How to Think About Corporate Growth Investment (Or Lack Thereof)
Ummm ... I usually don't react poorly to anyone who wants to find fault in what I write (“When Narratives Go Bad”). It's a big world with lots of room for alternate opinions, and god knows I've made my share of mistakes, both analytical and rhetorical, in my day. So - and I mean this sincerely - I'm a live and let live guy when it comes to market views and conclusions, even when they're different from or critical of mine. But don't tell me that I've been sloppy with the data or that you care more about the data than I do. Recently, Travis Cocke at Voss Capital wrote a piece on Harvest saying just that (" When Narratives about Bad Narratives are False - A quick response to Ben Hunt and Salient from Voss "), so in the spirit of zero tolerance for people who accuse you of a Clinton-esque extreme carelessness with the facts, here’s my response.
Travis’s central point is that if I had bothered to look at the data around corporate investment patterns, like he did, I couldn’t possibly come to the conclusion that corporations have favored stock buybacks and cash hoarding over growth investments. Travis looks at total capex versus sales to make his point. The problem with looking at total capex is that there’s just too much non-growth related spending that goes into total capex, maintenance capex being the most prominent problem but not the only one. Here's a chart of how I think most actual, real life economists prefer to look at growth investment – Durable Goods New Orders ex-Defense – measured against the same denominator that Travis uses – total business sales. Not sure why we’re measuring against sales, but okay, I’m game.
Corporate spending on growth hasn’t just been anemic, it’s been pathetic. I mean … this despite the most accommodative monetary policy in the history of mankind since March 2009.
And here’s why corporations continue to NOT invest for growth – persistent overcapacity and so no ROI from spending on new plant and equipment. That identical cascading downward pattern from 1992 onwards in the two charts is not an accident.
More generally, it’s not like I’m making up the secular stagnation argument out of whole cloth. The Fed has been talking about disappointing corporate spending on new plant and equipment forever. Or read anything that Larry Summers has published over the past three years.
Anyway, apologies to Harvest readers for the snarky tone here, but the next time someone wants to insinuate that I have a casual relationship with the truth, please reach out to me first (or really, anyone who has looked at these issues for more than 15 seconds) in order to make sure that you're not embarrassing yourself. Too late this time, I'm afraid.