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Pensions are relying on guaranteed ~8% returns. If a company doesn't think it can spend its profits wisely, and it chooses to buy back its own stock and enhance

Pensions are relying on guaranteed ~8% returns. If a company doesn't think it can spend its profits wisely, and it chooses to buy back its own stock and enhance the stock price, it indeed helps retirees, sovereign wealth funds, etc. It is quite rich that companies load up on debt so hard that the slightest blip and they collapse. But IMO the problem is not with that situation - it's that the government doesn't simply let these businesses fail. Bankruptcy can wipe out the shareholders while letting the business be purchased, re-capitalized, and brought back with more prudent owners. The government has trained the private sector to expect to be bailed out when a black swan event occurs, so they no longer worry about black swan events.

shawnz 7y ago
> The government has trained the private sector to expect to be bailed out when a black swan event occurs, so they no longer worry about black swan events. Why should they? How are bailouts any better or worse than having companies leverage less and therefore having less growth?
- chillacy 7y ago
  Even if the two turned out exactly the same in the long run, the slow path has lower volatility than cycles of bubbles and bust.
  - shawnz 7y ago
    Why is it good to have lower volatility? Doesn't that usually mean lower expected returns?
    - chillacy 7y ago
      Volatility and returns are not the same thing, but you're correct that people are usually willing to pay a premium to reduce volatility (for instance consider that Vegas Roulette has high volatility and negative returns, so plenty of people leave the table winning money). A lot goes into the price of a stock. At a minimum it includes some sort of fundamental value (price of all assets) plus some discounted expectation of future earnings. These two things don't actually change that quickly, so any wild price swings on top of that are probably not connected to the fundamentals.
dragonwriter 7y ago
Bankruptcy (which doesn't always result in companies failing) is a form of government bailout. You can't criticize bailouts and government unwillingness to let companies fail, and at the same time point to bankruptcy as a desirable tool.

shawnz 7y ago

> The government has trained the private sector to expect to be bailed out when a black swan event occurs, so they no longer worry about black swan events. Why should they? How are bailouts any better or worse than having companies leverage less and therefore having less growth?

chillacy 7y ago
Even if the two turned out exactly the same in the long run, the slow path has lower volatility than cycles of bubbles and bust.
- shawnz 7y ago
  Why is it good to have lower volatility? Doesn't that usually mean lower expected returns?
  - chillacy 7y ago
    Volatility and returns are not the same thing, but you're correct that people are usually willing to pay a premium to reduce volatility (for instance consider that Vegas Roulette has high volatility and negative returns, so plenty of people leave the table winning money). A lot goes into the price of a stock. At a minimum it includes some sort of fundamental value (price of all assets) plus some discounted expectation of future earnings. These two things don't actually change that quickly, so any wild price swings on top of that are probably not connected to the fundamentals.

dragonwriter 7y ago

Bankruptcy (which doesn't always result in companies failing) is a form of government bailout. You can't criticize bailouts and government unwillingness to let companies fail, and at the same time point to bankruptcy as a desirable tool.