Global financial system implosion begins

[ska invita]

I was reading an interview with the very measured Bob Jessop about Syriza and Labour and at the very end he had this question put to him:


On what arguments do you base your prediction that next economic crisis is coming in less than a year?

Everything that appears to be going well is doing so on the basis of such a massive injection of liquidity without providing any real growth. This is the biggest stimulus package which has ever existed, it was not used as a Keynesian stimulus package, but for buying up toxic debt and it has even not been able to get 0,5 percent growth. Now there is an even bigger debt bubble than in 2007/2008 and the banks are even more concentrated than before the crash. If you look at the US stock market, you will see that firms are borrowing money in order to buy their own shares to maintain the prices, and not investing in any real economy.
[is that true? madness!!]

Unemployment is increasing, at least in the terms of real jobs rather than pseudo-jobs. The European economy is not really recovering, and there are also difficulties in China. These three areas amount to 60 percent or more of the world economy – and if each of them is fragile, it is plausible to conclude that we will have a new crisis.

*will try and find a piece where talks just about the economy...

 

[ska invita]

Whatever else there is to say about this article - what a clickbait headline !

Doomsday clock for global market crash strikes one minute to midnight as central banks lose control
China currency devaluation signals endgame leaving equity markets free to collapse under the weight of impossible expectations
http://www.telegraph.co.uk/finance/...o-midnight-as-central-banks-lose-control.html

 

[yield]

Now there is an even bigger debt bubble than in 2007/2008 and the banks are even more concentrated than before the crash. If you look at the US stock market, you will see that firms are borrowing money in order to buy their own shares to maintain the prices, and not investing in any real economy.
[is that true? madness!!]

Yes really. It's cheaper for Apple and other big multinationals, to raise bonds or debt domestically in the USA, to buy back their shares, than to pay capital gains and bring their profits back onshore.

 

[teqniq]

'pop'

 

[teqniq]

Global stocks in 'panic mode' as Chinese factory slump drags on markets

 

[not-bono-ever]

Correction time

totally mexico.

worse to come I think

 

[Sprocket.]

I cannot find the report I saw earlier this week but it was saying that some of the larger America based multinationals were borrowing money on credit to buy shares in their own companies to appear stronger than they actually are.
Did I see this or is it my head letting rain in, because to me this sounds like insanity!

Edit: I have just re read higher up the page, please excuse I have been on twelve hour nights all week!

 

[Crispy]

multinationals were borrowing money on credit to buy shares in their own companies

That made me go full eyebrows too, but is there a source?

 

[teqniq]

I saw it someplace too a few weeks ago but I can't remember where

 

[ska invita]

That made me go full eyebrows too, but is there a source?

http://www.economist.com/news/leade...ing-back-their-own-shares-investors-should-be

Over the past 12 months American firms have bought more than $500 billion of their own shares, close to a record amount. From Apple to Walmart, the most profitable and prominent companies have big buy-back schemes (see article). IBM spends twice as much on share repurchases as on research and development. Exxon has spent over $200 billion buying back its shares, enough to buy its arch-rival BP. The phenomenon is less extreme in other countries, but is becoming popular even in conservative corporate cultures. Led by firms such as Toyota and Mitsubishi, Japanese companies are buying back record amounts of their own shares.

 

[not-bono-ever]

Scum like apple who have 200 BILLION in cash salted away - mostly in tax efficient vehicles outside the grasping claws of government - they are not allowed to use non US domicled cash to buy back shares.only a fuckton of thier cash is US based, so yes, they can use cheap credit to do this as somewhere in the machinations of the books of death cultists Apple, it will make economic and business sense.

 

[not-bono-ever]

Remember, credit has nevrr been cheaper fir blue chips

 

[Sprocket.]

Remember, credit has nevrr been cheaper fir blue chips

Yes, also remember that we are all in it together!

 

[Coolfonz]

Share buybacks are pretty standard fare for corporates. It's not that amazing.

Shares are bought and held in treasury status (ie: the company doesn't get its own dividend).

The rationale behind it is that it supports the company share price (that is debatable imo but you can never know) by removing a percentage of the stock from the market, and it also shows the power of the corporation, `we got so much dough we can buy up our own shares`. When interest rates are so low it makes more sense...

 

[ska invita]

If i understand it correctly its the propping up of the share price that is the biggest issue here, and creates an overvaluing of the market - a value which other parts of the economy look to for a benchmark. The more is spent on this the bigger the illusion and the further there is to fall.
If i understand it correctly

 

[Sprocket.]

It was the point of them borrowing to buy back shares that first made me take notice, I always thought buy backs were financed by previous years profits.

 

[Crispy]

Isn't it also an "investment" in the company's future?

"We reckon we'll do really well next year, so we'll buy some of our own shares and sell them back again next year when they're worth more"

 

[Coolfonz]

If i understand it correctly its the propping up of the share price that is the biggest issue here, and creates an overvaluing of the market - a value which other parts of the economy look to for a benchmark. The more is spent on this the bigger the illusion and the further there is to fall.
If i understand it correctly

Tbh it isn't that big a deal, in my opinion. The effect on the share price is kind of minimal, and also open to debate as you can never know what the share price would have done without the share buyback.

Companies with a lot of cash and buoyant free cash flow are often under pressure to do something with it that creates value for shareholders - that is the sole aim of companies at this level - so doing f all with piles of cash isn't a huge option. This has all been well practised and before the financial crisis as well, even when interest rates were at 6pc etc etc...

 

[Coolfonz]

It was the point of them borrowing to buy back shares that first made me take notice, I always thought buy backs were financed by previous years profits.

I haven't seen a company borrow to specifically buy back shares, not saying it doesn't happen tho.
Companies which do share buybacks also have open credit lines as standard kind of behaviour, normally this depends on the market cap of the firm.

So if your company is worth $500mn and you have $50mn of credit lines you have a very comfortable level of `gearing` (it would be 10pc in this case), kind of standard stuff. You might also opt to do share buybacks at the same time.

 

[not-bono-ever]

Dp

 

[not-bono-ever]

If you take heed of the Warren buffets of the world, then buybacks should only happen when the market value of a share is below the insrinsic of the company. Buybacks are not uncommon but using credit to do this was not that common- as cf says, leaving your cash is not an option these days.every bit of value should be squeezed .

The whole banking world went on a buyback spree just before the implosion. What you want to take from

 

[Falcon]

Share buybacks are pretty standard fare for corporates. It's not that amazing.

Exactly.

Remember the function of shareholding.

You give a firm some of your money (you buy a 'share'). The firm does something useful with that money that creates some more money*. The firm gives you some of that created money back (they pay you a 'dividend').

Firms don't have anything useful to do with your money any more.

'Doing something useful' involved the conversion of huge quantities of very cheap energy into goods and services for people who were sufficiently debt free that they could afford them**.

That model broke when energy went from being very cheap to being unaffordable (what happens when you deplete a resource base on a least-cost-first basis). Affordability was extended by synthesising debt. Now there is too much debt. Demand has fallen. Energy price has fallen.

Energy firms can't supply energy at this price. People can't afford goods and services at this debt level. Firms that needed very cheap energy and solvent customers can't do anything with your money.

So they are giving it back (buying your 'share'), inevitably under scams that enrich the firms' bosses (compensation schemes that reward share price inflation, most noticeably).

*I'm talking about how things used to be, not about the ponzi schemes and shenanigans of recent decades.

**Even selling photocopy insurance - a service - required the existence of a "photocopier" - a device that required very large quantities of very cheap energy to create.

 

[Coolfonz]

Oil cos were doing share buybacks at $100/bl + oil when interest levels were much higher. It all depends on how the company see value

 

[extra dry]

http://www.bbc.com/news/business-34033208 China using penson funds to prop up share prices, I guesss that will turn things around or I am I wrong?

 

[Sprocket.]

And the Chinese stock market is in free fall again this morning according to the BBC.
Cannot post link, at work, propping up the markets!

 

[Sprocket.]

Exactly.

Remember the function of shareholding.

You give a firm some of your money (you buy a 'share'). The firm does something useful with that money that creates some more money*. The firm gives you some of that created money back (they pay you a 'dividend').

Firms don't have anything useful to do with your money any more.

'Doing something useful' involved the conversion of huge quantities of very cheap energy into goods and services for people who were sufficiently debt free that they could afford them**.

That model broke when energy went from being very cheap to being unaffordable (what happens when you deplete a resource base on a least-cost-first basis). Affordability was extended by synthesising debt. Now there is too much debt. Demand has fallen. Energy price has fallen.

Energy firms can't supply energy at this price. People can't afford goods and services at this debt level. Firms that needed very cheap energy and solvent customers can't do anything with your money.

So they are giving it back (buying your 'share'), inevitably under scams that enrich the firms' bosses (compensation schemes that reward share price inflation, most noticeably).

*I'm talking about how things used to be, not about the ponzi schemes and shenanigans of recent decades.

**Even selling photocopy insurance - a service - required the existence of a "photocopier" - a device that required very large quantities of very cheap energy to create.

I understand how and why buybacks are common, the company I work for at the moment do it.
It is the borrowing of funds on credit to buyback shares to boost the companies worth that to me seems a bit odd!

 

[Fez909]

I understand how and why buybacks are common, the company I work for at the moment do it.
It is the borrowing of funds on credit to buyback shares to boost the companies worth that to me seems a bit odd!

I suppose if you have already bought back a substantial amount of shares at 100p, and then you see the value of those shares falling, it might make financial sense to borrow to prop the price because the borrowing costs are less than the projected losses on the 100p shares you bought.

It sounds like an awful practice though.

 

[J Ed]

boom

 

[not-bono-ever]

I think we are witnessting something pretty serious here. Its looking pretty grim out there.

 

[teqniq]

I take scant comfort in as a financial numpty being able to say 'I told you so'. What we really need is a completely new way of doing things, one that does not involve dog eat dog and plundering the planet's resources. If we don't come up with something this cycle of boom bust will continue until we destroy ourselves.