Back in April, we did an extensive analysis of what, in our opinion, is the primary reason for the slow burn experienced by the US, and global economy, and why virtually every liquidity pathway used by central banks is hopeless clogged: the complete lack of capital expenditures at the corporate level, and lack of (re)investment spending. Specifically we said that in both the context of Japan's plunging corporate profitability over the past 30 years despite year after year of record budget deficits, and its implications everywhere else, that "we get back to what we have dubbed the primary cause of all of modern capitalism's problems: a dilapidated, aging, increasingly less cash flow generating asset base! Because absent massive Capital Expenditure reinvestment, the existing asset base has been amortized to the point of no return, and beyond. The problem is that as David Rosenberg pointed out earlier, 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." Today, with the usual six month or so delay, this fundamental topic has finally made the mainstream media with a WSJ piece titled "Investment Falls Off a Cliff: U.S. Companies Cut Spending Plans Amid Fiscal and Economic Uncertainty ."
The WSJ is correct in its observations - capital spending (so very needed to replenish an aging asset base and to fund future revenue growth) has indeed plunged, however it is dead wrong in its diagnosis - it has little to do with the "cliff", as this has been a trend that has been far longer in the making than just the past few months, and everything to do with the Fed's control of virtually every market, and its ongoing encroaching control of the capital flows (so far miserably failing) of the economy, which in turn means companies are eager to spend cash on immediate IRR opportunities such as dividends, stock buybacks, and to a lesser extent M&A, than on longer-term, higher IRR, but less immediate bang for the buck opportunities, such as capital reinvestment. This will, sadly, continue until the breaking point is reached and there is no more revenue growth (such as Q3, when Y/Y revenue has finally turned the corner, even if there is still some more SG&A fat to be cut). At that point expect the mainstream media to once again, realize just what the true nature of the problem is, with its usual 6-12 month delay.
In the meantime, here is the pretty WSJ chart proving the collapse in CapEx:
Readers will recall that all of the above was noted a month ago, when we noted the gaping divergence between corporate and consumer outlooks in "What Do CEOs Know That The Consumer Doesn't ?"
As for the WSJ's stark awakening on the CapEx reality, here is some of their narrative, where everything is, for now, the Fiscal Cliff's fault:
U.S. companies are scaling back investment plans at the fastest pace since the recession, signaling more trouble for the economic recovery.
Half of the nation's 40 biggest publicly traded corporate spenders have announced plans to curtail capital expenditures this year or next, according to a review by The Wall Street Journal of securities filings and conference calls.
Nationwide, business investment in equipment and software—a measure of economic vitality in the corporate sector—stalled in the third quarter for the first time since early 2009. Corporate investment in new buildings has declined.
At the same time, exports are slowing or falling to such critical markets as China and the euro zone as the global economy downshifts, creating another drag on firms' expansion plans.
Corporate executives say they are slowing or delaying big projects to protect profits amid easing demand and rising uncertainty. Uncertainty around the U.S. elections and federal budget policies also appear among the factors driving the investment pullback since midyear. It is unclear whether Washington will avert the so-called fiscal cliff, tax increases and spending cuts scheduled to begin Jan. 2.
Companies fear that failure to resolve the fiscal cliff will tip the economy back into recession by sapping consumer spending, damaging investor confidence and eating into corporate profits. A deal to avert the cliff could include tax-code changes, such as revamping tax breaks or rates, that hurt specific sectors.
The only thing we would add here is that we are eagerly looking forward to the WSJ's follow up piece some time in mid-2013, when it observes investment spending in the aftermath of the "resolved" Fiscal Cliff, and notices that the collapse in CapEx has continued.
Just what will the ongoing unwillingness to reinvest in one's business, and to dividend as much of the cash on hand as possible to shareholders, be blamed on then?