Today, in an interview with Betty Liu on Bloomberg TV, I was asked about the “news” of the day, of course that being the APPLE decision to pay a dividend and buy back stock. Long-time readers of NOTES are aware that I am a believer in stock dividends as a way to return capital to the genuine owners of a corporation: THE SHAREHOLDERS. Ms. LIU wanted to know if the APPLE news was bullish for the EQUITY markets as the share price of the technological behemoth would drive all indices higher. As a GLOBAL MACRO analyst/trader/investor, I said that it was more bullish for capitalism in America.
I have long argued that Washington operates under the misconception that dividends benefit the rich. Many middle class investors desire dividend payouts as a way to supplant their cash flow, especially in a ZERO INTEREST RATE WORLD (ZIRP). Wealthy investors have the capital to invest in higher risk-oriented investments such as private equity, hedge funds and other exotic venues that have high risk with high rewards. Washington needs to understand that cash sitting on CORPORATE BALANCE SHEETS doesn’t result in positive outcomes.
First, cash rich companies become the targets of cash-starved entities who need finance takeovers through the use of DEBT to acquire very healthy firms then run down the cash and increase the DEBT LOAD because the tax laws are dedicated to DEBTISM and not CAPITALISM.
Second, cash sitting on the balance sheet will usually wind up in the hands of management rather than shareholders, creating a greater disparity in the measures of wealth in America. It is amazing that the DEMOCRATS incessantly complain about increased wealth differentials but seek to aid the growing levels of financial inequality through a poorly devised dividend policy that helps create the amalgamation of money into the hands of upper management. Many of the most recent studies of wealth inequality place the blame on the great discrepancy between pay levels in corporate America, with the lowest to highest pay ratio moving out to a factor of 450 times.
Third, money sitting on corporate balance sheet becomes as seductive to wall street as the APPLE TREE was to Adam and Eve. A pool of capital sitting idle is a target for fee generation on some silly acquisition. The proof of this hypothesis can be found scattered all over the fabric of takeovers over the last 40 years. There are many more arguments to be made but my desire is for corporate America to return income to shareholders, whether individuals or pension funds. In one fell swoop APPLE is returning $38 BILLION in cash. Imagine how stimulative it would be if other corporations followed a similar path.
Very few corporations have the sagacity of a Warren Buffet to know how to put the cash to work. Some may argue that relieving CORPORATIONS of cash will inhibit their ability to grow (RUBBISH). If an acquisition or other opportunity evolves, a strong corporate entity would have little trouble raising the needed capital through bank loans. (As an added bonus the proposed deal would have to stand the test of being a sound financial deal or the loan would not be available.) Wake up Washington and financial fiduciaries, for there is a great opportunity at hand–ALL POWER TO THE SHAREHOLDERS!
***In today’s Financial Times, there were two articles that follow on the heels of NOTES FROM UNDERGROUND.Wolfgang Manchau had a piece, “There Is No Spanish Siesta For the Eurozone,” detailing some of the problems that PM Rajoy faces in dealing with budget austerity in a contracting economy. Also, Tony Jackson has a well-written piece on Carmen Reinhart’s work on financial repression.
***In tomorrow’s FT there is a piece by former Bank of England MPC member, Andrew Sentance, “Central Banks Must Address Rising Oil Prices.” While a member of the BOE monetary policy committee, Mr. Sentance was a noted monetary HAWK. He advised that the BOE needed to raise rates in 2007, which turned out to be a very poor decision as the world was entering a severe period of deleveraging. Now as an adviser at PWC, he writes that the world’s central banks should begin raising rates in an effort to “lean against the wind.”
The thrust of Mr. Sentance’s piece is that central banks need to get ahead of the inflation curve by raising interest rates to prevent commodity prices from racing ahead of growth. In a fragile global economy this view will be met with derision by the growth-first crowd, but look for the argument to gain some traction as Bernanke’s easy money policies have created imbalances around the globe.
The substance of the article is derived from a 2006 piece by BIS chief economist Bill White, who asked the existential question for all CENTRAL BANKS: “LEAN OR CLEAN”? Meaning, does a CENTRAL BANK raise rates to head off price bubbles or does it aggressively move to lower rates to clean up the mess? BILL WHITE was a LEANER while SIR ALAN GREENSPAN was a cleaner. Well, six years later where are we?