On Wednesday, Walmart stock went down by over 10%. And over the following two days, it has slowly gone down another 3%. Walmart did announce that earnings for the next year will be 6% to 12% less. But as Michael Hiltzik pointed out, this is primarily due to investments that the company is making. In particular, Walmart is raising wages and improving its ecommerce capabilities. To offset this, the company is going to do a $20 billion stock buyback, which should increase shareholder value. But that was apparently not good enough. And clearly, this wasn’t an impetuous reaction from Wall Street — the slide continues.
What the whole thing shows is how American finance is razor focused on short term profits. The things that Walmart is doing are undoubtedly good for its long term profitability. In fact, this has traditionally been the point of having stocks. It is a way for businesses to raise money so that they can invest in their infrastructure. But today, it seems the only point of stocks is to have a quarterly return. The stock traders figure that they can always buy back into Walmart after it is done with its worker and capital improvements. They don’t need to be part of the process, because actual business investment is scary.
As I write this, the total value of Walmart stock is down over 12%. Supposedly, this means that the company is worth that much less than it was Wednesday morning. You know: the perfection of markets and all. But this just shows that Wall Street doesn’t actually reflect the value of companies. It is some kind of sick and twisted notion of wealth where companies are worth only what they can bring in immediately. It is this kind of thinking that never would have gotten us to the Moon or even to civilization.
Although I think this is a particular dysfunction of modern Wall Street, this has actually always been the problem with capitalism. It really is great at doing the minutia of production and distribution. If you need to produce and distribute disposable diapers, capitalism is absolutely the best way there is for getting them to new parents. When it comes providing prenatal care for mothers, capitalism is a particularly bad system. So that ought to be settled. But as a society, we seem incapable of looking objectively at capitalism, and see it rather as a law of the universe that can’t be questioned.
But it is very disturbing that as proven a moneymaker as Walmart can’t look out for its long term interests without being savaged. Investors would rather use their money to get certain immediate profits than do the work of actual investment. There are only two possibilities in the Walmart case. It’s either that the investors are panicking over nothing — they care only about profits in the next year and not at all about Walmart’s long term profitability. Or it is that investors greatly overvalued it before based only on short term considerations, not calculating its need to continue to invest in order to grow.
This is a great example of the failure of capitalism. And part of it is that the rich understand that they don’t need to worry about the long term. If things go wrong, the government — which they spend so much time complaining about — will be there to bail them out. So they base everything on a three month time frame. Squirrels plan further ahead.