Stock Market Distortions

On today’s show we’re breaking down specifically how the low interest rate environment has translated into inflated asset prices in the stock market. Unless you’re deeply immersed in the system, it may not be obvious how and why that relationship has happened.

We’re going to connect the dots for you so that you understand how compensation structures are design in most public companies, and how those structures are being manipulated to maximize compensation for directors and officers at the expense of investors.

Let’s imagine that you are the CEO or CFO of a public company. You negotiated bonuses and restricted share grants that reward the officers of the company for improving the profitability of the company for shareholders. The key metric is the earnings per share.

In the good old days, company executives focused on growth of revenue and growth of earnings as the pathway to maximizing earnings per share.

But remember, we’re maximizing earnings per share. There are two ways to increase that metric. One is to increase the earnings. The second is to reduce the number of shares in circulation. If there are fewer shares in existence, then by definition, the earnings per share went up.

Of course by now, since the start of the year we are seeing that it takes more than share buybacks to sustain growth of share prices. Meanwhile these companies are now saddled with a lot more debt that they will need to find a way to pay back from future earnings.

When we say that so much of the money printed over the past two years went straight into wall street, this is what we’re talking about.