The Slow Collapse of Long Term Planning

0:00 while everybody in their chainsaw is fixated on US federal debt there is another type of debt that has grown just as fast and is most likely a bigger problem business debt now is at all-time highs and is approaching $14 trillion in America alone unlike the government private businesses don't have the luxury of printing their own money in an emergency and as interest rates have risen they are starting to feel a squeeze to make matters worse most of this money hasn't been used to make productive Investments it's been used for financial engineering to make invest happy in the short term this trend is the result of a business strategy that can explain the station of companies like Boeing Intel and General Electric and it's largely responsible for increasingly unstable stock markets and it's also making that other debt situation much worse now the best part

0:46 is that this has been tried many times before and people know that it's not sustainable but that's a problem for next quarter General Motors uh when it comes to the financials of the company the company initiating a $6 billion stock buyback B and Beyond filed for bankruptcy today the company says profits took a big hit during the pandemic they tried to bounce back by closing nearly half their stores but it just wasn't enough Administration awarding Intel nearly $0 billion worth of Grants and loans that of course from the chips act company right now will receive 8 and A5 billion in Grants uh but could get as much as a okay so back in the 1970s companies had a problem their Executives were just regular employees that were collecting a paycheck like everybody else their paycheck was larger but actually not that much larger than a regular employee according to data

1:35 from the economic policy Institute the average CEO of one of the largest 350 companies in 1965 earned just over 20 times more than the average employee this was partially because average workers earn more and because Executives earned significantly less year to year this was obviously a big problem because it encouraged Executives to hold on to their jobs longterm and not take too many risks so they could keep on earning this comfortable salary back then the average tenure of a top executive was roughly double what it is today and the average company spent roughly twice as much time in the s&p500 at this time most of the profits these companies made were reinvested back into the company itself to acquire new business research and develop new products and pay their staff eventually shareholders figured out that it was better to pay these Executives larger bonuses

2:21 based on performance especially performance that returned more money to them now hot take alert but this by itself is completely reasonable shareholders own the company and they should make sure that there are systems in place to align employee incentives with their own objectives and of course their number one objective is getting a return on their investment where things did start to go a little bit off the reals though was when a law that significantly Limited stock BuyBacks was repealed in 1982 this let Executives use company money to buyback their own shares on the public market which did a few things the first thing was that it increased the share price even if the company wasn't actually doing any better when when this law was repealed the average company in the S&P 500 had a price to earnings ratio of about 6.2 which meant 6.2 years of company profits would

3:08 cover the price of the company's shares today that PE ratio is over 36 which really just means that shares are roughly six times more expensive than they were in 1982 for the same amount of profit this is great for existing shareholders but makes the whole Market a lot more questionable in terms of True Value BuyBacks also make Financial metrics like earnings per share look better but not because the company makes more money but rather because there are just fewer shares now another hot take alert but even this was arguably good for shareholders who enjoyed capital appreciation in tax efficient stock returns but as the late Charlie Munger once said show me the incentive and I will show you the outcome stock BuyBacks are kind of like crack for corporate finance they will get that stock price High even if the rest of the business is falling apart or even if

3:56 they are causing the rest of the business to fall apart stock by back started as an alternative to dividends that could be used when the executive team believed that the company's stock was undervalued that eventually gave way as more money started to be spent on BuyBacks than dividends and then more money was spent on BuyBacks than reinvestment into the business itself to fund R&D or Workforce Development a lot of companies took it even further than this and spent more on stock BuyBacks than the company was making a profit they did this by borrowing money to buy their own shares back from their own investors which is why corporate debt is at all-time highs now for most business businesses this was clearly very dumb but it pumps stock prices enough for CEOs to make absolutely enormous bonuses the average CEO now earns more than 340 times more than their average employee and with such enormous fortunes that can be made in such little time it's very hard

4:46 for anybody to not play the game of course it's not sustainable but that's next quarter's problem so it's time to learn how money Works to find out what happens when the next quarter finally arrives this week's video is sponsored by zip recruiter running this channel takes a ton of hard work and I couldn't do it without the amazing team behind the scenes whether you're growing a business or just need the right people in your corner hiring the best talent makes all the difference that's where zip recruiter comes in their powerful matching technology connects you with top candidates fast so you don't waste time sifting through endless resumés when I'm hiring I want the best people on my team asap and zip recruiter smart Tech starts showing you your qualified candidates immediately that's a game changer hire experienced people who are excited about what they

5:32 do with zi recuiter four out of five employers who post on zi recter get a quality candidate within the first day see for yourself go to this exclusive web address to try zip recruiter for free ziprecruiter.com how money works again that's ziprecruiter.com howon Works zi recruiter the smartest way to hire so corporate BuyBacks have been bad for workers bad for the economy and worst of all it's been bad for the investors but people already knew this and there is a reason that they simply don't care over a decade ago one of the CEOs broke Rank and wrote in an open letter that too many companies have cut Capital expenditures and even increased debt to boost dividends and increase share BuyBacks that was back in 2014 and what people thought was the peak of the

6:18 buyback Mania since then quarterly BuyBacks have roughly doubled despite interest rates being much higher which would theoretically make businesses want to hold on to cash rather than borrowing it but that's a problem for next quarter by the way the CEO that betrayed his executive comrades to raise the alarm about how share BuyBacks had undermine the market was none other than Larry Fink the head of Black Rock the largest asset manager in the world so yeah it's pretty easy to blame the rise in short-term thinking on corporate Executives using questionable Financial strategies to make themselves incredibly wealthy but they are really just a symptom of a much bigger problem that goes well beyond Corporate America and there are a few reasons why this is happening the first reason is that there is now a lot more money to be made in value extraction rather than

7:05 value creation William Lazonic a professor of Economics at the University of Massachusetts wrote about this in a now inFamous Paper titled profits without Prosperity he noted that between the end of the second World War and the early 1970s most businesses became Successful by creating value for consumers or other businesses today that's much harder as companies are trying to keep up with their financial commitments to shareholders over time more money for research and development has come from the government instead as companies have spent what they used to spend on R&D on pumping up their own stocks today corporate profits are at all-time highs while a record number of companies are actually losing money this again is largely the result of short-term business planning as companies price to earnings ratios have expanded the best way for innovators to get money out of their ideas is not actually to run a business it's to scale

7:54 a business and then sell it when average company PE ratios were 5 to 6 that means it would take 5 to 6 years for the business to cover its purchase price good Founders would rather stick with their business because they could make that money back pretty quickly today some valuations are easily as high as a 100 times earnings so Founders and early investors would be long dead before the company has had time to make more money than what they could just get by selling now some of these companies could continue to grow but a lot of them still fail a lot of them never make any profit at all but still make their Founders very wealthy big exist companies don't mind this because it lets them simply purchase the best ideas before they can compete with them and they don't need to take the risks of funding their own technical development even still the net earnings of the

8:40 largest listed companies in America is claiming the highest share of GDP in history which in plain English means corporate profits make up more of our economy than ever with the exception of early pandemic stimulus so where are these profits coming from well there are only two customers left who still have money to fund these profits the first is very wealthy people who have so far benefited from stretched asset values but we spoke about them in last week's video If there is oh I don't know some kind of shakeup that impacts asset markets these people will cut back on their spending which could create a bad feedback loop lower spending by the only people who can still afford to spend leading to lower company earnings leading to Market drops leading to further reduced spending of course the market can stay irrational for a long time but this is one of

9:28 the risks of having too much economic activity dependent on a small group of people but don't worry there is a backup the other big spender is the government who either directly through contracts or grants or indirectly through other spending has been such a big driver of corporate profits that you probably didn't even realize that I mixed up these charts they're the same picture through contracts schemes deferments subsidies incentives co-investments bailouts financial protection programs offsets bonuses grants public private Partnerships guaranteed and intellectual property Awards there are Limitless avenues for businesses to make money off government spending this is not to mention new initiatives like the potential cryptocurrency Reserve which will also largely benefit institutional asset holders but that's a whole different discussion now to be

10:14 fair regardless of party over the last 50 years the government has become an incredibly lucrative customer just federal government expenditure now accounts for more than a third of our GDP Which is higher than even the total war economy of 194 4 other countries like the UK are higher but here in America we also have significant spending done by state governments as well so it's not an entirely fair comparison business executives are not the only people guilty of looking out for their own short-term interests at the expense of wider long-term consequences government programs that put money into people's pockets create employment and promise to solve big problems are really easy to announce but once they are operating they are really hard to roll back because nobody wants to be the politician link off workers ahead of the next election as noted in his article

11:03 this has overtime created a system of profits without prosperity and now even those profits are balancing on a delicate system of speculative wealth and unsustainable government spending so yeah I guess we got to talk about it the Doge in the room now the disappointing part of all of this is that almost everybody agrees that cutting back on government spending is a good initiative that should make businesses less rely on taxpayer money and the economy as a whole more fiscally sound but we have now built such a big Deb filled House of Cards on such a precarious system that walking these programs back will take meticulous planning over years if not decades to avoid any runaway economic complications impulsive sweeping changes done over the course of weeks to grab some headlines is exactly the same kind of short-term thinking that got us into this mess in the first

11:49 place realistically the biggest source of fat that can be cut is the various Cost Plus contracts awarded to companies with immense lobbying pressure even those cutbacks should be done slowly and carefully and probably not be overseen by one of the biggest beneficiaries of government funding we have asset markets reaching record stretch valuations held up by record corporate and government debt which can no longer rely on genuine household spending because their savings are at record lows and their debt is also at record highs now this kind of short-term planning is nothing new human nature did not change in the 1970s and before this turns into another episode of Angry Stickman points at historic financial data the more important question is what can be done about this you should probably acknowledge that if you ever found yourself as a CEO of a major public company and you had the opportunity to secure a lucrative options packaged by doing

12:38 a share buyback you would probably do it I mean I know I would certainly do it executive compensation has become so generous that just one or two years of these bonuses can set your family up for generations and if the company crashes and burns after that it really doesn't matter for you kind of sucks for the employees though the same basic truth is true for starting a company it doesn't need to be a viable business anymore it just needs to shake things up that it gets it acquired there are biots that happen every single day that would also comfortably set people up for life now the solution to these problems are the same old boring solutions to almost every problem in Corporate America regulate the financial [ __ ] that the CEOs are allowed to pull with their own stocks and control corporate consolidation if people can only get rich slowly then the

13:23 next quarter becomes their problem again the last big problem is that a lot of people in leadership positions and businesses or the government have become extremely old there is no point thinking about next quarter if you aren't going to be alive for it go and watch this video next to find out how we let this happen and make sure to like And subscribe to keep on learning how money works