The Slow Collapse of Long Term Planning | How Money Works

0:00Yamavav Resortant Casino at Sandman Well is bringing the biggest laughs to the stage. Break Taboos with Ali Wang on August 28th and 29th. Enjoy Ralph Barbosa's Dry Humor on September 18th and 19th. And don't miss Nikki Glazers on Apologetic Comedy November 19th. Tickets on sale now at YamavavTheater.com. Only at Yamavav Resortant Casino, celebrating its 40th anniversary. You in must be 21 to enter. When you shop pick up at Fred Meyer, you can expect the savings you love and fresh groceries selected just for you. Our associates are committed to getting every detail right, carefully hand picking your items, checking for quality and freshness and packing your order with care. Because bringing you fresh, quality groceries is what we do best. And right now, enjoy $30 off your first online order of $75 or more. Restrictions apply, seaside for details. Fred Meyer, fresh for everyone.

1:27While 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 and 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 investors happy in the short term. This trend is the result of a business strategy that can explain the stagnation 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 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, when it comes to the financials of the company, the company initiating a $6 billion stock buyback.

2:28Bed, bath, 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. My administration, awarding Intel nearly $20 billion worth of grants and loans, that of course from the CHIPSAC company right now will receive $8.5 billion in grants, but could get as much as up. 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 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 earned 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 long term 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&P 500.

3:37At 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 based on performance, especially performance that returned more money to them. Now, hot take alert, but this by itself is completely reasonable. Shareholders owned 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 reels though, was when a law that significantly limited stock buybacks was repealed in 1982. This led executives use company money to buy back 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 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 cover the price of the company shares.

4:39Today, that PE ratio is over 36, which really just means that shares are roughly 6 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 they are causing the rest of the business to fall apart. Stock buybacks stirded as an alternative to dividends that could be used when the executive team believed that the company 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.

5:45A 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 businesses, this was clearly very dumb, but a pump stock price is 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 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 Zipper Cruder. 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 Zipper Cruder comes in. Their powerful matching technology connects you with top candidates fast, so you don't waste time sifting through endless resumes.

6:49When I'm hiring, I want the best people on my team ASAP, and Zipper Cruder Smart Tech starts showing you your qualified candidates immediately. That's a game changer. Higher experienced people who are excited about what they do, with Zipper Cruder. Four out of five employers who post on Zipper Cruder, get a quality candidate within the first day. See for yourself. Go to this exclusive web address to try Zipper Cruder for free. Zipper Cruder.com forward slash how many works. Again, that's zipper Cruder.com forward slash how many works. Zipper Cruder, 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. Yamabah Resort and Casino at Sandman Well is bringing the biggest laughs to the stage. Break taboos with Ali Wang on August 28th and 29th. Enjoy Ralph Barbosa's Dry Humor on September 18th and 19th. And don't miss Nikki Glazer's unapologetic comedy November 19th. Tickets on sale now at Yamabah Theatre.com. Only at Yamabah Resort and Casino, celebrating its 40th anniversary.

7:53You in must be 21 to enter. When you shop pick up at Fred Meyer, you can expect the savings you love and fresh groceries selected just for you. Our associates are committed to getting every detail right, carefully hand picking your items, checking for quality and freshness and packing your order with care. Because bringing you fresh, quality groceries is what we do best. And right now, enjoy $30 off your first online order of $75 or more. Restrictions apply, seasite for details. Fred Meyer, fresh for everyone. Visible puts unlimited 5G data in hotspot in the palm of your hand. Powered by Verizon's 5G network, with no contract holding you back. And for a limited time, you can get visible for just $19 a month for 12 months when you use promo code Save6. All the features of Big Wireless Service for half the cost. Tap the banner to switch today. Terms apply, standard rate applies at month 13. See visible.com for plan features and network management details.

8:57Already knew this. And there is a reason that they simply don't care. Over a decade ago, one of the CEO's broke rank and wrote in an open letter that too many companies have cut capital expenditures and even increased debt to boost dividends and increased share buybacks. That was back in 2014. And what people thought was the peak of the 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 had treated his executive comrades to raise the alarm about how share buybacks had undermined the market was none other than Larry Fink, the head of BlackRock, 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.

9:57The first reason is that there is now a lot more money to be made in value extraction rather than value creation. William Luzonic, 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 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 a business and then with average company PE ratios were 5-6, that means it would take 5-6 years for the business to

10:59cover 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 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 existing 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 finding their own technical developments. Even still, the net earnings of the largest list of 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

11:59have 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 shake up 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 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, guarantees, and intellectual property awards, there are limitless avenues for businesses to make money off government spending.

13:03This 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 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 1944. 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 laying off workers ahead of the next election. As Luzonik noted in his article, this is over time created a system of profits without prosperity, and now, even those profits

14:06are bouncing on a delicate system of speculative wealth and unsustainable government spending. So yeah, I guess we gotta 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 reliant on taxpayer money, and the economy is a whole more fiscally sound. But we have now built such a big debt-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 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

15:06government 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 find yourself as a CEO of a major public company and you had the opportunity to secure a lucrative options package by doing 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 biodes 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

16:10solutions for almost every problem in corporate America. Regularly, the financial f***ery that the CEOs are allowed to pull with their own stocks and control corporate consolidation. If people can only get rich slowly, then the 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 a life 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. Yamabab Resort and Casino at Sandman Well is bringing the biggest laughs to the stage. Break taboos with Ali Wang on August 28th and 29th. Enjoy Ralph Barbosa's Dry Humor on September 18th and 19th. And don't miss Nikki Glazer's unapologetic comedy November 19th. Tickets on sale now at Yamabah Theatre dot com. Only at Yamabah Resort and Casino, celebrating its 40th anniversary. You in must be 21 to enter.

17:11When you shop pick up at Fred Meyer, you can expect the savings you love and fresh groceries selected just for you. Our associates are committed to getting every detail right, carefully hand picking your items, checking for quality and freshness and packing your order with care. Because bringing you fresh quality groceries is what we do best. And right now, enjoy $30 off your first online order of $75 or more. Restrictions apply seasite for details. Fred Meyer, fresh for everyone. Imagine a left brain and a right brain got together and came up with an incredible banking solution. The innovative minds at Silicon Valley Bank and the pragmatic ones at First Citizens Bank have put their heads together so they can deliver solutions tailored to your unique financial needs. You want deep innovation insights paired with the financial power of a top 20 US bank? Now you can have it. Silicon Valley Bank and First Citizens Bank. It's the best of bank worlds.

18:39Online and a flexible spending capacity that can grow with your business. You'll have the confidence to keep building. Apply today and earn a welcome offer of $1,500 cash back. After you spend $50,000 in qualifying purchases on your new card within the first six months of card membership, terms apply. Learn more at Go.Tamik slash graphite. On-Select Unlimited Plants, which means you can watch every out of market game, every Sunday afternoon, and it's all on us. Now that's the Verizon way to kick off the NFL football season right. Switch and get NFL Sunday ticket from YouTube on us, only with Verizon.