If This Isn’t Stock Manipulation, I Don’t Know What Is

There is a growing chorus surrounding the topic of stock buybacks and whether they should be banned. Most recently, Chuck Schumer and Bernie Sanders wrote a piece for the New York Times arguing that buybacks are nothing more than corporate self-indulgence that leads to long-term harm to both companies and the economy. This may be true and, with equity valuations at or near all-time highs, buybacks certainly appear uneconomic at current prices but this is no reason to ban them. Companies should be allowed to throw money down the drain if they so choose. It’s a free country, as they say.

That said, there is a very good reason for banning buybacks and it’s the very same reason they were banned for decades before the Reagan administration allowed them to recommence in 1982: They are nothing more than stock manipulation on a massive scale.

As John Authers recently pointed out, “For much of the last decade, companies buying their own shares have accounted for all net purchases. The total amount of stock bought back by companies since the 2008 crisis even exceeds the Federal Reserve’s spending on buying bonds over the same period as part of quantitative easing. Both pushed up asset prices.” Let me rephrase that: there have been essentially no other buyers of equities over the past decade besides the companies themselves and they’ve spent over $4 trillion at it, even as liquidity has fallen to record lows.

So it’s not hard to understand how valuations have gone to the moon. Without that $4 trillion in stock buybacks and in a market where trading volume has been falling for decades they never would have been able to soar as high as they have. The chart below plots “The Buffett Yardstick” (total equity market capitalization relative to gross national product) against total net equity issuance (inverted). Since the late-1990s both valuations and buybacks have been near record highs. Is this just a coincidence? Considering all of the above, I think it’s safe to say it’s not.

Source: Seeking Alpha

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