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We're living through an unprecedented global experiment, wherein central banks manipulate interest rates in order to encourage investment. The reasoning (as I u

We're living through an unprecedented global experiment, wherein central banks manipulate interest rates in order to encourage investment. The reasoning (as I understand it) is that if companies can borrow money with low interest rates, they're more likely to invest. By the looks of stock prices, this strategy appears to be working. But when you look under the hood, it's mostly self-serving financial engineering, at an unprecedented scale. As the article points out, companies use the cheap money to manipulate their share prices. This isn't real investment. "The later stages of the 2009-2017 bull market are a valuation illusion built on share buyback alchemy. Absent this accounting trick the S&P 500 index would already be in an earnings recession." "Rather than investing to increase earnings, managers simply issue debt at low rates to reduce the shares outstanding, artificially boosting earnings-per-share by increasing balance sheet risk, thereby increasing stock prices." "Share buybacks have accounted for +40% of the total earning-per-share growth since 2009, and an astounding +72% of the earnings growth since 2012."

tfehring 9y ago
>We're living through an unprecedented global experiment, wherein central banks manipulate interest rates in order to encourage investment. The reasoning (as I understand it) is that if companies can borrow money with low interest rates, they're more likely to invest. By the looks of stock prices, this strategy appears to be working. Investment actually seems to be quite low right now by most metrics, relative to the supply of capital seeking investment opportunities. See, e.g., [0] (2017) Also, as I’m sure you might expect, the reason behind high stock valuations is more complex than this. Notably, stock represents a claim on future cash flows, and lower interest rates mean that the expected present value of those cash flows is higher when all else is equal. Highly recommended reading related to this: [1] [0] https://www.brookings.edu/articles/secular-stagnation-even-truer-today-larry-summers-says/ https://www.brookings.edu/articles/secular-stagnation-even-t... [1] https://johnhcochrane.blogspot.com/2018/02/stock-gyrations.html https://johnhcochrane.blogspot.com/2018/02/stock-gyrations.h...
- kaycebasques 9y ago
  I’m with you. I didn’t mean to imply that investment is actually high. I just meant that by the looks of stock prices, one might suppose that investment is high. From what I understand, the central bankers hoped that flooding the markets and driving down interest rates would force investment into the real economy (for lack of yield anywhere else), but that doesn’t appear to be actually happening.

tfehring 9y ago

>We're living through an unprecedented global experiment, wherein central banks manipulate interest rates in order to encourage investment. The reasoning (as I understand it) is that if companies can borrow money with low interest rates, they're more likely to invest. By the looks of stock prices, this strategy appears to be working. Investment actually seems to be quite low right now by most metrics, relative to the supply of capital seeking investment opportunities. See, e.g., [0] (2017) Also, as I’m sure you might expect, the reason behind high stock valuations is more complex than this. Notably, stock represents a claim on future cash flows, and lower interest rates mean that the expected present value of those cash flows is higher when all else is equal. Highly recommended reading related to this: [1] [0] https://www.brookings.edu/articles/secular-stagnation-even-truer-today-larry-summers-says/ https://www.brookings.edu/articles/secular-stagnation-even-t... [1] https://johnhcochrane.blogspot.com/2018/02/stock-gyrations.html https://johnhcochrane.blogspot.com/2018/02/stock-gyrations.h...

kaycebasques 9y ago
I’m with you. I didn’t mean to imply that investment is actually high. I just meant that by the looks of stock prices, one might suppose that investment is high. From what I understand, the central bankers hoped that flooding the markets and driving down interest rates would force investment into the real economy (for lack of yield anywhere else), but that doesn’t appear to be actually happening.