Secular Stagnation (Or Corporate Suicide?)

Robert Ayres and Michael Olenick, INSEAD
INSEAD WORKING PAPER

 Abstract

We advanced the null hypothesis that stock buybacks will have a positive impact on the market value of a business over a five-year horizon. We find that there is a negligible chance for this to be true (with a two tail heteroscedastic p=.000023).

We find that the more capital a business invests in buying its own stock, expressed as a ratio of capital invested in buybacks to current market capitalization, the less likely that company is to experience long-term growth in overall market value.

Our findings, for US firms worth more than $100 million, suggest that long-term investors, such as pension funds, should be wary of investing businesses that have engaged in significant cumulative stock repurchases (i.e. 50% or more of current market cap.)

We find that excessive buybacks in the past decades are a significant cause of secular stagnation, inasmuch as they effectively reduce corporate R&D while contributing, instead, to an asset bubble that creates no value.

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The Bubble Economy: Is there a way out?

The United States may not be the most admired country in the world today, as once it was. Bubble Economy book cover - top halfBut the economic decline of the US is still capable of doing much harm outside its borders as well as internally. Part of the underlying  problem is an extremely unrepresentative  government system of the US.  Congress is currently  dominated by entrenched special interests – “big money” —  that want to preserve the status quo. This reality makes it very difficult for the executive branch  to function day-to-day, still less respond creatively  to new challenges.

There is a weak economic  recovery under way. It is weak because most OECD  governments have been persuaded by conservative economists that government debt is now much too high and that government deficits have to be cut by cutting welfare spending.  As a direct consequence of austerity policies, unemployment is still too high, especially when under-employment and “drop outs” are taken into account. Youth unemployment is bad in the US, worse in Europe (except Germany) and truly terrible in the Mediterranean countries (Greece, Italy, Spain, Portugal).  Meanwhile, economic inequality has been growing , most workers (except the top 10 percent) have static or declining incomes,  but corporate profits have soared.  Corporations, especially the “tech” companies of Silicon Valley, are sitting on vast hoards of money, stashed mostly in off-shore banks to avoid taxes.

Neo-Keynesian economists, like Paul Krugman,  have been saying for years that austerity is a bad idea. They advocate more “stimulus” spending,  even at the expense of increasing the government  deficits. The problem with that approach, of course, is that there is no visible end to it.  Bigger deficits would (will) unquestionably increase the government debt burdens still more in the short run. The problem is that it is not clear why or how growth could cut those deficits in the future.

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Part II. The Future of Energy: Why the price of oil and gas should increase (but will it?)

– Robert U. Ayres. Paris, 29 October 2014

Photosynthesis was (and is) the biological process that removed carbon dioxide from the primitive atmosphere and left some of the oxygen in the atmosphere and sequestered CO2 in the earth’s crust. That happened as living organisms, such as diatoms, in the oceans attached carbon dioxide to calcium ions to make shells for themselves and left them as chalk or limestone. This went on for billions of years. When the oxygen level in the atmosphere rose enough, the new ozone layer cut the UV radiation level and made life on land feasible. Plants moved onto the land, and thrived spectacularly during the so-called Carboniferous era, several hundred million years ago when the CO2 level was still quite high by present standards. For over a hundred million years immense accumulations of dead plant biomass were covered by silt from erosion of the land surface. Meanwhile the bodies of dead marine organisms accumulated in some places under the sea. These accumulations were gradually compressed and “cooked” (pyrolized) releasing some of the hydrogen and converting the rest of the mass successively into peat, lignite and coal or (in the case of marine biomass) into bitumen and petroleum.

These accumulations constitute an energy (exergy) resource that currently drives industry and human civilization. We humans are now “un-sequestering” those stored hydrocarbons, combining them with oxygen and putting CO2 back into the atmosphere. Moreover, we are doing this at a rate thousands or even millions of times faster than the original accumulation. This ultra-rapid dissipation of stored exergy in the form of hydrocarbons clearly cannot continue indefinitely, not because we will run out of carbon fuels immediately, but because the atmospheric buildup of CO2 cannot continue much longer without catastrophic climatic consequences (IPCC 2007, 2014).

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Part I: The Future of Energy (and the Planet)

– For Exernomics. Robert Ayres, Paris. 25 October, 2014

The future of energy will be driven by a combination of price and availability, as it always has. But in an uncertain world one thing is very sure, and that is that this combination is already in rapid transformation, so we are looking at a very different future indeed.

In my recent book (“The Bubble Economy”) , I have argued that the rising price of oil, in particular (because of its unique role as a fuel for mobile applications) together with the declining price of “renewables”  creates an opportunity for long-term investors. It is estimated that $2 trillion/year must be invested in renewable energy to meet future energy demand without increasing carbon dioxide emissions. Surprisingly, perhaps, current trends suggest that – contrary to widespread assumptions – such investments can be very profitable.

cropped-enegy-penury-nyc-skyline-without-lights.jpg

New York City skyline during power outage

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The Bubble Economy: Energy, Finance and Growth

– R. U. Ayres. Support for public presentations in Cambridge, Carnegie Mellon, Washington DC, November 2014

I want to present four theses of possible interest. First, that economic theory today has not caught up with the changes in the world since Adam Smith and David Ricardo. Then externalities were comparatively rare and unusual. Today they are pervasive, thanks to urbanization, networking and globalization. The financial externalities associated with bubbles now far exceed in damage the profits to the bubble-makers.

Second, economic growth since that time has been demand driven because energy prices kept falling,– on average —  until the beginning of this century. Future growth is not guaranteed in a world of “peak oil”, and oil price bubbles. It is not certain that our grandchildren will be much richer than we are. Secular stagnation May be caused by energy constraints.

Third, the policy response by central banks – low and lower interest rates, creates the condition for the next bubble. This cannot continue.

Fourth, there is a profit opportunity approaching with a huge payoff If grasped it will kickstart growth, reduce unemployment, ameliorate the Greenhouse effect and help solve the problems of the pension funds.

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Renewable Energy Portfolios: New avenues for pension funds

solar panel array m4gwThe problem of providing pensions for retirees is becoming acute. Dependency ratios are climbing in all western countries. By 2050 they will double in most western countries. In Japan, the number of retirees, now 35 percent of active workers, will reach 80 percent. Most European countries will have dependency ratios greater than 50 percent. The US, now about 20 percent, lags a little, because of continued immigration (mainly from Latin America), but the ratio will rise to 40 percent by 2050.

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