Superannuation, the ultimate government cash cow?

[sydboy007]

So, Syd, if your above suggestions were to be taken up by government to provide the income you describe as slightly better than the current age pension, would you anticipate that should replace the age pension?

In time yes. It has to otherwise we have to increase taxation to cover the costs, and you can't target a diminishing workforce too much more.

I'd prefer to see us move towards taxing land, resources, consumption and minimally taxing work and profits.

 

[sydboy007]

View attachment 58169

The projections here are based not on 9.25% but 12% and

* the amount of people who will receive the FULL age pension will decline
* the amount of people receiving a part pension will increase
* there will be a gradual increase in retirement income for people alongside the pension.
* the Henry review Retirement income consultation paper issued in December 2008 discussed that the amount of concessions are "heavily weighted" to individuals on higher personal tax rates.

http://www.crikey.com.au/2014/05/14/...witcher=mobile

''...The Australia Institute showed in 2009 that the top 5% of income earners obtain 37% of all superannuation tax concessions....''

And that, imo is the issue that we should be discussing in this forum. Taxpayers are supporting a public superannuation system where their taxes pay more towards the retirement fund of a "wealthy" contributor than an contributor in the category that more than 60% of us fall into. While some here have pointed out that if this were to change, i.e if the tax concessions were to be less favourable to individuals on higher personal income tax, their behaviour would change, and they would look for tax reductions elsewhere, isn't that a separate issue? Others have spoken at length how the onus lies on people to accept responsibility to save for themselves. I agree, but I do not agree that it is possible for many to do so on low incomes where 60.7% of wage earners earn less than $52k, and where about 36% earn less than $32k. Is it right that a person earning $52k pays around $8447 in taxes, has little $$ left after his living expenses to save for retirement, but where his taxes supports a super system which advantages the minority?

The lack of equity in the current system has been known since super was rolled out to the masses. Recent tax cuts have tended to make it less attractive to the bottom 30-40%. It riles me that Abbott sided with 16000 rich superannuants that received over 100K in tax free super pensions each year and cancelled the LISC to help the bottom 1/3 who receive little to no benefit from super.

I don't know if I agree using 12% super as a base since we're only at 9.25%, the moved to 12% will occur over an extended period of time, or it may never happen. 0.25% differences over 45 years cause major changes to final balances due to the effects of compounding.

I think the bottom third would be better off if the Govt set up a SWF legally required to be run for the benefit of the members, then promised to provide a certain % of income above the pension. The level of fees charged would plummet, a longer term focus could be taken to produce better returns, and these people would actually get a liveable income at the end. I don't see it happening though.

Removal of RBLs and tax free super have to be some of the biggest costs to the budget a Government has ever introduced. It really does leave tax payers facing an unfair burden of tax unless major reforms occur.

Remember 50% of wage earners are on less than $47K a year, and roughly $35K year is likely to only get you an income roughly equivalent to the current pension.

Personally I think inflation will increasingly become a major destructor of wealth as resource depletion becomes a growing problem and the cost of all resources goes up, where we use more resources just to do the same level of economic activity as before. New sources of oil are already at $80-100 break even points, new iron ore mines seem to be up around the $60-70 tonne point. Higher inflation, stagnating wages does not paint a good future for people being able to increase their rate of savings for future retirement.

 

[sydboy007]

http://www.macrobusiness.com.au/2014/06/unraveling-pension-system-confusion/

well worth a read

summary:

The other important point here is that there is nothing that makes pay-go systems unsustainable that wouldn’t also make a fully-funded system unsustainable, though I think neither system is. Each is merely a transfer from one group to another in society, with the same level of output to be shared at each point in time.

Let’s be clear about this. In the pay-go system wealth is transferred between tax payers and the retirees each year. The retirees share of the economic pie is whatever is determined by demographics and government policy on retirement pensions.

In the fully-funded system we have the bizarre situation of working age people buying assets from retired people who had accumulated them in the past, so that they can then sell them when they retire. There is a lot of asset churn in this system to generate what is a transfer from working age to the retired at all points in time. In essence, it is a pay-go system with the added cost of private funds management.

My point here is that this is yet another example of economists inappropriately equating savings, which are transfers, with investment, which is the production of new capital equipment.

and referenced in the article is another good one http://www.macrobusiness.com.au/2013/01/the-pre-saving-myth-of-superannuation/

The below is what the under 50s are currently facing

What it interesting is what happens when we examine the effects of transitioning from pay-as-you-go to fully funded. The children in the household not only pay for their parents during the transition period, they must also buy the house from them. That means the parents get twice the income – once from the transfer, and once from the asset sale. Only after that generation has lived with less than their fair share does the system become fair again for the third generation.

The generation facing the transition needs to work more for the same income, and may retire later due to tightening of social security for unfunded pensioners.

The net effect of a transition between the systems is to transfer wealth from the working generation to the retiring generation. Policies such as this deserve the criticism they receive about intergenerational fairness. The same logic applies to transition from fully funded to pay-as-you-go university eduction. In this scenario the working age generation benefits by not having to fund the younger generations education.

 

[craft]

The below is what the under 50s are currently facing

What it interesting is what happens when we examine the effects of transitioning from pay-as-you-go to fully funded. The children in the household not only pay for their parents during the transition period, they must also buy the house from them. That means the parents get twice the income – once from the transfer, and once from the asset sale. Only after that generation has lived with less than their fair share does the system become fair again for the third generation.

The generation facing the transition needs to work more for the same income, and may retire later due to tightening of social security for unfunded pensioners.

The net effect of a transition between the systems is to transfer wealth from the working generation to the retiring generation. Policies such as this deserve the criticism they receive about intergenerational fairness. The same logic applies to transition from fully funded to pay-as-you-go university eduction. In this scenario the working age generation benefits by not having to fund the younger generations education.

Not widely understood, I bet. And it won't end, tax free super will be a thing of the past by the time these under 50's get to 60, as will home exemptions from pension assets test, retirement age increases etc. etc.

 

[craft]

My point here is that this is yet another example of economists inappropriately equating savings, which are transfers, with investment, which is the production of new capital equipment.[/I]

This is a little contentious. If the savings pool size is staying the same then yes it is only transfers.

Changes in the size of the savings pool however need to come from aggregate under consumption with corresponding investment in capital goods.

Each is merely a transfer from one group to another in society, with the same level of output to be shared at each point in time.

This is an important point, even subtracting the dispute about whether self funded system's increase the output.

It has huge ramifications and is the underlying reason that I pay scant attention to current asset prices but huge attention to how much economic production my assets generate.

How are house prices going to hold up in comparison to medical services when the economy is struggling to meet medical demand from people that no longer have luxurious accommodation requirements?

 

[sydboy007]

My point here is that this is yet another example of economists inappropriately equating savings, which are transfers, with investment, which is the production of new capital equipment.

This is a little contentious. If the savings pool size is staying the same then yes it is only transfers.

Changes in the size of the savings pool however need to come from aggregate under consumption with corresponding investment in capital goods.

This is an important point, even subtracting the dispute about whether self funded system's increase the output.

It has huge ramifications and is the underlying reason that I pay scant attention to current asset prices but huge attention to how much economic production my assets generate.

How are house prices going to hold up in comparison to medical services when the economy is struggling to meet medical demand from people that no longer have luxurious accommodation requirements?

I can't find an article I read the last few days, but it basically said that buying and currently exisiting assets is not investment in the economic sense since it does not lead to the formation of new capital - it's just a shuffle of ownership.

The argument was that by increasing the savings pool you do not automatically increase the formation of new assets. What seems to have been happening is the bidding up of the value of current assets has mainly occurred. Australian residential property is a classic example as over 90% of investors are buying pre existing housing, so there's really no new capital formation, just a shuffling of ownership most likely from one specufestor to another.

You could argue that the forced savings leads to lower demand. Lower demand leads to lower investment as you don't need as much capacity to meet the lowered level of demand.

I'm prob not quite explaining it exactly correct, but that was my understanding of it all.

 

[craft]

I can't find an article I read the last few days, but it basically said that buying and currently exisiting assets is not investment in the economic sense since it does not lead to the formation of new capital - it's just a shuffle of ownership.

The argument was that by increasing the savings pool you do not automatically increase the formation of new assets. What seems to have been happening is the bidding up of the value of current assets has mainly occurred. Australian residential property is a classic example as over 90% of investors are buying pre existing housing, so there's really no new capital formation, just a shuffling of ownership most likely from one specufestor to another.

You could argue that the forced savings leads to lower demand. Lower demand leads to lower investment as you don't need as much capacity to meet the lowered level of demand.

I'm prob not quite explaining it exactly correct, but that was my understanding of it all.

Syd - this is how I see it. (disclaimer - I'm an idiot)

Ultimately there must be a seller – yes there may be thousands of transactions churning existing assets in-between a new entrant and an exiting seller but a net seller there must be.

The entrant has to under consume compared to his productivity to have the money to pay for the asset. He can do this before buying the asset (savings) or after (debt funded).

The seller can now over consume compared to his current productivity. If his over consumption doesn’t equal the entrants under consumption an amount remains (increase in the savings pool) for purchasing capital goods (remembering he is the net seller of existing assets – so by definition will not be re-investing in existing assets but new production)

Ongoing mark to market of asset values is just an illusion until people try to exchange their claims on the real economy for current needs, i.e. become a net seller of an asset. Those decreasing investments in property, downsizing or dying are making windfall gains from housing now but it will be equalled out overtime by net losers in real terms– this is effectively just a transfer of lifetime consumption ability.

 

[FxTrader]

I can't find an article I read the last few days, but it basically said that buying and currently exisiting assets is not investment in the economic sense since it does not lead to the formation of new capital - it's just a shuffle of ownership.

The argument was that by increasing the savings pool you do not automatically increase the formation of new assets. What seems to have been happening is the bidding up of the value of current assets has mainly occurred. Australian residential property is a classic example as over 90% of investors are buying pre existing housing, so there's really no new capital formation, just a shuffling of ownership most likely from one specufestor to another.

I don't concur with the generalist nature or logic of the argument put forward here. If you just churn existing property between new owners then yes, no capital formation is occurring. When billions are invested by super funds in businesses that add to capital (equipment, buildings and other intermediate goods) that produces goods and services then they contribute to capital formation. How that "savings pool" is invested proportionally in different asset classes determines the total level of capital formation occurring.

The consumption habits of most self-funded retirees (relying on a superannuation income stream) would likely be quite modest. The accumulated wealth/savings of older generations that remains as they die off does not evaporate, it's passed down in most cases through inheritance, not transferred at a higher price to the next generation via a sale transaction.

Collectively that asset pool is growing though not equitably. The tax treatment of super may well be too generous for the moment but some form of mandatory savings contribution scheme is required or the problem of underfunded or unfunded retirement will become an overwhelming burden to future generations.

 

[DeepState]

...

1. it basically said that buying and currently exisiting assets is not investment in the economic sense since it does not lead to the formation of new capital - it's just a shuffle of ownership.

2. The argument was that by increasing the savings pool you do not automatically increase the formation of new assets. What seems to have been happening is the bidding up of the value of current assets has mainly occurred. Australian residential property is a classic example as over 90% of investors are buying pre existing housing, so there's really no new capital formation, just a shuffling of ownership most likely from one specufestor to another.

3. You could argue that the forced savings leads to lower demand. Lower demand leads to lower investment as you don't need as much capacity to meet the lowered level of demand.

1. Savings equals investment. It is a tautology. However, savings does not have to equal new capital formation. New capital formation is a form of investment. So is saving to buy shares already listed which does not, in of itself, equate to new capital formation.

Given you can direct your savings to activities that deepen the capital stock by erecting structures, building machines etc. there is also the possibility to form capital with savings.

As mentioned, savings does not have to lead to capital formation. But, really, that's just an extreme end concept which, whilst correct, does not actually occur.

Either form of savings can be good or bad for economic wealth. Speculation in the property market just boosts prices and, with it, savings or investment - however you want to look at it (it is both). Clearly it can be destroyed. Savings deployed to roads and highways can be good...or just being pissed up against the wall. It depends on the value of the investment ultimately perceived by the users of the asset. Either way, savings deployment into a bad investment destroys wealth.

2. That is a reasonable example of adding credit to an otherwise closed system. It is not necessarily a bad thing if the valuation of properties is being brought to a level which approximates/equates to the value which the users actually believe it is worth or, more correctly, will derive value from. Beyond that point and you get into various degrees of speculation. Below that point, it is understating true wealth and will constrain consumption behavior. This is the wealth effect.

3. Increased saving does indeed lead to lower consumption or 'immediate' demand. But the savings can be deployed into capital formation which is a different kind of demand. If capital formation is occurring, which is not of the sort which darkens walls, these have much larger economic multipliers than consumption and increase wealth which increases long term consumption. Planning for capital deployment can take these types of effects into account. If the savings are being put to speculation with no resulting capital formation directly or subsequently by the investment recipient (the guy who sold you the share and went off to buy another) or the subject of investment (the company), it can still lead to wealth effects that increase consumption.


All of the above is governed by a system of price indications, preferences and structures like tax, law, monetary policy etc... which helps the system to equilibrate itself to maximize real wealth...until it occasional ruptures itself for all sorts of reasons.

 

[DeepState]

...

1. it basically said that buying and currently exisiting assets is not investment in the economic sense since it does not lead to the formation of new capital - it's just a shuffle of ownership.

2. The argument was that by increasing the savings pool you do not automatically increase the formation of new assets. What seems to have been happening is the bidding up of the value of current assets has mainly occurred. Australian residential property is a classic example as over 90% of investors are buying pre existing housing, so there's really no new capital formation, just a shuffling of ownership most likely from one specufestor to another.

3. You could argue that the forced savings leads to lower demand. Lower demand leads to lower investment as you don't need as much capacity to meet the lowered level of demand.

1. Savings equals investment. It is a tautology. However, savings does not have to equal new capital formation. New capital formation is a form of investment. So is saving to buy shares already listed which does not, in of itself, equate to new capital formation.

Given you can direct your savings to activities that deepen the capital stock by erecting structures, building machines etc. there is also the possibility to form capital with savings.

As mentioned, savings does not have to lead to capital formation. But, really, that's just an extreme end concept which, whilst correct, does not actually occur.

Either form of savings can be good or bad for economic wealth. Speculation in the property market just boosts prices and, with it, savings or investment - however you want to look at it (it is both). Clearly it can be destroyed. Savings deployed to roads and highways can be good...or just being pissed up against the wall. It depends on the value of the investment ultimately perceived by the users of the asset. Either way, savings deployment into a bad investment destroys wealth.

2. That is a reasonable example of adding credit to an otherwise closed system. It is not necessarily a bad thing if the valuation of properties is being brought to a level which approximates/equates to the value which the users actually believe it is worth or, more correctly, will derive value from. Beyond that point and you get into various degrees of speculation. Below that point, it is understating true wealth and will constrain consumption behavior. This is the wealth effect.

3. Increased saving does indeed lead to lower consumption or 'immediate' demand. But the savings can be deployed into capital formation which is a different kind of demand. If capital formation is occurring, which is not of the sort which darkens walls, these have much larger economic multipliers than consumption and increase wealth which increases long term consumption. Planning for capital deployment can take these types of effects into account. If the savings are being put to speculation with no resulting capital formation directly or subsequently by the investment recipient (the guy who sold you the share and went off to buy another) or the subject of investment (the company), it can still lead to wealth effects that increase consumption.


All of the above is governed by a system of price indications, preferences and structures like tax, law, monetary policy etc... which helps the system to equilibrate itself to maximize the utility/happiness of the members of the system ...until it occasional ruptures itself for all sorts of reasons.

 

[qldfrog]

http://www.macrobusiness.com.au/2014/06/unraveling-pension-system-confusion/

well worth a read.....[/I]

Indeed look at it this way: I mam 45 I pay taxes which fund the pensions on current retirees (or the su[er exemptions of the 60y olds
but I have to save (ie pay a mandatory tax) for my own super while payinmg back morgages, my child education, etc

so indded I am the sucker for the 60y plus;
Should I pity the 20yold gen Y?
Well we are more or less together in the same boat ; by the time I reach 70y (if I do), i will have no access to the pensions , my super will be taxed and the unemployed masses of youngster will have no super aside as they will have had no work or poorly paid ones
(european scenario Australia is following blindly mistake after mistake and has been for the last 20y)
So the baby boomer will have had a win all life, the following generation (mine0 will start hurting and the coming gen Y and later will be scr#wed: they'd better enjoy their ipads.....
And the last budget was a good indicator

 

[sydboy007]

I don't concur with the generalist nature or logic of the argument put forward here. If you just churn existing property between new owners then yes, no capital formation is occurring. When billions are invested by super funds in businesses that add to capital (equipment, buildings and other intermediate goods) that produces goods and services then they contribute to capital formation. How that "savings pool" is invested proportionally in different asset classes determines the total level of capital formation occurring.

The consumption habits of most self-funded retirees (relying on a superannuation income stream) would likely be quite modest. The accumulated wealth/savings of older generations that remains as they die off does not evaporate, it's passed down in most cases through inheritance, not transferred at a higher price to the next generation via a sale transaction.

Collectively that asset pool is growing though not equitably. The tax treatment of super may well be too generous for the moment but some form of mandatory savings contribution scheme is required or the problem of underfunded or unfunded retirement will become an overwhelming burden to future generations.

Buying existing shares in a company is not investment. Purchases of newly issues shares via an IPO or issue of new shares is likely to be investment, but then maybe not depending on what the raised funds are put to.

For example, during the GFC lots of new shares were issued, but little of it was actually invested - it went to paying down debt, or in the case of the banks, used to improve their capital buffers or replace debt from overseas. I doubt there was actually any new capital formation, especially with teh contraction in demand until the Govt stimulus started flowing.

If you build a new office tower - that's investment. Selling the building when it's finished, well the new owners aren't actually investing are they? Thee's be no newly created asset.

Looking at shares, the share price of company has practically no relevance to the company's propensity to invest. If the owners see a large opportunity and the shares are undervalued in their opinion, this may act as a constraint since they would be unlikely to want to issue a lot of new shares at below (their opinion) fair value.

 

[qldfrog]

Looking at shares, the share price of company has practically no relevance to the company's propensity to invest. If the owners see a large opportunity and the shares are undervalued in their opinion, this may act as a constraint since they would be unlikely to want to issue a lot of new shares at below (their opinion) fair value.

the share price maybe not but an IPO can be used for example to purchase an existing business and then get some synergy and grow the sum of the two tackling another market (or swallowing competition);
but I agree the price of the shares is of no importance ..or should be except for the end of year bonus of the pigs lining for the trough with their gifts of options ...am i cynical?
but starting to be off subject here?????

 

[Smurf1976]

New sources of oil are already at $80-100 break even points, new iron ore mines seem to be up around the $60-70 tonne point. Higher inflation, stagnating wages does not paint a good future for people being able to increase their rate of savings for future retirement.

Agreed with your point about resources but it could be argued that this is also an effect of broader inflation.

Looking at how inflation is commonly measured (CPI), there is a significant skewing due to the globalised economy. Eg a TV would cost a lot more than it does today if we still manufactured them in Australia as we used to. The relocation of production, combined with technology improvement in both the product and production processes (anyone under a certain age has probably never seen a TV in a wooden cabinet - but they were all like that at one point and a wood box is more labour intensive to manufacture than simply putting a plastic back on an LCD). So to put it another way, the cost of doing things in Australia has inflated more than the cost of doing them in some other places, the ability to relocate masking the effect from the perspective of consumers (but not for producers) in Australia.

But with resources the opportunity to relocate production is far less. If you're going to mine iron ore in Australia or drill for oil in the USA (and the US is still a major oil producer, has been since 1859) well then you are going to incur your costs in Australia or the US. You can't get someone in China or somewhere else with cheap labour to do it for you, you have to actually dig the ore or drill the wells where the resource is. Hence the cost of extracting the resource increases along with local inflation where the resource is located which, in practice, has been a faster rate of increase in many countries with resources as compared to the ability to relocate the production of consumer goods to wherever is cheaper.

I don't doubt that resources and the "we've already picked the low hanging fruit" argument is valid, but there's also a general inflation aspect to it given the limited options for relocating production to wherever labour is cheapest.

 

[sptrawler]

Indeed look at it this way: I mam 45 I pay taxes which fund the pensions on current retirees (or the su[er exemptions of the 60y olds
but I have to save (ie pay a mandatory tax) for my own super while payinmg back morgages, my child education, etc

Who paid for the baby boomers parents, many who are still alive and had no super?

I know a mate looked after his mother and her sister, in his house, well into their 90's.

 

[medicowallet]

Who paid for the baby boomers parents, many who are still alive and had no super?

I know a mate looked after his mother and her sister, in his house, well into their 90's.

The baby boomers had to contribute much much less because:

1. There were wars which decreased the amount of older people
2. Life expectancies were much lower.

The current Gen Y etc have it much worse than what we had it, unfortunately people of my generation whine and carry on about how easy they have it.

Sure they have more TVs and larger houses, but to survive now you need dual incomes, have to sacrifice having a large family / having families younger etc.

AND this is compounded because people retiring now use the stupidity of the system to piss away their super then draw on the pension, which is not what super was all about.

MW

Things like this always make me realise that the average Joe looks out only for average Joe, and cannot comprehend what this kind of selfishness means (though often the beneficiaries of the generosities of others)

 

[medicowallet]

Buying existing shares in a company is not investment. Purchases of newly issues shares via an IPO or issue of new shares is likely to be investment, but then maybe not depending on what the raised funds are put to.

For example, during the GFC lots of new shares were issued, but little of it was actually invested - it went to paying down debt, or in the case of the banks, used to improve their capital buffers or replace debt from overseas. I doubt there was actually any new capital formation, especially with teh contraction in demand until the Govt stimulus started flowing.

If you build a new office tower - that's investment. Selling the building when it's finished, well the new owners aren't actually investing are they? Thee's be no newly created asset.

Looking at shares, the share price of company has practically no relevance to the company's propensity to invest. If the owners see a large opportunity and the shares are undervalued in their opinion, this may act as a constraint since they would be unlikely to want to issue a lot of new shares at below (their opinion) fair value.

Surely a strong share price gives a company stability, opportunity to borrow etc.

eg if my company is worth $1000000, I cannot borrow as much against its underlying value as I could if it were worth 100 times as much. Also if a foreign investment company saw the awesome things I was doing with my investing, they could not as easily take it over etc, also giving some stability. (and also net inflow of cash into the country in quite a few cases)

Now plowing money into realestate on the other hand.... nope, don't really see how that improves income into the country, all I see is net outflow from the country.

But try to explain the fact to people who believe that internal churning of money is important.

MW

 

[sydboy007]

Surely a strong share price gives a company stability, opportunity to borrow etc.

eg if my company is worth $1000000, I cannot borrow as much against its underlying value as I could if it were worth 100 times as much. Also if a foreign investment company saw the awesome things I was doing with my investing, they could not as easily take it over etc, also giving some stability. (and also net inflow of cash into the country in quite a few cases)

Now plowing money into realestate on the other hand.... nope, don't really see how that improves income into the country, all I see is net outflow from the country.

But try to explain the fact to people who believe that internal churning of money is important.

MW

Isn't it more about the income earning potential of the company. It's like asking someone which is more expensive? The $1 share, or the $600 share. Wouldn't, or shouldn't, it be the case that the one providing the better yield, and the likelihood of increased income wins? Certainly larger companies have easier access to debt markets, but that is not relevant to the share price, or are you saying that if 2 companies with billion dollar market caps could be judged by banks differently because 1 has a share price of $100 and the other only $20?

I'd say only the ASX 20-50 are take over proof, otherwise pretty much most Australian companies are easy takeover targets because they're not really worth much on a global scale, and with practically free money available in the US and EU getting the debt to buy prob isn't much of an issue either, especially now the PIK (Payment In Kind) loans are making a comeback.

 

[sptrawler]

Isn't it more about the income earning potential of the company. It's like asking someone which is more expensive? The $1 share, or the $600 share. Wouldn't, or shouldn't, it be the case that the one providing the better yield, and the likelihood of increased income wins? Certainly larger companies have easier access to debt markets, but that is not relevant to the share price, or are you saying that if 2 companies with billion dollar market caps could be judged by banks differently because 1 has a share price of $100 and the other only $20?

I'd say only the ASX 20-50 are take over proof, otherwise pretty much most Australian companies are easy takeover targets because they're not really worth much on a global scale, and with practically free money available in the US and EU getting the debt to buy prob isn't much of an issue either, especially now the PIK (Payment In Kind) loans are making a comeback.

There isn't a company in Australia, that couldn't be bought out, unless the Government intervened?

For example Wallmart market cap $249billion, our big retailers Woolies, Wesfarmers $40 - 50 billion

Woodside market cap $34b whereas Chevron have a market cap of about $240b.

 

[DeepState]

First, this is just some economic relationships showing that, at least for national accounts, savings equals investments:

http://www.freeeconhelp.com/2011/11/why-savings-equals-investment-si-and.html

Second, there seems to be a sense that investment not in the form of new capital formation is not actually investment. I have some sympathy for this. Savings directed to existing assets just doesn't seem as productive. It's like the primary market is where all the value is created but the secondary market just rotates ownership around.

Why it is important, though, is to act as a store of wealth in a form other than to build a machine or something that is capital formation (including creating IP in the form of a Hollywood movie...can you believe it). It also forms a mechanism which fosters price discovery helping with capital allocation decisions. These choices are very important to guide money to what might be the best opportunities. This then helps to more accurately decide the build vs rent trade-off. Thus, at the very least, investment which is not in the form of capital formation helps to decide where capital formation might be most effective. Price discovery can occur in the absence of a secondary market though. Additionally, if the builders (those forming fixed capital) cannot sell the asset they create, their capital is forever locked up and cannot be redeployed to pursue their skill of building. Other 'passive' investors must take that load for the primary market to function or hurdle rates would be enormous. Though indirect, the presence of a secondary market in any form, listed or unlisted, lowers cost of capital and greatly enhances the propensity of capital formation and, usually, leads to improved productivity. Both need to exist in some form for an efficient deployment of capital in all forms to take place (GFCs and other calamities aside).

Share prices per se don't mean anything. The market value implied by the share price does mean something. Without affecting their internal operations, management faced with a low share price relative to their assessment of fair value can engage in a debt funded buy back (or just taking it out of cash resources, or offering a dividend reinvestment plan). The converse occurs also. Hence they engage in balance sheet engineering. If they have a pipeline of direct investment opportunities which requires more capital than available within the firm, the relative value will impact the extent to which these plans are implemented and also the form of financing undertaken (ie. more debt finance, where possible, if share price is judged to be below fair). Same deal for purchases of secondary investments as per take-overs. Hence share prices impact capital allocation and finance structure.

A company trading below fair is a greater likehood for being an acquisition target. However, synergy issues and other deal terms etc. will impact the propensity for being an active target despite other factors being identical.