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February 27, 2018 | Share Buybacks are Market Manipulation and They Must be Banned

Danielle Park

Portfolio Manager and President of Venable Park Investment Counsel (www.venablepark.com) Ms Park is a financial analyst, attorney, finance author and regular guest on North American media. She is also the author of the best-selling myth-busting book "Juggling Dynamite: An insider's wisdom on money management, markets and wealth that lasts," and a popular daily financial blog: www.jugglingdynamite.com

Some $4 trillion in share buybacks by corporations since 2009 have been a indiscriminate force levitating stock prices to valuation extremes this cycle.  It’s also been a non-productive waste of funds enabling asset bubbles, piling on reckless debt and financial alchemy at the expense of long term investment, innovation, strength and stability.  We have been down this destructive road before which led to the banning of buybacks as illegal market manipulation.  And very obviously, we need to ban them again.  This is a huge pillar of the change that must occur to get businesses focused on productive investment once more and stop the debt plague that ails us from metastasizing further.  See more here The end of the low volatility regime (continued):

Until the early 1980s, buybacks were illegal in the U.S. due to concerns executives would use them to manipulate share prices. Today, politicians on both sides of the aisle are threatening restrictions, if not a reinstatement of the ban. Democrats have already made it clear buybacks will be a primary attack point as they seek to sway public opinion about the tax law and take back the House and Senate in the midterms. If rising interest rates and market volatility don’t curb buybacks, politicians may step in and do the job anyway.

One way or another, as the low-volatility regime winds down, buybacks appear destined for a day of reckoning. They have played far too big a role in the QE era not to cause complications as QT progresses. In the words of Warren Buffett: “Only when the tide goes out do you discover who’s been swimming naked.”

The IMF estimated in 2017 that 22% of US corporations were at risk of default when interest rates rise.  No surprise there.  Bankruptcy probability has risen with debt (in red) used for share buybacks (blue) here since 1990.

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February 27th, 2018

Posted In: Juggling Dynamite

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