It was a month ago when Zero Hedge first revealed [11]that as QE was "tapering", a just as powerful and even more indiscriminate force had stepped in to make up for the loss of Fed buying of last resort: corporations themselves, almost exclusively on a levered basis (issuing debt whose use of proceeds are stock buybacks). Specifically, we showed that the total amount of stock bought back by corporations in Q1 was the highest since the bursting of the last credit bubble. In fact it was the highest ever.
[12]
This was promptly noticed by both the WSJ [13]and the FT. [14] What the two financial media outlets likely have not grasped is that based on trading desk commentary, according to which the bulk of "flow" now originates almost exclusively at C-suites ordering banks to continue the buyback activity, the Q2 stock repurchase totals will be even greater than Q1, and likely surpass $200 billion. This means that every month this quarter companies are buying back about $70 billion of their own stock: an amount which at this runrate will surpass the Fed's original QE(3) amount of $85 billion within a quarter!
But while the "mysterious, indiscriminate [11]" buyer of US stocks has been fully unmasked now, what most likely do not know is that just this is happening at a comparable record pace nowhere else but the place which is mirroring and repeating every single Fed mistake tit for tit.
Japan.
According to Bloomberg [15], companies in the Topix index are acquiring their own stock at the fastest pace ever, led by NTT Docomo Inc. and Toyota Motor Corp., with $25 billion of announced purchases so far this year, data compiled by Bloomberg show. The buybacks are limiting losses in the world’s worst-performing developed equity market: Companies using the strategy have gained even as the Topix slid.
Only $25 billion you say? Why that is less than a fifth of what their US peers are doing. Well, yes. But remember that on a relative basis, the BOJ's $75 billion or so in QE is orders of magnitude greater than the Fed's own QE when one factors in the relative sizes of the US and Japanese stock markets.
Additionally, keep in mind that the net annual bond issuance in Japan is already well below half of the amount monetized every year by the BOJ (which means if you think US bonds are illiquid, just try to buy, or sell a JGB - good luck). This means that vastly more of the BOJ's intervention ends up in the stock market [16]: either Japan's or that of the US, courtesy of immediately fungible global fund transfers.
[17]
But back to Japanese bond buybacks, which in a far more "concentrated" and illiquid market, are having an impact on stock prices that is orders of magnitude higher than their nominal value would suggest.
Bloomberg then proceeds to give a quick lesson on logic 101: “Share buybacks have the effect of supporting the market when it’s weak,” Daiwa Securities Group Inc. quantitative analyst Masahiro Suzuki wrote in a report on June 10. “Return to shareholders is a big theme.”
Companies’ purchases of their own equity can be seen as a vote of confidence by executives that their stock has room to rise. The buybacks can also suggest a company has run out of things to spend money on, curbing its growth potential.
The problem, whether Japanese corporate executives are merely doing the same as their US peers and cashing out on their equity-linked comp plans at a furious pace thanks to their stocks hitting record highs having used corporate cash to boost the stock price while saddling the company with massive debt which will be some other CEO's concern down the line (a clear conflict of interest if there ever was one), is irrelevant. What matters is that stock buybacks have zero impact on the economy. Zilch. Nada. Because instead of investing capital in projects, either for maintenance or growth, all that happens is the shareholders get rich here and now, at the expense of economic, and certainly revenue, growth in the future (as we explained two years ago [18]).
Even if buybacks continue, companies need to increase investments at a faster pace, according to Coutts’ Calder, a harder choice compared to improving return on equity with share repurchases in the short term. The amount of cash they hold means companies should able to afford both buybacks and capital investments, he said.
While businesses have boosted capital spending for three straight quarters, their investments in the period ended March remained 31 percent below a 2007 peak, Finance Ministry data show.
“Buybacks only result in raising ROE and share prices, so their effect on Japan’s economy is indirect,” said Masaru Hamasaki, a Tokyo-based senior strategist at Sumitomo Mitsui Asset Management Co. “Capital investment directly boosts the economy, so I think for now, they should invest more money there.”
Since the start of January, 152 companies on the Topix announced buybacks worth 2.5 trillion yen, data compiled by Bloomberg show. The previous high for an entire year was 1.5 trillion yen in 2008. Companies unveiled an average 567 billion yen in annual buybacks over the decade through 2013, the data show.
And here is where it all comes full circle, because the "economic theory" so to say seeking to reward corporations right now is that these same corporations will, out of the goodness of their heart, turn around and share their profits with their non-stock holding employees, i.e. the rank and file. Because the only way an economy can generate benign inflation is if there are real (not nominal) wage increases. Instead, Japan's only inflation to date is in import cost, in "non-core" staples such as food and energy, and of course, the stock market.
This is what is also affectionately known as trickle-down economics. It also doesn't work. Case in point - Japan's soaring stock market has resulted in exactly zero wage increases in the past 23 months [19], and soon: straight years of declining wages. Of course, to the Keynesians in charge it simply means that any minute now Japanese wages will increase. Alas, they won't. Because corporations realize that this emergency liquidity injection measure is merely confirmation by the central banks that the economy is failing and that companies should either be stockpiling cash for whatever comes after the Fed or BOJ withdraw, or, failing that, hand it over to shareholders who can do the same however without a corporate veil, and the money will simply reside in a personal bank account instead of a corporate one.
“The government recognizes that in order to resuscitate Japan’s economy, there needs to be a cycle where corporations profit, then return those profits to the public,” said Hisashi Kuroda, the head of Japanese equities and chief portfolio manager at Meiji Yasuda Asset Management Co. “Even if public finances are used to help companies make more money, it’ll be negative for the economy if the firms just stockpile the cash.”
Not surprisingly, with the BOJ injecting trillions into the market, some of it makes its way to corporations. Sure enough, "Non-financial firms’ holdings of cash and deposits rose to a record 232 trillion yen at the end of March, BOJ data show. Earnings by Topix companies swelled 69 percent last year as unprecedented central bank stimulus drove down the yen, boosting exporters’ profits. That added to balances built by executives to shield their companies amid more than a decade of deflation and economic malaise."
Alas, as we noted every month, none of that cash is making its way to employees. Instead, in addition to buybacks it also going for other shareholder friendly activities like dividends. "Other types of returns to shareholders are also on the rise. Estimated annual dividends per share for the Topix climbed to 24.4 yen last week, close to the highest since 2008." And while there has been a modest pick up in CapEx too, it is well below the expected, and certainly well below any level that is required to sustain a virtuous economic cycle. Because what idiot CEO would opt to invest in growth that materializes in 5 to 10 years (the typical peak IRR of CapEx) or when some other CEO is in charge, when there is an quick and easy option to cash out now if said CEO holds stock.
In the meantime, everyone in Japan, and the US, is ignoring the reality and sticking their noise in the sand.
Brokerages are touting stock-picking based on who’s next to buy back shares.
Societe Generale SA says investors should seek out cash-rich companies with low leverage and valuations. Top picks include regional lender Tottori Bank Ltd. and homebuilder Mitsui Home Co., analysts led by Vivek Misra wrote in a June 4 report.
“Many investors don’t realize that corporate Japan is changing,” said Meiji Yasuda Asset Management’s Kuroda.
It's changing all right: in less than two years Japan has adopted all the worst qualities of the US financial system. And just like in the US, when the central bank liquidity music stops, the collapse will promptly follow.
Japan could have avoided this if it had merely continued it slow shallow drift into deflation: painful for debtors but sustainable for most, and most importantly, not some insane Ponzi game where the pensions of the population are being invested in overvalued, social-networking stocks. However, with its berserker rush into stimulating inflation at all costs, the next deflationary shock will be epic, and one whose only "fix" will be for the BOJ to go from mere JPY7 trillion liquidity injection per month, to literally pulling out the firehose and proceeding with creating the hyperinflation that results from a collapse in the currency which we have said since March 2009 would be the ultimate endgame of this entire failed economic and monetary experiment.
