Last week the Fellowship explored how the Federal Reserve’s QE2 strategy is designed to pour wealth into the stock market. Next we discuss what that means for unemployment.
As discussed before, low interest rates pull money out of savings accounts in search of profit elsewhere. From the investor’s point of view, an investment account full of expensive stock means newfound hope for household wealth.
But what does that mean for companies? Simply put, if they want to cooperate with the Fed’s strategy, they have to do their part to keep those stocks valuable. Investors can be persuaded to buy some stock initially, but it won’t stick if the shares don’t keep any value. Thus the Fed is pushing this from both sides: investors drift toward stock, companies pad the value of that stock, and more people come around.
How do companies make stock more valuable? By hoarding money behind it. This simple diagram explains something liberals seem unable to grasp:
To see this in action, look no further than Lowe’s home improvement stores. Today the company announced a surge in earnings thanks to snow shovel purchases and repairs from ice damage. When asked what it would do with the extra money, the company discussed plans to – wait for it – make its stock more valuable:
On a conference call to discuss its results Wednesday, Lowe’s didn’t mention dividends, but it said it plans about $2.4 billion in share repurchases this year. At the end of November, Lowe’s said it plans $18 billion in buybacks through early 2016, or an average of $3.6 billion a year, which at today’s prices would buy back over half its currently outstanding stock. It also targeted a dividend that’s 35% of earnings, up from about 30% currently.
Translation: it will reduce the number of slices in the pie and then pay bigger bonuses to those who still hold the remaining slices.
That’s what companies are doing right now. When genius reporters at USA Today complain about companies sitting on extra cash, they stir up their readers into anger that these companies refuse to spend the money on hiring more workers. And very few in the media report both sides.
General Motors was able to launch its IPO last November (which liberals cheered as its only way out of bankruptcy) precisely because it limited new wage spending and stockpiled enough value to make the stock attractive.
Companies have no motivation to spend the money on anything else. Yes they could grow and open more stores and hire more people, and in a few years that would make them richer – but the Fed doesn’t want them blowing through that money when there’s a crisis to solve right now.
And so we live in a Catch 22. Building a strong stock market pressures companies to put off expansion. This will boost consumer confidence and get people to spend more… which will somehow get companies to expand eventually.