Doug Kass: Here’s Why Easy Money Often Winds Up in Money Heaven

There are an increasing number of examples of the tide going out and exposing us to who is swimming naked. 

Excessive monetary growth gave capital to the likes of Chamath Palihapitiya, Cathie Wood and Mark Zuckerberg. And now we see the consequences.

An extended period of low interest rates has contributed to poor investment decisions — remember the popularity of Coinbase  (COIN) , Carvana  (CVNA) , Robinhood  (HOOD) , PayPal  (PYPL) , Et al. — and even worse corporate capital allocation strategy as corporations were moved to buy their own shares high with “free money.”

Regarding wrong-footed corporate decisions: Meta  (META) has purchased over $42 billion of its own stock at an average price of about $300/share (META was recently trading at about $100/share).

Or look at Seagate Technology  (STX)  , which spent an extraordinary amount of money on buybacks, which are really retiring executive stock option exercises and supporting their stock price — instead of doing the right thing of cleaning up its balance sheet by deleveraging.

Now, with Seagate missing on earnings and the share price getting hammered ($115 to $50!), the company has no dry powder or inclination left to buy stock as, after buying over $400 million of stock in the prior quarter, and increasing the company’s debt levels from $5.6 billion to $6.2 billion, Seagate has suspended its share buyback.

A larger point can be abstracted.

It never should have been as easy as it was to begin with, but that is what easy money created by the Fed and our government does.

When money is free, the money is sent to places that it should not have gone to — in an ARK (ARKK) inspired buying binge of overvalued tech stocks and on the buyback of overvalued company shares.

And the money has ended up, as it always does when cycles end, in money heaven.

(This commentary originally appeared on Real Money Pro on October 27. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass’s Daily Diary and columns from Paul Price, Bret Jensen and others.)