February 21, 2025 • 34 mins
This week, we look at why US automakers are getting hit by the threat of tariffs meant to protect them. And, the Inflation Reduction Act was supposed to be able to pay for its spending without increasing inflation - did it live up to its name? Plus, the promise of AI keeps growing along with the hurdles in its way. We talk to Nobel Laureate Geoffery Hinton and "Chip War" author, Chris Miller.
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Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:20):
This is Wall Street Week. I'm David Weston, bringing you
stories of capitalism. Vice President Vance tells the world the
US will lead in artificial intelligence, but there are some
hurdles to get over in the race to get there.
Plus the story of the tax on stock buybacks that
was going to make sure the Inflation Reduction Act lived
(00:41):
up to its name. But we start with a story
on everyone's mind this week on Global Wall Street, the
story of countries and companies trying to sort out with
the growing range of tariffs President Trump promises will mean
for them. With the US auto industry front and center,
at least for the tariffs threatened on Canada in Mexico.
Speaker 3 (01:01):
We're going to bring companies and jobs in at levels.
Speaker 4 (01:05):
That you've never seen.
Speaker 5 (01:06):
The only way you can do it is through the
threat of tariffs.
Speaker 2 (01:11):
In his first few weeks in office, much of President
Trump's focus has been on tariffs. He announced and then
suspended twenty five percent tariffs on Canada and Mexico. Announced
a ten percent levy on goods from China effective in March.
Speaker 1 (01:24):
Make America great again, right, that's what we care about.
Speaker 2 (01:27):
Announced tariffs on all steel and lunant imports from around
the world, and then reciprocal tariffs on the entire world
as of April.
Speaker 6 (01:36):
So when you imposed the tariffs the first time, you
added one hundred and twenty thousand jobs, and since that
time it's been picked away and nicked away and excluded away.
You're going to bring those one hundred and twenty thousand
jobs back to America. You are the president who's standing
up for the American steel worker.
Speaker 2 (01:55):
Commerce Secretary Howard Lutnik says that tariffs would be good
for jobs.
Speaker 7 (02:00):
Our industry is in the midst of the disruption.
Speaker 2 (02:04):
But Ford CEO Jim Farley, who went to Capitol Hill
to tell lawmakers that the tariffs on Mexico and Canada
would be a disaster for the US auto industry, I.
Speaker 7 (02:13):
Think longer term is the bigger concern. These kind of tariffs,
especially in these two countries, are very significant, and if
they persist beyond months, you know, we could see billions
of billions of dollars of pressure on the industry, lost jobs,
lots of impacts to communities and our ecosystem in the industry.
Speaker 2 (02:34):
The Council on Foreign Relations estimates that the US auto
industry may be among the hardest hit, so it's no
surprise that automaker stocks have underperformed the S and P
five hundred since President Trump's election, with a pronounced dip
since the announcement of tariffs.
Speaker 8 (02:51):
If you look at the landscape of the auto industry,
it represents about five percent of GDP. It's about one
point two trillion dollars of activity with almost you know,
in the case of manufacturing in parts, that represents about
two million workers.
Speaker 2 (03:11):
Ellen Hughes Cromwick is a senior fellow at Third Way
and spent much of her career as the chief Global
economist at Ford before serving in the Department of Commerce
under President Obama.
Speaker 8 (03:22):
There's no question that tariffs raise inflation.
Speaker 1 (03:27):
S and P.
Speaker 2 (03:27):
Global Mobility estimates that the average twenty five thousand dollars
price of a car imported from Mexico or Canada could
go up by six two hundred and fifty dollars if
tariffs take effect. The fifty best selling models in the
US market account for about sixty percent of the market volume,
half of which would be directly affected by the tariffs.
Speaker 8 (03:49):
The importer pays the tariff, not the company that's exporting.
Speaker 2 (03:56):
To the United States.
Speaker 8 (03:58):
So number one, that business has a choice to make.
Either they pay the tariff and import the goods, or
they begin to substitute away from those imported product and
try to find other sources. They could also pass along
that increase in their cost because of the import tariff
(04:21):
to their and market customers, and it in general will
just simply raise prices.
Speaker 2 (04:30):
The hit the auto producers may suffer from tariffs is
already being seen not only in their stock prices, but
in their being less profitable than their suppliers for the
first time in six years, and RBC calculates that it
will be the US producers gm Ford and Stilantis that
will be hit the hardest. Imposing tariffs on inputs to
(04:52):
any products made in the United States will increase costs,
but in the case of tariffs on auto parts crossing
the Mexican or Canadian borders, the problem is particularly acute
given the complexity of the supply chains and the need
for parts to cross the border several times over the
course of production. Everett Eisenstadt served as the Deputy Director
(05:12):
of the National Economic Council under President Trump during the
last term, where he has seen trade sentiment go from
integrated to protectionists.
Speaker 1 (05:21):
So the twenty five percent tariff would have a pretty
disruptive impact on the integration that has been ongoing now
for a couple of decades, and it would be quite
a dramatic shift, I think if that were to go
into effect for a sustained period of time.
Speaker 2 (05:36):
One alternative, of course, might be for US automakers simply
to source all their parts in the United States. But
putting together an automobile is a complex task. Most have
tens of thousands of parts, so shifting that process entirely
back to the United States is unrealistic and certainly couldn't
be done quickly.
Speaker 8 (05:56):
Any assembly of a vehicle that product cycle can be
three to five years. Now back into the supply chain
and look at a tiered three supplier. Hundreds of these
supplier businesses have to then start to think, Okay, well,
what investments do I have to make in order to
(06:19):
supply that part to Ford Motor Company, for example.
Speaker 2 (06:23):
What makes it worse for auto companies is that they
are not working with substantial margins to begin with, which
makes fundamental changes in the way they produce that much
more difficult.
Speaker 8 (06:33):
There's enough excess capacity to generate a very competitive industry
with you know, when you look at many of the
companies with very thin profit margins, and if you, for example, say, okay,
I want to be more resilient for this particular component
(06:55):
going into my vehicle. But if I dual source or
decide I'm going to try to source over a few
different suppliers, I'm going to be adding cost.
Speaker 2 (07:11):
The US auto industry has a long history of reckoning
with federal national security and trade policy.
Speaker 1 (07:18):
One you had the North American Free Trade Agreement, which
was designed to enable the US auto sector to compete
with China and other markets that were starting to produce
manufacturing at a much reduced cost. And the idea was
you could create a North American supply chain that would
make the US competitive, that would enable the exports to
continue from the United States. The Transpacific Partnership Agreement, which
(07:41):
was something that President Obama negotiated, which was one of
the last efforts to really bring integration at the highest
levels among many economies. That agreement was hanned pretty badly
by both then presidential candidate Hillary Clinton but also soon
to be President Trump. That was really the end of
the integrated effort for the United Slime States. So this
kind of shipped away towards integration just in time. Delivery
(08:05):
towards a more unilateral trade approach has been brewing for
quite some time. Now we're into an acceleration of that
unilateral trade pattern. So it's a trajectory that's been ongoing
for a while. I think it will be ongoing for
quite some time.
Speaker 2 (08:22):
The higher costs and disruption that the threatened tariffs represent
for US automakers come to an industry already struggling to
deal with a massive transition to electric vehicles. GM committed
to shift fifty percent of its fleet to evs by
twenty thirty, but delayed plans for a new electric Buick
last year, setting lower than expected EV adoption. Policies under
(08:46):
the Biden administration, namely the Inflation Reduction Act, attempted to
support EV adoption, but the Trump administration is now saying
it will pull back on those initiatives.
Speaker 1 (08:57):
When you have situations where policy moves back and forth,
and you saw it most recently. You know, under President Biden,
you had a lot of incentives to go to electric vehicles,
and with the emissions requirements that really almost force them
to produce a certain type of vehicle. Now you've got
an administration with a very different perspective that is not
as focused on those emission standards. That actually is putting
(09:18):
a different type of pressure on the industry. It takes
time to adapt, and I think it puts a lot
of pressure on the ability to plan a long term
trajectory for the industry. And at some point that's going
to be impactful.
Speaker 8 (09:32):
Now, if you pull the rugout from under that brand
new industry with thousands of jobs, we're basically making all
that capital investment just way inefficient and wasted. And that
isn't really a way to run the country either. I mean,
we want to support businesses to be competitive and to
(09:56):
grow and to create jobs. We don't want to destroy
wealth by penalizing companies that made those investments over the
last several years. And I think you know that's just
a misguided business policy approach.
Speaker 2 (10:16):
While the US goes back and forth on its commitment
to electric vehicles, the rest of the world moves ahead,
with US EV adoption largely flatlining since hitting the tipping
point of five percent of new car sales in twenty
twenty one. But wherever the government ends up on tariffs
or on ev incentives. The one thing that is certain
(10:37):
is that for the industry to thrive, it needs the
certainty that it is not getting.
Speaker 1 (10:43):
We need to remember that the US auto industry doesn't
sit in isolation. We're part of a global economy and
there's a lot of other actors in the world. And
while we may wish that we had the auto industry
we did in the early ages and the US was
completely dominant, the reality is there's a lot of other
players in this sector now. There's a lot of other
countries that have very, very productive, robust automobile exports. And
(11:06):
I hope there are ancillary policies that come into play
that enable the industry to make the kind of adjustments
they're going to need, both with capital investments and make
sure they're able to get the technology they need here
in the United States, the workforce they need in the
United States, the the ability need to get products, and regulations.
You know, to move quickly in getting facilities up and running,
(11:27):
because you can't wait a year or two for everything
to be perfect. You got to constantly be running in
this industry.
Speaker 2 (11:35):
While President Trump was talking tariffs again in Washington, this week,
his Vice President JD. Vance had returned from Europe, where
he talked about the US winning the race in artificial
intelligency and though the prize may be great, there are
some hurdles on the way to the vice President's goal.
That's next on Wall Street Week. This is a story
(12:04):
about a race, a race to be the fastest and
the biggest, but with hurdles to overcome on the way
to the prize. Companies are in a frenzy to get
ahead in artificial intelligence. But it's not just companies in
the race, its entire countries, led by the United States.
Speaker 9 (12:22):
The United States of America is the leader in AI in.
Speaker 1 (12:25):
Our administration plans to keep it that way.
Speaker 2 (12:28):
So what could the prize of winning the race in
the so called Fourth Industrial Revolution be? What could it
do for productivity and therefore economic growth? And who stands
to benefit? We posed those questions to doctor Jeffrey Hinton,
who won the Nobel Prize for his work on large
language models and is often called the godfather of AI.
Speaker 10 (12:51):
It will be a wonderful thing for productivity, that's true.
Whether it be a wonderful thing for society is something else.
Wild Together in a decent society. If you increase productivity
a lot, everybody's better off. But here what's going to happen.
If you increase productivity a lot. The rich and the
(13:11):
big companies are going to get much richer, and ordinary
people are probably going to be worse off because they
lose their jobs.
Speaker 2 (13:18):
AI's ability to drive productivity could give new life to
economies whose productivity has stalled. US productivity grew at only
one point five percent a year for twenty years and
then shot up to two point seven percent in twenty
twenty three, and economists anticipate that widespread adoption of AI
could keep the momentum going, with Goldman Sachs expecting AI
(13:41):
to be a key driver of productivity growth in developed economies.
In particular, when wider adoption does come, Hinton says, it
won't come equally to all involved. It will have very
different effects on different parts of the workforce.
Speaker 10 (13:55):
Many people say, you know, ille crate more jobs for
this particular thing. I'm not convinced of that. What we're doing.
In the Industrial Revolution, we made human strength irrelevant. Now
we're making human intelligence irrelevant, and that's very scary. So
there's some areas where demand is very elastic. An example
(14:18):
would be healthcare. If I could get ten hours a
week talking to my doctor, I'm over seventy, I'd be
very happy. So if you take someone and make them
much more efficient by having them work with a very
intelligent AI, they're not going to become unemployed. It's not
that you're now only going to need a few of them.
You're just going to get much more healthcare. Great. So
(14:41):
in elastic areas, it's great.
Speaker 2 (14:43):
But for all the talk of AI's sweeping effects, economic
change has been slow to materialize. That same Goldman report
says that only five percent of companies claim to use
generative AI in regular production, with tech and information businesses
leading the way. Whatever hurdles may hold us back in
the race to AI, it doesn't look like it will
(15:04):
be for lack of spending. AI spending by four of
America's biggest tech companies surged sixty three percent last year
and should rise even higher this year. Chris Miller is
the author of Chip War. He says the challenge for
big tech companies isn't the money being spent, but lack
of capacity.
Speaker 9 (15:24):
There are two limiting factors right now. One is the
chips and servers themselves, which are less and shortage than
they were eighteen months ago, but are still hard to
come by for some of the biggest tech firms and
the vast quantities that they need. The second hurdle, which
is new, is actually the power. To make the data
centers function the way they need to. They need huge
(15:44):
quantities of power. And is AI gets more advanced, that
requires bigger and bigger data centers. And so now if
you listen to companies like open Ai or Google, they're
talking about bringing online data centers that use a gig
awot of power. You need a whole power plant to
power some of these facilities, and it just takes time
to build all that infrastructure.
Speaker 2 (16:04):
For some time, chip manufacturing capacity has been concentrated in
Southeast Asia. That began to change with the Biden administrations
Chips and Science Act encouraging investment in US chip manufacturing.
Samsung is investing in a chip plan in Texas, while
TSMC is opening a new plant in Arizona. Alissa Apsel
(16:25):
is the director of Electrical and Computer Engineering at Cornell University.
Speaker 11 (16:29):
The Chips Act is a response to a covid era
supply chain interruptions that made it very very clear that
the US needs to be competitive in semiconductors. Otherwise we're
going to lose out to other countries because we can't
supply our own semi conductors and will be beholden to
other countries to supply them for US, and that that
(16:52):
puts US in a precarious position in terms of national security.
The infusion of funding into the US, both on the
research side and for companies to develop products, but also
for small companies to be able to compete in this
space in order to support growing this infrastructure has been
(17:16):
quite significant and it's really changed the game in this space.
Speaker 2 (17:20):
Building more chip making and power plans is one way
to get over the AI capacity hurdles. Another could be
finding ways to achieve the benefits of AI without requiring
the same supplies of chips or energy. Wall Street was
rattled in recent weeks by a new, more efficient AI
model out of China.
Speaker 9 (17:39):
I think in Silicon Valley there was actually a lot
of surprise as to why Deep Sea garnered so much
attention in the media and on Wall Street. Deepsek was
part of the AI conversation for most of the last
half of twenty twenty four, and then just in the
past couple of weeks it gathered attention in the media
and in Wall Street. I think what you'd find is
that compared to open AI, or compared to Nthropic, the
(18:01):
number of paying customers is far, far lower. And that's
where the US firms have a real advantage. They've already
got the distribution channels, they've already got the market reputation
to be the real leaders in AI. Certainly they've got
high quality technology, but they've also got these other factors
in their business model which give them a real head
start visa a deep Seek. And so if you ask
yourself what will deep Seek's revenue be in six months
(18:23):
time from paying subscribers outside of China, I would bet
that number is going to be pretty low.
Speaker 2 (18:28):
Is there any prospect that we could engineer or innovate
our way out of the problem, that is to say,
reduce the need for the computing capacity by really re
engineering as it were, generate of AI.
Speaker 9 (18:40):
We've seen plenty of efforts to make AI more efficient,
in part because it requires so much extraordinarily expensive computing infrastructure.
And the trend has been that for a given quality
of AI system, it does get a lot more efficient
over time. If you look, for example, at the price
it costs to use a GPT three model, the type
of model it was released a handful of years ago
(19:02):
by open AI, we've seen a two order of magnitude
decrease in the price of using that model, so huge
efficiency gains. But the problem is that we also get
better models that require more computing. And the trend line
over the last couple of years has been that the
advances we gain from harnessing more computing power and throwing
all that at the problem of AI dramatically outweigh the
(19:24):
efficiency gains. And so long as the rate of innovation
remains so rapid and that innovation is catalyzed by computing power,
the efficiency gains are going to be outpaced by the
capability and the computing needs of these new models. That's
certainly the trend right now. It's also the trend that
all of the world's big tech companies are betting on.
That's why Amazon, Meta, Microsoft and others are building these
(19:47):
vast data center complexes, because they're betting that capabilities gains
enabled by more computing will be the dominant feature in
AI for the rest of the decade.
Speaker 2 (19:55):
Economists talk about something called the Jivon's paradox that came
out of coal usage or fishing. You got using coal.
There was just more demand for coal, more applications of it.
Do we have that prospect that essentially, as far as
I can see, we're never going to catch up the
supply of chips with the demand.
Speaker 11 (20:11):
I think it's exactly that. I think that the more,
at least from where I stand today. I don't know
that this is always going to be true. But like
in the foreseeable future, I don't see that we're going
to say, oh, okay, now I have twice the processing power,
that's enough. I think we'll wind up pushing more applications
(20:32):
and developing more utility and finding kind of new spaces
where we need AI or new types of jobs for
it to do that require more and more processing, and
just ride that curve in that direction.
Speaker 9 (20:44):
AI and automation can have unintended consequences.
Speaker 2 (20:48):
The race to win the prize in artificial intelligence is
well and truly on, but some of those who understand
the power of AI best warn that we need to
make sure it's not just a fast race, but a
safe one. That we need to build capacity, not just
to drive large language models, but to make sure that
they do what we want them to. Can governments keep
(21:09):
up and how do they regulate something that's advancing so quickly.
There are good people in the government, smart people, some
probably less smart, but are they up to the job
of really understanding what you're talking about and getting their
arms around it.
Speaker 10 (21:23):
We need many of the smartest young researchers to be
working on this problem, and we need them to have resources.
Now the government doesn't have the resources. The big companies
have the resources. The government, i think should be insisting
that the big companies spend much more of their resources
on safety, on this safety research or how will we
(21:45):
stay in control? Compared with what they do now. Right
now they spend like a few percent on that and
nearly all their resources go into building even better, bigger models.
They should be spending a much bigger fraction on safety
and the government to try and mandate that. So there
was a bill in California that the governor recently vetoed
(22:05):
that would have gone a little bit in that direction.
But of course big companies don't want that. Big companies
want to be free to make profits. That's the system
we're in. And so if you take some outwore. For example,
open ai was initially very concerned about safety. As time's
gone by, it's got less and less concerned about safety.
Some Auntmas still says he's concerned with safety, But if
(22:25):
you look at what he does and not what he says,
he's turning it into a pure for profit company. There's
far less resources spent on safety, and most of the
leading safety researchers who were kind of the best in
the world and open AI have left. So to prevent
that kind of thing happening, we need. Governments are the
only thing powerful enough to prevent that. Maybe they're not
even powerful enough. They should force the big companies to
(22:49):
provide resources for safety research.
Speaker 2 (22:51):
As you say, big companies don't like to be told
by the government how to spend their money, but they
are often. I mean, you have big accounting departments, for example,
to comply with various regulatory requirement on accounting. If the
government were to say, yes, we're in at least for
the very largest tech firms involved in AI, mandate a
percentage of your revenue that will be devoted towards safety.
What's the right number.
Speaker 10 (23:12):
I'm not sure that's the right thing to go for.
It shouldn't be a percentage of the revenue, because that's
very complicated, and they put all the revenue in some
other country and cheat. The thing to go for is
a fraction of their computing resources. The bottleneck here is
computing resources. How many Nvidia chips or how many Google
tensor chips can you get? It should be a fraction
of the computing resources. What's an easier thing to measure?
Speaker 2 (23:34):
What fraction?
Speaker 10 (23:36):
I think it would be perfectly reasonable to say a third.
Now that's my starting point, and I'd settle for a quarter.
Speaker 2 (23:43):
We were promised that the Inflation Reduction Act would live
up to its name by collecting taxes on all those
stock buybacks. But now that we've had a couple of
years living with it, has it done what it promised?
That's next on Wall Street Week. This is a story
(24:08):
about names, getting them right, and making sure things live
up to what we name them. When enacted by Congress,
the name of the Inflation Reduction Act was derided by
Republicans like then Senator Rob Portman of Ohio.
Speaker 12 (24:24):
It's called the Inflation Reduction Act, but don't be fooled
by the name. It doesn't actually decrease the inflationary pressure
we all feel at the gas pump, at the grocery store,
clothes shopping. It actually makes it worse.
Speaker 2 (24:41):
But some of us may have forgotten how the law
got its name in the first place. It was meant
to be the rare bill that included both spending and
how to pay for it, in part by imposing a
one percent excise tax on corporations buying back their own stock.
Speaker 5 (24:58):
There are time when stock buybacks make a lot of sense.
That frankly, they've made a lot of sense when interest
rates have been a record low amounts, which has allowed
companies even to borrow money to do stock by that
that those seems like it's gaming the system. And I've
been disappointed when companies have said, you know, lower our
(25:19):
taxes and we're going to invest more in plant and equipment,
and instead they use it for stock buybacks. So putting
a one percent tax on those stock buybacks, I think
makes sense.
Speaker 2 (25:28):
What is the purpose of stock buybacks? When are they appropriate?
And when can they be a form of gaming the system?
As Senator Warner warned about when the IRA was first passed,
it turns out that they weren't even allowed in the
United States until fairly recently.
Speaker 4 (25:44):
As simple as the name, it's when the company buys
back its own stock, and there's a reason that this
was illegal until nineteen eighty two.
Speaker 2 (25:53):
Nel Mino has spent a good deal of her career
studying stock buybacks. She is now vice chair of Value
Edge Advisors, where she advises institutional investors like pension plans
about stock buybacks and how they can affect the value
of the companies they invest in.
Speaker 4 (26:10):
I think they did it because at the time they
felt that buybacks would only occur when there was excess
cash and on your valued stock. But there are a
lot of moral hazards there, because sometimes companies that should
be spending the money on operations and research and marketing
and things that are more directed at long term value
(26:32):
will spend them on the quick hit on the stock
price that you get from a buyback.
Speaker 2 (26:37):
Despite the moral hazards, economists generally favor allowing stock buybacks
as one way to allocate capital efficiently. Glenn Hubbard served
as the chairman of President George W. Bush's Council of
Economic Advisors. He went on to serve as dean at
the Columbia Business School where he remains on the faculty.
His book The Wall and the Bridge set out some
(26:58):
of his ideas about how to invest in the country
and the economy.
Speaker 3 (27:02):
It's a way to get cash back.
Speaker 1 (27:04):
You know.
Speaker 3 (27:05):
Economists for years talked about so called agency problems in
the company, that there may be too much in the
way of internal finance that gets wasted paying the money
out stops that dividends tend to be very regular. Companies
don't like changing their dividends a lot and then having
to bring them back down. So share we purchases are
one way to get cash back to shareholders.
Speaker 2 (27:27):
So from an economist point of view, they might allow
more efficient allocation of capital. If it's not doing so
well with the company, maybe I should have it and
put it all.
Speaker 1 (27:33):
They definitely do.
Speaker 3 (27:35):
If too much money gets trapped in let's say, an
old style company, why not put it in a new
company where they're better opportunities. Obviously their costs and benefits.
I'm not saying it's one sided, but my own prejudice
is an economist as buybacks are just fine.
Speaker 4 (27:49):
That's what I represent shareholders. We love to hear that
a stock buy back a special dividend. Absolutely if you
haven't got a good idea for the money, give it
to us. Let us decide what to do with the money.
That's when buybacks work.
Speaker 2 (28:03):
To the right way, whatever their advantages or disadvantages. Stock
buybacks have become a central part of corporate finance since
the SEC first gave them the green light. They're estimated
to have reached one trillion dollars in volume in twenty
twenty four, roughly double what they were ten years ago,
led by some of the Magnificent seven like Apple, Alphabet, Microsoft,
(28:26):
and Meta, followed by some of the big banks. But
the executives putting the buybacks in place have particular incentives
that can influence their judgment. They can increase management compensation
as the number of shares bought reduced the denominator of
earnings per share without adding to the earnings numerator.
Speaker 4 (28:45):
The first red flag is when they don't adjust the
EPs targets for incentive compensation. There are two ways you
can hit your EPs targets. The way that we like
as shareholders is to increase earnings. The way that is
not as beneficial to shareholders is to decrease the number
of shares outstanding, and so for a Board of Directors
(29:08):
Compensation Committee to set the EPs targets and then do
a buy back. That's a very easy way for them
to hit those targets without any real benefit to shareholders.
You have to remember that there's another element of manipulation,
and that is that the executives control the timing of
the buyback, and sometimes they do it in order to
(29:28):
hit those EPs targets. Sometimes they do it just because
they have no other idea about how to increase the
stock price. But we want to see them increase the
stock price by doing a better job, which.
Speaker 2 (29:39):
Is where the board should come in. If it's doing
its job, the.
Speaker 3 (29:43):
Board has to be focused not simply on the mechanics
of EPs, but really, what are the growth prospects for
this company. If you were doing that, you would be
eating your seed corn and you'd get caught napping by
the market. So a good board should stop that.
Speaker 2 (29:58):
Most often, management justifies a stock buyback as just a
prudent investment, claiming that their company's stock is not getting
their respect in the market it deserves. That it's undervalued,
which makes it a goodbye. But it's harder to make
that case when market valuations become elevated as they are now.
Speaker 4 (30:17):
But remember that the original concept of the buyback was
exactly what you said, excess cash and the stock price
is lower than it should be. In other words, the
stock is a good investment, just like any other asset
allocation made by the executives and the board of directors
(30:37):
you look at in terms of return on investment. The
stock market has been very high, as you know, in
the last couple of years, and so it's really harder
to justify buybacks. It's harder to argue that the stock
is undervalued.
Speaker 2 (30:50):
And whatever the overall valuations, it's awfully hard to reconcile
management's claim that its stock is undervalued if members of
the management team themselves decide to sell their shares into
the buyback.
Speaker 4 (31:02):
The other one that bothers me even more is when
the executives sell into the buyback, which I think should
be prohibited. The whole justification for the buyback is that
the stock is undervalued. Well, if it's undervalued, why are
you selling well?
Speaker 3 (31:19):
In general, I think when managers are selling it's one
of two things. One so called ten B five plans
where they have regular opportunities to sell, and just happens
to be at that period, or there could be a
particular event in their personal life. But I agree with you, Yes,
management in general should be holding shares during the tenure
in which the manager's in charge.
Speaker 2 (31:39):
So what does all this mean for the Inflation Reduction Act?
Now that it's been enforced for over two years? What
are the results? First of all, did it raise much
needed money for the federal treasury? The Joint Committee on
Taxation estimates it contributed seven point nine billion dollars in
twenty twenty four, and we'll add up to about seventy
four billion dollars over the ten year period ending in
(32:02):
fiscal year twenty thirty one. Certainly a nice contribution, but
not likely to put a big dent in the one
point six trillion dollars the Congressional Budget Office estimates will
be added to the federal debt every year for the
next ten I think of the.
Speaker 3 (32:18):
Game showed Jeopardy, where if you give me an answer,
I guess the question. So a stock buybacks one possibility
for the question is what is revenue? But actually don't
raise much revenue. The US buy back at one percent
maybe raises about seven seven and a half billion dollars
a year.
Speaker 2 (32:33):
And if Senator Warner thought that the tax on buybacks
would reduce the appetite for them, it doesn't look like
it had that intended effect either. Stock buybacks have continued
to grow despite the excise tax.
Speaker 4 (32:45):
I would say that stock buybacks have been bigger and
bigger every year. We've seen some of the biggest companies
in the country buy back more and more stock, and
we've seen very little benefit to shareholders except in a
very short term way, and more benefit to the executives.
(33:07):
So I think it has become a genuine problem. One
thing that I know will never help is taxing it.
You know, there have been a number of proposals, it
was included in some legislation. Those expenses have just passed
right on to the shareholders and sometimes the consumers as well.
Companies are completely indifferent to paying taxes.
Speaker 2 (33:29):
When you mentioned taxes, the Inflation Reduction Act does have
a one percent excise tax on stock buybacks. What effect
did that have on stock buybacks?
Speaker 4 (33:37):
Not at all. It was gasoline on the fire. They
just kept growing and growing.
Speaker 2 (33:41):
And perhaps most basic of all, when does it ever
make sense for a company to do what Senator Warner
was particularly concerned about a company borrowing money to buy
back its own stock, given that the entire theory of
allowing buybacks was to let companies make constructive use of
excess cash.
Speaker 4 (34:00):
In reality, like a lot of other financial structures, it
got abused. I mean, when I saw that people were
borrowing money, companies were borrowing money to buy backstock, when
the stockboys at a record high, I realized that the
original justification had just completely been forgotten.
Speaker 2 (34:20):
That does it for us here at Wall Street Week,
I'm David Weston. See you next week for more stories
of capitalism.
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:20):
This is Wall Street Week. I'm David Weston, bringing you
stories of capitalism. Vice President Vance tells the world the
US will lead in artificial intelligence, but there are some
hurdles to get over in the race to get there.
Plus the story of the tax on stock buybacks that
was going to make sure the Inflation Reduction Act lived
(00:41):
up to its name. But we start with a story
on everyone's mind this week on Global Wall Street, the
story of countries and companies trying to sort out with
the growing range of tariffs President Trump promises will mean
for them. With the US auto industry front and center,
at least for the tariffs threatened on Canada in Mexico.
Speaker 3 (01:01):
We're going to bring companies and jobs in at levels.
Speaker 4 (01:05):
That you've never seen.
Speaker 5 (01:06):
The only way you can do it is through the
threat of tariffs.
Speaker 2 (01:11):
In his first few weeks in office, much of President
Trump's focus has been on tariffs. He announced and then
suspended twenty five percent tariffs on Canada and Mexico. Announced
a ten percent levy on goods from China effective in March.
Speaker 1 (01:24):
Make America great again, right, that's what we care about.
Speaker 2 (01:27):
Announced tariffs on all steel and lunant imports from around
the world, and then reciprocal tariffs on the entire world
as of April.
Speaker 6 (01:36):
So when you imposed the tariffs the first time, you
added one hundred and twenty thousand jobs, and since that
time it's been picked away and nicked away and excluded away.
You're going to bring those one hundred and twenty thousand
jobs back to America. You are the president who's standing
up for the American steel worker.
Speaker 2 (01:55):
Commerce Secretary Howard Lutnik says that tariffs would be good
for jobs.
Speaker 7 (02:00):
Our industry is in the midst of the disruption.
Speaker 2 (02:04):
But Ford CEO Jim Farley, who went to Capitol Hill
to tell lawmakers that the tariffs on Mexico and Canada
would be a disaster for the US auto industry, I.
Speaker 7 (02:13):
Think longer term is the bigger concern. These kind of tariffs,
especially in these two countries, are very significant, and if
they persist beyond months, you know, we could see billions
of billions of dollars of pressure on the industry, lost jobs,
lots of impacts to communities and our ecosystem in the industry.
Speaker 2 (02:34):
The Council on Foreign Relations estimates that the US auto
industry may be among the hardest hit, so it's no
surprise that automaker stocks have underperformed the S and P
five hundred since President Trump's election, with a pronounced dip
since the announcement of tariffs.
Speaker 8 (02:51):
If you look at the landscape of the auto industry,
it represents about five percent of GDP. It's about one
point two trillion dollars of activity with almost you know,
in the case of manufacturing in parts, that represents about
two million workers.
Speaker 2 (03:11):
Ellen Hughes Cromwick is a senior fellow at Third Way
and spent much of her career as the chief Global
economist at Ford before serving in the Department of Commerce
under President Obama.
Speaker 8 (03:22):
There's no question that tariffs raise inflation.
Speaker 1 (03:27):
S and P.
Speaker 2 (03:27):
Global Mobility estimates that the average twenty five thousand dollars
price of a car imported from Mexico or Canada could
go up by six two hundred and fifty dollars if
tariffs take effect. The fifty best selling models in the
US market account for about sixty percent of the market volume,
half of which would be directly affected by the tariffs.
Speaker 8 (03:49):
The importer pays the tariff, not the company that's exporting.
Speaker 2 (03:56):
To the United States.
Speaker 8 (03:58):
So number one, that business has a choice to make.
Either they pay the tariff and import the goods, or
they begin to substitute away from those imported product and
try to find other sources. They could also pass along
that increase in their cost because of the import tariff
(04:21):
to their and market customers, and it in general will
just simply raise prices.
Speaker 2 (04:30):
The hit the auto producers may suffer from tariffs is
already being seen not only in their stock prices, but
in their being less profitable than their suppliers for the
first time in six years, and RBC calculates that it
will be the US producers gm Ford and Stilantis that
will be hit the hardest. Imposing tariffs on inputs to
(04:52):
any products made in the United States will increase costs,
but in the case of tariffs on auto parts crossing
the Mexican or Canadian borders, the problem is particularly acute
given the complexity of the supply chains and the need
for parts to cross the border several times over the
course of production. Everett Eisenstadt served as the Deputy Director
(05:12):
of the National Economic Council under President Trump during the
last term, where he has seen trade sentiment go from
integrated to protectionists.
Speaker 1 (05:21):
So the twenty five percent tariff would have a pretty
disruptive impact on the integration that has been ongoing now
for a couple of decades, and it would be quite
a dramatic shift, I think if that were to go
into effect for a sustained period of time.
Speaker 2 (05:36):
One alternative, of course, might be for US automakers simply
to source all their parts in the United States. But
putting together an automobile is a complex task. Most have
tens of thousands of parts, so shifting that process entirely
back to the United States is unrealistic and certainly couldn't
be done quickly.
Speaker 8 (05:56):
Any assembly of a vehicle that product cycle can be
three to five years. Now back into the supply chain
and look at a tiered three supplier. Hundreds of these
supplier businesses have to then start to think, Okay, well,
what investments do I have to make in order to
(06:19):
supply that part to Ford Motor Company, for example.
Speaker 2 (06:23):
What makes it worse for auto companies is that they
are not working with substantial margins to begin with, which
makes fundamental changes in the way they produce that much
more difficult.
Speaker 8 (06:33):
There's enough excess capacity to generate a very competitive industry
with you know, when you look at many of the
companies with very thin profit margins, and if you, for example, say, okay,
I want to be more resilient for this particular component
(06:55):
going into my vehicle. But if I dual source or
decide I'm going to try to source over a few
different suppliers, I'm going to be adding cost.
Speaker 2 (07:11):
The US auto industry has a long history of reckoning
with federal national security and trade policy.
Speaker 1 (07:18):
One you had the North American Free Trade Agreement, which
was designed to enable the US auto sector to compete
with China and other markets that were starting to produce
manufacturing at a much reduced cost. And the idea was
you could create a North American supply chain that would
make the US competitive, that would enable the exports to
continue from the United States. The Transpacific Partnership Agreement, which
(07:41):
was something that President Obama negotiated, which was one of
the last efforts to really bring integration at the highest
levels among many economies. That agreement was hanned pretty badly
by both then presidential candidate Hillary Clinton but also soon
to be President Trump. That was really the end of
the integrated effort for the United Slime States. So this
kind of shipped away towards integration just in time. Delivery
(08:05):
towards a more unilateral trade approach has been brewing for
quite some time. Now we're into an acceleration of that
unilateral trade pattern. So it's a trajectory that's been ongoing
for a while. I think it will be ongoing for
quite some time.
Speaker 2 (08:22):
The higher costs and disruption that the threatened tariffs represent
for US automakers come to an industry already struggling to
deal with a massive transition to electric vehicles. GM committed
to shift fifty percent of its fleet to evs by
twenty thirty, but delayed plans for a new electric Buick
last year, setting lower than expected EV adoption. Policies under
(08:46):
the Biden administration, namely the Inflation Reduction Act, attempted to
support EV adoption, but the Trump administration is now saying
it will pull back on those initiatives.
Speaker 1 (08:57):
When you have situations where policy moves back and forth,
and you saw it most recently. You know, under President Biden,
you had a lot of incentives to go to electric vehicles,
and with the emissions requirements that really almost force them
to produce a certain type of vehicle. Now you've got
an administration with a very different perspective that is not
as focused on those emission standards. That actually is putting
(09:18):
a different type of pressure on the industry. It takes
time to adapt, and I think it puts a lot
of pressure on the ability to plan a long term
trajectory for the industry. And at some point that's going
to be impactful.
Speaker 8 (09:32):
Now, if you pull the rugout from under that brand
new industry with thousands of jobs, we're basically making all
that capital investment just way inefficient and wasted. And that
isn't really a way to run the country either. I mean,
we want to support businesses to be competitive and to
(09:56):
grow and to create jobs. We don't want to destroy
wealth by penalizing companies that made those investments over the
last several years. And I think you know that's just
a misguided business policy approach.
Speaker 2 (10:16):
While the US goes back and forth on its commitment
to electric vehicles, the rest of the world moves ahead,
with US EV adoption largely flatlining since hitting the tipping
point of five percent of new car sales in twenty
twenty one. But wherever the government ends up on tariffs
or on ev incentives. The one thing that is certain
(10:37):
is that for the industry to thrive, it needs the
certainty that it is not getting.
Speaker 1 (10:43):
We need to remember that the US auto industry doesn't
sit in isolation. We're part of a global economy and
there's a lot of other actors in the world. And
while we may wish that we had the auto industry
we did in the early ages and the US was
completely dominant, the reality is there's a lot of other
players in this sector now. There's a lot of other
countries that have very, very productive, robust automobile exports. And
(11:06):
I hope there are ancillary policies that come into play
that enable the industry to make the kind of adjustments
they're going to need, both with capital investments and make
sure they're able to get the technology they need here
in the United States, the workforce they need in the
United States, the the ability need to get products, and regulations.
You know, to move quickly in getting facilities up and running,
(11:27):
because you can't wait a year or two for everything
to be perfect. You got to constantly be running in
this industry.
Speaker 2 (11:35):
While President Trump was talking tariffs again in Washington, this week,
his Vice President JD. Vance had returned from Europe, where
he talked about the US winning the race in artificial
intelligency and though the prize may be great, there are
some hurdles on the way to the vice President's goal.
That's next on Wall Street Week. This is a story
(12:04):
about a race, a race to be the fastest and
the biggest, but with hurdles to overcome on the way
to the prize. Companies are in a frenzy to get
ahead in artificial intelligence. But it's not just companies in
the race, its entire countries, led by the United States.
Speaker 9 (12:22):
The United States of America is the leader in AI in.
Speaker 1 (12:25):
Our administration plans to keep it that way.
Speaker 2 (12:28):
So what could the prize of winning the race in
the so called Fourth Industrial Revolution be? What could it
do for productivity and therefore economic growth? And who stands
to benefit? We posed those questions to doctor Jeffrey Hinton,
who won the Nobel Prize for his work on large
language models and is often called the godfather of AI.
Speaker 10 (12:51):
It will be a wonderful thing for productivity, that's true.
Whether it be a wonderful thing for society is something else.
Wild Together in a decent society. If you increase productivity
a lot, everybody's better off. But here what's going to happen.
If you increase productivity a lot. The rich and the
(13:11):
big companies are going to get much richer, and ordinary
people are probably going to be worse off because they
lose their jobs.
Speaker 2 (13:18):
AI's ability to drive productivity could give new life to
economies whose productivity has stalled. US productivity grew at only
one point five percent a year for twenty years and
then shot up to two point seven percent in twenty
twenty three, and economists anticipate that widespread adoption of AI
could keep the momentum going, with Goldman Sachs expecting AI
(13:41):
to be a key driver of productivity growth in developed economies.
In particular, when wider adoption does come, Hinton says, it
won't come equally to all involved. It will have very
different effects on different parts of the workforce.
Speaker 10 (13:55):
Many people say, you know, ille crate more jobs for
this particular thing. I'm not convinced of that. What we're doing.
In the Industrial Revolution, we made human strength irrelevant. Now
we're making human intelligence irrelevant, and that's very scary. So
there's some areas where demand is very elastic. An example
(14:18):
would be healthcare. If I could get ten hours a
week talking to my doctor, I'm over seventy, I'd be
very happy. So if you take someone and make them
much more efficient by having them work with a very
intelligent AI, they're not going to become unemployed. It's not
that you're now only going to need a few of them.
You're just going to get much more healthcare. Great. So
(14:41):
in elastic areas, it's great.
Speaker 2 (14:43):
But for all the talk of AI's sweeping effects, economic
change has been slow to materialize. That same Goldman report
says that only five percent of companies claim to use
generative AI in regular production, with tech and information businesses
leading the way. Whatever hurdles may hold us back in
the race to AI, it doesn't look like it will
(15:04):
be for lack of spending. AI spending by four of
America's biggest tech companies surged sixty three percent last year
and should rise even higher this year. Chris Miller is
the author of Chip War. He says the challenge for
big tech companies isn't the money being spent, but lack
of capacity.
Speaker 9 (15:24):
There are two limiting factors right now. One is the
chips and servers themselves, which are less and shortage than
they were eighteen months ago, but are still hard to
come by for some of the biggest tech firms and
the vast quantities that they need. The second hurdle, which
is new, is actually the power. To make the data
centers function the way they need to. They need huge
(15:44):
quantities of power. And is AI gets more advanced, that
requires bigger and bigger data centers. And so now if
you listen to companies like open Ai or Google, they're
talking about bringing online data centers that use a gig
awot of power. You need a whole power plant to
power some of these facilities, and it just takes time
to build all that infrastructure.
Speaker 2 (16:04):
For some time, chip manufacturing capacity has been concentrated in
Southeast Asia. That began to change with the Biden administrations
Chips and Science Act encouraging investment in US chip manufacturing.
Samsung is investing in a chip plan in Texas, while
TSMC is opening a new plant in Arizona. Alissa Apsel
(16:25):
is the director of Electrical and Computer Engineering at Cornell University.
Speaker 11 (16:29):
The Chips Act is a response to a covid era
supply chain interruptions that made it very very clear that
the US needs to be competitive in semiconductors. Otherwise we're
going to lose out to other countries because we can't
supply our own semi conductors and will be beholden to
other countries to supply them for US, and that that
(16:52):
puts US in a precarious position in terms of national security.
The infusion of funding into the US, both on the
research side and for companies to develop products, but also
for small companies to be able to compete in this
space in order to support growing this infrastructure has been
(17:16):
quite significant and it's really changed the game in this space.
Speaker 2 (17:20):
Building more chip making and power plans is one way
to get over the AI capacity hurdles. Another could be
finding ways to achieve the benefits of AI without requiring
the same supplies of chips or energy. Wall Street was
rattled in recent weeks by a new, more efficient AI
model out of China.
Speaker 9 (17:39):
I think in Silicon Valley there was actually a lot
of surprise as to why Deep Sea garnered so much
attention in the media and on Wall Street. Deepsek was
part of the AI conversation for most of the last
half of twenty twenty four, and then just in the
past couple of weeks it gathered attention in the media
and in Wall Street. I think what you'd find is
that compared to open AI, or compared to Nthropic, the
(18:01):
number of paying customers is far, far lower. And that's
where the US firms have a real advantage. They've already
got the distribution channels, they've already got the market reputation
to be the real leaders in AI. Certainly they've got
high quality technology, but they've also got these other factors
in their business model which give them a real head
start visa a deep Seek. And so if you ask
yourself what will deep Seek's revenue be in six months
(18:23):
time from paying subscribers outside of China, I would bet
that number is going to be pretty low.
Speaker 2 (18:28):
Is there any prospect that we could engineer or innovate
our way out of the problem, that is to say,
reduce the need for the computing capacity by really re
engineering as it were, generate of AI.
Speaker 9 (18:40):
We've seen plenty of efforts to make AI more efficient,
in part because it requires so much extraordinarily expensive computing infrastructure.
And the trend has been that for a given quality
of AI system, it does get a lot more efficient
over time. If you look, for example, at the price
it costs to use a GPT three model, the type
of model it was released a handful of years ago
(19:02):
by open AI, we've seen a two order of magnitude
decrease in the price of using that model, so huge
efficiency gains. But the problem is that we also get
better models that require more computing. And the trend line
over the last couple of years has been that the
advances we gain from harnessing more computing power and throwing
all that at the problem of AI dramatically outweigh the
(19:24):
efficiency gains. And so long as the rate of innovation
remains so rapid and that innovation is catalyzed by computing power,
the efficiency gains are going to be outpaced by the
capability and the computing needs of these new models. That's
certainly the trend right now. It's also the trend that
all of the world's big tech companies are betting on.
That's why Amazon, Meta, Microsoft and others are building these
(19:47):
vast data center complexes, because they're betting that capabilities gains
enabled by more computing will be the dominant feature in
AI for the rest of the decade.
Speaker 2 (19:55):
Economists talk about something called the Jivon's paradox that came
out of coal usage or fishing. You got using coal.
There was just more demand for coal, more applications of it.
Do we have that prospect that essentially, as far as
I can see, we're never going to catch up the
supply of chips with the demand.
Speaker 11 (20:11):
I think it's exactly that. I think that the more,
at least from where I stand today. I don't know
that this is always going to be true. But like
in the foreseeable future, I don't see that we're going
to say, oh, okay, now I have twice the processing power,
that's enough. I think we'll wind up pushing more applications
(20:32):
and developing more utility and finding kind of new spaces
where we need AI or new types of jobs for
it to do that require more and more processing, and
just ride that curve in that direction.
Speaker 9 (20:44):
AI and automation can have unintended consequences.
Speaker 2 (20:48):
The race to win the prize in artificial intelligence is
well and truly on, but some of those who understand
the power of AI best warn that we need to
make sure it's not just a fast race, but a
safe one. That we need to build capacity, not just
to drive large language models, but to make sure that
they do what we want them to. Can governments keep
(21:09):
up and how do they regulate something that's advancing so quickly.
There are good people in the government, smart people, some
probably less smart, but are they up to the job
of really understanding what you're talking about and getting their
arms around it.
Speaker 10 (21:23):
We need many of the smartest young researchers to be
working on this problem, and we need them to have resources.
Now the government doesn't have the resources. The big companies
have the resources. The government, i think should be insisting
that the big companies spend much more of their resources
on safety, on this safety research or how will we
(21:45):
stay in control? Compared with what they do now. Right
now they spend like a few percent on that and
nearly all their resources go into building even better, bigger models.
They should be spending a much bigger fraction on safety
and the government to try and mandate that. So there
was a bill in California that the governor recently vetoed
(22:05):
that would have gone a little bit in that direction.
But of course big companies don't want that. Big companies
want to be free to make profits. That's the system
we're in. And so if you take some outwore. For example,
open ai was initially very concerned about safety. As time's
gone by, it's got less and less concerned about safety.
Some Auntmas still says he's concerned with safety, But if
(22:25):
you look at what he does and not what he says,
he's turning it into a pure for profit company. There's
far less resources spent on safety, and most of the
leading safety researchers who were kind of the best in
the world and open AI have left. So to prevent
that kind of thing happening, we need. Governments are the
only thing powerful enough to prevent that. Maybe they're not
even powerful enough. They should force the big companies to
(22:49):
provide resources for safety research.
Speaker 2 (22:51):
As you say, big companies don't like to be told
by the government how to spend their money, but they
are often. I mean, you have big accounting departments, for example,
to comply with various regulatory requirement on accounting. If the
government were to say, yes, we're in at least for
the very largest tech firms involved in AI, mandate a
percentage of your revenue that will be devoted towards safety.
What's the right number.
Speaker 10 (23:12):
I'm not sure that's the right thing to go for.
It shouldn't be a percentage of the revenue, because that's
very complicated, and they put all the revenue in some
other country and cheat. The thing to go for is
a fraction of their computing resources. The bottleneck here is
computing resources. How many Nvidia chips or how many Google
tensor chips can you get? It should be a fraction
of the computing resources. What's an easier thing to measure?
Speaker 2 (23:34):
What fraction?
Speaker 10 (23:36):
I think it would be perfectly reasonable to say a third.
Now that's my starting point, and I'd settle for a quarter.
Speaker 2 (23:43):
We were promised that the Inflation Reduction Act would live
up to its name by collecting taxes on all those
stock buybacks. But now that we've had a couple of
years living with it, has it done what it promised?
That's next on Wall Street Week. This is a story
(24:08):
about names, getting them right, and making sure things live
up to what we name them. When enacted by Congress,
the name of the Inflation Reduction Act was derided by
Republicans like then Senator Rob Portman of Ohio.
Speaker 12 (24:24):
It's called the Inflation Reduction Act, but don't be fooled
by the name. It doesn't actually decrease the inflationary pressure
we all feel at the gas pump, at the grocery store,
clothes shopping. It actually makes it worse.
Speaker 2 (24:41):
But some of us may have forgotten how the law
got its name in the first place. It was meant
to be the rare bill that included both spending and
how to pay for it, in part by imposing a
one percent excise tax on corporations buying back their own stock.
Speaker 5 (24:58):
There are time when stock buybacks make a lot of sense.
That frankly, they've made a lot of sense when interest
rates have been a record low amounts, which has allowed
companies even to borrow money to do stock by that
that those seems like it's gaming the system. And I've
been disappointed when companies have said, you know, lower our
(25:19):
taxes and we're going to invest more in plant and equipment,
and instead they use it for stock buybacks. So putting
a one percent tax on those stock buybacks, I think
makes sense.
Speaker 2 (25:28):
What is the purpose of stock buybacks? When are they appropriate?
And when can they be a form of gaming the system?
As Senator Warner warned about when the IRA was first passed,
it turns out that they weren't even allowed in the
United States until fairly recently.
Speaker 4 (25:44):
As simple as the name, it's when the company buys
back its own stock, and there's a reason that this
was illegal until nineteen eighty two.
Speaker 2 (25:53):
Nel Mino has spent a good deal of her career
studying stock buybacks. She is now vice chair of Value
Edge Advisors, where she advises institutional investors like pension plans
about stock buybacks and how they can affect the value
of the companies they invest in.
Speaker 4 (26:10):
I think they did it because at the time they
felt that buybacks would only occur when there was excess
cash and on your valued stock. But there are a
lot of moral hazards there, because sometimes companies that should
be spending the money on operations and research and marketing
and things that are more directed at long term value
(26:32):
will spend them on the quick hit on the stock
price that you get from a buyback.
Speaker 2 (26:37):
Despite the moral hazards, economists generally favor allowing stock buybacks
as one way to allocate capital efficiently. Glenn Hubbard served
as the chairman of President George W. Bush's Council of
Economic Advisors. He went on to serve as dean at
the Columbia Business School where he remains on the faculty.
His book The Wall and the Bridge set out some
(26:58):
of his ideas about how to invest in the country
and the economy.
Speaker 3 (27:02):
It's a way to get cash back.
Speaker 1 (27:04):
You know.
Speaker 3 (27:05):
Economists for years talked about so called agency problems in
the company, that there may be too much in the
way of internal finance that gets wasted paying the money
out stops that dividends tend to be very regular. Companies
don't like changing their dividends a lot and then having
to bring them back down. So share we purchases are
one way to get cash back to shareholders.
Speaker 2 (27:27):
So from an economist point of view, they might allow
more efficient allocation of capital. If it's not doing so
well with the company, maybe I should have it and
put it all.
Speaker 1 (27:33):
They definitely do.
Speaker 3 (27:35):
If too much money gets trapped in let's say, an
old style company, why not put it in a new
company where they're better opportunities. Obviously their costs and benefits.
I'm not saying it's one sided, but my own prejudice
is an economist as buybacks are just fine.
Speaker 4 (27:49):
That's what I represent shareholders. We love to hear that
a stock buy back a special dividend. Absolutely if you
haven't got a good idea for the money, give it
to us. Let us decide what to do with the money.
That's when buybacks work.
Speaker 2 (28:03):
To the right way, whatever their advantages or disadvantages. Stock
buybacks have become a central part of corporate finance since
the SEC first gave them the green light. They're estimated
to have reached one trillion dollars in volume in twenty
twenty four, roughly double what they were ten years ago,
led by some of the Magnificent seven like Apple, Alphabet, Microsoft,
(28:26):
and Meta, followed by some of the big banks. But
the executives putting the buybacks in place have particular incentives
that can influence their judgment. They can increase management compensation
as the number of shares bought reduced the denominator of
earnings per share without adding to the earnings numerator.
Speaker 4 (28:45):
The first red flag is when they don't adjust the
EPs targets for incentive compensation. There are two ways you
can hit your EPs targets. The way that we like
as shareholders is to increase earnings. The way that is
not as beneficial to shareholders is to decrease the number
of shares outstanding, and so for a Board of Directors
(29:08):
Compensation Committee to set the EPs targets and then do
a buy back. That's a very easy way for them
to hit those targets without any real benefit to shareholders.
You have to remember that there's another element of manipulation,
and that is that the executives control the timing of
the buyback, and sometimes they do it in order to
(29:28):
hit those EPs targets. Sometimes they do it just because
they have no other idea about how to increase the
stock price. But we want to see them increase the
stock price by doing a better job, which.
Speaker 2 (29:39):
Is where the board should come in. If it's doing
its job, the.
Speaker 3 (29:43):
Board has to be focused not simply on the mechanics
of EPs, but really, what are the growth prospects for
this company. If you were doing that, you would be
eating your seed corn and you'd get caught napping by
the market. So a good board should stop that.
Speaker 2 (29:58):
Most often, management justifies a stock buyback as just a
prudent investment, claiming that their company's stock is not getting
their respect in the market it deserves. That it's undervalued,
which makes it a goodbye. But it's harder to make
that case when market valuations become elevated as they are now.
Speaker 4 (30:17):
But remember that the original concept of the buyback was
exactly what you said, excess cash and the stock price
is lower than it should be. In other words, the
stock is a good investment, just like any other asset
allocation made by the executives and the board of directors
(30:37):
you look at in terms of return on investment. The
stock market has been very high, as you know, in
the last couple of years, and so it's really harder
to justify buybacks. It's harder to argue that the stock
is undervalued.
Speaker 2 (30:50):
And whatever the overall valuations, it's awfully hard to reconcile
management's claim that its stock is undervalued if members of
the management team themselves decide to sell their shares into
the buyback.
Speaker 4 (31:02):
The other one that bothers me even more is when
the executives sell into the buyback, which I think should
be prohibited. The whole justification for the buyback is that
the stock is undervalued. Well, if it's undervalued, why are
you selling well?
Speaker 3 (31:19):
In general, I think when managers are selling it's one
of two things. One so called ten B five plans
where they have regular opportunities to sell, and just happens
to be at that period, or there could be a
particular event in their personal life. But I agree with you, Yes,
management in general should be holding shares during the tenure
in which the manager's in charge.
Speaker 2 (31:39):
So what does all this mean for the Inflation Reduction Act?
Now that it's been enforced for over two years? What
are the results? First of all, did it raise much
needed money for the federal treasury? The Joint Committee on
Taxation estimates it contributed seven point nine billion dollars in
twenty twenty four, and we'll add up to about seventy
four billion dollars over the ten year period ending in
(32:02):
fiscal year twenty thirty one. Certainly a nice contribution, but
not likely to put a big dent in the one
point six trillion dollars the Congressional Budget Office estimates will
be added to the federal debt every year for the
next ten I think of the.
Speaker 3 (32:18):
Game showed Jeopardy, where if you give me an answer,
I guess the question. So a stock buybacks one possibility
for the question is what is revenue? But actually don't
raise much revenue. The US buy back at one percent
maybe raises about seven seven and a half billion dollars
a year.
Speaker 2 (32:33):
And if Senator Warner thought that the tax on buybacks
would reduce the appetite for them, it doesn't look like
it had that intended effect either. Stock buybacks have continued
to grow despite the excise tax.
Speaker 4 (32:45):
I would say that stock buybacks have been bigger and
bigger every year. We've seen some of the biggest companies
in the country buy back more and more stock, and
we've seen very little benefit to shareholders except in a
very short term way, and more benefit to the executives.
(33:07):
So I think it has become a genuine problem. One
thing that I know will never help is taxing it.
You know, there have been a number of proposals, it
was included in some legislation. Those expenses have just passed
right on to the shareholders and sometimes the consumers as well.
Companies are completely indifferent to paying taxes.
Speaker 2 (33:29):
When you mentioned taxes, the Inflation Reduction Act does have
a one percent excise tax on stock buybacks. What effect
did that have on stock buybacks?
Speaker 4 (33:37):
Not at all. It was gasoline on the fire. They
just kept growing and growing.
Speaker 2 (33:41):
And perhaps most basic of all, when does it ever
make sense for a company to do what Senator Warner
was particularly concerned about a company borrowing money to buy
back its own stock, given that the entire theory of
allowing buybacks was to let companies make constructive use of
excess cash.
Speaker 4 (34:00):
In reality, like a lot of other financial structures, it
got abused. I mean, when I saw that people were
borrowing money, companies were borrowing money to buy backstock, when
the stockboys at a record high, I realized that the
original justification had just completely been forgotten.
Speaker 2 (34:20):
That does it for us here at Wall Street Week,
I'm David Weston. See you next week for more stories
of capitalism.
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