (through stock issuances and equity raises). Companies use this capital to buy things and pay workers, so the dollars end up recirculating through the economy just like if a regular person spent it.
2) Buying houses is consumption. And increases in housing prices causes more building of houses. Which leads to people getting paid for building houses and creating materials which leads to money circulating.
Wealth inequality is bad, and Congress should have done more to help the American people. But the populist "rich people hoard money in stonks and houses so it doesn't recirculate" is also a complete misunderstanding.