June 25, 2021
“Having too much money” sounds like a cry-me-a-river problem that we’d all like to have… right up there with “there’s not enough garage space for my fifth Ferrari.”
But like many other too-much-of-a-good-thing things in life, too much money has a toxic side effect: It makes you do stupid things.
Just like too many gin and tonics on the veranda (“Shure, letsh jump into da pool from up here!”)… too much meat (try to string a sentence together after completing the Texas Roadhouse 64-oz Steak Challenge)… too many spouses (a few episodes of HBO’s polygamist series Big Love will turn you off of that idea)… or too much travel (too many G&Ts might give you a hangover for a day… jet lag from Singapore: almost as bad, but it lasts for 10 days)…
Like cash, these are great in moderation. But in excess, they’re an idiot pill on steroids.
And we’re seeing that now. All that cash from the COVID-19 stimulus checks… multiplied by a post-pandemic (in the U.S., at least) treat-yourself brain… raised to the power of pent-up demand for beach vacations, luxurious SUVs, and going anywhere that’s not the living room. It’s spawned one-hour wait times at your local Applebee’s, Hertz charging $105 per day for a Chevrolet Spark – a tin can on a lawnmower motor – at Dulles International in Washington, D.C., and $2,000 signing bonuses for gas station convenience store staff.
All that money has also created kamikaze capital, the meme-stock-focused speculators who are prepared to use their last penny of capital to make a point and stick it to “the man” (hedge-fund managers, The Fed… whomever) – fundamentals, and earning a return, be damned.
And it’s not just people. Companies – which, as every Democrat’s favorite Republican, Mitt Romney, explained in August 2011, are of course people, too – are also going nuts on cash.
How Too Much Cash Happens
How did we get here? Well, when the babbling brook is flash-flooding, look upstream… in this case, to the Federal Reserve.
The Fed has been on a money-printing mission. As of May 31, roughly 79% of all dollars that have ever been made were created over the previous 17-month period. That’s in part to the $6 trillion or so (and counting) in COVID-19 stimulus. And it’s what’s behind a federal budget deficit last year that amounted to an emerging-market-gone-wild level of 14.9% of GDP, the highest since World War II. (Budgetary excess poster child Argentina posted a deficit last year of a comparatively prim 8.5%.)
For this year, the Congressional Budget Office forecasts a deficit of 10.3% of GDP. And that’s even with the denominator (that is, GDP) forecast to rise by upward of 6%.
If the U.S. dollar wasn’t the world’s reserve currency, the American economy would be staring into the wild black eyes of hyperinflation. U.S. Treasuries would be jostling with Mozambique and Mongolia for the attention of investors – rather than doing a Queen Elizabeth wave from the stands as one of global markets’ few remaining AAA credits (the highest investment grade).
As a result, businesses are inhaling capital like Al Pacino’s Tony Montana in Scarface. They kicked off in earnest last spring, as companies used the cover of the evolving pandemic to draw down credit lines, sell bonds, and take out loans as if preparing for the zombie apocalypse (which, as far as anyone knew at the time, was the case).
From the second quarter of 2019 to one year later, total borrowing by U.S. companies (excluding financial institutions) increased by 16% to an all-time high, according to data from the St. Louis Fed. Also bolstered by strong profitability, total cash balances (which includes borrowed funds) of U.S. companies were up an incredible 54% as of March 31, compared to a year earlier. At that point, they were more than double the levels of early 2019.
And what exactly are they doing with all that cash? Some companies have been reinvesting into the business, making smart acquisitions, strategically expanding their operations, and bolstering research and development… In other words, doing the kinds of things you’d hope they’d do to generate returns for shareholders and grow.
But like those G&Ts, too much money makes you stupid. So what have the rest of the companies been doing instead?
I’m not sure if you remember books, America, but it’s what people used to sink their faces into to avoid dealing with family and strangers. Our editor-in-chief, P.J. O’Rourke, has written a few in his time, and he’s re-releasing his bestselling Eat the Rich, complete with a new chapter to take on the absurdity of 2021 economics. And as an American Consequences subscriber, you can have access to the newly released edition for free! Claim Your Copy Now.
Returning Cash to Shareholders – But…
One way that companies have been spending their cash is through share buybacks, in which a firm buys its own stock. This increases earnings per share (all else equal, if the number of shares outstanding drops, earnings per share will rise) – and, if the share price remains the same, reduces the valuation of the stock. (All else equal, if earnings per share rise, the price-to-earnings (P/E) ratio goes down.)
Share buybacks also create demand for the stock, which boosts the price of the shares… to the benefit of current shareholders. For example, the $90 billion share-buyback program that Apple announced in April (following $50 billion shares purchased last year) means that the company is a steady buyer in the market.
And companies are laying the groundwork for a “buyback bonanza,” as the Financial Times explained last month…
“Companies are preparing to launch a record wave of share buybacks as executives get comfortable with spending excess cash following a blockbuster earnings season and greater clarity on the trajectory of the world economy.”
Share buybacks are a quick and easy way to return value – indirectly – to shareholders. They’re also extremely lazy: For a company, the most obvious thing in the world to buy is… itself. It’s like the unimaginative hungry man who eats whatever happens to be within arm’s length… whether it’s yesterday’s leftover pizza next to him, or the upholstery of the couch he’s sitting on.
And they’re also the financial equivalent of empty calories that deliver a short-term rush but no long-term benefit, as an article in the Harvard Business Review last year explained…
“Stock buybacks made as open-market repurchases make no contribution to the productive capabilities of the firm. Indeed, these distributions to shareholders, which generally come on top of dividends, disrupt the growth dynamic that links the productivity and pay of the labor force. The results are increased income inequity, employment instability, and anemic productivity.”
(Share buybacks are also a sneaky way for company executives to pay the people they love most in the world… see below.)
Dividends, of course, are the vanilla way of giving cash to shareholders. Unlike share buybacks, though, dividends (which are usually scheduled at regular intervals – say, quarterly or annually) are taxed, while buybacks aren’t. What’s more, companies enjoy a lot of flexibility with share buybacks, and aren’t penalized when they have a buyback plan one year or quarter but don’t the next.
That’s not the case with dividends, which are kind of like birthday gifts for your spouse: If you get him a Rolex one year (or, if you get her a Kate Spade purse), it’s tough scaling back the next year to a six-pack of Jockey socks (or, say, a sidewalk Pashmina scarf). Unless dividend payment volatility – fifty cents this quarter, five cents next – is the nature of the sector or industry, investors tend to expect dividend payments to move in only one direction: Up. And when a new high-water benchmark is established with a dividend raise, the shares of companies that move in the opposite direction are often punished by the market.
What Companies Also Do With Too Much Cash: Buy Stupid Stuff
Share buybacks are lazy. Dividends are dull. But at least they’re not like opening a furnace door and shoveling cash into it…
That’s what AT&T has turned into an art form. Bloomberg described the cash-rich telecom giant as “… the poster child for firms willing to sacrifice their credit ratings for the sake of debt-fueled acquisitions.” Whereby a big up-front capital investment yields years of high-margin cash flow, AT&T has lots of cash thanks to its utility-like business. And it bellied up to the debt bar – using those cash flows as collateral – to become the world’s largest borrower.
As I wrote last month, AT&T committed one of the more impressively egregious examples of dumb acquisitions when it bought Time Warner for $85 billion in June 2018. And last month, it dumped most of its play toys like a blazing dumpster fire of hot potatoes via a deal to combine portions of the former Time Warner with Discovery. (AT&T shares are down 14% since just before the deal was announced, while the S&P 500 Index is roughly flat over the same period.)
The annals of corporate history are littered with disastrous acquisitions made by companies with more cash than sense. The biggest-ticket and most impressively awful include AOL buying Time Warner (yes, the same) for $164 billion in 2000, and German carmaker Daimler-Benz purchasing Chrysler for $36 billion in 1998. It would take around five minutes to put together a list of dozens of other purchases over the past two decades that may have been smaller tickets but were as poorly thought through – and symptomatic of “cash brain.”
A subset of companies buying stupid stuff is those that use their money in ways that are completely inconsistent with their ostensible corporate objectives. Like business intelligence firm MicroStrategy, which hopes to sell $400 million in bonds (that is… it’s getting more cash) to buy bitcoin to add to its current $2.25 billion bitcoin holding (the stock has a market capitalization of $6.4 billion).
MicroStrategy is a company that’s supposed main business is to develop software to analyze data. It’s headed up by a prominent bitcoin bull, who’s turned MicroStrategy shares into a cryptocurrency fund. It might be a strange move, but (so far) it hasn’t hurt the company’s share price – which is up 384% over the past year (bitcoin has risen 229%).
The wealth gap in America has never been wider — we’ve still never fully recovered from the Great Recession of 2008, and it’s only going to get worse from here. But the effects of the Big Con are going to devastate those who don’t take action. So do something now while you still can.
Another Too-Much-Cash Option: Pay The Man (More)
Companies can give excess cash to the people they like the most – themselves… or, better put, the guy in the corner office. After all, in observing that “corporations are people,” Romney (presumably) meant that companies are made up of people – employees, managers, and shareholders… and not least, those first-among-people, CEOs.
Those CEOs are the guys (actual guys – all but 6% of the CEOs of S&P 500 companies are men) who, according to the Economic Policy Institute, earned an average of $21.4 million in 2020. That was up 14%, during a we’re-all-in-this-together pandemic year – when unemployment soared to nearly 15% in April. At the top of the CEO pay heap, according to CGLytics, a corporate governance data provider, was the head of Alphabet (formerly Google) – who took home $276.9 million in total compensation.
Of course, no matter how much cash is burning a hole in a company’s pockets, CEOs can’t just pay themselves whatever they want. But they can load the board with buddies who behave like rubber-stamping bobbleheads when it comes to executive pay. Happily, this may be changing at the margins, as I wrote a few weeks ago – as it becomes easier for small shareholders to vote against compensation proposals… and as the spirit of kamikaze capital slowly wafts into the boardroom.
Of course, much of the outlandish pay packages of CEOs are made up of stock options and stock awards, incentivizing company heads to do whatever they can to goose the share price, which brings us back to… share buybacks, as Harvard Business Review explains…
“With the majority of their compensation coming from stock options and stock awards, senior corporate executives have used open-market repurchases [that is, share repurchase programs] to manipulate their companies’ stock prices to their own benefit and that of others who are in the business of timing the buying and selling of publicly listed shares.”
So while a CEO may be limited in his scope to directly pocket the hot cash of his company, he can instead engineer a buyback program and put some of that cash to good use – to enrich himself.
Nothing Is New… and What You Can Do
“The global economy’s bizarre problem: Too much money,” headlined Quartz in April 2015, decrying the 400% growth in the Federal Reserve’s balance sheet since 2007 (The Fed’s balance sheet has nearly doubled since then). In June 2019, Axios warned, “A truly bizarre trend is having an impact on the economy — wealthy people and corporations have so much money they literally don’t know what to do with it.” Sound familiar?
Spending money on silly things, of course, has also plagued non-corporate people – that is, normal persons – ever since there was currency of exchange to be (mis)spent. Restraint and common sense are the best ways to avoid buyer’s remorse, the financial equivalent of a hangover.
Part of that process is to ask yourself these three questions before you slap down the crisp Ben Franklins, or the platinum-tinted gold uranium card, to splash out your cash on something stupid…
- Why am I buying this? Perhaps you’re buying something you legitimately need, like a toaster or jeans or a way to get to work. Or maybe you’re buying what you want (but don’t need), like a bungalow on the beach, a Tom Ford bespoke suit, or a Samsung 8K HDR Smart TV. Remember: a need serves a purpose… while a want fulfills a desire. Confuse or conflate the two, and the chances are much higher that you wind up feeling like you’ve ripped yourself off.
- When – and why – am I going to sell? A lot of things – in that “need” category in particular – you probably won’t sell. For everything else, though, you’ll be less likely to suffer buyer’s remorse if you know when and why you might sell, and what kind of return (whether it’s enjoyment or utility or financial) you expect. Whatever the objective of the purchase, it makes sense to sell when the reason that you bought it is no longer valid. So before you buy, make sure you have that reason in mind.
- What am I not buying? The universe is full of stuff with a price tag. But we don’t have an infinite amount of money (unfortunately). So whenever we buy one thing, we’re making an explicit decision to not buy other stuff. And there is a cost associated with that decision – it’s called opportunity cost. The money you spend on a surf getaway is cash that you’re not putting away for your children’s education. So when you understand what you’re not buying, you might change your mind about your purchase. Or you might decide that given your aims and objectives (see question No. 1 above), what you’re buying is the best possible use of your funds.
All too often, companies with lots of cash don’t answer the corporate equivalent of these questions. Fortunately, you don’t have to have that problem.
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June 25, 2021