Author Topic: One reason why the stock market is up: federal deficits  (Read 769 times)

Offline Mr. Bill

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One reason why the stock market is up: federal deficits
« on: June 24, 2019, 02:59:19 PM »
Yes, taxes are bad, tax reduction is good.

But let's ignore morality and just look at arithmetic.  The federal government decides it's going to turn down the cash flow from businesses by 35%, and make up the difference by borrowing money.  Businesses are then supposed to drastically increase investment and hiring, causing an economic boom which ends up paying for the deficit, and everyone wins.

What really happened: Most of the money was spent on stock buybacks, and to a lesser extent on dividends, thereby handing the funds back to the stockholders.

Here's an article with a bunch of numbers and graphs, focusing on Texas Instruments as an example:

Dallas Morning News, 6/23/19: Thanks, Uncle Sam! After tax cuts, Texas Instruments spent $5 billion on stock — three times more than R&D

I'm not passing judgment here -- just suggesting that the current stock market valuation may have a lot to do with temporary and unsustainable government actions.  Plan accordingly.

Offline Mr. Bill

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Re: One reason why the stock market is up: federal deficits
« Reply #1 on: June 28, 2019, 02:10:33 PM »
...Most of the money was spent on stock buybacks, and to a lesser extent on dividends, thereby handing the funds back to the stockholders. ...

Ditto for banks, which are reducing their capital reserves, rather than increasing their financial stability or their lending:

Reuters, 6/28/19: U.S. banks play cat-and-mouse game with Fed on capital returns

Quote
...The Federal Reserve on Thursday approved the capital plans of 18 banks in this year’s test, although it placed conditions on the U.S. operations of Credit Suisse Group AG (CSGN.S) after identifying weaknesses in its capital planning.

JPMorgan Chase & Co (JPM.N), one of the best capitalized U.S. banks, had to resubmit its proposal after the Fed assessed its initial plan would result in it falling below the minimum capital it is required to hold to cope with a downturn.

The bank eventually won the regulator’s approval for a capital plan that will increase its quarterly dividend to 90 cents per share from 80 cents, starting in the third quarter, and buy back up to $29.4 billion of shares over the next year. ...

As they push to maximize shareholder payouts, banks run a greater risk of seeing their capital levels dip below regulatory minimums when run through a hypothetical economic downturn. That’s what happened to JPMorgan this time. ...

There is little doubt that banks are becoming more headstrong. Fitch analyst Bain Rumohr said that, for this year, U.S. banks’ payout ratios - the percentage of earnings they payout as dividends and share buy backs - have risen to over 100% of earnings, compared with 80% to 90% last year.

In essence, some banks are planning to pay out more in share buybacks and dividends than they will earn in the current year. ...

Offline David in MN

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Re: One reason why the stock market is up: federal deficits
« Reply #2 on: July 01, 2019, 07:15:53 AM »
They're kind of hemmed in though. Sitting on cash is a no-no for big business and would anyone expect them to begin construction with a few months lead time? Even in the TI example they did do capital projects and used some of the extra cash to fund R&D. But I wouldn't expect them to have 40 years of R&D ready to go. But in the short term they can buy shares to give the board more control and a higher dividend with buybacks is usually a wash.

In another sense I get a little angry when I read articles like this. First, they skip over profit sharing and bonuses because people understand them. What people don't understand is that big companies often match employee retirement with company stock. [In fairness I couldn't find the TI policy on giving employees stock.] So many times when a company is doing buybacks and raising the dividend they are doing something for the employees.

Even if I didn't believe all this what is the harm in providing value to shareholders? That's the legal responsibility of the board after all. We all might retire earlier. That's not a bad thing.

The government debt is an issue. But when you add up all the taxes and compliance costs government is already the biggest cost of business.

Offline Mr. Bill

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Re: One reason why the stock market is up: federal deficits
« Reply #3 on: July 01, 2019, 01:06:17 PM »
I'm not too annoyed about the companies returning value to stockholders.  As somebody said in one of the articles, that's an entirely rational economic decision.

But that's not how tax reductions and deficit spending are sold to the public.  It's always supposed to decrease unemployment and increase wages and reduce the cost of borrowing, all at no cost to the taxpayer.  Instead, it ends up being a net transfer of wealth from taxpayers to stockholders.

Offline David in MN

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Re: One reason why the stock market is up: federal deficits
« Reply #4 on: July 01, 2019, 02:53:14 PM »
Most companies are on net taxpayers. Even those increased dividends and bonuses are taxed. If you count things like EPA and OSHA shakedowns as taxes companies pay a lot of tax.

It also has a dramatic international effect. We'd be better off being known as the country of low corporate taxes and attracting business here. Businesses can move and I'd loved to see a Honda, Diageo, Samsung, or Siemens become "American companies". Good for them and good for us. That's the real driver of controlling the corporate tax rate.

I'm also a deficit hawk but as a former director liked to say 'fish where the fish are'. The tax cuts are dwarfed by the warfare state.

All that said I also understand the sentiment that major tax changes are portrayed different than they in reality are (always).