The Dirty Secret Behind CEO Earnings & Its Effects On The American Economy-Part Two-
Joe: I remember when Covid-19 was booming; when the numbers were as bad as they could be, I saw that 30% of small businesses had shuttered their doors and that so many companies were slumping. And now the economy is catching up to that. Many people think the war in Ukraine is causing the economy to immediately have inflation. But inflation was starting before that. So I'm wondering how our CEOs are doing so damn well. You said something that just blew my mind: CEOs in the top Echelon of wealthy people were 55% richer since covid started. What's the old phrase? The best time to buy is when there's blood in the streets.
Todd: Yeah, and a lot of great businesses have started during recessions and depressions. How could that be right, with fewer people buying things? Well, it goes back to the Great Depression. Everyone knows when the stock market had that big crash, millionaires were no longer millionaires on paper anymore, and they were jumping out of buildings to their death. Back in the Great Depression, CEOs made a plan. Though their company was not worth anything, they started to buy their own company's stock. Does that sound crazy to you?
Joe: In stock terms, they're buying their own shares back…their own stock back. That sounds insane.
Todd: But what these wise, shrewd businesspeople knew was that when you have less of something, it's worth more. It's more valuable. They would buy their own stock to make it more valuable because there was less of it to buy. This is how a lot of big companies in America survived the Great Depression. But then the Law Security Exchange Act came. FDR saw this going on and said this could not go on any longer. So after that, when companies got more profits, what they had to do was they had to invest in something; they had to develop new products, raise wages, or they could just pay dividends to the investors.
Joe: Could we pause on that just for a second because that is such an extraordinarily important part. Traditionally, the dream of everybody who likes money is the ideal that if your company does well, then you invest in people and innovation. That's the dream. And so, you're saying that they came up with buying back their own stocks to shrink the available stocks, but it makes shareholders not want to go away; it means that their stock still stays valuable, so they don't leave.
Todd: It was that way, but then FDR came in and said you couldn't do that anymore. You have to put the money towards one of these three buckets. You made a great point about the tech and improving products. So, what happened when technology and productivity went up, wages also went up because they were using this FDR model. That made a thriving middle class for over 30 years. And that's when America boomed because the middle class started buying cars, houses, and washing machines. And then, in the 1980s, Ronald Reagan had a new SEC chair called John Shad. He brought buybacks back. So buybacks were in business during/before the depression, then they had a legal vacation and were brought back. CEOs used to get paid on how their company does and how profitable it is. But what changed was they could then get bonuses on what their stock was worth, not how much the company was worth. Does that make sense?
Joe: It makes a twisted sense. You can have a company that is inventing new things making the world a better place but don’t have a good stock. But then you have a CEO who’s not putting anything new out there like Blockbuster, and the CEO just takes stocks off the market to get a good buyback bonus.
Todd: Ridiculous bonuses. And one of the best examples of it is in the automobile business. General Motors in 2008 was worth 22M, Volkswagen 12M, and Toyota was 3M. General Motors was way in the lead but was not reinvesting in its employees and its plant. And they're making a record that they were making huge money but went from number one down to number four, and it didn’t make any sense. The collateral fallout from that is that it does not just affect them. It affects all their subcontractors. They were decimating towns and whole communities. In some of these big auto towns, when they close down these shops, things like schools and hospitals close because everyone packs up, moves out, and goes to find a new job.
Joe: But if I'm a shareholder, I don't see the town that got shut down around the company that's failing. What I see on paper is my shares are worth $130 and the CEO just got his bonus, and everything is copacetic. My portfolio doesn't change, or it's even better because the stocks got bought back so who cares. This makes sense now why Chipotle can lose a couple of locations and one of them is staffed by one poor teenager during covid. Now this kind of clicks, so I guess the next big part is, how many companies are doing this? Let’s go back to the S&P 500 on the index, 255 of those companies reward executives at least in part by their earnings per share. Of the 500 Index, more than half are doing this and that's insane. Like, that's an American economy-based incentive, allowing stock Buybacks to be at least an option for them.
Todd: What is this greed? How could you take a 55M dollar payday when you're already wealthy, and you're already successful? How could you close down whole towns of blue-collared, hard-working people and not have some sort of guilt?
Joe: If we're looking at it from a capitalist perspective, per share does not mean your product is worth more on the market. If you remove a bunch of stock from the market suddenly your shares, quote-unquote, earn more. But that doesn't mean you have anything out there that is worth value to anyone. It just means that you have moved the money around very cleverly.
Todd: Doesn’t that collapse?
Joe: Oh yeah. According to Reuters, 28% of the companies on the S&P use something other than per share metrics, which buybacks can still influence. It's not that they got away from them, but some companies are pledging not to do this. We did not just break this as a new story to America. Economists know about this. In fact, there's probably some listening to this, hearing two newbies realize how screwed we are. That said, the Pepsi CEO has pledged to phase out corporate buybacks entirely. I think they said that their stock purchase spending will plunge to almost zero after reaching 3B in 2019 and dipping past 2B last year. So, some companies get that this is unhelpful to the economy and unhelpful to their workers. This is not good for the economy, and politicians have been working against it as well because of that reality.
Todd: Do you think some of the powerful politicians, whether red or blue, are a little jealous? They don't want CEOs to have that much power and that much money.
Joe: I remember somebody publicly asked Nancy Pelosi if politicians should be allowed to even participate in the stock market, and she totally dodged the question. Going back to CEOs, I see CEOs picking a lane, and they get extraordinarily knowledgeable and good at it, along with having a great team, a great mentality, and a great work ethic. The ones that really make a lot of money, they really are working for it, and a lot of it is committing themselves to a passion and knowledge of that passion. So, that's my next question for you…Were you ever given the marshmallow test when you were a kid?
Todd: Marshmallow test. What is that?
Joe: This has become an old standard in Psychology. The idea is you put a marshmallow in front of a toddler, and you leave the room, and you tell them if this marshmallow is here in 10 minutes when we get back, if you can wait that long, you get another marshmallow. You get to eat two instead of just the one. So, they're incentivized to have delayed gratification. The reason why this test has become so popular is because as they followed up on kids who were given this test, they found out that kids who could delay gratification, who could avoid eating the marshmallow and wait for two marshmallows, they lived happier lives, they had investment portfolios, and they had better careers.
Todd: It makes total sense, though, doesn't it? Because that's how life is; you plant seeds, and then you harvest more if you're willing to plan and wait.
Joe: It's funny because 30% of the kids are not able to delay gratification. Even funnier because 25% of Americans right now have no retirement savings. Only about 30% feel on track. So like, this is not correlation or causation, but I just think it's amusing that 30% of all people can't delay gratification and about 30% of people don't have savings or retirement saved up. So, if we're just talking about if everybody can be a CEO? We're just going to go with the very simplest way to assess it: do you have a delayed gratification mentality? By just that, we can quietly eliminate 60% of the population from being a CEO, purely based on temperament and delayed gratification.
Todd: Because it takes a long time, it really does.
Joe: I will say that I've seen a lot of CEOs where they delay gratification long enough to get their education and to get their career, starting to start really making money, and then they go freaking crazy. I mean, the more we talk, the more it sounds like America has oligarchs. Like we're an oligarchy, not a democracy, especially if you take in that Princeton study that found the general public does not get what they vote on. It's actually lobbyists and people with money who get their way. But can we talk about the crazy spending of some of these Tech billionaires? Because I've heard of so many of them doing bunkers?
Todd: They're amazing. They have these bunkers, and what do you think they're worried about? Do you think they're worried about the next World War or pollution? Why do you think they're hiding these?
Joe: I personally think they're worried about the French Revolution. I think they're worried about the lower class is going to rise up and try to team against them.
Todd: You're absolutely right. They're absolutely afraid of civil unrest. I was reading through all these different articles of one Contra Costa. They have one that's called the presidential bunker and you know, it's not your idea of a hole in the ground. It's 6,000 square feet, has six bedrooms, two kitchens, and a bowling alley. And it's to keep the lower class from going down there and cutting their heads off.
Joe: I was kind of joking about the Guillotines thing, but that's crazy. It really is just civil unrest. That is so wild. Instead of lowering rent on the properties that they are renting to us poor serfs, they'll spend that money on a bunker so they can escape us poor serfs when it comes time.
Todd: I mean, they don't just want to hide; they want to hide in comfort. They don't want to lose any part of their lifestyles even though they're hiding in the ground like a rat.
Joe: I'm going to be just an ultrasonic here. It's the idea of extracting wealth from the people who are supporting the economy and then going underground with as much of that wealth as possible to live comfortably while everybody else kind of combusts on top.
Todd: I can see you and me out with some shovels trying to look for these things.
Joe: That's the apocalypse from civil unrest. You and I will be out in the desert with a couple of metal detectors, just asking to be let in. We’ll be like, hey, we will podcast for you if you let us hang out in your bowling alley.
Todd: Joe and I are a couple of cockroaches. I have a feeling we're going to be the last one standing in this country.
Joe: I was going to say us and Twinkies, but we already busted the twinkie thing last week.
Final Thoughts
On paper, we can't all be wealthy CEOs – not when they make 350 times the salary of a worker, not when stock buybacks and CEO pockets take precedence over strengthening American business. We're sorry to be the bearer of bad news, but the economy just can't support any more successions. In fact, with those pay rates, not only can we not all be CEOs, but the 60% of teens who want to open normal businesses won't be able to either, nor can the 80 million people who bought the book, Think and Grow Rich, or the 26 million, who bought Rich, Dad, Poor Dad.
One estimate by Zippia puts the number of traditional company-running CEOs at 39,000 scattered throughout the US - 39,000 in a country with over 30 million people. Those are not bad odds if you are a mega ball lottery player. Not great if you had your eye on a luxury bunker with a swimming pool, But hey, if you're listening to this podcast, your odds are already going up.