How QE and Stock Buybacks Reinforce Each Other

In the United States in 2013, stock buybacks broke all records : companies on the stock market bought back $600 Billions of their own shares. Since 2009, $1,000 B have thus been bought back, about 10% of market cap, which shows the scope of this phenomenon. Businesses that are doing well or, more simply, that are reducing their costs, are accumulating cash but, since growth prospects are dim, they are not investing and are sitting on tons of cash. The best example would be Apple, with about $160 B in cash, that, having relented for a while, finally started to buy back some of its own shares, to the tune of $40 Billions so far. A stock buyback generally translates into an increase in price : the company’s value stays the same, but the number of outstanding shares shrinks, so the price of each share goes up. It’s like a gift to the shareholder.

The scope of those stock buybacks constitutes another hint as to the lack of a real economic recovery in the United States. Furthermore, this $600 Billion figure must be put in relation to another one : the $1.2 Trillion created by the Fed during 2013 with its QE plan ($85B/month X 12). On the one hand, the Fed creates paper money, and on the other hand businesses destroy paper... not money, but their shares. On the one side, liquidity is created, and on the other, it is destroyed, as if it had to be compensated for.

As a matter of fact, both phenomena reinforce themselves, pushing stock prices up. On the $85 B of QE in 2013, $45 B go to buying Treasury bonds, thus financing the budget deficit, and $40 B go to buying back dubious mortgage-backed securities (MBS), in order to prop up the real estate market. This way, $40 B go to the banks, and they can also borrow from the Fed at 0%. Then the banks reinvest these monies in the stock markets, notably on Wall Street, which helps boost the shares... It’s like a two-tiered rocket, sort of : more money is circulating and, at the same time, less shares are available.

This liquidity funnels through the stock markets and finds its way into the shareholders’ pockets, i.e. wealthy households, societies of funds. For those entities this produces a « wealth effect », an increase in their assets, but based on artificially created liquidity, a bubble waiting to explode. This mechanism is, of course, very unstable. A little of that « new-found » money is spent, stimulating a little jolt of economic growth which, in turn, is good enough for the Fed, the politicians and the media to proclaim that the economy is on the mend... but this is all a smoke screen.

Funny how the Fed and Big Business are not true to their primary function (guarantee the value of the money, invest and increase profits) and would rather manipulate the tools at their disposal, for which they are responsible, that must be used to establish objective measures (dollars, stocks)in the economy. They’re acting as if there were nothing else left than subterfuges with this depressing situation in the real economy...