options thread

Rakesh Bhandari bhandari at phoenix.Princeton.EDU
Wed Apr 5 12:56:58 PDT 2000

> The numbers I was citing are based on the market averages, so they're
> not per capita.

Doug, just want to focus on the surreal aspect of the stock market you emphasize--that it's an institution that retires more stock than it offers. So if there is enough buy back, then earnings growth on remaining shares can race ahead of GDP growth, right? Don't hesitate to tell me if I am way off.

Investors don't want highly taxed pay outs, they want dividends to be used for share retirement, if not investment, right? All this means explosive capital appreciation of outstanding shares, no?

Now you are saying that for continuing buybacks at the level needed to ensure expected earnings growth on remaining shares, profits would have to continue to grow at truly unsustainable rates, right? But won't foreign investors continue to buy US corporate bonds to finance defacto this buyback as long as Greenspan keeps inflation in check even if they know deep down the US will have to organize the depreciation of its currency to honor obligations. These big comapnies have great lines of credit, so there is no fear of default. The Treasury will have to create reserves if they max out their lines of credit. Debt can be rolled over for a long time.

Despite fear of dollar devaluation, these foreigners still need the dollars for international business, oil, some key high tech inputs. They still like the liquidity of the American market. Especially after Asia panic, their appetite for dollar denomiated assets is simply astoundingly enormous. Foreigners know that their own governments can't let the dollar actually collapse since there wouldn't be any intl trading system and an insolvent US would close off its market and retrct its military.

Maybe it's a Ponzi scheme. But it seems different when Uncle Sam is playing it, instead of little old Charles (?) Ponzi.

Yours, Rakesh

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