Caipirinha
Member
I think China is being treated as a scapegoat.
I think that the 2008 financial crises instead, has not ended, that we are still in a recession in real terms but that it has been hidden by yet another bubble: stock buybacks.
After the 2008 financial crisis, central banks around the world began printing money and dropping interest rates in order to encourage companies to resume borrowing and investing.
Rather than invest in sustainable models of growth, either for the economy at large (increased wages for it's employees) or indeed the company itself (R&D, expansion), they instead used this cheap money to buy back their own stocks at a time when they were being sold for far less than their intrinsic value.
During the "recovery" the market value of those shares at some point reached their intrinsic value, but the corporate world didn't stop buying back those shares. Interest rates remain rock bottom and they had gained a taste for the benefit of stock buybacks - by buying your own stocks and "retiring" them, you artificially inflate the value of the remaining stocks in your company in the market, meaning that a large amount (95%+) of your companies profits go directly into shareholders pockets.
Why? Two reason, 1) many of those shareholders are on the management teams of these companies and 2) the rest are short term traders not interested in the long term health of the company, just a quick buck.
This is the first time such a phenomenon has occurred outside of a period of negative growth. Indeed, it is now responsible for the growth that we are supposedly seeing in the economy.
The collapse in oil and commodities values just highlights the fact that the "recovery" has not been based on a growth of industry or demand, so whilst it may notbe a direct cause of concern as some analysts say, it is the canary in the coal mine that the recovery is built on very loose soil. or maybe more accurately, air.
What happens when this bubble bursts? Well look at RadioShack, they spent more than their corporate earnings on share buybacks per year and the result when stock prices inevitably reached their peak even despite this artificial inflation? Bankruptcy. The company dies and the banks that loaned that cash loose their investment.
Now extrapolate this to the global corporate economy. $1trillion of the US stock market alone is purely a stock buyback prop-up, meanwhile corporate profits are falling.
My uncertainty is how much these loans companies have taken to afford their buybacks are levereged. If not much, the best case scenario is the bubble bursts, there are mass high profile corporate bankruptcies and the stock market collapses. If they are highly levereged by financial products like credit default swaps (by other names) then I guess the banking sector collapses. with it, finally paying the dues of 2008.
No matter the cause of the next financial crisis, I suppose the euro as a currency is destroyed and I don't really want to imagine the social and economic impact on the eurozone.
Any thoughts?
I think that the 2008 financial crises instead, has not ended, that we are still in a recession in real terms but that it has been hidden by yet another bubble: stock buybacks.
After the 2008 financial crisis, central banks around the world began printing money and dropping interest rates in order to encourage companies to resume borrowing and investing.
Rather than invest in sustainable models of growth, either for the economy at large (increased wages for it's employees) or indeed the company itself (R&D, expansion), they instead used this cheap money to buy back their own stocks at a time when they were being sold for far less than their intrinsic value.
During the "recovery" the market value of those shares at some point reached their intrinsic value, but the corporate world didn't stop buying back those shares. Interest rates remain rock bottom and they had gained a taste for the benefit of stock buybacks - by buying your own stocks and "retiring" them, you artificially inflate the value of the remaining stocks in your company in the market, meaning that a large amount (95%+) of your companies profits go directly into shareholders pockets.
Why? Two reason, 1) many of those shareholders are on the management teams of these companies and 2) the rest are short term traders not interested in the long term health of the company, just a quick buck.
This is the first time such a phenomenon has occurred outside of a period of negative growth. Indeed, it is now responsible for the growth that we are supposedly seeing in the economy.
The collapse in oil and commodities values just highlights the fact that the "recovery" has not been based on a growth of industry or demand, so whilst it may notbe a direct cause of concern as some analysts say, it is the canary in the coal mine that the recovery is built on very loose soil. or maybe more accurately, air.
What happens when this bubble bursts? Well look at RadioShack, they spent more than their corporate earnings on share buybacks per year and the result when stock prices inevitably reached their peak even despite this artificial inflation? Bankruptcy. The company dies and the banks that loaned that cash loose their investment.
Now extrapolate this to the global corporate economy. $1trillion of the US stock market alone is purely a stock buyback prop-up, meanwhile corporate profits are falling.
My uncertainty is how much these loans companies have taken to afford their buybacks are levereged. If not much, the best case scenario is the bubble bursts, there are mass high profile corporate bankruptcies and the stock market collapses. If they are highly levereged by financial products like credit default swaps (by other names) then I guess the banking sector collapses. with it, finally paying the dues of 2008.
No matter the cause of the next financial crisis, I suppose the euro as a currency is destroyed and I don't really want to imagine the social and economic impact on the eurozone.
Any thoughts?
