It was one thing for centuries prior for business to have been single-mindedly focused on the pursuit of profit, and something altogether more Darwinian to be focused solely on share price. As we've seen for the past several decades often the most profitable companies i.e. "value" companies have the lowest share prices, whereas the least profitable companies i.e. "growth" companies garner the highest share prices.
The single minded pursuit of growth distorts in a number of ways, most specifically in the willingness and ability to use capital as a weapon to destroy competition. Meaning the company with the deepest pockets survives by taking market share away from every other company, using predatory pricing. This Darwinian business model which used to be regulated by Anti-trust law is now manifest across all major sectors. Wall Street has been rewarding Amazon for 25 years for decimating the retail sector.
In addition, it should come as no surprise that the share buyback which had previously been illegal, was legalized in the 1980s. Subsequently, share buybacks have grown from 0% of GDP to 4% of GDP.
"a growing body of research that might help explain why economic growth is so sluggish, productivity so low, and increases in worker compensation so piddling, even as the stock market is surging and corporate profits are at historical highs. Companies are working overtime to make their owners richer in the short term, more so than to improve their longer-term competitiveness or to invest in their workers."
This alchemization of the economy speaks to the bigger underlying problem - which is this view that the stock market and economy are somehow separate entities. The complete divorcing of underlying economic value creation from wealth creation. It should come as no surprise that the U.S. stock market is outperforming every other world stock market on a dollar basis - because only U.S. policymakers allow financial markets to supersede the underlying economy. Post-2008, U.S. businesses were willing to extract far larger wage and job concessions from the U.S. workforce than overseas companies were permitted to extract, in the name of continued profit growth.
Apologists for the U.S. system who consider it "socialism" to put the local economy ahead of alchemized share price would do well to realize that as we saw in the last cycle, stocks can continue to ignore growing economic risk for a very long time. But in the end, the health of the economy is always the determining factor for share price.
Alchemists pointing to the current high level of earnings per share which is a function of stock buybacks, which are a zero sum function of economic plundering, are only fooling themselves. Given corporate debt as a % of GDP is at all time highs, corporate balance sheets are now a call option on indefinite economic growth. Growth they themselves are happily undermining.
No one will be more surprised than those holding on to worthless chits when the music's over.
"The retail industry spent nearly 80 percent of its profits on buybacks"
No one will be more surprised than those holding on to worthless chits when the music's over.
"The retail industry spent nearly 80 percent of its profits on buybacks"
