DID YOU KNOW STOCK BUYBACKS USED TO BE ILLEGAL BECAUSE THEY WERE CONSIDERED STOCK MANIPULATION?
Here is a throwback to something we wrote on March 18th of 2020, but not much has changed since then aside from a market recovery I can’t explain without pointing out even more manipulation…
With stock buybacks – also known as “stock repurchasing” making headlines, I'm starting to get more questions on them. I've given my opinion on them, but I'm not sure that I fully explained what's going on so I will now.
Here are the basics and why they've been so impactful...
We're a consumer nation and in recent years we've been on a massive spending spree which means profits are up for many large companies. Take into account all the massive tax breaks going to them too and that's a lot of extra cash these companies have. Now we're told we need to help large companies make lots of extra money so that they can increase R&D, expansion, job creation, raise wages, etc., well is that what they did? Nope, what they did was use that excess cash to buy back stocks.
Why is that so bad? Well, the government helping businesses gain more cash was suppose to go to all the things previously mentioned and they didn't. All those things mentioned expand the economy and are good. What stock buybacks do is increase the market which only helps a select few until it doesn't anymore. Much like the massive losses you're seeing now.
Stock buybacks are when companies use their excess cash to repurchase their own shares. By purchasing these shares it limits what's available to the public and increases their value. The more people buying the more the market goes up. Very basic stuff.
Now to make things worse interest rates have been at extreme lows since the crash in 2008. Interest rates drop as a way to stimulate the economy, increase loans, which increase spending. Make sense so far? Well the market's gone skyhigh, yet the interest rates remained low, very low in fact. This shows that the economy isn't as stable as the rise in the market would lead you to believe.
With interest rates so low, this allowed companies to borrow even more money, which allowed them to buy even more stocks back, which allowed the markets to grow even higher without any real validity.
That's why something as simple and basic as stock buybacks has been so terrible for our economy.