May 26, 2016

Quantitative Easing And The Corruption Of Corporate America

To be precise, today’s dangers emanate from our nation’s boardrooms, where officers and executives have authorized an era of reckless abandon in the form of share buybacks. In the event the word ‘hyperbolic’ just came to mind, the ramifications of a lost generation of investment in Corporate America should not be lightly dismissed. This trend, above all others, has weakened the foundation of U.S. long term economic growth.

The real question is whether those who have facilitated the malfeasance will be held accountable. Before the launch of the second iteration of quantitative easing (QE2) that the Fed voted to implement on November 3, 2010, Richard Fisher, to whom yours truly once answered, raised serious concerns. An October 7, 2010 speech before the Economic Club of Minneapolis was the venue.

The contextual backdrop is key: Just weeks before at Jackson Hole, Ben Bernanke had unleashed the mother of all stock market rallies by hinting that QE2 was indeed coming down the FOMC pipeline. The hawks were understandably hopping mad as the debate on the inside was anything but settled. Fisher indicated as much, albeit with notoriously diplomatic panache:

“In my darkest moments I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places. Far too many of the large corporations I survey that are committing to fixed investment report that the most effective way to deploy cheap money raised in the current bond markets or in the form of loans from banks, beyond buying in stock or expanding dividends, is to invest it abroad where taxes are lower and governments are more eager to please.”

Six years on, corporate leverage is hovering near a 12-year high and domestic capital expenditures have plunged. In the interim, reams of commentary have been devoted to share buybacks and with good reason. Companies reducing their share count have, at least in recent years, been where the hottest action is, courtyard-seat level action.

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