I can only speculate that the entire journalistic profession is on vacation. Massive demonstrations continue in Iran. The French are outraged by violence directed at police officers. The Bitcoin bubble is reaching alarming proportions. The numbers tell me that the U. S. economy is swell but it doesn’t feel swell. North Korea’s nuclear weapons development program is proceeding apace. It’s not as though there isn’t any news. It’s just that nobody has much new to say about the news.
“The numbers tell me that the U. S. economy is swell but it doesn’t feel swell.”
Let’s set aside that the so called main stream press has an embargo on good news due to its jihad against Trump. I think the reason for your economic feeling is that although prospects clearly appear to be improving, reflected in some numbers, I hardly think it could be characterized as a boom. Optimism and forward looking indicators like the stock market may be betting that better times are ahead, but much is still on the come. It takes time for deregulation, tax benefits and a generally friendlier environment to make their way into capital spending decisions.
You may be interested in a recent interview snippet with Lacy Hunt, published recently at ZeroHedge. He awkwardly states it, but has a view similar to mine that poor demand prospects caused corporations to choose to return capital through dividends and buybacks as opposed to invest in the company’s capital base. And, for him, the big boogeyman is debt – personal, corporate and government. With all that cash, the corporate side is relatively easy. Personal and government, not so much.
I think I would state it differently. Demand would have been seen as sufficient to justify higher investment levels 25 years ago but managers have become accustomed to much higher returns over the last decade or so. I think that a decline of entrepeneurship; you apparently think it’s inadequate demand.
I guess that according to one set of definitions you’re right but constantly increasing expectations of returns to capital investment don’t seem sustainable to me. Please note that I’m talking about a second derivative phenomenon here. Not increasing returns but an increasing rate of return.
Here’s a bet. In the next two weeks, the media is going to give more air time to the “fight†between Steve Bannon and Donald Trump compared to the stories you listed above combined.
It may reflect on what the media thinks is newsworthy, but then again they know customers like to see a grisly car accident when it happens….
I don’t think it is what the media thinks is newsworthy, but will sell. It still eludes me as to why people forget that the “media” is business. So, apparently, people would rather watch yet another dissection of Trump tweets than protests in Iran. Who knew?
http://www.adweek.com/tvnewser/2017-ratings-cnn-is-down-in-prime-time-but-earns-its-largest-audience-ever-in-total-day/353147
Steve
I’m not complaining about their marketing judgment. That’s a worthy but different subject. I’m complaining that there’s so little substantive in the news media for input.
Another interesting topic for debate: are the major news outlets actually businesses? I’m not so sure. Consider the Washington Post, for example. It appears to be a vanity project for Jeff Bezos rather than an actual business. Heck, I think if it were an actual business they’d be making different choices than they’re making.
The Wall Street Journal is an actual business and waddayaknow? It makes money.
Just a couple thoughts and observations.
In the private equity business one makes two types of investment, a purchase of an enterprise, and then investing in that enterprise. I’ve been doing this for about 25 years now. I know and have spoken with umpteen participants in the industry. Whether the endowments and pensions that make up the bulk of the LP’s, the principals in PE firms, or the managers who steward the companies, I have seen absolutely no decline in entrepreneurial inclination. None. Objectively, the amount of capital that has flowed into the business since 1995 is staggering. The business is not for the feint of heart. It would not suggest a decline in entrepreneurship. Nor would the capital flowing into early stage venture capital.
However, the biggest impediment to PE activity is lack of growth. You want to see a company that cannot be sold, or doesn’t receive fresh capital? Show me one with poor growth prospects. In the early days (80’s up to about 1992) the model was, buy at 5x, finance with 1x equity and just pay down debt. Voila! 20% IRR. Today, with properties selling for 8-12x, you need growth and you must invest in growth and efficiency/capability. Else don’t buy.
Now, I’ve been talking about PE. I suppose there is the chance that the only entrepreneurs left are tech guys, and PE guys. In that case they should be building shrines to me and my brethren. I won’t hold my breath. But I seriously doubt that Fortune 1000 companies have all lost their mojo. They are very rationally making judgments as to invest in their business or return capital. And I see no evidence of increased return expectations. If anything, they have been driven down, especially risk adjusted returns.
The cycles of thought are fascinating. Back when I was in business school returning capital was considered noble. We were forced to read and debate any number of popular press and academic pieces advocating that. Contra, “hoarding cash” for “management empire building” was considered poor stewardship and flat damned wrong. Big wheel keeps on turning…………..
The issue is that demand is definitely rising. It’s sharply above where it was in 2009 and in 2009 it was sharply above where it was in 1999 and in 1999 it was sharply above where it was in 1992.
PCE is increasing as a percentage of GDP but BI isn’t. Maybe my terminology is wrong but my interpretation of that is that managers are expecting increasing rates of return to investment.
“I have seen absolutely no decline in entrepreneurial inclination.”
With the people you know. Looking at the numbers, it looks otherwise. Sounds a bit like “How did he win? I don’t know anyone who voted for him.”
“With all that cash, the corporate side is relatively easy.”
I thought we noted the other day that 1/3 of all corporate case is held by 5 companies. 60%-70% of that cash is overseas. Didn’t look it up, but I would bet most of that debt is spread over more companies and not thrones holding the cash. I think debt could be a problem, just part of it.
Steve
Oops. Forgot to add that we hit record highs in profits, before and after taxes, in the Obama years.
Query- Companies faced much higher taxes in the past, and may’ve had fewer regulations, but they were more restrictive. Why were companies willing to invest back then but not now? Guess that is Dave’s question reworded.
Steve
Corporate taxes were lower during the period of higher investment (during the 80s). They have been the same since the early part of the Clinton Administration until the recent passage of tax reform. That’s slightly higher than they were during the 80s but not much.
Still, yes, that’s my point. Why were companies willing to invest 30 years ago but not now? It’s not low demand or the prospect of lower demand.
A few final thoughts, as I’m sure these topics will arise a number of times.
“…my interpretation of that is that managers are expecting increasing rates of return to investment.”
I just can’t get my head around that statement. Whether measured by any of the handy dandy metrics: IRR, payback period, return on capital employed, cash on cash etc, the trend has been downward, not upwards. Expectations have adjusted due to increased costs, growth prospects, greater risks and so forth. The investing world hasn’t ground to a halt, but it has been attenuated.
“With the people you know.”
Yes, that’s true. But it’s a wide swath. Remember, in addition to the parties I cited, we buy companies that are frustrated with the environment. Many heave the problem over to us. More importantly, you are ascribing the issue to lack of desire and not to adjustment to reality, reflected in the numbers.
“Companies faced much higher taxes in the past, and may’ve had fewer regulations, but they were more restrictive. Why were companies willing to invest back then but not now.”
Don’t take a static and mono-variable world view. You are free to believe that the management world has been afflicted with tiny balls syndrome if you like. As a variant of Bobby Jones’ comment on a young Jack Nicklaus, that is a world with which I’m not familiar.
I’ll try my hand at drawing a graph. The issue is very apparent when seen in graphical format. Here’s one depicting the issue up to 2011:
Note that:
1. PCE is rising.
2. BI is falling or flat (it’s been steady at 11% for most of the last 10 years).
3. The difference between PCE and BI is increasing. That’s what I mean.
I’m out of my area of expertise here, but the graph shows domestic BI – so my guess is the “missing” BI is overseas, a consequence of globalization and outsourcing.
I haven’t looked up the numbers specifically, but this article suggests that BI for 2016 was 16% of GDP.
Also, the article notes that 7% of GDP from the BI category is commercial and residential real estate construction.