One of the great themes of our time is that we’ve largely lost a sense of the common good – that for most of us, our actions are based on what’s good for us, and screw everyone else.
Which is why the following chart is not surprising, courtesy of Zero Hedge:
Over the past eight years, we’ve seen the stock market more than triple, from 6,627 in March 2009 to 21,637 as of Friday (July 14, 2017). But as the chart shows, households and institutions have been net sellers in that time. Instead, one of the main reasons that stocks have gone up is that publicly-listed companies have been using cheap debt for stock buybacks, reducing the number of shares in the market.
Why would they do that? They do it to make their corporate performance, commonly measured in earnings per share, look better than it is. Think about a business with a million outstanding shares, and a net profit of a million dollars. That gives you earnings per share of $1.00. Now suppose that business has a bad year, and profits drop to $750,000, which is a drop of 25%. Sounds bad, right? Not necessarily; just use virtually-free debt to buy back half your shares, and your earnings per share actually increase to $1.50, an increase of 50%!
And why would companies do that, rather than use that debt (or, god forbid, those earnings) to invest in the company’s growth, either through hiring, R&D, or acquisitions? Because increasing earnings per share pays off for management, who commonly get bonuses and raises based on that metric, as well as an increase in their own stock portfolios. It’s good for the managers but bad for the company, which increases its debt load and doesn’t see any investments in its future.
So don’t assume the growth in the market indexes is a reflection of a healthy economy; like most things today, it’s actually a reflection of peoples’ greed and their me-first, screw-everyone-else mentality.