As I wandered around my local supermarket (in the suburbs) at the weekend, I kept thinking about my favourite author, J G Ballard and his worry that the veneer of civilisation is wafer-thin. Obviously, there was no toilet roll, but the masses had also gorged on chopped tin tomatoes, minced beef, and home baking yeast. I was there exclusively for the last item, so I wondered why the sudden fascination with home baking machines.

But I also mused on the jokey asides we all subscribe to that posits that this behavior is irrational and uninformed. As a lifelong, covert, (liberal) prepper I’m not so convinced that it is irrational. If you are told that you are about to sent into lockdown for four weeks – allowed out only for occasional visits – why wouldn’t you hit the shops, especially as most punters know damned well we operate on a just in time supply chain system. People may be selfish but stupid and irrational, they ain’t.

So given these musings, I was struck by a note recently on the psychology behind panic buying, by Ian Bright, ING Research Managing Director. He uses two examples of crowding behavior amongst ants and pop music fans to construct a case for panic buying as a perfectly rational (though undesirable) agenda.

“ If a group of people can shift rapidly from one state to another and also the dominance of one opinion can be influenced by knowing the decision of others, why can’t a society shift quickly from not worrying about the availability of toilet paper to panic buying? You see the shelf with toilet paper get a bit low, then hear others are buying more than usual. Suddenly, everybody is trying to get toilet paper. As in the music experiment, your individual decision to buy toilet paper is influenced by knowing what others are doing. And as in the ant experiment, there is not a smooth transition from toilet paper plenty to toilet paper scarce. Behaviour changes quickly. It can be discontinuous.

 “Panic buying is not irrational. It is a function of how decisions are made in groups. Simply supplying more toilet paper may not solve the panic. The market for toilet paper is broken. Other solutions may be necessary. Rationing sales. Shaming hoarders. Calming words from a trusted authority. Each of these may have more effect in changing demand for toilet paper.”

Spot on.

It’s a similar case made by the excellent Tom Chivers, a science writer on the Unherd website. You can see his superb summary of the behaviourial challenges here –[0]=18743&tl_period_type=3

But it’s Felix Martin in the New Statesmen magazine who makes the all-important link back into investment. Martin is reviewing Robert Frank’s epic tome Under the Influence which in a sense represents the flip side of the nudge theory school of thought. Frank’s research takes to task the nudge enthusiasts “insistence that an individual’s behavior can be usefully understood in isolation from the behaviour of their peers”.

Put simply, people can be perfectly rational and still cause enormous societal damage. As Ian Bright at ING reminds us, invocations to not panic will amount to nothing if those shoppers all believe – correctly – that they are behaving rationally.  You need armed guards on the door and on the spot fines.

By the way, you can read Felix Martin’s excellent review here –

But I think we can extend this analysis out from individuals to groups – and groupthink.

Share buybacks

At this point, lets raise the tricky issue of share buybacks. I’ve long been deeply suspicious of the C suite group think which suggests that if a company can’t find a better way of allocating spare capital, it should have the money back to shareholders.

The attack on share buybacks comes from both ends of the political spectrum. Many leftish economists think that this rational group think ignores the wider stakeholder concerns of wider society and is incredibly short termist. Many financial analysts take a different view. They question whether this is all

  • Just helping C Suite bosses as their share options mature (and also helps motivate tech hires via options)
  • Piling on corporate debt to give cashback to shareholders
  • And is nearly always appallingly timed and thus destroys shareholder capital.

I think both parts of the spectrum are probably right. Crucially I think there is a good chance that the chaos of the last few weeks will crystallize an important tectonic shift. As nearly all the major devastated corporate sectors plead for cash, government’s will rightly say – “what happened to all those share buybacks over the last decades?”. If you had spare capital, why did you not conserve it ?

It is I think a brilliant question and one which I’m afraid there is no sensible rebuttal. All those economists arguing from a purely rational capital allocation POV are speaking in a vacuum and the mirage is now revealed. Share buybacks, unless done under certain circumstances, can be dangerous for the wider economy – they deplete corporate resilience, and impair Capex spend. You may disagree with me, but I would suggest that that political battle is about to be lost.

And here’s the rub. Those share buybacks helped sustain an almighty bull market in US equities.

In a brilliantly timed note today analysts at S&P Dow Jones released figures on Q4 2019 which look like a message from a different age. Here are the numbers…

  • Q4 2019 share repurchases reached $181.6 billion – 3.2% higher than Q3 2019,and 18.6% lower than the record Q4 2018.
  • Apple continued to lead, spending $22.1 billion– up from last quarter’s $17.6 billion, and ranking as the 3rd highest expenditure historically.
  • Buybacks for the full year 2019 were $728.7 billion – down 9.6% from the record $806.4 billion set in 2018.

S&P Dow Jones now says that the

outlook for buybacks in 2020 however, is unsurprisingly grim: “COVID-19 has significantly changed the 2020 landscape, as dividends are under pressure and buybacks appear to be gasping for air,” said Howard Silverblatt, Senior Index Analyst for S&P Dow Jones Indices.  Pre-COVID-19 estimates predicted 2020 buybacks would come close to or exceed the $806 billion record set in 2018.”.

 No shit sherlock.

 I can only concur with Howard’s assessment that  Q1,’20 buybacks are expected to be down significantly, that Q2,’20 is expected to be dismal, with corporate participation light and that for 2020, buybacks may see a complete reversal of the 2018 buyback bonanza.

Yep. And I would go further, much further.

If I was a policymaker or politician on either the right or the left who was worried by the resilience of capitalism, I would be jumping on a podium now and saying we need to regulate share buybacks. Welcome to the new Ice Age for Buybacks.