Permanently low interest rates?

[Seppia]

My view: share buyacks aren't necessarily evil per-se.
In a vacuum, they are probably the most tax efficient way to give capital back to shareholders.
Also, if timed smartly, they can be a great investment.

Problem is things don't happen in a vacuum and IIRC multiple studies show massive repurchases are consistently done with the worst possible timing (huge repurchases at market peaks, they are the first thing to be cut in bad times).

Another example: I would be all-in borrowing to fund share buybacks in the case of a company with solid balance sheet, no ways of deploying capital and great return on assets (think cigarette companies with relatively low debt).

So I would say it depends. I don't think buying back shares is always a bad thing.
It sure seems like many US companies have ballooning debts due to huge borrowings used for share repurchases. It's basically a way of increasing leverage.

[Mister Imperceptible]

Seppia, this is the chart from the Collum Year in Review I recommended.

Buybacks post-2008 are just not a feature of the market. They are the market.

Buybacks supported by the record corporate debt.

Record corporate debt support by record low interest rates.

Market Cap to GDP in the US now over 152%, surpassing the peak of 148% in March 2000.

But in 2000 the US National Debt to GDP was 56% compared to 106% today.

Tick tick tick tick tick tick tick.........

[jacob]

Near ZIRP has made it very tempting for corporations to institute a massive leveraged buy-out of themselves. Essentially the LTdebt/equity rate has changed materially. This makes it easier to create ROE (because the E is lower as it has been replaced with debt). This will last exactly as long as corporations can maintain their debt-service. There are two things that could end this strategy. 1) Short term(*) interest rates increase. 2) Corporate earnings decrease (dividends would be cut first).

(*) Look at the duration of corporate financing and realize that the market control the long end and the central banks the short end.

The structure is similar to the 2007/8 real estate bubble except that it's corporations instead of marginal borrowers. And [the perceived risk reduction is] made possible by central banks rather than fancy financial engineering tranching. This does mean that the equity markets are more responsive to short interest rates than they otherwise would be.

Despite and maybe because of various gurus whining about corporate debt, at least some corporations are working on decreasing their leverage.

Would you like to know more?(*) Consider the entire yield curve vs the debt structure of the companies you invest in.

(*) Just a Starship Trooper reference

[Seppia]

@MI:

Don't get me wrong, I agree with you 100% on the assessment (I own a grand total of 0% usa equities right now, and 0% bonds).
I've definitely increased my cash allocation, and as stated above I moved 100% away from the USA in terms of equities*

It's just that I know I don't know, so I'm always afraid going all-in on one strategy.
I'm sure my approach will never make me massively overperfom, but the flipside is it won't make me massively underpeform as well.
That's fine with me

*I have mentioned this many times on this forum

@jacob: I am reassured when my big stock holdings have decided to reduce leverage and pay down debt starting early last year of earlier. Sounds to me like "hey we had a great opportunity lately but this bonanza is about to end someday, so we're back to being wise"

[Mister Imperceptible]

Love the Starship Trooper reference!

The wrinkle regarding whether the short-term rates are controlled by central banks is to look at the developments in the repo market since mid-September, and what is the feedback loop between the increasing national debt and the repo market developments.

[jacob]

@Seppia - Last year (around Nov 2018) I eliminated all my holdings which demonstrated an above average (relative to their sector) debt/equity level EXCEPT the ones (count: 2) that had made a big issue of deleveraging. They've subsequently followed through. Happy so far.

I'm convinced that the CEO/politico world is actually pretty small (sufficiently small relative to the Dunbar number) and many of these guys know each other already. So it's just a question of who is paying attention and who is following who. I stopped believing that this is about numbers/reality about 10 years ago. This is a greater fool market now. I just try to be a lesser fool.

[Mister Imperceptible]

Did not and am not making fun of anyone. Perhaps I am just am a poor communicator.

If I am wrong and precious metals markets move sideways, I am ok with that, it means I can buy more cheaply. My derivatives bets are a small portion (less than 20%) of my portfolio that could conceivably blow up. In which case we would have to see whether I have the balls to roll forward at a loss and continue with the strategy.

My portfolio does not exist in a vacuum. Meaning, the side-effect of being wrong is that the current state of the economy remains intact and I am able to earn more dollars that have not yet materially depreciated. The side-effect of being right is that I might be out of a job, hence the reason to position for explosive gains in the event I am right.

Note the difference: Dr. Fisker is managing a portfolio from “retirement” and I am still accumulating. A major component of my portfolio strategy is to hedge against the future loss of the ability to accumulate as rapidly (in real terms).

Consider it like building a portfolio backward from as it is traditionally understood. Instead of taking on more equity risk early or midway thru the accumulation phase, recognize that the ability to accumulate and contribute to the portfolio is correlated to the greater economy (and hence equity performance). This ensures that the loss of the ability to accumulate during equity-economy downturn is compensated for by not suffering major portfolio losses early or midway thru the accumulation phases.

[vezkor]

edit: moved post to the correct thread. Please delete this when possible. thanks!