Watching the world going through its worst financial crises over the last couple of months was an interesting experience to say the least. It was stunning for me to watch that truths that were held and thought of being indestructible, were thrown overboard in no time. Many times they were replaced with the exact opposite of what was held sacred before. Point in case: the saving of AIG and the American Banks by the government in the worlds most open capitalist system. Government intervention was usually favored by the socialists, not so much this side of the atlantic though – or at least so I thought… (I can hear the spin doctors: “black, the new white”)

Another interesting example is the government funded stimulus called “cash for clunker” program in the US and “Abwrackpraemie” in Germany. While a very similar concept (in fact the US took a page from Germany’s play book, after seeing it vastly successful in Europe), both programs were judged very differently in each country. Despite both countries being capitalist systems, operating in a similar macroeconomic environment, the German program was perceived as a huge succes, hailed by the press, the industry and the general public. In the US the government wasn’t so lucky and the public opinion perceived the program as the biggest waste of government stimulus money. The discrepancy in perception puzzles me to this day.

Through this crisis I came to realize that certain truths coexist at all times, just the weights they’re believed and applied shift over time – like fashion. Some of it is influence by lobbies, media and politicians, but to a large part the swing in opinion and conviction is real and comes from experiences gained in the current or very recent environment. Historical influences take a back seat.

When I try to understand how this all works, I am often reminded of the system response of a PID controller: when a change in desired output value leads to an overreaction and oscillation past the target value. It eventually settles on the new found equilibrium, but only after having kicked up plenty of dust.

Interesting headline, isn’t it? Why would anyone volunteer to write about this (your newspaper doesn’t)? When we were children we all learned that you can’t put a price tag on a single human life. It’s unethical and also violates the dignity of humans. Sure, that’s one way to look at it. When studying the fine print of my health insurance I’ve learned that other people have since stepped up to the task and actually put a price tag on my life. Mine is currently 2 million dollars. That’s the accumulated life benefit limit on my insurance. So after that you’re pretty much on your own – (get ready to die, no-body’s paying for you here any more). So after the initial shock, that some company has defined how much my life is worth, I thought who else might be inclined to put a value on human life. Turns out companies do it all the time (don’t they have a conscience?) – i.e. car companies that need to determine if they need to have a recall (number of cars with this problem * probability of failure * cost for lost life >=? cost for recall). Insurance companies do it (you carry life insurance, don’t you?). So in business it’s quite common to put a $$$ amount on a human life. Which leads me to the following thought: yesterday there was a suicidal man with a gun at the intersection of two of Austin’s most traveled highways, threatening to kill himself. After a two-hour stand-off with the Austin police the person was taken into custody unharmed. Meanwhile traffic came to a grinding standstill for those two hours. So can I now calculate the loss in GDP contribution from the created traffic jam and compare that with the value of the person’s life? Should the police use this to decide when to intervene or walk away? Police over megaphone: “You’ve 12min left to drop the gun. After that it’s cheaper to kill yourself!” … You obviously don’t want the police to pull the trigger. (Although it would be with the consent of the victim (but you would want to get that in writing) and it would make economic sense.) What a mess.

P.S.: Then imagine the next day – “we’re sorry to admit that we miscalculated the loss of GDP by assuming that all 3 highway lanes were open, when in fact one was closed. The victim would have had another 23 minutes. Our regrets go to the family.”

This is going to be a rant. It’s about stock buyback programs. Stock buybacks are these great programs that are loved and demanded by MBA suits and finance folks to trick public companies to spend their money on guess what: buying themselves! Now think about this for a moment: The company that has generated a hard earned profit, tries to put that money to work. And the best way they can come up with is buying more of its own. Cmon’ you’re kidding right? It isn’t investing in more R&D, thinking up new products, it’s not investing in more aggressive marketing of existing products, it’s not investing in the sales force, it’s not buying other companies to grow new business, it’s not paying bonuses to high achieving employees, it’s not spending on shoring up their employees retirement plans. No, it’s spending on shareholder value, the reduction of dilution in stocks to increase earnings per share. And why does this work so beautifully? Because influential investment funds own ridiculously large amounts of the publicly traded stocks and are benefiting disproportionally from such a buyback. “Just give me that money you’re having!”  But it gets better: Not only doesn’t have  the company a good ideas how to grow its business faster than the competition, it does this kind of buyback usually during good times, when stock prices are high. Granted, nobody can predict the stock price and cost averaging takes care of some inefficiencies, but shouldn’t this kind of investment then continue during bad times, when the stock prices are deflated? You would think. Price averaging works that way. But NO, suddenly cash preservation takes precedence and stock purchases stop during bad times. Latest example: Intel. They’ve been buying their stock all three quarters long, until business turned really sour in Q4 of 2008. So they stopped buying back stock. The stock is 48% down since it’s high in 2008. Not that I think preserving cash is a bad thing during these times. But it’s more important to invest the money in new products or business (you can’t save yourself out of a recession, you need to invest!) to emerge stronger when the next cycle starts. I’m not suggesting Intel isn’t doing that. It is. But it’s also having a stock buyback program because it fell slave to the fund managers. I’m convinced that stock buybacks weren’t a good idea to spend your money on in first place. Not in good times, and not in bad times. If you can’t find management to grow the business faster than investing in their own stock, get rid of them, is what I say. They’re out of ideas or have fallen slaves to their investors. But IMO the reason we have so many buyback programs is that that’s really all the MBA suits understand of the companies’ underlying businesses they invest in. And it’s the fastest way known to them to extract money. It’s easy to ask for, especially if you own huge chunks of stocks. So give me more of your hard earned money!