The above chart shows the number of companies in the S&P index that announced share buybacks in the last 3 years, marked in red or blue depending on whether their earnings (as measured by EPS) was shrinking or growing. As the saying goes - a picture is worth thousand words. So in this post, I'll save those thousand words for another day, and just leave the reader to draw their conclusions on how financial engineering took over our world. It is telling that even with buybacks, so many companies' EPS was on a downtrend.
PS: Running one of the largest Share Repurchase programs in the industry is my day job, and I'd be the first to say that share buybacks should be an important part of a company's business model and tool for managing capital structure. However, the operative word is "part" - when allowed to run amok like it was in the past few years, it is a colossal waste of shareholder wealth.
I have been wondering about a gas tax that is indexed in some progressive manner to an economic measure like GDP growth or inflation or … heck, why not - unemployment rate. Why, you may ask, would I imagine such a strange creature?
We need to be cured of our addiction to gas guzzlers, as Tom Friedman so eloquently argues in his column in NYT. Its a great piece, and should be read in its entirety, but the following paragraph struck me as especially powerful:
...A gas tax reduces gasoline demand and keeps dollars in America, dries up funding for terrorists and reduces the clout of Iran and Russia at a time when Obama will be looking for greater leverage against petro-dictatorships. It reduces our current account deficit, which strengthens the dollar. It reduces U.S. carbon emissions driving climate change, which means more global respect for America. And it increases the incentives for U.S. innovation on clean cars and clean-tech....
However, as Mr. Friedman himself acknowledges, Raising taxes in a recession is a no-no.
And that is how I came to hit upon the idea of tying the gas tax to some economic measure. This will allow the tax to be passed even now, amidst immense economic pain, since the tax will kick in at a very low level at current levels of economic activity. Just like the automatic economic stabilizers are supposed to work, the tax will kick up as economic activity picks up. This will prevent gas junkies from going after their favorite poison (SUV, big block coupes) and abandoning enviro-friendly cars as their budgets become less cramped.
It is true that indexing a tax to some economic measure involves administrative overhead that is not insignificant: updating gas station billing systems all over the country every quarter or even year would require some non-trivial cost and effort. However, the idea of indexing a tax to an economic metric is not exactly unknown - at least one developed nation that I know of (New Zealand) has its personal income tax indexed to inflation. In order to prevent us from falling off the wagon so as to speak, we need to become serious about gas tax now, while ensuring that we don’t cause more hurt to families already squeezed in the current situation. An index gas tax can help.
Casey Mulligan (an economist from UChicago, the school everyone loves picking on these days) in a guest blog in NYT has invited a lot of derision for his proposal that we are not really facing a shortage of jobs but that of labor (and quite justly for such a slip-shod presentation of ideas).
However, I believe it is worth considering how the impending demographic falling-off-the-cliff (or population implosion - even China and Iran will have more 55+ than 16- population by 2020) might have impacted various asset valuation assumptions? I have been trying to formulate/ formalize this idea, and thought Mulligan's idea that labor shortage might be a candidate. Only, I don't quite believe that the labor shortage is now (in the present), but it is in the near future, and what are current valuations but earnings from future output discounted to the present? If the expectation is that in the near future a sharp demographic decline will sharply decrease the output, it has to be reflected in current valuations. Of course, severe illiquidity in the markets have also caused the effective discount rates to skyrocket (causing valuations to drop like a rock) - but hopefully the policy actions taken and in the pipeline will cause this rise to reverse .. but it will be hard to reverse the demographic falling-off-the-cliff.
I have been wondering how the VC industry is different from a regular Ponzi scheme. Seems that I am not alone .. more accomplished folks like Dr. Utpal Bhattacharya, point out that there are legal Ponzi schemes as well.
After all, it involves a tight circle of (rich) people pooling in their cash and betting on some technology (some call it fad), betting on the chance that a wider circle of (less rich, but larger in number) people will be drawn in by the fad at which point they can pull their cash (times X) from that bet and into the next one, leaving the wider circle holding the bag of dirty diapers. Rinse, repeat.
I actually did find a difference between regular Ponzi schemes and VC-led ventures, at least for a very small fraction. The difference is in sustainable ventures (I almost said successful, but in the VC world, not all successful ventures are sustainable - they just need the fad to succeed long enough to pull the money with fat returns). These actually add value to the cash from the tighter circle, in the form of intellectual capital (patents, efficient organizations, supply chains etc.). So when the tighter circle pulls out, the wider circle might not be left holding a bag of just dirty diapers .. there might actually be some value in there, even after adjusting for options and other benefits promised to the VC's and execs. This was actually mentioned by Catherine Rampel as one of the motivations of a Ponzi scheme - take it legit. But it only happens once in 10,000 bets or less.
I am quite concerned after reading inWSJ (http://online.wsj.com/article/SB122879485373290759.html?mod=rss_markets_main) that the big corporate CU's are in need of a bailout. I went through Tech CU's latest filings with NCUA (the 5300 report), and noticed that $111M of $169M in Total Net Worth is deposited with the corporate CU's (as cash and other investments)
I feel quite comfortable with Tech CU's 13.11% Net Worth ratio (way higher than the 7% needed to qualify as "Well-capitalized"), but that is tempered from the knowledge that 65% of that ratio is tied up in the toxic CDO's that the corporate CU's had invested in.
Credit unions have so far been considered unaffected by the toxic instruments that have been killing the rest, so this revelation is a shock and a concern.
I think a lot of Tech CU members would feel more assured if Tech CU could put out a statement laying out what's going on vis-a-vis the corporate CU's.
Mr. Obama has to get our country away from the idea that jobs can be stratified into "high skill" and "low skill" categories, and somehow the march of civilization mandates that all "low skill" jobs go away to far away foreign lands where poor souls do the same work (poorly) for cents on the dollar. There is no such thing as "low" or "high" skill .. for example, to produce something as complex as a high end computer system, a highly qualified Ph.D. is required (to design and write specifications), as is a crane operator (to load boxes into transport). I believe this theory of "evolving" to high skill society has created "make work" industries like health care back office, call centers (they are integral part of any customer-oriented industry, but as a separate industry???). Check out this link to see how make work industries affect us everyday by increasing health costs.
I was interested to see how bad historically this was .. so I looked at the data since I was born: expressed as percentage of total workforce, this loss of jobs ranks 5th after Nov & Dec 1974, Feb 1975 (when we lost over 1.5M jobs in 4 months) and May 1980. In all, from the data BLS publishes (from 1948), it is not even in the top 30. Serious stuff (2nd worst since Reagan era began) … but definitely not unprecedented even in my life time.
My day job is strategist at the Corporate Treasury of one of the largest corporates. While I am literally ambidextrous (I can brush/eat/play tennis with either hand, yeehaw!), I named my blog ambdex because I plan to write about my passions from both sides of the brain - finance (e.g. what's going on with the meltdown) and arts (e.g. Indo-American literature).
Alum of UC Berkeley and IIT Kanpur, I was an early hire at a Silicon Valley startup that ultimately got acquired by a large tech.
The above chart shows the number of companies in the S&P index that announced share buybacks in the last 3 years, marked in red or blue depending on whether their earnings (as measured by EPS) was shrinking or growing.
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