Two Years Later, Larry Fink Confirms Zero Hedge Was Right

Tyler Durden's picture

Almost exactly two years ago, on April 2, 2012, long before it became abundantly clear to even the most clueless CNBC hacks, we said that there will be no capex boom as long as corporate management teams abuse ZIRP (and yes, it is all the Fed's fault as we further explained) to allocate capital, most of it courtesy of low-cost debt, by providing quick returns to activist investors through dividends and buybacks, instead of reallocating the funds to grow the company by investing in Capex (the latest proof of the unprecedented lack of capital spending growth increase came earlier today) and SG&A or at least M&A.

For those who many not remember, here is what we said:

... companies are now forced to spend the bulk of their cash on dividend payouts, courtesy of ZIRP which has collapsed interest income.

Which means far less cash left for SG&A, i.e., hiring workers, as temp workers is the best that the current "recovering" economy apparently can do. It also means far, far less cash for CapEx spending. Which ultimately means a plunging profit margin due to decrepit assets no longer performing at their peak levels, and in many cases far worse." And while we have touched on Europe's record aged asset base, we now get confirmation that, as expected, the same issues affect the US and Asia too, where Japan, not surprisingly, has the oldest average asset age. But there is more: as we suggested, courtesy of Fed intervention, which in turn shifts capital allocation equations, ever less cash is going into replenishing asset bases. The implications are that following the recent surge, corporate profits are set to plunge (no more terminations possible as most companies are already cutting into the bone) once the depreciation and amortization cliff comes, and the threshold of useful asset life is crossed.

Here is what average asset age looks like:

Now investing in CapEx is a traditional strategy for growing companies. This can be seen in the chart below, showing cash usage in Asia, es-Japan (which is much more like the US than any of its peers).

Asia is doing the right thing: it is investing proportionally the same amount of cash in CapEx as it has in the past. Alas, one can not say the same about the US:

When it comes to deploying excess cash, traditionally, the decision for CFOs and Treasurers has been to either put the money into Capex or into M&A. Here is how Goldman summarizes that decision three:

Organic growth (capex)...

  • Greater control
  • Keep corporate culture on place
  • Grow from lean base
  • Prevents overpayment or bidding war
  • Allows entry where others aren't playing
  • Successful capex leads to greater outperformance vs sector (>30% outperformance, vs c.18% for successful acquirors)

...vs acquisitive growth (M&A)

  • Timely/ immediate access to growth
  • Early-mover advantage in new markets
  • Allows for a step-change in industry positioning
  • Less execution risk (but more integration risk?)
  • Ready-made brands
  • Acquire local knowledge, infrastructure and distribution networks
  • Opportunity to extract synergies

What is quite curious is that companies that grow via CapEx vs M&A, typically have far greater returns in future years, as can be seen on the chart below.

However, with debt financing effectively at zero cost these days, companies can prefund M&A using debt market access, thus making the IRR calculation skewed to prefer M&A. Unfortunately, none of the underlying problems go away, and the returns are still far lower for M&A compared to the now largely ignored CapEx growth.

And here we get to the second point of Fed pushing capital misallocation, namely dividends. The chart below shows the cash manager framework in its simplest format: in norm al times dividend payments are the last of management's concerns, when there are little to no growth opportunities at the company's growth hurdle rate available (remember this Apple in 1 year). In other words, it signals the end of the growth and the start of the stagnation phase.

Instead, what the Fed has done by crushing returns on interest-bearing instruments, is to force companies to pay ever greater dividends (hence push equity investors into the dividend bubble), because companies too realize that for US baby boomer investors/consumers to make up lost purchasing power shortfall, they need to get the cash from somewhere. And since the fascination with capital appreciation is now gone, the only option is dividend return.

Personal Interest Income:

Personal Dividend Income:

All this simply shows merely the most insidious way in which the Fed's ZIRP policy is now bleeding not only the middle class dry, but is forcing companies to reallocate cash in ways that benefit corporate shareholders at the present, at the expense of investing prudently for growth 2 or 3 years down the road.

Then again, with the US debt/GDP expected to hit 120% in 3 years, does anyone even care anymore. The name of the game is right here, right now. Especially with everything now being high frequency this and that.

Anything that happens even in the medium-term future is no longer anyone's concern. And why should it be: the Fed itself is telegraphing to go and enjoy yourself today, because very soon, everything is becoming unglued.

* * *

Two years later after we wrote this post, whose conclusion has been proven empirically by what has happened in the US economy where CapEx still refuses to pick up despite endless lies of some recovery that refuses to materialize except in talking head year-end bonuses, none other than the head of the world's largest asset manager, BlackRock's Larry Fink admits we were right all along.

From the WSJ:

In a shot across the bow of activist investors, BlackRock Inc. Chief Executive Laurence Fink has privately warned big companies that dividends and buybacks that activists favor may create quick returns at the expense of long-term investment.


In so doing, the head of the world's largest money manager by assets lent his voice to a popular criticism of activist investors, even as his firm sometimes aligns with and may benefit from their efforts.


"Many commentators lament the short-term demands of the capital markets," Mr. Fink wrote in the letter reviewed by The Wall Street Journal, sent to the CEO of every S&P 500 company in recent days, according to BlackRock. "We share those concerns, and believe it is part of our collective role as actors in the global capital markets to challenge that trend."


Mr. Fink doesn't specifically mention in his letter activist hedge funds, which typically take stakes and push for corporate or financial changes, from management ousters to buybacks, dividends and spinoffs. Instead, he addresses a broader concern that markets and companies generally have become too vulnerable to short-term thinking. But the increasing clout of activists contributed to Mr. Fink's decision to write the letter, people familiar with the matter said. New York-based BlackRock itself votes about a third of the time with dissident shareholders seeking corporate board representation, according to data from D.F. King & Co., a proxy-solicitation firm.

Don't worry though: even this "complaint" is merely for purely theatrical reasons. As long as companies can lever up to the hilt and use the debt proceeds to fund dividends or stock buybacks (as we predicted they would in November 2012), and as long as the Fed keeps the cost of debt artificially low, nothing will stop management teams, many of whom also own stock in their companies, to lever up and provide quick gains to equityholders, while saddling the future growth of the company (and creditors) with the bill. Because one thing everyone somehow forgets, is that while companies have raised their cash to record levels, they have raised their debt to even recorder levels (as also explained before).

When Bernanke's (because Yellen is merely an unwitting passenger at this point) bubble bursts, and when companie suddenly find themselves saddled with a debt load unseen ver before, that's when people will finally take Zero Hedge's 2012 warnings, and Larry Fink's caution from two years later, seriously. As usual, by then it will be too late.

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stant's picture

zh rocks bitchez!!

Divided States of America's picture


Main Card:

Larry 'MuthaFuckin' Fink  vs. Carl 'I Can' ICahn

I dont care who wins as long as someone gets knocked out for good.

skwid vacuous's picture

you forgot mommy's boy Ackman, he's younger but only 138 lbs -  i had a dog that weighed more a few years back

Divided States of America's picture

Oh there are tons of these assholes I excluded...Tepper, Loeb but CNBS mentioned that these two senile titans are butting heads so I suggest they make a fight between these two greedy bastards for the Undisputed Old Fucker championship title.

skwid vacuous's picture

ha - my undercard would be einhorn v ackman, loser gets baked alive at 550 degrees

maskone909's picture

ZH is the beacon of sanity in the psych ward. Thanks tyler.

Where is my mind? Super sick version

old naughty's picture

Nice to have Larry...What about King?

Offthebeach's picture

Pixies "Debaser" is a Fed Reserve favourite. 

Headbanger's picture

But the awesome thing to see from that link is this:,32068,901495844001_2064551,0...

Learn fucking Dutch or get to fuck out!


Steaming_Wookie_Doo's picture

Indeed I saw the link and went to it. OK so you have to have enough Dutch to be conversant and be able to pass a citizenship test. Now this would be just as hard for a Frenchman or Englishman as it would be for the Pakistani lady. If I went there, I would be faced with the same challenge. Unless the test has a question like "Who is the one true God" and "Is it wrong to wear a veil" I don't see how it's discriminatory. If you're forever illiterate in a language & culture, how can you contribute to that society?

Tsar Pointless's picture


Those who believe we are witnessing "socialism" or even "communism" under Barry Soetero, must explain to me in coherent, logical sentences how they still hold such beliefs.

NoDebt's picture

Show me where the line is between banks and the government and I might take a stab at answering that question.  Problem is, I lost track of where that line is years ago.  Around 2008 it got very blurry and it's only gone further out of focus since then.

All of those old -isms were hung up on "the means of production".  Does that even matter any more?  It's all about the means of CONTROL now.  Whose name is on the title to a building is irrelevant.  Who controls that asset is what's important.  That's where politics and money join hands and run virtually everything.  Which is where we're headed.

Don't know what -ism to call that.  Not sure such a word exists yet.  But using simple language, it's institutionalized state-sponsored corruption and theft in order to achieve near-universal control.

All right, gimme a grade on that answer.

greatbeard's picture

>> coherent, logical

There is nothing coherent or logical about the folks bringing up communism, Marxism, or socialism (at least not in the respect they are referring to) so don't expect logical, coherent arguments.  Expect parrots squawking back what they've been told.

duo's picture

Mitt Romney is on line 3

Headbanger's picture

Fuck you!

Any other stupid questions you mook!?

TheReplacement's picture

Isn't corporatism fascism?  Isn't fascism a form of socialism?  Isn't communism a form of socialism?  Aren't they all just very closely related cousins making out on the deck swing?

scraping_by's picture

Socialism assumes government is dictating to business. Corporatism assumes business is dictating to government. Figure out who's running who, and you'll get the answer.

It's called corruption for a reason.

kellycriterion's picture

Socialism, Communism, Fascism, Oligharky,, The isms have a lot in common. People chose to focus on the differences. Corps which deal with both external and internal competition, are supposed to adapt to the playing field the official and unofficial governmnets create. If they don't adapt and exploit the incentives present someone else will. Capital and value migrate where they flourish best. Old lefties are so, so sad.

TahoeBilly2012's picture

They don't care what "ism" it is as long as they can take over the entire fucking globe with it and where the "ism" doesn't work, there is always the US Military and cannon fodder punks from the hinterlands. 

Wahooo's picture

It's more like a cancer, the body turning on itself. There's no getting out of it either.

cougar_w's picture

The company I work for is sensitive to swings in capex spending. We've been monkey hammered for years, no end in sight. Global corporations are sitting on their hands doing nothing, amassing huge piles of cash. Personally I think they are waiting to die, and someday soon after their stocks tank the "Cs" and Boards plan on paying off shareholders at $.10 on the current dollar and making away with the loot.

It's bad, people. It's a nightmare. The gears are not turning. Nobody can restart this engine.

xamax's picture

We think your view is much too pessimistic , we still see S&P500 touching easily 2400 by year end, on renewed CapEx spending of companies and a beeter job situation.

maskone909's picture

"Are you putting money to work in this market?"

cougar_w's picture

We think you might want to put down the crack pipe.

maskone909's picture

They cant start the engine because the car was stolen and strip'd and sold to china

ParkAveFlasher's picture

When will China be so stuffed to the blowhole with American "investment" that it explodes like a beached whale in the hot sun, is the question I'm asking myself and ZH.

cougar_w's picture

A: early 2015.

A lot of trust bonds are coming due in China during Q2. If half default then the PBoC go into disaster mode, but it will already be hopeless. Bank runs and suicides. Six months after that, the wheel come off.

drinkin koolaid's picture

Not gonna happen guys. Sorry.

ParkAveFlasher's picture

I agree there.  China was supposed to explode, as mentioned by a slurry of estimates and estimators, in every quarter since 2005.  They hit their "stall speed", but never stalled.  They threatened both hot war and trade war with the West, and no one called them out.  They made aggressive moves into territories like Tibet, nothing was done.  They armed, were accused of stealing technology, engaging in mayhem, and so forth, and nothing really happened.  Western industry is paying for the manufacture of tools (CAPEX) there, specifically for use there.  That won't stop until there is so much local rot that there is no one to functionally unload the freight carriers as they come in, nor anyone to buy the products.

disabledvet's picture

"Lightening strikes.
Not once...maybe twice."

Unlike the rest of the detritus mouthing off at Bloomturd et al "this is the largest asset manager in the world" and the rest of clowns are just flotsam and jetsam now.

They have no choice but to ask AND ANSWER "how this all looks." And of course the entire Enterprise is a fraud.

No Judge will rule as such. They don't understand the last court of Justice to adjourn was in Nuremberg in was a Judge from little Clinton, NY..and. Professor from Hamilton College no less...and yes he had to LOBBY to get that job.

Pouring over those papers he knew the American People's most basic Rights were under threat...and he acted by hanging the phucks like pigs in an otherwise unceremonious ending.

"I will not fear.
I am love."

eclectic syncretist's picture

I would be interested to hear where you are finding evidence of "huge piles of cash" being accumulated and socked away, because when I look at corporate balance sheets I see something quite different.  Take GE for instance, with 88B$ in cash and equivalents, and 221B$ in long-term debt.

or AT&T, with 3B$ in cash and 70B$ in long-term debt.

or IBM, with 10B$ in cash against 100B$ in total liabilities

Viewed as a percentage of debt, the "huge piles of cash" most large corporation have would be gone in a flash if their debt suddenly got called in, and they would quickly be broke, especially since they also have a large percentage of "assets" tied up in accounts recievables, which probably wouldn't get paid in such an eventuality.

Vampyroteuthis infernalis's picture

The huge piles of cash are all debt driven. It is like someone who took out a huge mortgage, maxed out their credit cards then dance around claiming how wealthy they are. It is one BIG illusion!

WillyGroper's picture

T is canning another 6% this year. 

Believe me, they were to the bone in 2011.

Cocomaan's picture

I remember that article! Congrats to ZH. 

skwid vacuous's picture

POS, he needs a good beating, and he can't be that hard to locate...probly nouveau riche greenwich jew...or maybe darien

ebworthen's picture

"Cash on the sidelines", yeah, right.

This also explains the 18 month no correction ramp job in equities, and the concomitant pain individual investors will feel when the bubble pops because they can't seem to understand that their savings are being used for leverage in a leveraged casino.

Not to mention that their kids are living in the basement because companies have no reason to hire or commit to employees.

Go ZH!

Bonus chart:^RUT+Interactive

(choose "2 YR" then under "Technical Indicators" choose "EMA" and type in "200" - RAMP!)

scraping_by's picture

Ah, but they are putting on people. It's just in India, China, Japan, and all over Asia. Pivot, indeed.

The sad thing is by now, they know they don't save any real money outsourcing. But you can't fight fashion, and mainstream management is still surfing that trend.

saveUSsavers's picture

Like all the 1% SCUMBAGS, he waited til market up 180% to talk about it ! A-HOLE

Gamma735's picture

WAR WORLD III will be the answer to our panacea of problems.  Capex spending will skyrocket whilst the worlds' governments conscript and train a generation of young ne'erdowells and arm them to reduce their own generation.   

cougar_w's picture

There is not enough cheap oil left to wage global war. What little there is will stay in the ground when central bank policy reverses and investment capital dries up.

This goes down with a whimper, not a bang. Hedge accordingly.

Headbanger's picture

It's also going to solve global warming real fast with a nuclear winter.

Urban Roman's picture

Fortunately you need not fear the fallout any longer. It is but a tiny fraction of the radioactivity being spewed by Fukushima every day.

Unfortunately, there are hundreds of similarly designed plants at various locations worldwide, and we now know that they will blow up if left unmaintained for a week or so.

disabledvet's picture

Oh and Jeff Immelt...YOU'RE FIRED!

buzzsaw99's picture

the looting will continue

Ghordius's picture

sometimes I hate ZeroHedge. and then Tyler comes back with an article like this and it's seminal predecessor, and then I'm a fan again

"All this simply shows merely the most insidious way in which the Fed's ZIRP policy is now bleeding not only the middle class dry, but is forcing companies to reallocate cash in ways that benefit corporate shareholders at the present, at the expense of investing prudently for growth 2 or 3 years down the road."

1. insidious? it also forces the whole frigging world to either have ZIRP-similar policies or being subjected to huge waves of hot speculative money

2. yes, stocklisted corporations are subject to this ZIRP-induced destruction of their future for the "now, immediately". and this is why I'm still confident about the eurozone... we simply don't have that much of the economy on stock exchanges

3. any explanation why all the graphs are in... EUR?

maskone909's picture

And then there was natural gas