CapEx, Corporate Cash, And ZIRP's Vicious Cycle

Tyler Durden's picture

The short-termist instant gratification society in which US consumers live in has seemingly - increasingly - permeated the supposedly more strategic CEO class. Building huge war-chests of cash - just in case - remain the status quo, seemingly more prescient now that real cash flow is slowing down. The subject of mis-allocation of corporate cash has been one we have often discussed. Thanks to Bernanke's ZIRP, investing corporate cash into improved RoC projects is outweighed by short-term reparations to a punishing investor class via special dividends or buybacks. Any use of cash for real business expansion is often frowned upon (as we noted here). Nowhere is it more evident than in this chart of post WWII business investment just how 'bad' our current 'recovery' is - CapEx spending rates are the lowest in 63 years.

The vicious circle that we have discussed - a dilapidated, aging, increasingly less cash flow generating asset base - unable to sustain its own growth will be forced to self-destructively divert more and more of that cash horde to shareholders for fear that one day the music will stop. Until a virtuous cycle begins where European and American firms start spending more on CapEx which more than offsets annual depreciation and amortization, everything else is irrelevant, yet the ongoing confusion of a liquidity with a solvency problem (because unlike assets, liabilities do not "amortize" on their own absent a default of course) will continue.


The vicious cycle:

the return on an aged assets gets progressively lower the further it depreciates and amortizes. Further, the less cash available for capex, the lower the rate of asset replacement, and the older the prevailing asset base becomes. This all ends up in a toxic spiral in the context of continent deleveraging, where old assets create lower returns, leading to less cash, leading to less capex spending, all the while the liability side of the balance sheet stays fixed.

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francis_sawyer's picture

Huge war chests of cash... Now THAT was funny!... Is that what they teach 'future CEO's' at Princeton these days before handing them a diploma & shuffling them off to the country club circuit?

Vampyroteuthis infernalis's picture

Downward spiral!  Turd in a punch bowl until it hits the sewer.

Wayne_Stover's picture

my co-worker's sister makes $82/hr on the internet. She has been fired for 10 months but last month her income was $16681 just working on the internet for a few hours. Here's the site to read more...

in4mayshun's picture

Your co-workers sister is what we in America call a "hooker" or "call girl." But mad props on utilizing the Internet to stream line the process!

clara-to-market's picture

Not only is Ben Bernanke a thief.

That son of a bitch is also banging my mother.



venturen's picture

Is this what they mean by ZERO SUM GAME! Or did they mean zero sum gain!

JustObserving's picture

forced to self-destructively divert more and more of that cash horde to shareholders for fear that one day the music will stop.

The music has stopped.  If you cannot hear the silence, it is the sound of the printing presses rolling out $3 billion every day.

The endgame is here - so gold and silver and real assets must be destroyed.

Perhaps, start a few real wars instead of the currency wars that are underway.

Bam_Man's picture

The very definition of the "stag-" part of stagflation.

Jack Sheet's picture

I would be grateful if one of you MBAs could explain the causal link between (1) ZIRP and (2) cash hoarding for dividends/share buybacks (rather than Capex).
Is it because bond prices rise as interest rates fall, thus providing higher total returns (interest + price) on bonds, and therefore make stocks less attractive even though the bond yields decrease?

GMadScientist's picture

Because there's no point in capex when there's no one to whom one can sell product.

Trickle down slows to a crawl once the line for the bathroom gets too long.

Caviar Emptor's picture

...the very definition of Depression. The reason why no Capex? No point in building even more capacity when demand is dropping through the floor. 

TBT or not TBT's picture

Also, aging societies want to cash out at some point, vs re-investing. A good part of our real estate bubble was also about an aging Europe not having anyone to lend to domestically. They've had low birthrates for a long time. So they shipped 6T in savings into stuff like MBS. The triple AAA stuff. That's the Big, Dep reason the fed found itself in the business f bailing out europeon (sic) TBTFs.

TBT or not TBT's picture

Atop that, note in the great depression the same thing famously(famously at the time) occurred. A drop in capex/cash hoarding by by businesses. The government under FDR had engaged in bold and persistent experimentation you see. The demagogue and his cronies had set out to fundamentally transform the united states, to translate into obamaspeak. Amity Schlaes' The Forgotten Man tells the tale. FDR and Congress gt after businesses back then to hire people with the money they accumulated, through all sorts of measures ranging from bully pulpit vilification to regulatory harassment to punishment. It was a pre-fascist era then as it is now. We pulled out of it thanks to the counter-example and threat of worse totalitarianisms elsewhere around the world. Those lessons are forgotten now, and the Constitution has since been worn down to a nub, starting with the progressives and FDR's control freak attentions but not only.

NotApplicable's picture

I was a bit surprised that Tyler failed to mention this part of the dynamic. Meanwhile, look where capex IS occurring and you'll likely see a project backed by Uncle Sugar ("healthcare" industry, for instance).

YC2's picture

With ZIRP, tards looking for income will eventually compare equity and debt as if they are substitutes or using some kind of premium to account for the fact that they are different asset classes with different characteristics. Since bond yields are low under ZIRP the dividends from equity look appealing when looking at it in a narrow view that only accounts for yield. So, cash flows command huge multiples in debt and equity markets, and the "bang for the buck" is huge in terms of stock price multiples from paying out incremental dividends compared to incremental organic expansion to serve a tapped out customer (plus they are probably already trying to cut costs anyways in this environment, so more capex is sort of anathema to that strategy to start with).

There are a lot of angles to how the ZIRP environment affects decision making, but that's how I talk through what they're describing here mentally.

socalbeach's picture

According to the previous article on the subject, it results from,

"the Fed's monetary policy which forces corporate executives to focus on short-term gratification of shareholders via prompt return of cash instead of reinvestment into the business - a critical requirement to assure top-line stability and growth. It got so bad that in 2012 numerous bond issues fared worse simply by stating the use of proceeds from refinance as CapEx and General Corporate Purposes instead of share buybacks or dividend recaps, in some ways converting the entire public capital market into one large private equity fund, where management works to keep their fleeting shareholders happy with dividend after dividend (instead of at least keeping the cash on the books)."

So if that's true, why would shareholders want immediate return of free cash?  Presumably because they're not getting a decent yield anywhere else as a result of ZIRP.

NotApplicable's picture

I see it as capital consumption in an effort to get the last bit of value remaining.

DonutBoy's picture

You may own a business or work for a business.  Do they believe their market is growing, that their customers will be able to afford more - or that there will be more cuistomers?  Are they afraid, as I am, that as the sovereign debt bubble comes undone everyone will be suffering for months or years?

The cost of money has been driven to zero - but to invest in what?  Do we seriously want more widget-making machines?  How many widgets can people buy when gas is $5 a gallon, health-care premiums are doubled, payroll taxes are up, defense spending is done, and we are net importers?

I don't think MBA's know any more about it than you do.  They are educated in allocating resources and capital to be sure - but there must be a credible model, actual prices for capital and goods for any business model to be meaningful.  We're living in a charade created by the Fed and everyone knows it.


Atomizer's picture


CNN Economist Ali Veshi: I Sure Hope The Republicans' Sequester Doesn't Spoil This Blistering-Hot Economic Boom We're Enjoying


Lordflin's picture

I have been expanding the farm as I figure folks have to eat... starting with my own family. But I wouldn't invest in this economy. Everything I have, other than the farm, is in metal or junior miners... in effect it is cash sitting on the side lines. I hate to see idle cash, but I hate sending it down a sinkhole even more.

JR's picture

If this is the “instant gratification society (for the consumer),” then I dread consumer pain. We are on the Keynesian track where increased debt calls for more borrowing. And this plan has brought the economy to crisis. But, still, the Fed - following the Keynes blueprint - drives the nails deeper and the consumer, instead of being allowed to reject debt, is punished with no choices and a lower standard of living.

And now that the public is opposing the idea of borrowing and spending more, the government is doing it for them.

Simply put, the central bankers are following the nonsense of the Keynes blueprint to drive the US and the EU into world governance -- ruled from above by the financial oligarchs.

Here is just one of many Keynesian debt paradoxes (untangled by Hugh Lewis) that are intended to push the United States into a global economic mire. It banks on the fact that the public will believe anything and on the Keynesian premise that “the more indebted an economy is, the more important it is to increase borrowing (Lewis)" in order to prevent a deflationary spiral:

“If interest rates are approaching zero, they can still be driven down a lot lower. How? The US Federal Reserve (or any other central bank) should hold the nominal rate at near zero, but also create some “significant’ consumer price inflation. This way, real (inflation-adjusted) interest rates will be way below zero. Just think – 4% rates? -6% rates? Nobody will be able to resist borrowing at those kind of rates! (This is a proposal from distinguished Keynesian-inspired economist Gregory Mankiw. He does not specify what the ‘significant’ inflation target should be. Others have suggested as much as -6%.)”

And guess who is the chief lender preaching that “saving is an antisocial act”?

GMadScientist's picture

Sure, a situation which Keynes advised against and for which he created the name "liquidity trap", should be attributed to him instead of the neoclassical nimrods who actually espouse it.

So, you're arguing for a deflationary spiral then? It's better to have perfectly sound businesses plowed under by lack of customers than debase a fiat currency?

Help me understand exactly what you're advocating...I see plenty of complaints, but no proposed solutions in sight.

Atomizer's picture

History speaks well. During the deflationary spiral, many banker's were killed. QE is designed to firewall such family threats. The problem is that when peasants stop spending, price point meets a bankers ass. This is a two step process. No inflow and bankers portraying a fugitive role in escaping responsibility.

GMadScientist's picture

Good thing killing bankers solved that banker problem. LOL

JR's picture

Thanks for asking me what I propose.

It is simply to have the market make the decisions about which products are desired and which products are not. The alternative is chattel slavery. And if you do not believe that the grip of the international banks and the network of central banks tied into the Fed are not after world government (translation: bankers win everyone else works for them) then you are not paying attention.

Tell me how a producer unable to judge supply and demand because of imbalances and manipulation of the markets and the interest rates can stay in business when he misjudges demand?

“The central paradox of Keynesianism is that it attempts to ‘fix’ the price and profit system - by subverting it. No free price or profit relationship is left untouched…”

and as for fixing prices, “interest rates are some of the most critical prices. All prices are interrelated to a degree, but interest rates especially influence other prices. In the Keynesian system, followed by all world governments, interest rates are supposed to go in one direction only, down.” – Hugh Lewis

 Meanwhile, “the speculators can use the cheap new money to make bets and with luck win vast fortunes, while ordinary mortals and plodders just seem to fall further behind” and even indirectly paying the corporate taxes.

As a result, because of Bernanke’s and Goldman’s poking and pushing and pulling apart the price/profit system around the universe let alone fraud, here we are, in complete Keynesian shambles.

Make no mistake, I am advocating an end to the Fed and the restoration of a free enterprise supply and demand economy. I do want deflation and I do not want inflation. I want justice.

GMadScientist's picture

Okay, you've already abdicated your decision making to an inanimate concept, but I'll try and go with you. You've said you want restoration of a free enterprise supply and demand economy; I'm not sure how you can "restore" something that has never existed, but again, I'll try to go with you on this one.'ve achieved your goals: government has been slashed, businesses are taking home 20% more than they did before, unemployment is even worse than before (now that those deadbeat govvies are on the street too), and we're in full-on deflation. Those tax-unencumbered business are closing their doors at record pace for lack of business, but at least there's not inflation.

Then what?

Here's my guess: businesses start to merge and consolidate, laying off "redundancies" with each buyout, until you are eventually left with a small number of very large companies that can dictate nominal wages as they see fit and engage in the very same price-fixing you claimed to be railing against.



g speed's picture

I gave you the thumb down--

GMadScientist's picture

I gave you the middle finger up.

in4mayshun's picture

I'd like to know how you figure there's no inflation cause where I live everything is getting more expensive.

disabledvet's picture

with interest rates "at or near zero" for a long AND going invest in such a business and business model at your own risk. THE primary reason to own an equity is to see to it that capital is put at risk...simply put there is no other way to make money. the WORST investment class during this whole debacle HAS BEEN CASH so companies that specialize only in hoarding it/throwing it off as a one time payment to the Wall Street coupier class (cough cough Apple cough cough) pay the price (cough cough Apple cough cough.) i'm a big believer in the recovery thesis precisely because i think CEO Incorporated knows this, act on it, have the policies of the State literally backing them up to do just that. The best Wall Street will ever do is "another great bubble (courtesy of the taxpayer) in real estate." but that's about it. this is not to say QE is a policy success. i think the loss of the American consumer is devastating for the economy and economic growth going forward. "We the People" will be the determining factor in how this "thing" goes forward for the forseeable future. "When you set savings rates at zero don't don't expect a lot of spending." i'm sorry but the retail lobby has spoken nary a peep about about "killing your customer." the bulk of the American people have no migrated to the internet "in search of some value PERIOD." your ability to deliver literally directly to the consumer will define whether or not you have a retail operation period. same goes for policy makers. this whole "let's get America out shopping again" mode of policy making is driving State and local governments into the ditch as well. regulators need to start looking at the DRIVERS of growth...and act accordingly. if not why should the American people give a rat's ass if the entire State of Illinois goes bankrupt? Indeed...THEY SHOULD WELCOME IT. "hahahaha. looks like your vote counted after all!" is what they'll be saying...and rightfully so.

Hohum's picture

Perhaps the titans of industry cannot figure out how to grow output faster than debt.  Perhaps they cannot create high wage jobs (government workers overpaid, private workers hardly paid).  Perhaps nothing will kick start investment levels.

Rustysilver's picture


Another site that's dedicated to car/trucks talk did analysis of you GM channel stuffing column.

tony bonn's picture

the evaporation of capital spending seems to vindicate fekete's prediction about the effect of ever declining interest rates and certainly the negative consequences of also seems to vindicate his views on the carry trade for bonds or the preference for bonds (debt) over capital (equity). this is the heritage of the chairsatan - one of the most evil men to head the federal reserve....

in any event, the evidence here implies no no recovery - just a readjustment downward as capital disintegrates and with it investment is the sin qua non of prosperity and productivity. the prediction of 3d world status of the usa is a most realistic assessment of our engineered crisis.

Charles Wilson's picture

Tyler, Tyler, Tyler...What're we gonna do with you?

Friedman pointed out that the growth of Mega-Monster-Corporations came about because our Gummint allowed them to deduct Tax Liabilities if they shunted Share Holder Dividends into Company Expansion instead.

I've noticed that you seen to have a problem with shareholders receiving ANYTHING other than a slap to the chops with the back of the hand.

How'sa 'bout returning the money to the shareholders and LET THEM FIGHT IT OUT in the Board Rooms instead of letting a Corzine fly off in his private jet to give Protection Money to Dumbo in return for Tax Breaks for him and other Protected Groups.


Disburse the power.  Don't concentrate it for political end.