Yes. Aggregate corporate profits have not gone up at all: <a href="https://fred.stlouisfed.org/series/A053RC1Q027SBEA" rel="nofollow">https://fred.stlouisfed.org/series/A053RC1Q027SBEA</a><p>There's a long way to go down to normalize this situation. I'm not saying this will happen, but the downside potential is enormous.<p>Also, don't forget about the 50% of US GDP ($11T) that have been loaded into US capital markets (both debt and equity) by foreigners. This is also hugely out of balance:
<a href="https://fred.stlouisfed.org/series/IIPUSNETIQ" rel="nofollow">https://fred.stlouisfed.org/series/IIPUSNETIQ</a>
It's certainly more nuanced than that. However, it does point out the fact that corporations focus too much on shareholder value as opposed to just making a good business system...except for the major players that is.<p>These the so called "too big to fail" types of companies which borderline monopolize market sectors like Amazon and Walmart. But they don't care during recessions because they're fine. They essentially are the government as they have a larger impact on your daily life than the actual government!<p>It's not so much that the stock buybacks are the straw that broke the camel's back, it's just another inevitable economic event that the invisible hand dealt. There is no stopping it. Otherwise we're just back in a labor economy again where money can't flow where irrational people deem they need to place it.
Do people not expect the market to go down when business revenues have been forced lower due to unforeseen circumstances? The fact is a valuation made in November 2019 had no way of taking this into account.<p>This isn't to say whether or not it's a bubble, but I am surprised at the number of people who think that stock prices going down is due to financial health of companies rather than people attempting to sell stocks either in a panick or because they suddenly need the liquid cash on hand (due to job loss) and are thus willing to sell at a loss.<p>And regardless of their merits or demerits, share buybacks do increase actual earnings per share, which is one method to valuate shares. It's like, if there are four partners in a partnership and two decide to buy out the other's shares, their shares are now worth twice as much, assuming the corporation continues making revenue.<p>Then I hear about corporate debt and how that forces layoffs. The fact is companies are not going to retain employees when they cannot conduct business, regardless of cash on hand. It's not even a moral concern. Companies can simply layoff their employees and have them receive unemployment insurance. Even if they wanted to be 'ethical' and provide health insurance, the cost of a severance package with 18 months of health insurance is less than paying them and providing health insurance. From a corporation's perspective, irrespective of how much cash or debt they have, layoffs are simply superior.
The bubble has been enabled by the Federal Reserve. Quantitative easing and money printing has served to inflate asset prices over many years.<p>For some reason markets going up is fine but when they inevitably decline sharply this is viewed as 'disorderly' and the Fed prints money to keep asset prices high. The Fed ensures that hedge funds have counter-parties to buy their toxic overvalued assets.<p>It's now clear that our economic system is run for the benefit of corporations and hedge funds.
This reminds me of a paper I read in the Quantitative Finance section on arXiv.org, in which the author claimed stock markets are being manipulated by big portfolio owners, because the gains happen overnight, while the intraday returns are negative. I'm not endorsing this idea, but I consider it a fun conspiracy theory and maybe it's a good time to throw this into the discussion here.<p><a href="https://arxiv.org/abs/1912.01708" rel="nofollow">https://arxiv.org/abs/1912.01708</a>
"When a measure becomes a target, it ceases to be a good measure." (Goodhart's law)<p>Does this apply here? It seems you could argue that profit is the one true number that _is_ a good measure, but it seems even that can be 'hacked' so that it isn't good anymore.
One man's bubble is another man's under valuation.<p>Big moves when there is big news (like a global pandemic say) are normal events.<p>The thing I find concerning is why the FED are "intervening". Dumping cash made sense during a cash shortage. But when there are actual, real, concerns about the future (coronavirus), price falls are perfectly correct. They don't need "fixing". Happy to be corrected if anyone knows?
Is the sky blue? The Pope catholic?<p>Vast money supply inflation, rock-bottom interest rates, stagnant wages, share buybacks. All accelerating over the last several decades.
Here's what I don't get: this article claims that big (since that's what matters for stock market index levels) business sits on a mountain of debt. At the same time many economists (e.g Yanis Varoufakis) claim that big business sit on mountains of cash kept in tax heavens rather that "working" for the benefit of the economy. Which way is it and are there any confirmed statistics to check it?
How about taxing corporate stock buyback transactions at a high enough rate to make it hurt, and keeping the money set aside for social safety net and training programs that support the people who are losing their jobs.<p>History has shown again and again that corporate tax cuts and repatriation schemes go right into stock buybacks and don't trickle down nearly enough to individuals. So tired of corporate welfare.
There was an interesting interview with Chamath Palihapitiya on CNBC last week. Whether you like him or not, he made some good points around buy-backs and earnings per share manipulation.<p>Worth listening to the full interview if you have 15 minutes: <a href="https://www.youtube.com/watch?v=NvEWez59fbI" rel="nofollow">https://www.youtube.com/watch?v=NvEWez59fbI</a>
Issuing debt to buyback stock isn’t ‘financial engineering’ its trying to address the fundamental problem of corporate finance. You have two sources of capital, debt and equity. What is the optimal capital structure of the firm.<p>There is no moral component as to whether a firm should be financed with debt or equity. While EPS has a smaller denominator, it also has a smaller numerator as earning will reflect the interest payments on the debt.
For a more balanced view, you can turn to JP Morgan's Guide to the Markets. It's a reliable summary of actual data so you can draw your own conclusions.<p><a href="https://am.jpmorgan.com/blob-gim/1383407651970/83456/MI-GTM_1Q20.pdf" rel="nofollow">https://am.jpmorgan.com/blob-gim/1383407651970/83456/MI-GTM_...</a>
OSAM has a great data-driven analysis of this question and end up on the other side in the conclusion: <a href="https://www.osam.com/pdfs/whitepapers/_2_Commentary_BuybacksBearsBulls_Oct-2016.pdf" rel="nofollow">https://www.osam.com/pdfs/whitepapers/_2_Commentary_Buybacks...</a>
One use of financial engineering is to distill risk into very narrow products that allow innovative instruments to be created.<p>The problem is that systemic risk is then distilled out of the priced instruments that are created, yet those instruments are significantly more vulnerable to systemic risk than simple equities, etc.
Blog spam that is effectively just a gish gallop of weak points that are each contentious on their own and it uses citations of Seeking Alpha which is about as good as a citation of Medium.com.
They've buried the lede. In the last sentence, in the last 6 words.<p>> With Corporate profit growth unmasked and the Baby Boomer’s transition into retirement, it seems unlikely that stocks will make a quick return to their prior levels unless governments engage in massive asset inflation.<p>It is not the Federal Reserve's mandate to inflate asset values, however it tends to be a consequence of their mission to support low unemployment and some stable, positive inflation. We have $6 trillion in emergency stimulus arriving shortly -- two thirds of that support is monetary policy.
I find this scary and telling.<p>"It is too early to say where the bottom is to this recession, but we have reason to believe the Millennials and Generation X do not have the resources to purchase the stock that Baby Boomers want to sell at prior market highs. With Corporate profit growth unmasked and the Baby Boomer’s transition into retirement, it seems unlikely that stocks will make a quick return to their prior levels unless governments engage in massive asset inflation."<p>It's almost like bankrupting a generation by forcing them through punishingly expensive higher education, obscene healthcare costs, absurd cost of living in major metropolitan areas, and stripping worker benefits makes an entire generation of this country's youth unable to prosper like their predecessors. I truly have no idea what will be left behind for me and my peers, when all of this is said and done.