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Capex Recovery Is Worst In History, BofAML Says
One of the major themes we’ve discussed this year is the overwhelming tendency for US corporates to take advantage of record low borrowing costs and voracious demand from yield-starved investors by tapping credit markets and investing the proceeds in share repurchases. Setting aside the fact that this dynamic is embedding an enormous amount of risk in corporate credit (a booming primary market is a dangerous thing when the secondary market is completely illiquid and investors are staring down a Fed rate hike cycle), record issuance and buybacks have come at the expense of capex.
Price insensitive corporate management teams are leveraging their balance sheets in order to buyback shares, thereby artificially inflating the bottom line, boosting equity-linked compensation, and underwriting a stock market rally.
This comes at the expense of capex (i.e. investing the proceeds from debt sales in future growth and productivity). While some will note that capex hit a record in absolute terms in 2014, that obscures the fact that if one looks at how companies are using cash, the trend is clearly towards buybacks and dividends and away from investment.
This, we’ve argued, could imperil top line growth going forward, as financial engineering is not, in the final estimation, a viable growth strategy.
Against this backdrop, BofAML is out with a new note, calling business capex “a major drag” on the ‘recovery.’ Here’s more:
Business investment has been one of the more important weak links to the sluggish recoveries in most advanced economies in the aftermath of the Great Recession of 2009.
In the United States, it took 18 quarters (4.5 years) before fixed business investment regained its pre-recession peak, in chain-volume terms. That compares with an average of just five quarters before business investment recovered to its peak level prior to the onset of previous post-War recessions; previously, it had never taken longer than three years for that milestone to be attained.
Since the Great Recession, US business investment has grown at an average annual rate of 4.9%, compared with the 8.1% average for the corresponding period of all post-war recoveries. This shortfall is a much larger than the 1.8pp shortfall for household consumption, and the 2.0 pp for residential investment.
Why the weakness? As we have observed on many different occasions, banking and real estate crises tend to cause big recessions and abnormally slow recoveries. Rather than counter the balance sheet consolidation of the private sector, governments have pursued their own consolidation. It is hardly surprising that businesses lack confidence in any sustained upswing in demand that would justify taking the risks associated with large increases in investment. For many listed companies, returning surplus cash to shareholders through dividends or share buybacks has seemed a safer strategy.
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In other words, it has taken three-and-a-half times longer for capex to recover from the recession versus the historical average. Worse, it has never taken longer than three years — it took four-and-a-half years this time around. This is directly attributable to companies opting for buybacks over fixed investment, which means two things: 1) the stock market rally is illusory, and 2) corporate America's productive capacity has not grown with its market cap.
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Why would any company increase capex when they have unused capacity now?
The problem all around the world is lack of DEMAND not lack of capacity. And the Fed can't print demand.
Demand is still there. It just still hasn't caught up with the over-capacity still around from 2006-2007. Credit too easy for more than a decade now.
"Demand is still there."
Is that why the ISM polled companies mentioned that worldwide demand is the worst they've ever seen it?
DEMAND? What I see increasingly every day is that everyone DEMANDs that fucking criminals be prosecuted for their crimes, and the people see that is is NOT happening. People are getting PISSSED OFF. That is the DEMAND. Until that DEMAND is met, everything will stagnate, because people have NO FAITH in the system.
Capex = Keynesian investment. Why does everyone keep forgetting that the economic crisis came after the financial crisis and was caused by government intervention in supporting the banks, beyond the role of lender of last resort? In fact in the US the Fed even bailed out the world's largest insurer and 2 mortgage companies, something for which they never had a mandate. If they just let the failing banks hit the wall the real economy would have carried on fine without them. Capex, like most other economic measures, have been rendered obsolete through QE which caused a Lucas Critique event that hardly anyone can get their head around and acknowledge, let alone understand the implications.
"...returning surplus cash to shareholders ...."
I'm sorry, I thought these companies were issuing bonds (debt) in order to acquire the cash to buy back those shares. How is that "surplus" cash?
Demand!?!? For what? Do you really need the Iphone 16 when you have the Iphone 14? I was just at Sears yesterday, in it's death throes by the way, Saturday afternoon and I think I saw 12 people in their mall store, but they have 55" 4K LED televisions for $1299! 60" LED 240 Hz tv's for $799! We are getting deflation already and it's going to get worse. It is just in the things you don't need . Food, fuel, and utilities will go through the roof, that's because that is the only demand left, they have sucked the middle class dry and moved all good jobs overseas. The only people getting jobs, the 54-65 set, don't want the newest playstation or Xbox. China is going to be just as fucked as we are until they inflate their wages to create demand. All in all I see a very dark 20 years for the entire world.
Bad as the situation is now for the entire economy (outside of the top end real estate industry that acts as a laundromat for drug money and flight capital), what would happen of the government started laying off spooks and ending contracts with private snoop vendors like Booz Allen Hamilton, owned by the Wall Street hedge fund The Carlyle Group since 2008. Carlyle has made over $2 billion by 2013 off its Booz Allen investment, thanks to Obozo's drunken sailor spending on spy and military projects. Those spy contracts created jobs for thousands of employees at high 5 and low 6 figure salaries. Half the FBI and much of the Secret Service is also busy spying on Americans, when not getting drunk on the job and whoring around. If those government agents get riffed, there are not enough night watchmen jobs to go around for them.
Here in Baltimore, 25-30,000 workers a day went to the Bethelehem Steel mill at Sparrows Point.
That was 25 years ago. Ft. George Meade was a sleepy backwater.
Today, Beth Steel is GONE and the mill , once the biggest in the world, is being scrapped.
BUT!!!!!, 30,000 a day arrive at the huge NSA headquarters at Ft. Meade.
30,000 tax paying , value producing, economic stimulating blue collar jobs, replaced with 30,000 tax SUCKING .gov overpaid spooks, spying on us.
Stalin would blush.
I think you provide evidence of a Depression just like Chart 1 above.
If we take Chart 1 and then look at where the Investment has gone and who has been investing, I think we have a depression.
Also Capital Flight, Brain Drain from Industry, Decapitalization of Industries, Wealth moving off shore, Economic Leakage of Money out of the Economy, Fiscal Stimulus through the Largest Federal Spending Budgets of our Wildest Dreams, and Record Foreign Investment in US Treasuries and US Property & Securities.
I need some database access to the data. Not sure if I can get it through
- BLS
- BEA
- FED FRED Charts
- WB Data
- OECD Data
- BIS Reports
.
In the 1990s Congress went through a new Phase of BRAC, Military Installation Base Realignment and Closure.
One of the Bases was the Navy Ship Yard, Portsmouth Maine if my memory is correct. It was a Main Facility for Building and Refitting Navy Ships.
- Part of this was to Privatize Government Jobs, Core Missions or Not
- A huge Era of Federal Government Contracting started about the time office Computers became common, 1990
- Steel Industry, Metal Works, Machining, Manufacturing, these are Core Functions for a Superpower or a Strong Country
- Another Part of BRAC was to sell of Lands, Give up Leases for Facilities & Lands
- US Assets, Facilities, Materials, and Utilities on these Military Bases were often handed over to Contractors who then tripled the Cost for Services which needed to be available for wartime, civil emergencies, or to augment Electric Grids, not sure if this is related to the Davis-Bacon-Act type thinking
- BRAC seems like part of this whole destruction of US National Security & Loss of Industry & Huge Federal Spending and Contracting for Services
- US Doesn't have enough Ships or Airplane to move US Soldiers, Airmen, Sailors, Contractors, Tanks, Trucks, Humvees, forklifts, containers, food, fuel, generators... in the event of huge Regional war, that is why Iraq War was so contracted out, but this war contracting is 'the plan'
- Contracting out of War as a plan, but then being a superpower that drives the nation to war, is Racketeering, Wealth Transfer
That makes sense. But while thinking of solutions I know if we got rid of the Income Tax Laws by simplifying, and simplified financial instruments and business regulations & laws... there would be a lot of accountants and useless financial and tax advisers out of work.
If we could simplify, streamline, and standardize the entire nation people would be freed from non-productive work. Obviously that would include the Federal Government and Federal Contracts. Probably my guess is that government people can hire Techies guys to run their own teleconference centers, computer servers, and run cable line for offices and installations.
Two observations here. First, the stock market rally is real and actually legal. In some years from now only ZHers will remember just how we got there. Second, lack of demand is relative to previous oversupply which continues, coupled with decreased consumer ability to obtain goods and services.
lol, Capex, the ol'timers talk about the days when you could request equipment and tools! They even tell stories about when you were really busy, and needed help finishing a project, management would schedulle something called Laybur Ours, then, more people would show up to help! Crazy, right?
4.5 years and $2T from the Fed. Talk about having a hard time with it.
How Tech Giants Became Big Buyers of Debt Bloomberg Business https://www.youtube.com/watch?v=Xi05S46lpO0
More regulation, higher taxes, broke consumers, wide open borders, globalozation and failure to fix the financial system post-2008 are all parts of the problem.
Private Banks don't invest in Depressions or Recessions.
We can wonder about the Privilege given to Private Banks and TBTF Banks. They act like Royalty since we all need credit and funding. Royal JPM, GS, BOA, Citi.
Probably is a good point made about Banking Recessions/Crisis. The Great Depression was a similar time of Banks tightening up credit for over 50 years in the Tradition of English Banks. They cause the Crisis, but it is natural for them to avoid investment in an era of lower wages, jobs losses, job off shoring, and wealth off shoring.
"Why the weakness? As we have observed on many different occasions, banking and real estate crises tend to cause big recessions and abnormally slow recoveries. Rather than counter the balance sheet consolidation of the private sector, governments have pursued their own consolidation. It is hardly surprising that businesses lack confidence in any sustained upswing in demand that would justify taking the risks associated with large increases in investment."
US currency is about to disappear.
Retail is in a shit hole.
And you expect someone to invest in it.
Restaurants and fitness centers wont save America.