US companies buy back their shares

There is a very revealing story in today`s New York Times p.c1 business news by Floyd Norris `"Why won`t companies invest more " that points out that more and more US corporations are refusing to invest in their firms and are instead paying out bigger dividends and also buying back their own shares on the stock market.
This could reflect two trends. A continuing bearish sentiment about future economic prospects contrary to the optimism of the The Federal Reserve ,according to one of its governors economist Frederic Mishkin who was speaking at a conference at Bard College and the Jerome Levy institute, might be resposible .

OR it might reflect managers` preferences for high share prices in order to more profitably excercise their stock options. In any case companies like IBM are apparently doing this by borrowing money cheaply on the money markets. This is an important development if it becomes widespread because no new investment accompanied by higher stock prices and larger debt loads for corporate balance sheets means less new economic growth and trouble ahead if a real downturn materializes.

On the subject of stock options and managerial rewards Paul Krugman has a good piece(see the op ed page) on growing income and wealth inequality where he points out that the top hedge fund manager took home 1.7 billion dollars last year or 38,000 times the average income. compare that to the robber baron days when John D. Rockefeller took home just 7000 times the average income. Clearly future historians will have something to say about these times.

Generally speaking excessive wealth and income inequality and the corporate practices described above are generally a fairly accurate predictor of economic bust sometime in the near future. The only thing preventing it is the positive long run Kondratieff wave, the Schumpeterian boom in technology and the explosion of economic activity in China and India. How long that can last is anybody`s guess.

In fact, the latest economic data from the United states shows a significant first quarter slowing down of economic growth with the growth rate dropping to a mere 1.25 per cent, the slowest growth in the past four years. if the trend continues look for the Federal Reserve to lower the trend setting interest rate on overnight lending.