This is how it's going down. Late last week, Seattle Times reported that a "preliminary crash report" confirmed that the "Ethiopian 737 MAX pilots lost control" of the plane "despite following Boeing’s instructions." This is extremely bad news for the world's biggest plane manufacturer. Today, NBC reports that Bank of America has downgraded Boeing's stock precisely because its 737 Max troubles are much deeper than expected. Bank of America is also making matters worse by advising FedEx to delay "half its planned purchases of Boeing 767 and 777 aircraft by 2 years.” And what does BofA want FedEx do with the saved money? Precisely what has made Boeing financially vulnerable: buyback its own stock.
This will come as a shock to many people who have no idea of the scale at which stock buybacks have grown over the past 15 years. The bad business of repurchasing your stock so as to distribute income or borrowed capital to shareholders and increase share value by removing outstanding shares from the market, has no social value whatsoever, and, unlike dividends, they are disorganized. (Recall that credit default swaps—[financial] weapons of mass destruction—were similarly outside of the state order or regulation.) Boeing has been on a buyback binge like nobody's business.
But I know what you are thinking. Boeing is a blue chip company. It's huge. How in the world could it collapse or cause a crash? And I can even hear you say: You are not an economist or You've had no academic training in finance. You are even a socialist. And so on. Dear reader, I hope to wake you up from your sleepwalking with this 2017 post, "Hollowed-out blue chips are the next subprime," by a mainstream business reporter and former "international merchant banker," Martin Hutchinson, who recently posted about the real and mounting dangers of buybacks in the red commie rag called MarketWatch.
Here is the "bursting-out-of-sleep-shocker" passage in "Hollowed-out blue chips are the next subprime":
Boeing (NYSE:BA) Again because of stock repurchases of $42 billion, Boeing has a book net worth of around zero (depending on which quarter you pick) and a tangible net worth of minus $6.8 billion. This is a highly cyclical business, with massive capital investment requirements for each new aircraft; Boeing is surely in trouble in the next downturn.
This was in 2017. Boeing has not stopped blowing billions on buybacks. And now its stock is crashing because the problems of its poorly made but best-selling product, the 737 MAX, have, in all in honesty, no end in sight.
The latest bubble in the long history of bubbles (they go all the way back to the tulip mania of the Dutch Golden Age—capitalism's first major moment) is caused by share buybacks. Here are the numbers, which can be found Mariana Mazzucato's excellent and recent book, The Value of Everything. (Again, Mazzucato is no commie—she fuses the ideas of John Maynard Keynes, an economist and market speculator, and Joseph Schumpeter, a dandy and melancholy conservative, with those of a legit lefty, Karl Polanyi, a mid-century economic historian and sociologist.) She points out that a study conduct by the American economist William Lazonick revealed that between 2003 and 2012, top US corporations spent $2.3 trillion on share buybacks (that a stunning 54 percent of their earnings—only 9 percent went to product development).
Last year, share buybacks nearly reached $1 trillion. Many expect that that record will be broken if all goes well this year. We can call the buyback mania a bubble precisely because there's nothing in recent developments in the conventional economy (making and selling products) that can justify its galactic expansion. Nothing. The general economy has been growing around two percent—and this is much less if you remove the growth of the financial sector from the GDP (more about this in another post that concerns JP Morgan CEO Jamie Dimon, the king of banking).
Now why does Martin Hutchinson conclude that a blue chip company like Boeing will trigger the next crash in much the same way that the subprime loans did in the last? There are two things that are packing a huge amount of risk in the stock market. Both involve a form of inflation that is loved to speculators, the inflation of financial assets. The first inflation comes in the form of acquisitions (read Hutchinson's piece to get the details on this). But basically companies are buying overpriced companies because the cost of borrowing is cheap. The other is stock buybacks. Both, according to Hutchinson, have been "hollowing out" the "balance sheets of major companies" for over a decade.
Subprime mortgages caused much of the 2008 financial crisis by defaulting in much greater concentrations than the experts expected. The next financial crisis is likely to be caused by a similar disaster that surprises the experts. I have an excellent candidate: Fortune 500 companies that have been repurchasing their shares like maniacs for a decade, and in many cases have left themselves with negative net worth. In a major recession, when their business drops off and their cash flow turns negative, they will only need a breath of adverse wind to default. Like the subprime mortgages, once a few major companies default, the rest, with fragile credit structures, will fall like dominoes.
So, what exactly is the current state of Boeing after a long buyback binge that transferred a huge amount of its earnings to shareholders and executives? Is it really prepared for a downturn or a serious slowdown in sales? Not at all folks. It recently allocated another $20 billion to buybacks. Why?
Read for yourself:
Despite growing concerns that the global economy is slowing down, Boeing sent a big message to shareholders it remains upbeat about its business. The board voted Monday to raise its quarterly dividend 20 percent to $2.05 per share in 2019.
This happened in December, 2018, after the Lion Air 737 Max crash. The corporation could blow that off. But can it afford to blow off the Ethiopian Airlines crash and the grounding of its best-selling product? Now, what happens if one blue chip company goes belly up? Investors will look at the other "safe bets" and begin to prefer cash to shares. This is called liquidity preference. It has a long history. It's going to happen again. Soon. Believe you me.