no bubble

JW Mason jwm at
Tue Apr 11 21:34:29 PDT 2000

Enrique Diaz-Alvarez wrote:

> Except more than all of those buybacks are being carried out with freshly
> borrowed money, so from the point of view of shareholders it is a wash -
> they get the money, but also the increased liabilities of the companies
> they own.

Whether or not it makes a difference depends on what you think is guiding investor behavior, right? You've suggested a couple of times that small increases in interest rates won't have much effect on the stock market--if you're expecting a 20% return, what does it matter whether you're paying 7 or 8 or 9% to borrow? But if investors are mainly responding to their increased claim on corporations' cash flow, as I'm suggesting, that reasoning doesn't hold. Presumably corporations' ability to borrow to finance acquisitions and buybacks (and dividends) will be affected in a more straightforward way by rate increases. On this point, one interesting thing in Shiller's book is that in 1999 institutional investors, accoding to his polls, expected an increase in stock values over the next year of only 4.6%.

> It'd be interesting to see what the numbers look like once you substract
> net borrowing from stock repurchases.

I'm going to keep playing with this stuff. I'll let you know what I come up with.


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