Is the next recession on the way?

Returning profits to shareholders through buybacks and dividends accounted for 95 percent of all earnings in 2014. As a result, each additional dollar of corporate earnings now translates to under 10 cents of reinvestment, according to a study by J.W. Mason of the Roosevelt Institute. This explains why business investment is at record lows.  It’s because the bulk of earnings is being recycled into buybacks, over $2.3 trillion dollars since 2009 to be precise. Corporations no longer look for ways to grow their businesses, expand operations, hire more employees or improve productivity.  Instead, they look for the quick fix, that is, load up on debt, buy more shares, goose the stock price, and walk away with the loot. Last year, companies spent $553 billion to repurchase outstanding shares, just short of the record $589.1 billion in 2007. Large companies like Apple, General Motors, McDonald’s, Pfizer, Microsoft and more have engaged in buybacks in recent years.  Buybacks are driving the stock market higher. Corporations purchase buybacks with credit. The level of corporate debt relative to the size of the economy… is now at its highest level ever. As corporations have borrowed more and more money, the level of corporate debt relative to the size of the economy has continued to increase. As the chart below shows, this ratio is now at its highest level ever — even higher than it was in 2007, before the last debt-fueled economic implosion. Importantly, corporate net debt — the amount of debt that corporations are carrying minus the cash they have on hand — is also at its highest level ever as a percent of the economy. Those stock prices are a bubble and that a significant stock market shakeout could leave some of biggest corporations teetering towards insolvency.

The Wall Street Journal explains:

“Companies are increasingly turning to accelerated share repurchase agreements…to return cash to shareholders and secure an immediate boost to per-share profits…..But these turbo-charged stock buybacks can backfire, especially when a steep market plunge—such as the 5.3% drop in the markets over the past two trading days. That’s because a steep plunge in stock prices can force the companies to potentially pay more to buy the shares through an ASR than what they would pay if they purchased the shares over time on the open market.
 
“Things can go wrong,” said Robert Leonard, head of specialty equity transactions at Citigroup Inc…

Michael Hudson is a distinguished research professor of economics at the University of Missouri, Kansas City. His latest book, which we promise to unpack in detail very soon, is Killing the Host: How Financial Parasites and Debt Destroy Global Economy. He explains: 

Companies are under pressure. The managers are paid according to how well they can make a stock price go up. And they think, why should we invest in long-term research and development or long-term developments when we can use the earnings we have just to buy our own stock, and that’ll push them up even without investing, without hiring, without producing more. We can make the stock go up by financial engineering. By using our earnings to buy their own stock. So what you have is empty earnings. You’ve had stock prices going up without corporate earnings really going up. If you buy back your stock and you retire the shares, then earnings per shares go up. But all of a sudden the whole world realizes that this is all financial engineering, doing it with mirrors, and it’s not real. There’s been no real gain in industrial profitability. There’s just been a diversion of corporate income into the financial markets instead of tangible new investment in hiring…

… The job of the Federal Reserve is to increase the price of wealth and stocks and real estate relative to labor. The Federal Reserve is sort of waging class war. It wants to increase the assets of the 1 percent relative to the earnings of the 99 percent, and we’re seeing the fact that this, the effect of this class war is so successful it’s plunged the economy into debt, slowed the economy, and led to the crisis we have today…. when the 1 percent lose money, they scream like anything, and they say it’s the job of the 99 percent to bail them out.