12 ms·

I think the article brings up too many separate concepts without sufficiently tying them together. One of the most basic concepts you have to accept to agree w

by dangus 4y ago

I think the article brings up too many separate concepts without sufficiently tying them together. One of the most basic concepts you have to accept to agree with the premise of the article is that the Fed kept interest rates low to transfer wealth to the wealthy. > After the Great Recession, the Federal Reserve instituted a zero or near-zero interest rate regime. The philosophy behind it was simple: > > The Fed’s “strong and creative measures” would inflate stock prices, which would lead those holding stocks to feel wealthier and more confident, and then they’d spend a little more, and some droplets of this might trickle down to the people that are working in the real economy.5 Of note is the fact that the citation for this quote is some random dude Wolf Richter's website. The guy's a former car dealership manager, and that's the extent of his financial background. A much less sinister and simpler explanation exists: high inflation rates are bad for pretty much the entire economy regardless of level of wealth. We already saw this in action in the 1970s. I also take issue with a lot of the numbered points in the article. These points seem to avoid the more nuanced multiple factors behind those specific developments: 1. Tech companies are flushed with cash because it's the highest margin business out there. There was no such thing as software company profit margins in the olden days of corporate behavior. 3. The buyback graph didn't show R&D spending decreasing at all or otherwise being impacted by stock buybacks. The cited HBR article doesn't directly link the lack of R&D expenditures to stock buybacks. Aren't there companies out there that have minimal R&D expenses? S&P 500 companies like Dollar General, Costco, Robert Half, and CBRE Group? 4. Isn't the biggest reason to link CEO pay to stocks to avoid personal income tax? That's just a tax efficiency issue. 5. Aren't there other reasons why Vanguard is popular besides the popularity of stocks in general? I always thought it was because the Boglehead ideology spread and Vanguard's low expense ratios proved to be attractive. I see this as "passive versus active investing" not "investing in stocks versus investing in something else." 7. Who says FIRE isn't productive? Where do you think those "tech companies flush with cash" got the cash from?

s1artibartfast 4y ago
I never understood the negative attention stock buybacks have received relative to dividends. They do basically do the same thing, but nobody is offended when companies pay a dividend.
- salawat 4y ago
  In a stock buyback, the investor only is made whole by "exiting" the stock. I.e., if that stock has voting rights, and you're more interested in being able to influence as a shareholder, you're left out of the "lifting of every risk sinker" when a company does a buyback. In fact, it guarantees that the amount of shareholder influence as a whole decreases, because if someone were to reacquire that share it would be more expensive now. Stock buybacks are basically attempts to shirk leashes, freeing execs/other shareholders from the ongoing influence of exiting shareholders. Dividends on the other hand, are straightforward returns on what was a commitment to sink risk. An ongoing source of income for the shareholder as a result of the company thriving. It's a straight up payment of a coupon off a bond. There is no need to exit/re-enter required. Your # of shares do not move. Therefore your relative investment stays as it was, whereas with the buyback, you're handing back your ongoing leash and influence on the company. Stock buybacks are therefore not equivalent in any way to paying of dividends. I don't know why this is so hard to understand.
  - s1artibartfast 4y ago
    If a company does a buyback, shouldn't you still have a higher percent control if you dont sell any of your holdings, and the same % control if you do sell the dividend equivalent Imagine a company has 100 shares and I own 10. If they company buys back 50, the stock price will double, and my % ownership goes up from 10 to 20%. I can sell down to 10%, the same control I had before to take my profits. What am I missing here?
    - deleted 4y ago
      [deleted]
    - NickNameNick 4y ago
      Wouldn't that friend on who's voting the stock that company holds in itself? Is it the CEO? The board? The chairman? Or are the stocks cancelled from the total?
      - 4y ago
antonomon 4y ago
Regardless of Wolf Richter, the Wealth Effect is an actual philosophy tapped into by Ben Bernanke and others post-2009 > In defending the Fed’s bond-purchasing plan late last year, Bernanke said that “higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion” (2011) https://fortune.com/2011/04/21/wheres-the-wealth-effect/ https://fortune.com/2011/04/21/wheres-the-wealth-effect/
- KKKKkkkk1 4y ago
  The Fed was buying up government bonds in order to reduce long-term interest rates. The focus of Fed policy has always been on the long-term interest rates as a tool to control inflation/unemployment, and raising the demand for government bonds is the most direct way to lower the long-term interest rates. The quote from fortune.com is taking Bernanke's words out of context. Here is the original quote: This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate this additional action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.
- dangus 4y ago
  The difference is in the way Wolf Richter presents the concept and mischaracterizes it as trickle down economics. Wolf says: > …which would lead those holding stocks to feel wealthier and more confident, and then they’d spend a little more, and some droplets of this might trickle down to the people that are working in the real economy This is distinctly different than what Bernanke says in that quote. Bernanke is saying that the mere economic indicator of higher stock prices boosts consumer confidence, like when someone sees a lower gas price and feels better about the economy. I have to agree with Bernanke there. The layperson sees a number on the news that says “economy good” and they worry less about losing their job or spending too much. Richter misunderstands the wealth effect to be the literal spending of money by people who own assets like stocks and the trickling down of that money. Even if the wealth effect benefits the wealthy more, trickle down economics is not the same concept.

by dangus 4y ago

s1artibartfast 4y ago

I never understood the negative attention stock buybacks have received relative to dividends. They do basically do the same thing, but nobody is offended when companies pay a dividend.

salawat 4y ago
In a stock buyback, the investor only is made whole by "exiting" the stock. I.e., if that stock has voting rights, and you're more interested in being able to influence as a shareholder, you're left out of the "lifting of every risk sinker" when a company does a buyback. In fact, it guarantees that the amount of shareholder influence as a whole decreases, because if someone were to reacquire that share it would be more expensive now. Stock buybacks are basically attempts to shirk leashes, freeing execs/other shareholders from the ongoing influence of exiting shareholders. Dividends on the other hand, are straightforward returns on what was a commitment to sink risk. An ongoing source of income for the shareholder as a result of the company thriving. It's a straight up payment of a coupon off a bond. There is no need to exit/re-enter required. Your # of shares do not move. Therefore your relative investment stays as it was, whereas with the buyback, you're handing back your ongoing leash and influence on the company. Stock buybacks are therefore not equivalent in any way to paying of dividends. I don't know why this is so hard to understand.
- s1artibartfast 4y ago
  If a company does a buyback, shouldn't you still have a higher percent control if you dont sell any of your holdings, and the same % control if you do sell the dividend equivalent Imagine a company has 100 shares and I own 10. If they company buys back 50, the stock price will double, and my % ownership goes up from 10 to 20%. I can sell down to 10%, the same control I had before to take my profits. What am I missing here?
  - deleted 4y ago
    [deleted]
  - NickNameNick 4y ago
    Wouldn't that friend on who's voting the stock that company holds in itself? Is it the CEO? The board? The chairman? Or are the stocks cancelled from the total?
    - 4y ago

antonomon 4y ago

Regardless of Wolf Richter, the Wealth Effect is an actual philosophy tapped into by Ben Bernanke and others post-2009 > In defending the Fed’s bond-purchasing plan late last year, Bernanke said that “higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion” (2011) https://fortune.com/2011/04/21/wheres-the-wealth-effect/ https://fortune.com/2011/04/21/wheres-the-wealth-effect/

KKKKkkkk1 4y ago
The Fed was buying up government bonds in order to reduce long-term interest rates. The focus of Fed policy has always been on the long-term interest rates as a tool to control inflation/unemployment, and raising the demand for government bonds is the most direct way to lower the long-term interest rates. The quote from fortune.com is taking Bernanke's words out of context. Here is the original quote: This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate this additional action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.
dangus 4y ago
The difference is in the way Wolf Richter presents the concept and mischaracterizes it as trickle down economics. Wolf says: > …which would lead those holding stocks to feel wealthier and more confident, and then they’d spend a little more, and some droplets of this might trickle down to the people that are working in the real economy This is distinctly different than what Bernanke says in that quote. Bernanke is saying that the mere economic indicator of higher stock prices boosts consumer confidence, like when someone sees a lower gas price and feels better about the economy. I have to agree with Bernanke there. The layperson sees a number on the news that says “economy good” and they worry less about losing their job or spending too much. Richter misunderstands the wealth effect to be the literal spending of money by people who own assets like stocks and the trickling down of that money. Even if the wealth effect benefits the wealthy more, trickle down economics is not the same concept.