What’s Wrong with Capitalism?

Well, uh, nothing actually.  Okay, not nothing.  Some things- sure.  There’s no perfect system.  But the real problem is that what we actually have is less and less like real capitalism.  Adam Smith’s invisible hand and Schumpeter’s idea of creative destruction have both taken it on the chin.  Quantitative easing, low to negative interest rates, too much debt, and the growth of oligopolies and perverse management incentives are knocking capitalism for a loop. 

Follow this link to Epsilon Theory and read Ben Hunt’s article, “Yeah It’s Still Water.”  Please take the time to understand his analysis of what Texas Instruments has done with its cash flow in recent years.  Recognize that this is going on all across the public company space in our industry as well as others.

When you’re done, you might consider signing up for Epsilon Theory’s free weekly emails or putting the web site in your favorites for occasional consideration. 

If Texas Instrument had taken all that cash flow and put it into competitive enhancements rather than share buybacks and management compensation, what might they have accomplished? Our GDP as a country only grows because more people are working (population growth) or they are each making more for each unit of labor (productivity growth).  With population really only growing due to immigration we are dependent on productivity growth.  Unfortunately, stock buy backs, dividends and management compensation don’t contribute anything to it.

5 replies
  1. Glenn
    Glenn says:

    That article made me angry and sick to my stomach. It’s gonna suck for us Boomers, but its going to cause bloody revolution for Millennials and Gen Z’s.
    “Capitalism is like fire: keep it under control and it will give you heat and light; leave it untended and it will consume everything in its path.”. ― Billy Bragg
    Apparently Gordon Gekko is alive and well and running our publicly traded companies.

    • jeff
      jeff says:

      Hi Glenn,
      And that’s why I posted it, though it has nothing to do directly with the active outdoor industry. See, most people don’t know about this shit. When somebody like you doesn’t, it’s very troubling because your bright and pretty well informed. But you won’t see this very much in any mainstream media and certainly no politician is going to bring it up- yet. Now, if you’d like to be further pissed off and depressed, take a look at this. https://www.cobdencentre.org/2019/10/the-disaster-of-negative-interest-policy/ See you in Denver I hope. Which trade shows, if that’s what we’re still calling them, do you go to these days?
      J.

      • Glenn
        Glenn says:

        You’re right, most of us aren’t as deep, so we simply don’t see it. Well, except for the ripples. We don’t see the pebble drop.
        Surf Expo is my last gasp Jeffrey.

  2. Jason H
    Jason H says:

    Cliff Asness (AQR Capital) puts it more eloquently than I can arguing that capitalism is broken because of stock buybacks seems like a “correlation not causation” argument.

    https://www.wsj.com/articles/buyback-derangement-syndrome-1534460606

    I’m not familar with Texas Insruments in particular so perhaps TXN is forgoing excellent projects in lieu of reinvestment. However, sicce stocks are long tailed financial insturments, isn’t it a bit much to asset that the entire market – for years – has missed looming value destruction through underinvestment?

    Stocks buybacks and productive reinvetment are both crucial elements of capitalism; money needs to flow to productive uses.

    Enjoy your blog; thanks for the contriibutions over the years.

    • jeff
      jeff says:

      Hi Jason,
      How do stock buybacks make money flow to productive investments? If you haven’t read it, please go and get the book This Time Is Different; Eight Centuries of Financial Follies.

      I think that stock buybacks are a missallocation of capital, but perhaps, as you suggest, it’s not the cause. The basic cause, I’d suggest, is too much debt and interest rates kept too low for too long. Money is a commodity. Like gold, iron, or pork bellies. Its price needs to be set by the market. You can argue, and I’d agree, that it’s never been a completely market driven price since fractional reserve banking started, but it’s gotten way worse. What are the results? Companies in business that should not be in business and would be out of business if interest rates were market set, whatever level that implies. It’s way too easy to borrow money as people become desperate for yield. Businesses are being funded that should never have been funded at the valuations they were given. Pension plans and insurance companies are in trouble. People who just want to save a little money for retirement are forced into securities they don’t understand and are going to be hurt when the business cycle finally reasserts itself. Nobody seems to remember it these days, but there is still a relationship between risk and return.

      Somebody wrote that 19% of the S&P 500s value is the result of stock buybacks. Maybe that number isn’t exactly right, but I’ll bet it’s in the ball park. What would earnings per share be if all those shares were still part of the share base?

      Jason, how do you find productive investments when there’s massive over supply of so many products because money is so cheap and normal competitive dynamics are distorted by long term easy money? Turns out that buying back your stock is the best available investment, and it doesn’t hurt that it makes your personal net worth as an executive at the company go through the roof. So are buybacks the cause of poor allocation of capital? Let’s say no. But certainly they are a distortion of how capital should be allocated.

      Thanks for the comment.
      J.

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