Seriously? Do we now think the venerated Wall Street firm is making heavy contributions to the likes of Bernie Sanders, Charles Schumer and maybe even, cough cough, AOC? “Preposterous!” any company spokesperson would undoubtedly shout if one were actually to pose such a question. But some recent articles in Financial Advisor, most notably one dated 4/9/19, raise serious questions about the potential unintended consequences of views propagated by the firm.
A World Without Buybacks
That’s the title of the Goldman paper described by FA on 4/9/19. According to the summary by writer Lu Wang, Goldman believes stock valuations and would be threatened if buybacks are outlawed, as some big name Democrats propose:
“That’s because corporate demand has far exceeded that from all other investors combined, according to strategists led by David Kostin. Since 2010, net buybacks averaged $420 billion annually, while buying from households, mutual funds, pension funds and foreign investors was less than $10 billion for each, Federal Reserve data compiled by Goldman showed.
“‘Repurchases have consistently been the largest source of U.S. equity demand,’ the strategists wrote in a note Friday. ‘Without company buybacks, demand for shares would fall dramatically.’”
On behalf of those who don’t speak politics-ese, allow me to translate:
“That’s because corporations aside, demand for equities is nowhere near where it needs to be in order to justify current valuations. So buybacks (with funds inflated by a generous corporate tax cut that could have and were supposed to have trickled down into the pockets of ordinary people) are in fact accomplishing nothing more than continuing to inflate stock prices and, thereby, continuing to inflate the wealth of insiders who benefit from stock compensation, and of course, the rest of the 1% that cares about and benefits from higher stock prices.”
Is My Translation Correct?
In terms of actual financial and economic logic, no. And Goldman, among others, has said much regarding the underlying realities (efficient capital allocation, the reality that corporations are actually reinvesting, etc.). But what I offered was a translation of Goldman’s pro-buyback thesis (not necessarily what Goldman meant to say but definitely what many will hear).
I’m not offering an economic thesis of my own. I am, however, offering a political thesis . . . .
Optics Matter
Picture two candidates for an important public office.
One gestures to and addresses members of a live audience and/or TV cameras and rails about inequalities in income and wealth distribution and prompts listeners to compare their own circumstances with those of the 1%.
The other says things like “Executives whose compensation depends on EPS . . . did not allocate a higher proportion of 2018 total cash spending to buybacks than companies where management pay is not linked to EPS” and “Growth investment ‘has accelerated sharply’ since the tax reforms passed, contradicting ‘the widespread belief that the changed policies led only to a surge in share repurchases . . . . Companies have boosted buybacks relative to dividends to repatriate overseas profits and because of greater flexibility to match earnings volatility . . . .” (These quotes come from Joanna Ossinger’s 3/8/19 Financial Advisor’s article discussing Goldman’s views.)
Which candidate is more likely to inspire a crowd. Which candidate is more likely to produce appealing sound bites and 10-second footage that can be broadcast and re-broadcast again and again? Which candidate’s campaign is better able to produce catchy slogans for t-shirts and bumper stickers? Which candidate is more likely to win the (yet-to-be-and-hopefully-never-to-be-created) Nobel Prize for Twitter Excellence?
Capitalism Works, Socialism Fails
At this point in time, does anybody willing to consider the topic objectively need me to elaborate?
But Socialism Is Easy To Understand While Capitalism Is Hard
From each according to his ability, to each according to his needs. What else need a socialist or wannabe-socialist say? And as we look around us, we see how easy it is for “democratic socialists.” whatever those are to subtly advocate such notions while avoiding references to Venezuela and the like.
Turning to capitalism, how do you explain that in a sound bite? Supply and demand in equilibrium? Speaking for myself, I never did figure out during my initial undergrad Economics course what happens to people who demand food but can’t get any because the price at which they demand it is below the price at which supply and demand are in equilibrium. I didn’t really start dialing in until my first year of grad school, when the professor I had was an exceptionally great explainer. How far might a candidate at a televised debate get in explaining elasticity, the Philips Curve, etc. before the moderators shout them down with admonitions to the effect that their 60 seconds are up? Should they veer off into Modigliani Miller and balance sheet structure? Dare they even touch upon the differences between Keynesian and Monetarist economic views?
I presume you get the picture. (If not, I suggest reading All The King’s Men, at least far enough to see how Willie Stark, a fictional version of Huey Long, started winning at the polls, and if you’re not into literature, go on Google and acquaint yourself with Amazon’s misadventures in New York City.)
Freedom Versus Sensibility Of Speech
We live in a culture that places extremely high value of freedom of speech, so much so that we often think the First Amendment applies even when it doesn’t (it prohibits government restraints on speech, not restraints imposed in the private sector).
But at what point does speaking “freely” become unwise because it may spark consequences directly contrary to what the speaker desires?
Goldman’s views on buybacks are objectively correct. But are they likely to enhance the likelihood that enemies of buybacks will be held at bay, or are they likely to enhance the probability that enemies of buybacks will prevail?
As noted above, capitalism and market-based economics are hard to explain. With all the brain-power that can be marshaled by those who understand why these are good, can’t some of it that can be deployed to educate, in a manner that can be broadly and widely understood as opposed to just putting publishing pieces that are comprehensibly only by those who already agree? And unless or until this can happen (if it can or if it will happen), might corporate executives consider a suboptimal solution today (pull back on buybacks rather than continuing to splash them into the faces of opponents) in order to prevent a much more severe and potentially prolonged sub-optimal situation down the road?
Sometimes, it’s better to be strategic than to be right. (See, e.g., the role of Odysseus in The Iliad, Machiavelli, Three Kingdoms).
Acti-quant 