Wall Street

Today in “More Ugly Truth”: Capital Expenditures

By David Stockman  |  May 30, 2018

“In a Wonderland they lie, Dreaming as the days go by, Dreaming as the summers die: Ever drifting down the stream – Lingering in the golden gleam – Life, what is it but a dream?” – Lewis Carroll, Through the Looking-Glass, and What Alice Found There (1871)

The Stalinists of the 1930s could not have done better than Wall Street at using snatches of fact to tell big lies.

What would you expect? The Federal Reserve made honest price discovery a mug’s game. And, after a decade of monetary central planning, well…

There are stories to tell…

For instance, in recent weeks there’s been some noisy gumming about how corporate capital expenditures are fixing to explode.

Trump’s tax cut makes it so…

And they were up by 19.4% in the first quarter – that’s a true fact.

Then again, it’s also true that they were down 5.5% in the first quarter of 2017.

The year before that, they were down 7.5%.

The reality is that first-quarter 2018 capex is part of a three-year growth rate of 1.62%.

Here’s some context: The annual inflation for the same period was 1.65%.

S&P 500 CEOs have chased the global commodity and trade sub-cycle led by China/the Middle Kingdom/the Red Ponzi.

They’ve been around the barn and back during the last 36 months.

So, it now stands, in real terms, exactly where it started.

The truth is more nearly the opposite of this “booming CapEx” meme.

Here’s a fact.

Since the pre-crisis peak in November 2007, American business has been consuming its seed corn like there’s no tomorrow.

Capital consumption allowances are up 80%, from an annual run-rate $1.4 trillion to $2.5 trillion.

By contrast, gross outlays for new business fixed investment are up just 30%, from $2 trillion to $2.6 trillion.

No sacred scriptures define “a good economy.”

But we can make some inferences.

Here’s one:

A decade-long capital-consumption growth rate that’s two and a half times faster than gross investment in new and replacement capital is not healthy.

American business is consuming its own seed corn.

Those same guys and gals in the C-suites divert vast resources to financial engineering schemes rather than invest in productive assets.

The gap between the orange line and the blue line in that chart was effectively recycled from Main Street to Wall Street.

It was used to fund stock buybacks, M&A deals, leveraged buyouts, “leveraged recaps,” and unearned dividends.

The Fed’s monetary central planning has transformed CEOs, CFOs, and corporate boards into economic predators.

Decision-makers respond to incentives.

And the overwhelming incentive in vastly overvalued stock markets is to divert cash flows to shrinking the share base and pumping stock prices even higher.

The drug of Bubble Finance is cumulative. It gets worse over time…

During the 1990s boom, the residual discipline of old-time corporate management was still evident. That’s despite huge gains in stock prices.

On a peak-to-peak basis, capital consumption increased by 80% over the decade.

But, back then, new capex outlays rose even faster – by 100%.

Now, we’re consuming at 80%, and we’re investing at 30%.

Two consecutive stock market bailouts – Greenspan’s mortgage bubble and the Bernanke/Yellen put – have taught the C-suites destructive lessons.

Don’t worry about answering to shareholders for diverting vast amounts of resources to financial-engineering schemes during boom times.

Recessions will be short-lived – and stock market corrections even briefer – under the Fed’s regime.

Monetary central planning means “anything it takes” stimulus.

But we’ve reached Peak Debt. And, under these circumstances, central bank stimulus never really leaves the canyons of Wall Street.

The Main Street economy usually rebounds once liquidations from preceding bubbles are done.

But, then, it limps along until monkey-hammered by the next crash.
Even as financial asset prices inflate and the 1% gets richer…

David Stockman

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR