Why The Economy Sucks

[Kerim]

Hmmm. Here is an interesting and provocative article arguing that the economy is suffering because corporations are being greedy with their profits, giving them to shareholders through dividends and buybacks instead of investing the money in ways that would help the overall economy, such as investments and higher wages.

As an aspiring owner, I've got mixed reactions to this. I'm delighted to receive lots of profits as a shareholder. But if there is any truth the the article, then perhaps overall profits could be even higher if more was returned as wages, thereby stimulating more overall economic activity.

I'm skeptical that they can accurately measure or predict such things, but interesting in any case.

[EricL]

Businesses are in business to make money, that is the purpose of running a business. If they thought putting the money into new investments would create more profits they would. I think its overly simplistic to say the economy sucks because the evil corporations are hoarding everything. Corporations react to the economy, they don't forcefully grow it.

Energy prices have been on a steady rise over the last decade, with crude oil more than tripling in price. I think that is the biggest issue facing growth and was also one of the driving forces in causing the recent recession. I think the resurgence of energy production in the US over the last 5 years has saved us from a much worse downfall and will also lead us back into growth going forward as companies move jobs and manufacturing back to the US because of the cheaper input costs.

My 2c anyways...

[Markrichard]

That was a good read though, but I don't think businesses will be thinking too much about this article as they just think about their profit/earnings whether it might be a long term profit through buyback or profit through dividends. Investors always expect a good amount of dividends from the companies. even I don't think most cares about the economy as everyone thinks quite selfishly on the prospect. they just want to see them own in profit.

[hendi_alex]

Regardless of the reason, I think the observation has merit. I was listening to a Bloomberg piece the other day, and made a post regarding the effect of buy backs on per share growth, versus real overall earnings growth. Anyway the main point from that conversation lies in the fact that earnings growth for almost half of the S&P500 has been poor quality growth coming from share buy backs rather than coming from true earnings growth. There has also been much conversation related to the fact that many companies are not investing in growth, and that favorable stats continue to come from cost cutting which at this point may be something kin to various companies cannibalizing themselves such that future earnings growth may be hampered. IMO there seems to be a widespread practice of making expedient, short sighted decisions. Decisions that may only feed the anemic levels of GDP growth of the past few years.

My main questions can't be answered until things gradually unfold. How much of current business profits are a result of QE's low rates, easy money, and bond support? How much of current market valuation is a result of yield chasing by those who were previously the fixed investment income crowd? IMO we won't know those answers until the fed starts to normalize rates and until the retired community starts to move assets back to more normal allocations. I do believe that the shift out of equities will be swift and brutal, whenever the time comes. I also believe that p/e ratios will rise dramatically for various companies which get hit by significantly higher borrowing costs. If such is in the future, it would be prudent to have a list of companies whose debt is long term and fixed, such that any impact would be very gradual and spread over decades. Those companies will be taken down as well, and will most likely represent very good bargains at the time. Many of the DG types of stocks probably fit that profile.

[rnsmth]

The economy does not suck