40% Of The Bull Market Is Due Solely To Buybacks

What If I told you that 40% of the bull market rally over the last decade was from buybacks alone? That may not be as crazy as it sounds.

We previously discussed the misuse and abuse of stock buybacks over the last decade. Such is not surprising given the low interest rate environment. But, as we now know, there is a point where low rates deter economic activity. Companies become unwilling to “invest” due to the low return environment. The chart shows the problem of economic growth rates and monetary velocity.

The decline in monetary velocity is clear evidence the “economic transmission” system remains broken. One of the essential drivers of economic activity are banks lending money to support economic activity. As shown, the bank loan/deposit ratio has collapsed along with velocity. As a result, there is little benefit to loan money at ultra-low rates relative to the risk of default.

The problem for companies in a weak economic environment is the lack of topline revenue growth. Given higher stock prices compensate corporate executives, it is not surprising to see companies opt for a short-term benefit of buybacks versus investment.