In a post by Claire Boston and Carol Ko at BloombergView, ostensibly on how over-extended American businesses are, the graph above caught my eye. Look at the right hand side, the most recent years. It illustrates a point I’ve been making for some time: businesses aren’t investing.
That can’t be explained by slack demand or IMO anything else other than a basic change in how corporate managers are behaving. My interpretation is that they’ve given up on growing their businesses in favor of goosing the price of their companies’ stock. Let’s be realistic: that’s the way the incentives point. With so much of managers’ compensation based on stock performance, they’re doing exactly what you’d expect them to do.
And getting rid of employees is an easy, brainless way to give a quick, temporary jolt to your stock price. Then IBGYBG.
If we aren’t getting the growth we need from business investment, that leaves only four other components on which we might rely. As I posted a few days ago, consumers are over-extended, too, so don’t expect much from consumers. Any attempt at increasing exports is bound to be met with resistance and reaction from our trading partners so that’s no solution, either. Note well that we’ve fallen far short of President Obama’s pledges on exports. As I pointed out at the time, his promises were mathematically impossible and, consequently, couldn’t be taken too seriously.
That leaves government spending or imports. If you wonder why I keep saying that we need to produce more of what we consume, look no farther.
As to the meat of the post, if half of what the authors claim is true, the next recession—and there will be a next recession, eventually—is going to be a doozy unless something changes.
Update
Just to flesh out the potential implications a bit according to Moody’s they expect the default rate on corporate bonds to increase at least 20% by the end of this year and possibly by more than 300%.
Nowadays some of the biggest holders of corporate bonds are other corporations. A 300% increase in the default rate could trash balance sheets to the extent that it produces a cascade. That’s a worst case scenario.
Other large holders of corporate bonds are banks and insurance companies which have barely recovered from their near-death experience of nearly a decade ago.
“My interpretation is that they’ve given up on growing their businesses in favor of goosing the price of their companies’ stock. Let’s be realistic: that’s the way the incentives point”
Tax incentives to outsource work to other countries also plays a role, I’d guess.
It’s happening in private companies as well, as I’ve pointed out for quite some time. That takes the stock market meme off the table.
Then it sounds like a more general reduced appetite for risk, something that could explain the reduced number of start-ups. It may be that there are unrealistic expectations of what profits can be realized with what level of investment. Or maybe they’re just holding on waiting to see what comes next.
“Unrealistic” is in the eye of…….well, the hand holding the checkbook……
I’ve said for years that for many businesses, especially privately held, waiting is just fine. Sticking it to the man has predictable results. Regulating the man has predictable results. Creating a hostile environment for the man has predictable results. Barack Obama, and now Hillary Clinton and Bernie Sanders, have and are all proposing nothing but more headwinds at a time when – if your goal is job and wage growth – we need tailwinds. It’s in the name of fighting for the little guy. It’s really about vote getting appeal to aggrieved parties. And then what they really do is exchange donations from The Big Guy for favors. Big Guyscwhomdont create many jobs.
When investing and operating risk taking becomes unpalatable, return of capital makes sense, whether through internal cash flow or increased financial risk.