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Buffett Says “It’s Crazy To Borrow Money To Buy Stocks”… Don’t Show Him This Chart

Courtesy of ZeroHedge. View original post here.

Moments ago, speaking on CNBC, and echoing one of the main points from the annual Berkshire letter, Warren Buffett said that “it’s crazy to borrow money to buy stocks.”

By all accounts, this is a fair assessment: there is however one problem.

Yesterday, in a lengthy post on stock buybacks, we showed that corporations – via share buybacks - have been the main buyers of shares in the U.S. since 2009. According to the Federal Reserve’s flow of funds data, non-financial corporates have repurchased a net US$3.9 trillion worth of US equities since 2009. By contrast, households and institutions (insurers and pension funds) have sold a net US$672 billion and US$1.2 trillion respectively over the same period, while mutual funds and ETFs have bought a net US$1.6 trillion.

Of course, none of this would be a problem if companies simply used organic cash flow to repurchase shares: after all it is up to a company, and its shareholders, to decide how to allocate capital in the most shareholder-friendly way.

There is just one rub: as the following chart from SocGen – which we won’t tired of showing – demonstrates, virtually every single dollar use for buybacks not only since the financial crisis, but this century has come from… borrowing money.

In other words, the increase in net debt has matched the increase in net buybacks almost on a dollar for dollar basis. In other words, eliminate the buybacks and corporate America would not have unleashed an unprecedented debt borrowing spree over the past decade.

The good news for corporate America is that so far rates have been low enough to avoid a rendezvous with the piper. However, with rates now rising, Buffett’s warning will soon prove all too prudent.

And in a delightful coincidence, it was none other than Buffett’s quote that we closed our post yesterday:

Buybacks have played far too big a role in the QE era not to cause complications as Quantitative Tightening progresses. In the words of Warren Buffett: “Only when the tide goes out do you discover who’s been swimming naked.”

For now, however, the naked swimming continues without interruption.


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