The Three Charts Of The Corporate Apocalypse (Or Why Aren't Low Rates Working?)

Tyler Durden's picture

Corporates are in relatively good financial shape and theory says should respond to high profits and cheap debt by investing more. However, while high 'profits' and low cost of debt are reasons for capex and opex to be rising more quickly than they are, these two critical drives of recovery show no signs of responding to these profit/debt incentives - and so as Citigroup notes "recovering is not booming". Top-down, compared to history, capex is low, following P/E's sentiment - especially in Europe (indicating a lack of confidence in the future). However, at the sector level this reverses: high capex has been given a low PE, while low capex has a high PE. The market is effectively encouraging companies to invest less and return more money. Longer term the consequences for economic growth, inflation and earnings growth are negative. It seems - as indicated by the relatively low level of net borrowing during a period of ultra-low interest rates and the market's decision to demand low capex and more yield from companies - that the balance-sheet-recession mantra of debt-minimization over profit-maximization is in full swing in the corporatocracy - and we know from Japan that no matter how much extreme monetary policy is thrown at the wall, none of it sticks.

The Lower The Rate, The Less They Borrow


Despite extremely low interest rates around the world's advanced economies - and lots of chatter of high levels of new issuance, the fact of the matter is that net new issuance (i.e. new-issues - redemptions/maturies/coupons) has remained low to negative (one of the key reasons for credit's strength as the supply drag remains light). This is entirely paradoxical to the central-bankers' mantra of reducing rates to spark releveraging and growth...

Confidence Versus Capex


There is a close relationship between P/E multiples and capex over the last 20 years. Companies invest more when they are confident about the future. They get that confidence from the market’s confidence in their growth prospects, as shown by a higher P/E. As the P/E has fallen, capex/sales has declined. This lower level of investment is likely to have an impact on the ability of companies to grow and also on the growth rates of the economies in which this spend has been reduced.

Save  - Or Be De-Rated


The chart below shows the relationship between the level of 2012 capex/sales and the P/E. Unlike market history those companies that are spending relatively high levels of capex are now on low P/Es. Those sectors with lower capex/sales ratios are being rated more highly. The equity market is saying to those companies that invest heavily in capex that it would rather they didn’t.

The equity market is clearly skeptical about the value created by high levels of capital spending.

Bottom-Line:High profits and low cost of debt are reasons for capex and opex to be rising more quickly than they are. Compared to history capex is low, following the PE. However, at the sector level this reverses. High capex means a low PE, while low capex means a high PE. The market is effectively encouraging companies to invest less and return more money. Longer term the consequences for economic growth, inflation and earnings growth are clearly negative - as we trade (once again) short-term equity gain for long-term sustainable economic gain.


Source: Citigroup

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
vast-dom's picture

we may deduce from above the Bernank and his eurozone central bankers have no fucking idea what they are doing and/or are willfully attempting to destroy markets.

Ghordius's picture

"Bernank and his eurozone central banker"? Why do you imply that they are all pulling at the same rope as the FED does, those foreign CBs?

malikai's picture

Hey guys, off topic, but check this out:

GAO audit of the FED, $16T in free money to these guys:

List of Current PD's:

Pretty neat, huh?

Haole's picture

Naturally the 2012 U.S. "election" results will need to be "tabulated" by SOE's new Spanish owner SCYTL, using SOE's software in Spain.   Interesting also that the major "stakeholder" in this company is none other than George Soros.   Since "Obama's" second term has been in the bag for months now I guess they need to make it "official" conveniently after all. 

"All your votes are belong to us". - George Soros to the as of yet ignorant "voters" of the Western world.

Welcome to global Diebold-like "election" fraud on steriods.



Bananamerican's picture

" the major "stakeholder" in this company is none other than George Soros"

don't be such a dim partisan douche....

ALL your candidates belong to us.-CorpoRAT Amerika

sessinpo's picture


TD did a thread on this over a month ago.

lasvegaspersona's picture



MFGlobal didn't make the team this year...odd huh? Corzine was a helluva coach..

SafelyGraze's picture

pages 203-204:

Many foreign banks held U.S. dollar-denominated assets and faced challenges borrowing in dollars to fund these assets. ..

foreign banks facing difficulties borrowing against U.S. dollar assets may have faced increased pressure to sell these assets at a time of stress, potentially putting downward pressure on prices for these assets. ..

The Federal Reserve Board has interpreted section 14 of the Federal Reserve Act to permit the Federal Reserve Banks to conduct open market operations in foreign exchange markets and to open and maintain accounts in foreign currency with foreign central banks.

Section 14 states that “[a]ny Federal reserve bank may…purchase and sell in the open market, at home or abroad, either from or to domestic or foreign banks, firms, corporations, or individuals, cable transfers…” 

dear fed,
am facing challenges borrowing dollars to fund the upkeep on my car.
use your section 14 powers as you've interpreted them.
payment accepted in bitcoin.


Cult_of_Reason's picture

Until the U.S. fiscal situation finds some clarity, monetary policy is blunted. "There really is a lot to be solved on the fiscal side to create the conditions, arguably, in which further monetary action could really boost the economy," the policy maker said.

Mr. Lockhart is a voting member of the monetary policy-setting Federal Open Market Committee. He is widely viewed as a centrist, and many believe that his views are indicative of the way the committee as a whole is leaning. Mr. Lockhart was interviewed a day after a speech by Fed Chairman Ben Bernanke that took stock of all the stimulus efforts the Fed has provided over recent years. Mr. Bernanke suggested the Fed still has power to aid the economy, and he said the central bank will provide additional support to the economy if officials think it would help.

Many in markets interpreted the speech as another sign the Fed will soon provide some additional form of monetary policy stimulus relatively soon. But Mr. Lockhart cautioned against such views. The speech was an attempt to "take stock," he said.

When it comes to additional stimulus, Mr. Bernanke argued "it could help. I think, one, meaning the press or pundits, or observers, can overinterpret the speech as being, as indicating, his preference for further action," Mr. Lockhart said. "I don't think [Mr. Bernanke] signaled or indicated a particular direction."


Basically the same view (but Lockhart is a voting member) as Former Federal Reserve Governor Robert Heller's: "The Fed will not act before the Fiscal Cliff is resolved".


Ghordius's picture

The Freezing Zero Situation - chilling

so again, why do big listed corporations keep so much cash on their books? is it really cash during the whole month or only just at quarter ends? or... is this cash idle?

SafelyGraze's picture

holding the cash allows them to avoid keeping inventory

Umh's picture

Fear, uncertainty and doubt will lead people to "playing it safe". As long as their decision making is influenced more by central bank policy than anything else they will be fearful of any committed decisions.

Peter Pan's picture

What is the point of further captal expenditure in a world of such high excess capacity unless you are investing in equipment which further eliminates labour costs.

insanelysane's picture

Everything learned in the last 50 years is no longer valid.  The cost of labor continued to rise and the only way to offset the cost of labor was either through automation or off-shoring.  The apex has been reached and we are starting the slow descent and will see declining labor costs world wide for years.  Past experience would seem to indicate that plague, war, or natural disaster will be needed to readjust labor supply.

devo's picture

overall labor is a zero sum game. Right? I don't see how that isn't the case.

Bobbyrib's picture

Yeah, the corporations had to outsource and lower the cost of labor, or they would have all gone out of business. /sarcasm.

Would someone mind telling me who the main competitors the CEO's who rationalize outsourcing were (besides other American coporations)? What country were these corporations located? IMHO, CEO's used fake competiton to rationalize the lowering of labor costs, so that the people at the top of these corporations could receive larger compensation packages. They squeezed the middle class to the point where to keep up the middle class had to dip into any kind of savings to keep their lifestyles going, or they had to lower their standard of living (most of the time not too much.. for now). You would have to be an idiot to believe the US will ever return back to the prosperous nation we once were. Modern day CEO's will continue to squeeze every last drop out of the middle class so that the 1% can become even more wealthy. The country has been gutted. You would have to be a fool to invest in this country.

Kayman's picture

Any business that went through the last Fed fiasco in 2008/2009 knows you cannot trust a Central Banker, or any bank, for that matter. They rush to save their pals, and you get liquidated, via demand loans.

When companies like Caterpillar and McDonald's needed Bernanke to cover their payrolls, you know the system is rotten to the core.

Why are businesses sitting on piles of cash (I'll leave corporate debt aside) ?  Because they would be idiots not to.

FranSix's picture

P/E ratios may have declined, but that means that dividend ratios have increased.  You have to wonder if the whole world hasn't been enslaved into serfdom, where inflation-adjusted wages have fallen so far behind that the poverty line is actually where average wages are.  But nobody noticed.  Except dividends remain very firm, especially in the telecoms.

falak pema's picture

It is evident that as consumer debt is at 13 T in the USA and consumer confidence in financial meltdown is now down to shoe sock levels in Eurozone, the perspective  of P/E for companies who are NOT in price cutting substitution products, or in new niche markets, will swing low big time. Deflation of consumer demand means stocks will take nose dive except for niche players and game changers who open new markets.

As government spending is in the cross hairs of the world economy, logically speaking Arms spending, health care and financial sectors will get hit big. As these are government subsidised.

If there is no debt jubilee the Keynesian advocates will not get a hearing; except to debase the currency as done currently, not to invest in infrastructure and in consumer demand ramp up. 

Basically all the sectors of G+C+I will be moving down in first world. But when will the FED fiat pump cavitate and come to halt, to start this slide down and how long will the road to foggy bottom be? 

Before the first world healing begins.

3 years to start the slide down. Ten years to clean out the fiat stables of junk money and its poison pills. 

>>>> 2025.  Will we have a new energy paradigm in place by then, that avoids global 2°C temp rise over the century? 



moonstears's picture

 "Deflation of consumer demand" PRECEDES  touted recovery, stock rises, inflationary pressures, rampant inflation, price fixing/currency reform. Scrap JIT, buy a warehouse or clean out a closet in your business and fill with tangibles relative to your industry...wayyy better than sitting in cash. JMO

sessinpo's picture

This depends on your financial situation. For many business and consumers, they have debt. High debt, better have cash which is one reason I think some corporations are hoarding. Low debt, then take advantage of low interest rates if you actually have something productive to put that money into.

As for scrapping JIT, that depends on the payment schedule. If I can have JIT but pay on delivery (basically COD), then I'd take it. If I have to pay for JIT in advance, then I would forgo it. Most industries, as far as I know, do not pay in advance becauce the inventories being delivered JIT are of a specific quantity. The purpose of JIT was to cut down costs and to not have a bloated inventory. (JIT, Just In Time). The squeeze will be on the manufactures earlier in the process that have to deliver.

PLove's picture

Taste of ObamaCare:


   Page 50/section 152:  The bill will provide insurance to all non-U.S. Residents, even if they are here illegally.

                Page 58 and 59: The government will have real-time access to an individual’s bank account and will have the authority to make electronic fund transfers from those accounts. 

                Page 65/section 164:  The plan will be subsidized (by the government) for all union members, union retirees and for community organizations (such as the Association
Of Community Organizations for Reform Now -ACORN).

Page 203/line 14-15:  The tax imposed under this section will not be treated as a tax.  (How could anybody in their right mind come up with that?)


Page 241 and 253:  Doctors will all be paid the same regardless of specialty, and the government will set all doctors’ fees.

hardcleareye's picture

If you are going to post something like this on ZH than take the time to confirm that it is correct and accurate!!! 


This is the language for the HR 3200, Obama Care and this is the link to the bill in it's full text. (I am no fan of obama care, but not for your reasons.)

This is what Section 152 has to say



    (a) In General- Except as otherwise explicitly permitted by this Act and by subsequent regulations consistent with this Act, all health care and related services (including insurance coverage and public health activities) covered by this Act shall be provided without regard to personal characteristics extraneous to the provision of high quality health care or related services.

    (b) Implementation- To implement the requirement set forth in subsection (a), the Secretary of Health and Human Services shall, not later than 18 months after the date of the enactment of this Act, promulgate such regulations as are necessary or appropriate to insure that all health care and related services (including insurance coverage and public health activities) covered by this Act are provided (whether directly or through contractual, licensing, or other arrangements) without regard to personal characteristics extraneous to the provision of high quality health care or related services.


    Note that is does NOT "....provide insurance to all non-U.S. Residents, even if they are here illegally."




11b40's picture

Who cares if it's true...he got 2 green you get a red one for posting reality.

Maybe he was a speechwriter for Ryan at last week's convention. 

I am no big fan of Obummer, either, but I am a fan of accuracy, and I am sickened by the propaganda and outright lying that is going on.  Our choice may be tweedle dee and tweedle dumb, but I really think Romney/Ryan could do far more harm that Obama.  Maybe just the devil you know vs the one you don't syndrom, but Romney is much more worrisome to me.  Look at who he is surrounding himself with.  Bush on steroids is exactly what we don't need.

Mr. Lucky's picture

I do believe that if grandpa and mama grizzly were in office the affordable health care act would not be an issue.  So there are some differences.

Pareto's picture

Who are Ron Paul and Sarah Palin?

sessinpo's picture

Two people that will never become president. And I consider myself a conservative libertarian.

Buckaroo Banzai's picture

"...shall be provided without regard to personal characteristics extraneous to the provision of high quality health care or related services."

It is cleverly worded to obscure intent, but what the text clearly states is that services will be provided to EVERYBODY who shows up to receive them.

Find me the passage where services are explicitly denied to illegal immigrants, please.

moonstears's picture

If I were a business, I'd scrap JIT, and hedge for inflation with tangibles, with some of that "cash" (hint, hint for any in this position, from your friendly neighborhood armchair  economist...make donations payable to moonstears...if you appreciate this valuable info)

p.s. Specifically if there's some cheap chinese crap in your product, that'll be not so cheap anymore, and soon, I postulate.  

RiskAverseAlertBlog's picture

It would seem Bernanke's insistence that, a supposed existence of considerable excess capacity (this in his mind diffusing inflation concerns) reflects a fundamental perception driving circumstance this report presents. Why invest in new capacity when there's an excess of it already?

cdude's picture

Myopic corporate survivalism !  Innovation and entrepreneurship have become too risky.  This is the sad state of affairs following years of central intervention.

Eric L. Prentis's picture

Final demand is poor, due to ZIRP. Savers—who have good credit histories—are not earning interest on safe investments, and therefore, cut back on spending. Those in debt have hit a debt wall and cannot spend more.


Multi-national corporations are not leaders, they only respond to service demand in the marketplace. Consequently, their capex and opex growth lags.


ZIRP is a self-defeating Federal Reserve economic policy that only benefits insolvent banks. It is time for the Fed to raise interest rates.

Tombstone's picture

It may appear that balance sheets are very positive.  I have run across stats saying that corporate debt is at $12 trillion verses cash of about $3 trillion.  In any event, if much of this debt is bonds, what happens when interest rates rise?

sessinpo's picture


I've seen numbers indicating just the financial sector alone has about $9 trillion in debt though I don't know the maturity of such debt (which is relevant). Overall, several sources have indicated that corporations have upwards of % $40 + trillion in debt to rollover over the next 5 years.


Here is one source:


Yea, I know it is the S&P and we know how on top they are. I think ZH has done threads on this.

Winston Churchill's picture

With the unfunded legacy  pension liabilities are included ,they are sitting on nothing.


dolph9's picture

The problem with corporations, and particularly banks, is that they no longer endorse capitalism.

In capitalism, you succeed or fail based on your own merits.  There is no Bernanke or Federal Goverment or Saudi Arabia or China to bail you out when things go bad.

Now, they only believe in "success."  Sunny optimism and growth until the end of time itself.  Which of course means that losses have to be socialized, which is of course statism.

America has become a socialist hellhole like every place else.  It's finally happened.  The country is no longer "land of the free" it's land of the socialized, fearful, and subsidy and government dependent, including corporations.

And the Republicans won't do anything about it, they're a part of it.

OneTinSoldier66's picture



Stefan Molyneux(and Alex Jones) on Corporations(2:57)

TrustWho's picture

We maybe entering the Dark Ages II as every aspect of society is "eating its young". First, every society is faced with allocation of resources to the generations. Today, pension and healthcare promises are supporting the old and starving the young.

In the business world, the internet is the game changer. The Internet is the best Chainsaw Al in the history of man. Who wants to invest in future technologies that may or may not be profitable, if they work, when one can invest in Amazon, for example. Amazon adds little value to society, except cost reduction. We are replacing beautiful models with digitized replacements. These beautiful women had a skill society needed and used in a positive way. What do these women do? Do they become high priced sexual prostitutes?

I was at a healthcare investment conference in 2005 trying to launch a pharmaceutical company based on new deliveery device. I was slightly surprised that most investors wanted to launch companies with a simple business model that could satisfy customer needs with programs paid for by Uncle Sam.

Has technology run its course per the Law of Diminishing Returns? Is society so efficient at installing technologies so quickly that technology development can not keep pace? (eg. railroad vs. mobile phone) I do know this. The technology of electricity required huge labor amounts to install and changed people's quality and length of life immensely. Where are the huge break-through technologies? I asked the same question in 1970s and low and behold: desktop computure, silicone chip and internet gave the USA a balanced budget. Unbelievable, will it happen again? and soon enough to save us from our blood sucking debt spending chains?

LooseLee's picture

 - as we trade (once again) short-term equity gain for long-term sustainable economic PAIN.


There! Fixed it for ya!

yellowsub's picture

Corps are still downsizing and consolidating positions to throw more on the competent ones that are left.

Full time positions are being shedded and hiring back a small pool of them as contractors. 


Arnold Ziffel's picture

M3 is almost zilch despite soaring M2. No trickle down velocity as yet...or very little  of it anyway. On the ground I see more stores closings and many many more houses go up For Sale this past week and a handful more For Rent.

Old Paradigm: fixed in one dull job in one location hoping for a solvent pension plan paying off that 30 year ball-and chain-mortgage

New Paradigm: Nimbleness and Flexibility of renting for a quick move to that new job in the next state (or overseas) is King

intric8's picture

Haven't the corporations unwittingly set a very tough precedent over the last couple of years? They are sitting on record cash while outsourcing employment offshore. Cheap. All this while they stagnate wages domestically. Now the street will expect it to continue forever. Does not bode well for us.

andrewp111's picture

"The market is effectively encouraging markets to invest less and return more money."

Returning money is exactly what corps should be doing. The public is in hock up to their eyeballs, and what people need is income. Income to pay down debt in a multidecade long deleveraging process.  Dividends provide income.

And since global growth is constrained by energy supplies anyway, it is perfectly understandible that the market will punish capex.

neutrinoman's picture

I've never seen a more devastating smoking gun with regards to the costs of ZIRP. It does not stimulate real economic activity; it discourages it.

The "play pretend" reasons for ZIRP have to do with "stimulus." The real reasons have to do with propping up insolvent institutions, governments and banks; and with providing cheap liquidity for speculators.

For us now, this is the equivalent of those charts that discredited the Phillips curve and "output gap" models in the late 1970s. There was no fixed trade-off between unemployment and inflation, and inflation in the longer run is a supply phenomenon, not a demand one. (Friedman and Phelps predicted this in this 1960s.) The chart above shows clearly that borrowing is supply-limited, not demand-driven. The lower the rate, the less the lending.