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Why No Capex Recovery?

Tyler Durden's picture




 

In the spring of 2012, we predicted that not only would corporate excess cash not go toward such core economic recovery "uses of funds" as CapEx, not only for the simple reason that there was, and is, no actual recovery, but that in order to create the artificial impression of improving conditions, as well as the satisfy activist investors seeking a quick ROI, companies would spend the bulk of their cash on stock buybacks and dividends. Gradually, this cash use is shifting to M&A - a classic 'top of the cycle' indicator - although courtesy of the unprecedented bubble in various sectors, tech most notably, corporations are opting to chiefly use overvalued stock as the currency of acquisition (see the recent purchase of Whatsapp by Facebook, funded mostly through FB stock) instead of cash. As we further explained at the same time, the main reason for this capital misallocation was simple: the Federal Reserve, whose ZIRP policy has perverted traditional hurdle rate-based capital allocation decisions, and has unleashed an all out buyback bonanza at the expense of the one cash use that is so critical to sustain not only revenue, but economic growth: capital expenditures.

As happens at the end of every year, sellside analysts and economists, all predicted that this year would be different, and the long overdue capex spending would finally be unleashed. Apparently they had far greater visibility on this matter, than on the topic of snowfall in the winter, and its disastrous impact on a $17 trillion economy, whose Q1 GDP growth forecast has cratered from 3% at the start of the year, to barely half that number currently. One of the firms that preached that the CapEx recovery is imminent is none other than Goldman Sachs, the same firm that also year after year predicts a new golden age for the US, only to see its forecast crash and burn some 4-6 months later, couched in the tried (or is that now trite) and true scapegoatings: snow, unrest in Europe, inflation or deflation in Japan, the usual. However, this time may indeed be different, and the same Goldman has just released a piece wondering "Why no capex recovery?" (despite the firm's own forecasts to the contrary -just recall David Mericle's "Capex: The Fundamentals Remain Strong" which now in retrospect is completely wrong).

What follows is a whole new set of "explanations" for why - once again - Goldman will have been wrong in its optimism, and why once again, we were right, after simply, and accurately, putting the blame for all that is currently wrong in the world on the one place that deserves such blame: the Federal Reserve.

Anyway, here is Goldman's Aaron Ibbotson with Why No Capex Recovery?

Economic recovery should equal a capex recovery; that is indeed one of the key defining characteristics of the recovery phase of a business cycle. Yet we believe that “this time will be different”, certainly for developed market-based companies. Why? A combination of structural, cyclical and technological changes suggest to us that the need for capex will be lower going forward, one of the key reasons why we are cautious on capital goods.

Things are getting smaller, faster, lighter…

Ceteris paribus you need a big machine to make a big and heavy widget and a small machine to make a small and light widget; and a big machine generally demands a bigger investment than a small one. This may seem trivial, but as miniaturisation gathers pace you need less powerful motors, less space, a smaller truck to transport it around, less material to build it and much more – all with negative implications across the capex chain. In conjunction with miniaturisation machines are getting faster. A robot today can make more widgets than it could yesterday.

…until they disappear all together

The lightest and smallest widgets of them all are the ones that are now entirely virtual. As recently as the last up-cycle in 2003-2006, some companies invested capex building plants that made CDs, DVDs, video games, sat navs, maps, time tables and much more, that we now largely use our smartphones/tablets for. While capex will continue to be invested to produce our smart phones/tablets, it is difficult to envisage how it will compensate for the increasing number of goods that are becoming virtual.

Capex will be spent elsewhere…in Asia

While all capex counts, the capex we typically focus on is the that spent by listed companies in general, and listed DM companies in particular. However, the global supply chain looks very different today than it did only 10 year ago. Everything from electric components to steel is being sourced from non-DM companies, often not listed, and many of them based in China and other parts of Asia. This trend is particularly strong within tech, where Asian companies dominate the capex-intensive part of the value chain. However, myriad small Asian companies play an important part in the supply chain of many non-tech DM companies. And often, the part of the value chain that is being outsourced is the most capex-intensive part, such as producing raw materials or semiconductors, reducing both the cyclicality and the need for capex by DM-listed companies.

…and by states and private companies

The Chinese State Grid Corporation spent c.US$60 bn in 2012 and China Railway Corporation spent over US$100 bn. To put this into context, the 2,200 European non-resource companies GS covers spent in aggregate €250 bn. Over the last decade, FAI has increased by a factor of 2.5x in EMs while it has increased by only 10% in DMs. This has increased the proportion of capex spent by SOEs in a number of industries such as resources, transport and power generation and T&D. All capex counts, but this capex will not show up in the cash flow statements of the companies in our coverage, and we expect a declining slice to show up in the P&Ls of our capital goods coverage.

Too much was spent in the last up-cycle

The last cycle saw many booming end-markets: mining, power generation, shipping, O&G and Chinese construction among many growing 3x+. We do not expect this up-cycle to contain any booms, and see several of the preceding end-markets continuing (or entering) multi-year declines. At the core of our view is the long asset life of many of the capital goods sold into the booming end-markets of the last decade. This lends itself to multi-decade investment cycles. The 20-year decline in transmission and power generation capex in the US (early 1970s to late 1990s) provides a sobering example. We now believe that several end-markets are close to, or past, their peak. Of the five mentioned above, it is only O&G where we still expect growth, albeit at a substantially lower level.

 

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Sun, 02/23/2014 - 18:28 | 4468842 Flakmeister
Flakmeister's picture

Who needs capex when you already have too much capacity?

Well, except in the oil business...

Umm... even there CAPEX on the decline by the majors...

http://energypolicy.columbia.edu/events-calendar/global-oil-market-forec...

Sounds like they are giving up and accepting the inevitable...

Sun, 02/23/2014 - 18:51 | 4468897 seek
seek's picture

Nailed it. Most manufacturers have too much capacity and zero incentive to expand. Even in high tech you have companies like Intel mothballing just-completed facilities due to lower demand. It all goes back to this "recovery" being a Fed illusion based on gaming the markets.

Demand for many products is still at the levels they fell to after the 2008 collapse and have yet to recover. No demand = no capex.

Sun, 02/23/2014 - 22:31 | 4469071 philipat
philipat's picture

Capex data for US Corporations should also be looked at by Global Region. What Capex there is, is in Asia. US domestic CAPEX would probably be even more negative as manufacturing continues to exit and factories closed (The writedown of such assets is negative Capex in reality).

It's not rocket science. The US economy is 70% consumption. So for it to grow it needs more consumption, which isn't going to happen when real disposble income is falling. So why would anyone increase Capex in The US? Despite all the smoke and mirrors, it really is that simple.

Sun, 02/23/2014 - 20:54 | 4469223 negative rates
negative rates's picture

It's astounding that we haven't found a fall guy yet!

Sun, 02/23/2014 - 21:15 | 4469286 philipat
philipat's picture

Iraq, Libys, Afghanistan, Syria, Iran, China, Russia, North Korea?

Sun, 02/23/2014 - 22:09 | 4469454 Chuck Knoblauch
Chuck Knoblauch's picture

Global Warming?

Sun, 02/23/2014 - 23:19 | 4469664 Flakmeister
Flakmeister's picture

Peak Oil, actually...

Sun, 02/23/2014 - 18:38 | 4468863 pitz
pitz's picture

Don't need capex when the Fed is just printing up money and giving it away.  Didn't you get the memo, Bernanke re-jigged the economy so it could operate completely on bullshit instead of factories, mines, and hard work. 

Sun, 02/23/2014 - 18:44 | 4468875 Chuck Knoblauch
Chuck Knoblauch's picture

Merchantile economy being replaced by Neo-Feudalism.

 

Depopulation of the human race a priority now.

 

A World Conservation Bank will own all natural resources on the planet in Trust.

 

WCB Trust will issue Conservation Bonds for sustainable growth around the world.

 

A Global Use Tax will be imposed on the use of allocated global resources.

 

WCB will collect global tax revenues to service the global debt.

 

Welcome to your future. Resistance is futile.

Sun, 02/23/2014 - 21:09 | 4469268 Dollar Bill Hiccup
Dollar Bill Hiccup's picture

Chuck, you get over those yips yet?

USA's greatest export of them all, homosexual marriage.

Sun, 02/23/2014 - 18:46 | 4468883 spekulatn
spekulatn's picture

 

Here's a nice read.

 

 

Daily Bell: Where do you see the stock market headed? Why?

 

Fred Sheehan: All asset markets are disengaged from their foundations. They have been elevated by governments and their central banks. Central banks have done so by prodding savers into stocks and bonds. They have set artificially low borrowing rates. These artificially low rates are the source of so many perversities that are not immediately evident but have fractured the structure of companies, industries and the stock market. With Treasury rates so low, the issuance of investment grade, junk, covenant lite, PIKs and almost every other category of sloppy finance that met its maker in 2007 set new world records in 2013. The present and future consequences should be obvious. Regarding your question about stocks, U.S. stocks were up about 30% last year. U.S. stock market capitalization rose $13 trillion in 2013. On what? "Record earnings," we hear. -

See more at: 

http://www.thedailybell.com/exclusive-interviews/35051/Anthony-Wile-Fred...

Sun, 02/23/2014 - 19:20 | 4468978 Nid
Nid's picture

It's all ballbearings these days.......and gigafactories.

Sun, 02/23/2014 - 19:27 | 4468995 CalibratedConfidence
CalibratedConfidence's picture

Closed M&A Deals:

Sun, 02/23/2014 - 19:48 | 4469056 Oldwood
Oldwood's picture

Its not surprising that Goldman is extolling positivity as it is hard to find a pessimistic salesman. It does surprise me that they retain any credibility but I guess gamblers put less value on reality than wishful thinking. It isn't difficult to imagine why capital expenditures are down, when you look around at where market potential lies. It looks to me that it is in wishful thinking, where little capital is required short of some marketing and public relations money. That and buying market share are all that is left. For many manufacturers their equipment is wearing out after years of coaxing it along, waiting for the never to arrive recovery. Equipment suppliers are offering some pretty good finance deals,  but few feel confident in borrowing. fear and trepidation still rule.

Sun, 02/23/2014 - 20:48 | 4469206 lasvegaspersona
lasvegaspersona's picture

I have set up a nano factory in my garage. We produce more nano than any competitor. Our product is shipped by nano truck and nano drones. The main product as present is nano goo but for those wishing to get in on the ground floor send macro money to my bank and we'll arrange an electronic microscopic tour of the facilities. 

Sun, 02/23/2014 - 21:07 | 4469264 Dollar Bill Hiccup
Dollar Bill Hiccup's picture

Demand was inflated by, what else, leverage, the gross over financialization of everything.

Who f*&^ing needs capex when there are no organic growth patterns which are not propped up by that greatest of ruses, the "beautiful deleveraging" based in QE and its avatars.

Do market prices tell one anything at all about the economy?

Government distortions, manipulations, and lies. Sure, build your capex models based on that. Good luck.

Or, just STFU and take on debt to buy back equity.

Sun, 02/23/2014 - 21:15 | 4469284 Kreditanstalt
Kreditanstalt's picture

Must be 9AM market opening in Japan...paper gold crashes, paper silver dives, the paper dollar explodes as carry trade idiots sell paper yen & buy paper dollars.  Thanks for the manipulation.

Sun, 02/23/2014 - 21:50 | 4469389 Flakmeister
Flakmeister's picture

Umm... its down 3 bucks.... are we being a tad overdramatic, perhaps?

Sun, 02/23/2014 - 22:31 | 4469516 Kreditanstalt
Kreditanstalt's picture

Well, maybe...but it plopped almost instantly from $1325+ to $1319+...  I was just suspicious of the timing.

Sun, 02/23/2014 - 21:46 | 4469376 gdpetti
gdpetti's picture

Hmm. "the fundamentals remain strong"...Sounds like that line from the Minister of Magic in Harry Potter... just before he gets killed and the ministry falls. Is that art imitating life or the reverse? Is there a difference?

Mon, 02/24/2014 - 01:15 | 4469873 StychoKiller
StychoKiller's picture

"The time is coming when all must choose between what is easy and what is right." -- Albus Dumbledore

Sun, 02/23/2014 - 22:12 | 4469470 hairball48
hairball48's picture

There's no capex because there is no real savings pool to supply capital for investment...or anything else for that matter.

Sun, 02/23/2014 - 22:37 | 4469546 jerry_theking_lawler
jerry_theking_lawler's picture

huh....so you needs savings to create capital...who knew. maybe that should be written down in some economics text so we don't forget in the future.

Sun, 02/23/2014 - 23:19 | 4469665 MeBizarro
MeBizarro's picture

Some of this is true.  Cap ex spending is occuring and still in a big way in Asia.  It is just tough to get reliable and trustworthy numbers in a bench of Asian countries especially China and Vietnam and at SOEs. 

The rest about profound changes in production leading to greatly reduced cap ex is still utter BS.   The part about too much being spent in the last cycle is out for debate yet and a 'incomplete.' 

Mon, 02/24/2014 - 00:45 | 4469813 drstrangelove73
drstrangelove73's picture

Gosh,no Capex.
Gee,how could that be?
1.Got Marxist in the White House.check

2.Got Marxist majority in the senate.check

3.Got Chief Justice of the Supreme Court who will rubber stamp anything they want to confiscate,er,do.check.

4.Got governments all over the world on fire or ready to default.check

I don't get it?WHAT'S NOT TO LIKE???

Mon, 02/24/2014 - 10:25 | 4470550 AynRandFan
AynRandFan's picture

All good reasons for keeping one's assets liquid, the opposite of capital investment.

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