Paul Donovan, economist at UBS, is perplexed by cyclically abnormal levels of capital spending relative to borrowing costs in key western economies.
All the more so given that the sluggish capital spending story is also being accompanied by a significant increase in the number of businesses.
Since these two facts don’t logically tally up, what exactly is going on?
One point to consider, Donovan notes on Tuesday, is that capital spending by and large is associated with replacement investment. For new businesses this usually takes the form of start-up capital spending instead. Read more
Conventional wisdom says that businesses adjust their investment spending according to changes to the cost of capital. Intuitively, that makes sense: more projects become worthwhile as funding costs go down, while few make the cut when capital is expensive. (In reality, it turns out that interest rates, spreads, and volatility are all irrelevant for capex decisions, but let’s put that aside for now.)
If central bankers want to boost investment to encourage economic activity, conventional theory suggests they should lower interest rates. However, there is a limit to this process because you can’t lower rates below zero without imposing tyrannical controls. Hence the appeal of boosting inflation, which effectively reduces the real cost of capital (assuming risk premia don’t rise) by stealth even when interest rates have hit the floor. Read more
We’ll see your bullish forecast, and we’ll raise you, Brian.
That’s Brian Belski, the BMO strategist who thinks that 10 per cent annual returns for the next decade are plausible for the US stock market. Read more
Here is the Tesco share price, which you might notice is getting into lost decade territory.
Here meanwhile are Wednesday’s results: Read more
It may be something in the wind, but is it becoming acceptable for companies to spend again?
Exhibit A: Morgan Stanley politely suggests that, even though companies which actually increase investment in their business with capital expenditure have tended to trail the scrimpers, it might be time to look at the capital intensive types again. Read more
The economic recovery is still weird. Lets get away from the jobs question for a second, and look at capex, where companies are still not spending the cash they make, let alone their cash piles.
Consider this chart from Nikolaos Panigirtzoglou of JP Morgan that caught our eye this week: Read more
An interesting debate is popping up regarding the topic of capital expenditure.
Take the latest from Societe Generale’s Andrew Lapthorne and team. They argued on Thursday that the commonly held belief that companies’ capital investing ratios have been falling, whilst hoarded cash pools have been going up, is inaccurate. Read more
Global spending on mining, energy resources and commodities will surpass pre-crisis levels next year, according to an emerging industry consensus, indicating rising confidence in an economic recovery led by China and other fast-growing markets, reports the FT. The boom in capital expenditures, across oil, natural gas and agribusinesses, comes as prices jump for commodities such as copper, iron ore, crude oil and wheat. It also raises the prospect of short-term bottlenecks in the already stretched supply of equipment and services, and project delays as costs rise. Global mining expenditure is set to hit a record $115bn-$120bn next year, above the peak of $110bn set in 2008, according to a survey of industry executives and consultants.