Thursday, November 26, 2015

Quantitative easing, share buybacks, and secular stagnation

Martin Wolf lays out the reasons for the persistent low-interest rate environment. He attributes this to the "savings glut", arising not just from emerging market foreign exchange surpluses but also from the rising pile of retained surpluses of corporates from developed economies. These surpluses have been financing fiscal deficits in Japan and accumulation of foreign assets in the case of Germany. The first graphic points to the rising corporate gross savings.
However, the rising savings have been accompanied by declining corporate investment, a reminder of the secular stagnation argument.
These trends have led to accumulation of corporate retained earnings.
A significant portion of this is being used to buyback shares and return money to investors. In fact, corporates, especially in the US, have sought to leverage the ultra-low rate environment to finance the share buybacks. So much so that stock buybacks have overtaken aggregate dividends as the main form of corporate payout. These low rates and the resultant high equity risk premium make it prudent for businesses to replace costly equity financing with cheaper debt. The largest US corporates have been leading this market distorting trend. Apart from being an important contributor to fuelling the equity market boom, the resultant reduction in equity base has further inflated corporate surpluses. 

The BIS has documented that in the 2009-14 period, US non-financial corporates repurchased $2.1 trillion in shares and raised $1.8 trillion in net bond financing. 
Clearly, the extended period of quantitative easing and resultant ultra-low interest rates have served to amplify the effects of secular stagnation. 

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