Phillip Patrick Investigates Biden’s New Tax – What He Finds Is Very Alarming

Via Birch Gold Group

By Phillip Patrick for Birch Gold Group

There was a lot in last night’s State of the Union speech that came as no surprise. My predictions turned out to be pretty accurate – see for yourself:

There was one thing that really surprised me, though. Biden made one announcement that could be the straw that breaks the stock bull’s back.

Here’s how Reuters put it:

Biden, who earlier last year signed into law a 1% tax on corporate stock buybacks, used his speech to call for that to be quadrupled…

Today, I want to explain why this is a big deal.

What are corporate stock buybacks?

Just to be clear, this is what we’re talking about:

Corporate stock buybacks, where public companies buy back their own shares, thereby juicing the price of the shares as a way to return cash to shareholders, have grabbed headlines this year.

Biden has always hated the idea that corporations can effectively reward shareholders by buying its own shares on the open market. Here’s what he had to say about corporate buybacks in a Wall Street Journal op-ed back in 2016:

The notion that companies forgo long-run investment to boost near-term stock price — is one of the greatest threats to America’s enduring prosperity. Private investment — from new factories, to research, to worker training — is perhaps the greatest driver of economic growth… Yet all too often, executives face pressure to prioritize today’s share price over adding long-term value.

Seriously – one of the greatest threats to America’s enduring prosperity?

(Give the man credit, though, for acknowledging that private investment is the greatest driver of economic growth. That’s right – it is not government spending.)

Then I actually looked into this issue and what I learned astonished me…

25% of total stock market cap is buybacks

There’s really no way to prepare you for this.

That’s simply mind-boggling.Fully one quarter of today’s stock market owes its value to corporate buybacks.

And that number is climbing! January 2023 set a record for corporate buybacks, triple last year’s numbers, beating the previous record by 15%.

Now, corporations buying shares of their own stock on the open market is perfectly legal. Even when they have to take out loans to do so. But is it a good idea?

Let’s consider.

The opposite of diversification. Diversification is “the only free lunch in investing” as Nobel Prize-winning economist Harry Markowitz told us. A company buying its own shares is very much the opposite of diversification.

Consider from an individual’s perspective: if you’re employed by a publicly-traded corporation and you buy stock in that corporation, you’re concentrating rather than diversifying. In other words, one accounting scandal or a particularly bad quarter could cost you both your job and your savings.

Debt-funded growth. Most companies have relied on loans to fund their stock buy-backs over the last several years. Compare corporate borrowing to the overall market cap and you’ll see a very clear correlation. Corporate debt has approximately doubled over the last decade. I don’t know exactly how much of that was spent on stock buybacks, but I do know that rising debt is not healthy.

Systemic fragility. These two factors, concentration and rising debt levels lead to greater systemic fragility. Let me explain what that means:

Chevron recently announced a $75 billion stock buyback program on $10.78 billion quarterly profits. The Chevron balance sheet reports $15.43 billion total cash on hand. So where does the $75 billion come from? Presumably, loans.

Banks that make those loans are now dependent on Chevron’s ability to repay them. Other corporations are now dependent on Chevron’s continued success. Not only Chevron’s employees and vendors, but Wall Street banks too.

All this means the next time something like this happens, it will be much worse for many more people.

We’ll have to see whether Biden’s efforts to tax corporate buybacks into extinction will also crash the debt-fueled stock bubble…

What if the buyback bonanza is over?

Even a 2% tax rate on stock buybacks would cause nearly half of corporations to change their buyback plans. A 4% tax? On top of higher interest rates on loans (thanks to the Fed’s interest rate hikes) corporations need to finance those buybacks?

This combination could be enough to return current stock valuations to rational levels.

“Return to rational levels” sounds very calm, doesn’t it? Consider: based on the Shiller PE ratio, stocks are trading at double their historic average valuation. That means stocks must drop 50% before being fairly valued, based on history. 

Biden may end the buyback bonanza with taxation. Ultimately, though, it doesn’t matter. I believe, as Peter Reagan memorably said, the “financial law of gravity” (reversion to the mean) informs us that what goes up always comes down.

Be ready.

After 8 long years of ultra-loose monetary policy from the Federal Reserve, it’s no secret that inflation is primed to soar. If your IRA or 401(k) is exposed to this threat, it’s critical to act now! That’s why thousands of Americans are moving their retirement into a Gold IRA. Learn how you can too with a free info kit on gold from Birch Gold Group. It reveals the little-known IRS Tax Law to move your IRA or 401(k) into gold. Click here to get your free Info Kit on Gold.

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