Fleecing season

Practically all companies have excess production capacities, so they are not increasing their productive investments and, at the same time, the cost of renewing existing investments is going down. This being so, companies have disposable profits and borrowing possibilities to buy back their shares on the stock market. This is a reversal of the norm, where companies sell shares to finance investments, and is on a big enough scale to perturb market values.

Companies are not investing to increase production and are reinvesting at lesser cost to maintain production. They are not growing but they are making more profits. However, company buy backs and generous profits do not alone explain the record highs of stock exchange indexes. The other major factor is the low rate of interest. Bonds and shares compete for demand on the stock market. Bonds bring a return that is fixed at the time of emission, though the percentage changes when they are sold for more or less than their face value. This rate of interest is guaranteed, whereas the dividend paid to shares varies according to profits. The first is secure and the second is speculative. The past few years have seen such a glut of money on the stock market – largely due to quantitative easing – that rates of interest have been unusually low, share prices have been correspondingly high and returns on investments quite mediocre. The accumulated value of capital on the stock exchange has grown considerably – Dow Jones Index: Sept 2007, 16,000 (Feb 2009, 8,000) Feb 2015, 18,000 – but production has not followed and profits only partly.

Share prices have risen and stayed up because of low rates of interest and company buy backs. Behind this is quantitative easing. Banks were given wads of cash in exchange for overvalued bonds, and offered any more they wanted at negative interest. They multiplied the money and lent it out, thereby aggravating the general level of debt. Quantitative easing is over (though the ECB as a late starter is still practising it on a monthly basis, which explains why some European stock markets are still buoyant) and interest rates can only move upward, so share prices can only go down. The question is how far. They will have to compensate a swing to the security of bonds and the end of cheap credit, on top of falling sales and profits as austerity measures cut back demand. Added together these different factors look more like a fleecing than a haircut.