A buoyant and complacent stock market is worrying Richard H. Thaler, the University of Chicago professor who this week won the Nobel Prize in economics, “We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping,” Thaler said. Here is a direct video link.
As we have learned repeatedly through a century of cycles already, faith in central bank magic is misplaced and devastating in the end. Their interventions have made this cycle the most extreme ever, and asset prices that are inflated beyond reason are set up to deflate equal and opposite in the other direction. We must make our own financial decisions accordingly.
Mohamed El-Erian, Allianz chief economic advisor, discusses the current state of the markets and central bank policy. Here is a direct video link.
Mohamed El-Erian: You need a major shock to dislodge this market from CNBC.
Headline this morning on CNBC:
I have written about this many times over the years. Share-based executive compensation and stock-buybacks are an extractive, destructive combination that diverts capital and energy from productive pursuits and leads to extreme social divisions and great waste. We must restore the pre-1982 ban on share buybacks as destructive ‘stock manipulation’. There is no meritocracy, free market or intelligent resource utilization in the present model. See more here How CEO share buybacks parasitize the economy:
The monster of economic waste—over $7 trillion of dictated stock buybacks since 2003 by the self-enriching CEOs of large corporations—started with a little noticed change in 1982 by the Securities and Exchange Commission (SEC) under President Ronald Reagan. That was when SEC Chairman John Shad, a former Wall Street CEO, redefined unlawful ‘stock manipulation’ to exclude stock buybacks.
Then after Clinton pushed through congress a $1 million cap on CEO pay that could be deductible, CEO compensation consultants wanted much of CEO pay to reflect the price of the company’s stock. The stock buyback mania was unleashed. Its core was not to benefit shareholders (other than perhaps hedge fund speculators) by improving the earnings per share ratio. Its real motivation was to increase CEO pay no matter how badly such burning out of shareholder dollars hurt the company, its workers and the overall pace of economic growth. In a massive conflict of interest between greedy top corporate executives and their own company, CEO-driven stock buybacks extract capital from corporations instead of contributing capital for corporate needs, as the capitalist theory would dictate.
