Nearly two years ago, before the topic of (the great and constantly missing) Capex became a mainstream media mainstay, we said that as long as the Fed was actively engaged in manipulating the capital markets – and this was before the Fed launched its endless QEternity – the bulk of corporate cash would go not into investing for growth, i.e., capital spending and/or hiring, but dividends and (levered) stock buybacks. Nearly $1 trillion in stock buybacks later, and zero growth Capex, we were proven right, much to the chagrin of permabulls who said the capex spending spree is just around the corner again… and again… and again. The same permas (some of them of the reformed variety such as Rosenberg) swore up and down that 2014 is the year that Capex would finally appear: after all assets were record old (the same way they were in 2012).
Of course, if this were to happen, it would promptly refute our fundamental thesis that the Fed’s presence in the market results in the terminal misallocation of efficient corporate capital. We were not concerned. We are even less concerned now having just read an FT piece forecasting that “capital spending by US companies is expected to grow this year at its slowest pace for four years, in a sign of corporate caution over the outlook for global demand.” And like that, dear permabuls, the key pillar beneath all “corporate growth” thesis was yanked. Again. Fear not. There is always 2015. Or 2016. You get it.
Here are some of more notable permawrong permabulls opining,:
Mark Zandi of Moody’s Analytics said: “All the preconditions for much stronger business investment are in place.”
Doug Handler of IHS Global Insight said he expected growth in spending on plant and equipment to pick up from 3 per cent last year to 7 per cent this year.
However, he added: “The extent of the rebound may not be as strong this time as at the same point in the cycle in previous recoveries.”
Actually, no. The extent of the rebound will be limited by the hundreds of billions companies decide to spend on buybacks instead of investing in their future, thanks to such “activists” as Carl Icahn, who demands that companies lever to the hilt and use the proceeds to make him richer.
As for what to expect, here it is:
Total capital expenditure by the non-financial companies in the S&P 500 index is forecast to rise by just 1.2 per cent in the 12 months to October, according to Factset, a market data company that compiles a consensus of analysts’ forecasts.
Strong corporate balance sheets, rising business confidence and signs of stronger growth in the US economy have encouraged hopes of an acceleration in capital spending by American companies.
Yet while some, including Microsoft, Ford Motor, and Phillips 66 plan increased capital spending, others including Chevron, Intel and General Motors have indicated they expect to spend about the same this year as in 2013.
In aggregate, analysts’ forecasts indicated the slowest growth in capital spending by the largest US companies since it declined in 2010, in the aftermath of the recession of 2007-09.
And the punchline:
Companies are cautious about investing in spite of relatively low debt burdens by the standards of the past decade.
Dead wrong: companies are investing gobs and gobs of cash (recall that net debt is now far higher than it was in 2008, or simply look at the recent IBM results) however instead of investing in themselves, they are investing in the P&L of their loud-mouthed activist shareholders who get a quick benefit now, only to leave the companies holding the debt, in the longer-run making it far more likely that the company – now saddled with far more leverage and heading into a recession – will eventually file for bankruptcy, and leave all employees out of a job.
And for all this, as we showed in April 2012, we have Ben Bernanke’s centrally-planned abortion of a market to thank.