The AI-chip giant Nvidia (Nasdaq:NVDA) announced this week that it was launching the biggest share buyback in U.S. history, at $150 billion, taking its authorized buybacks to $235 billion by January 2028. Since NVDA has the world’s highest market capitalization at over $5 trillion and is up over 1,200% in the last three years, it is a racing certainty that NVDA will be buying stock at a nosebleed level, only to be forced to sell new stock at perhaps a fifth of the price (a $1 trillion capitalization) when the data center surge in its sales has worn off and it has spent its bubble profits on buybacks. This is daylight robbery of NVDA shareholders, all to boost the short-term value of management’s stock options. These loot-seeking stock buybacks must be banned by law, as they effectively were before 1982.

There is a plausible case for stock buybacks by a heavily capitalized firm operating in a declining traditional industry. The company is profitable, and depreciation charges make its cash flow even more impressive than its profits, yet the market recognizes its gradually fading low-growth business and awards it only a low P/E multiple. Stock buybacks can return capital to shareholders, who can use it more effectively in other opportunities, and gradually reduce their stake in the declining business, while the rising earnings per share allow management some reward from their stock options. Even in this case, I would prefer the company to return capital to shareholders through generous dividends, paying management in cash (their job here is not a difficult one, after all) although I recognize that the U.S. tax system works against this more sensible approach, since dividends are fully taxed, whereas share repurchases are not taxable to the sellers.

For tech companies like NVDA, the fairly feeble arguments for stock buybacks by mature industry corporations do not apply. Far from having excess cash flow, tech companies must invest gigantic amounts of money to keep up with their competition and markets in a rapidly expanding field. Furthermore, they normally trade at astronomical P/E ratios – NVDA’s is currently 28.69, with its earnings currently swollen by the AI bubble – so even if they have spare cash they actually lose by buying back stock at an earnings yield of 3.48% (100/28.69) when they could make 5% today risk-free in government bonds. If they must borrow money to buy back stock, their funding cost in today’s market is at least 7%, so buybacks make no financial sense.

Finally, tech stocks are subject to wild waves of fashion, during which extra capital can be raised, but their huge volatility greatly intensifies the danger of buying back stock that must then be resold at a much lower price in a year or two to fund the business. Even the normal excuse for stock buybacks, the need to reward management with stock options, does not apply here; any tech company worth its salt has a stock price that can soar into the stratosphere at any time, making its option holders inordinately rich.

Stock buybacks are inherently pro-cyclical. They are increased to an inordinate size as in NVDA’s case when operations and profits are very successful, which causes the stock price to head for the wild blue yonder, even without them. If a company in those circumstances does not need the bountiful cash flow it is generating for investment, it would do better to distribute it to shareholders as dividends. That way, ordinary shareholders get cash in their pockets, with which they can diversify their investments to less overvalued sectors, since the stock price rise will have increased its weighting in their portfolio, making them overweighted in it. Through stock buybacks, if their size is large in relation to the daily trading volume of the stock, companies push their stock prices to unsustainable levels. This sucks in millions of unsophisticated retail investors who see the stock’s outperformance and buy in at grossly inflated prices, to be met by management cashing out on their stock options.

In a rational world, extensive stock buybacks would be seen as evidence that the company’s management could not think of anything better to do with the money. Top management gets paid huge salaries, mostly through bonuses and options, to deploy the company’s resources, both financial and operating, into paths that will allow the company to achieve returns superior to those of an index fund. In most circumstances, if management cannot achieve this, it should be replaced – its inordinate cost in terms of bonuses and stock options is a complete waste of money. Buying back the company’s stock when there are alternative opportunities for the company’s cash flow is a misallocation of resources. That is especially the case when the company is in a rapidly growing sector, and investment opportunities abound. With large buybacks in a growth company, either the company will miss out on opportunities it should be taking, or it will drive itself into debt at levels that quickly become intolerable as interest rates rise, as they are currently doing.

The classic example of this is Boeing (NYSE:BA) which in the 2010s devoted its resources to buying back stock at over $400 per share, while skimping on investment in new projects such as the 737-MAX. The result was two early fatal crashes of the under-engineered 737-MAX, and a descent into a half-decade of losses for Boeing, which has now had its certification for the 737-Max 10 delayed until a software problem is sorted out. Meanwhile the stock buybacks exhausted the company’s stockholders’ equity, with the result that despite a “rescue” share issue at a low price, the company’s net worth is still negative. Passenger aircraft may be a mature business, but their demand is still expanding and there is as yet no sign of a viable replacement technology. The product group is roughly in the position of railroad locomotives around 1880, when the technology was fully mature but there was still a quarter century of highly profitable product development and growth ahead for the leader in the field, Baldwin Locomotive Company. Even though Baldwin did not diversify into electric or diesel transport, its peak sales year was 1906, with locomotive sales volume three times that of 1880.

There is a simple solution, which does not require Congressional action, but simply a rule change by the Securities and Exchange Commission, controlled by President Trump. The SEC should repeal Rule 10b-18, adopted in 1982, which “clarified” the stock buyback rules in favor of greedy management and against ordinary shareholders. Thereby, it would revert to the position that existed before that Rule, when the SEC correctly in my view regarded stock buybacks as price manipulation against retail holders and so effectively forbade them. Management would inevitably bring a court case, but surely greedy management, drooling with fury at being deprived of their manipulatory and excessive slush-funds, would be so politically unattractive a suitor that, even in the ultra-cautious Roberts Supreme Court, it would be unlikely to prevail.

With that rule change, and ideally a recission of the 1993 Revenue Reconciliation Act provision favoring stock options over ordinary salaries above $1 million, the scam level in corporate top management would decline, as would its robbery of shareholders. With those changes, top management would be able to earn a decent remuneration, but could no longer raise it to Pharaonic levels through manipulating the company’s stock price, overleveraging the company and depriving it of capital investment.

With the current rapid rise in long-term dollar interest rates, the perils of over-leveraging will soon be all too apparent, as overleveraged companies find they cannot make the sums add up with the high rates they must now pay for debt. Many of the fancy private equity-driven leveraged structures will also collapse, while asset values will shrivel like prime London property prices are currently doing (down 20% in nominal terms or more than 40% in real terms over the last 10 years – a bigger drop than in the 1970s). This will be painful, but enormously beneficial in the long-term, provided the Left does not use it successfully as a reason to vote out capitalism once and for all.

This creative destruction couldn’t happen to a nicer bunch of shysters. All we need is the firm hand of reform!

Disclosure: I have a modest residual holding of long-dated but thoroughly underwater NVDA put options.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)