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.