4 ms·

"The industry is acting like a low-competition industry, scaling back investment and plowing its profits into dividends and share buybacks and merger efforts."

by meric 12y ago

"The industry is acting like a low-competition industry, scaling back investment and plowing its profits into dividends and share buybacks and merger efforts." Most US industries are in a similar state (plowing profits into dividends and share buybacks and mergers). What's happening is companies are seeing there will be more benefit to their share holders to borrow money against their existing capital and paying that out as dividends than to risk that borrowed capital to make new investments. This is happening because the Federal Reserve has pushed the interest rate to near zero, at the same time people are over leveraged (since money has been so cheap for so long) and don't have the money to increase their spending in the future, which reduces the chance new investments will pay off. EDIT: This website tends to be very pessimistic, but I found the following article informative and would illustrate my point well: http://www.zerohedge.com/news/2014-05-12/writing-wall-and-we-should-all-read-it http://www.zerohedge.com/news/2014-05-12/writing-wall-and-we...

mikeyouse 12y ago
This is one of those ideas that sounds reasonable, but falls apart as soon as it's critically examined. Zerohedge has predicted about 17 of the last 2 recessions. * Household debt payments as % of disposable income are at 35-year lows: http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=z9a http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=z... * Business investment has resumed in full, nearly reaching the previous trendline: http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=Awr http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=A... * Commercial lending has resumed in full: http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=Awt http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=A... * Fixed investment is back at ~2004 levels: http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=AwB http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=A... * Net dividends are still lagging their pre-recession pace: http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=Awz http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=A... * Inflation is extremely low: http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=Awu http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=A... * Corporate debt is as safe as it's been since the 1970's: http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=Aww http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=A...
- meric 12y ago
  The article posted by the OP is backwards looking over the past 5 years, the 5 years after the financial crisis when things were pessimistic. You're posting current data. I did mention the Zerohedge article was very pessimistic. But I found it explains well in what circumstances companies choose to pay dividends, acquire using stock and to perform stock buybacks, instead of making new investments. You've linked to a reference to dividends. What about stock buybacks? Debt-service repayments are low due to low interest rates. If you've gotten a $1.5m loan at low variable rate of 1%, it would still be difficult to convince you to borrow another $1.5m, since there is uncertainty of future interest rates. You're not going to borrow more just because it's cheap, unless of course you're not on the hook in the case when interest rates go up. (i.e. using a limited-liability vehicle, i.e. a corporation.) A high value of loans being made does not a healthy economy make. There was a very high amount of loans being made just before the financial crisis, too. You've cherry-picked data that shows the economy seems to be in good shape. I can do the same too. Median household income in continuous decline since 2007: http://research.stlouisfed.org/fred2/graph/?id=MEHOINUSA672N http://research.stlouisfed.org/fred2/graph/?id=MEHOINUSA672N Less money = less spending. Civilian-Employment ratio stagnating at 1983 levels: http://research.stlouisfed.org/fred2/graph/?id=EMRATIO http://research.stlouisfed.org/fred2/graph/?id=EMRATIO Stagnating employment = stagnating future income. Inflation over 14 years at 2.5% is 40%: http://research.stlouisfed.org/fred2/graph/?id=CPIFABSL http://research.stlouisfed.org/fred2/graph/?id=CPIFABSL Reduced savings and income due to inflation reduce leverage available, leading less to spend. Investment looks like it's approaching a possible peak: http://research.stlouisfed.org/fred2/graph/?id=GPDIC96 http://research.stlouisfed.org/fred2/graph/?id=GPDIC96 Let's hope it can continue to increase - it's still far from the previous high in 2006. If the inflationary policies of the Federal Reserve aren't doing any harm to the economy why not just keep up the bond buying program? Why taper? They have to, that's why.
  - mikeyouse 12y ago
    > If the inflationary policies of the Federal Reserve aren't doing any harm to the economy why not just keep up the bond buying program? Why taper? They have to, that's why. Wasn't your first contention that interest rates were too low? Now the Fed is responsible for the lack of inflation because.. why again? Honestly, I was getting geared up to type a full rebuttal, but if you consider 2.5% p.a. inflation an issue, I'm just going to save my time.
kokey 12y ago
> "The industry is acting like a low-competition industry, scaling back investment and plowing its profits into dividends and share buybacks and merger efforts." Apple must be operating in a low competition industry then ;-) I am reading a lot of this noise, like the article, as, uhm, a naive perspective of business and economics through a political lens. It's like blaming retailers for inflation.
- twic 12y ago
  Apple is operating in a low competition industry. It has a monopoly on the sale of Apple products.
  - rrss1122 12y ago
    Those Apple products still have to compete with other companies' products.
hristov 12y ago
First of all zero hedge is entirely the wrong place to get any information on the economy. He really does not have any idea how the economy works. For the last couple of years he has been predicting that the economy would crash and gold would skyrocket and exactly the opposite has been happening. It is true that companies usually have a choice between investing and paying money back to the shareholders. It may be true that nowadays companies have mostly chosen to pay money back (i have not seen statistics, but it certainly feels that way sometimes). But the federal reserve is not to blame for this. Federal reserve policy makes money cheap but it does not force companies to pay money back to shareholders instead of investing. It does not weigh much on that choice. In fact if anything loose federal reserve policy should be steering companies towards investment as cheap credit should help consumption. However, this effect may have been negated by much tougher credit terms for consumer loans. But this lack of investing cannot be blamed on the federal reserve.
- brotoss 12y ago
  It's good for a contrarian analysis on world politics/economics if you take everything with a grain of salt
  - canvia 12y ago
    Every news source has a bias. It is the job of the consumer to understand what that bias is. An informed consumer observes the perspectives of many news sources with an understanding of their bias and forms an opinion of the truth based on that data.
cookiecaper 12y ago
I once heard a professional investor say that if you're buying stock that doesn't pay dividends, you're not investing, you're speculating.
- couchand 12y ago
  Then again, as long as we're appealing to authority, Warren Buffet isn't a fan of dividends.
- AnthonyMouse 12y ago
  > I once heard a professional investor say that if you're buying stock that doesn't pay dividends, you're not investing, you're speculating. You're speculating either way. Nobody will guarantee you a dividend.
pjc50 12y ago
For heterodox economics without the signature Zerohedge apocalypse hype, try the ftalphaville blog: http://ftalphaville.ft.com/ http://ftalphaville.ft.com/

by meric 12y ago

mikeyouse 12y ago

This is one of those ideas that sounds reasonable, but falls apart as soon as it's critically examined. Zerohedge has predicted about 17 of the last 2 recessions. * Household debt payments as % of disposable income are at 35-year lows: http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=z9a http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=z... * Business investment has resumed in full, nearly reaching the previous trendline: http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=Awr http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=A... * Commercial lending has resumed in full: http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=Awt http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=A... * Fixed investment is back at ~2004 levels: http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=AwB http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=A... * Net dividends are still lagging their pre-recession pace: http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=Awz http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=A... * Inflation is extremely low: http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=Awu http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=A... * Corporate debt is as safe as it's been since the 1970's: http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=Aww http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=A...

meric 12y ago
The article posted by the OP is backwards looking over the past 5 years, the 5 years after the financial crisis when things were pessimistic. You're posting current data. I did mention the Zerohedge article was very pessimistic. But I found it explains well in what circumstances companies choose to pay dividends, acquire using stock and to perform stock buybacks, instead of making new investments. You've linked to a reference to dividends. What about stock buybacks? Debt-service repayments are low due to low interest rates. If you've gotten a $1.5m loan at low variable rate of 1%, it would still be difficult to convince you to borrow another $1.5m, since there is uncertainty of future interest rates. You're not going to borrow more just because it's cheap, unless of course you're not on the hook in the case when interest rates go up. (i.e. using a limited-liability vehicle, i.e. a corporation.) A high value of loans being made does not a healthy economy make. There was a very high amount of loans being made just before the financial crisis, too. You've cherry-picked data that shows the economy seems to be in good shape. I can do the same too. Median household income in continuous decline since 2007: http://research.stlouisfed.org/fred2/graph/?id=MEHOINUSA672N http://research.stlouisfed.org/fred2/graph/?id=MEHOINUSA672N Less money = less spending. Civilian-Employment ratio stagnating at 1983 levels: http://research.stlouisfed.org/fred2/graph/?id=EMRATIO http://research.stlouisfed.org/fred2/graph/?id=EMRATIO Stagnating employment = stagnating future income. Inflation over 14 years at 2.5% is 40%: http://research.stlouisfed.org/fred2/graph/?id=CPIFABSL http://research.stlouisfed.org/fred2/graph/?id=CPIFABSL Reduced savings and income due to inflation reduce leverage available, leading less to spend. Investment looks like it's approaching a possible peak: http://research.stlouisfed.org/fred2/graph/?id=GPDIC96 http://research.stlouisfed.org/fred2/graph/?id=GPDIC96 Let's hope it can continue to increase - it's still far from the previous high in 2006. If the inflationary policies of the Federal Reserve aren't doing any harm to the economy why not just keep up the bond buying program? Why taper? They have to, that's why.
- mikeyouse 12y ago
  > If the inflationary policies of the Federal Reserve aren't doing any harm to the economy why not just keep up the bond buying program? Why taper? They have to, that's why. Wasn't your first contention that interest rates were too low? Now the Fed is responsible for the lack of inflation because.. why again? Honestly, I was getting geared up to type a full rebuttal, but if you consider 2.5% p.a. inflation an issue, I'm just going to save my time.

kokey 12y ago

> "The industry is acting like a low-competition industry, scaling back investment and plowing its profits into dividends and share buybacks and merger efforts." Apple must be operating in a low competition industry then ;-) I am reading a lot of this noise, like the article, as, uhm, a naive perspective of business and economics through a political lens. It's like blaming retailers for inflation.

twic 12y ago
Apple is operating in a low competition industry. It has a monopoly on the sale of Apple products.
- rrss1122 12y ago
  Those Apple products still have to compete with other companies' products.

hristov 12y ago

First of all zero hedge is entirely the wrong place to get any information on the economy. He really does not have any idea how the economy works. For the last couple of years he has been predicting that the economy would crash and gold would skyrocket and exactly the opposite has been happening. It is true that companies usually have a choice between investing and paying money back to the shareholders. It may be true that nowadays companies have mostly chosen to pay money back (i have not seen statistics, but it certainly feels that way sometimes). But the federal reserve is not to blame for this. Federal reserve policy makes money cheap but it does not force companies to pay money back to shareholders instead of investing. It does not weigh much on that choice. In fact if anything loose federal reserve policy should be steering companies towards investment as cheap credit should help consumption. However, this effect may have been negated by much tougher credit terms for consumer loans. But this lack of investing cannot be blamed on the federal reserve.

brotoss 12y ago
It's good for a contrarian analysis on world politics/economics if you take everything with a grain of salt
- canvia 12y ago
  Every news source has a bias. It is the job of the consumer to understand what that bias is. An informed consumer observes the perspectives of many news sources with an understanding of their bias and forms an opinion of the truth based on that data.

cookiecaper 12y ago

I once heard a professional investor say that if you're buying stock that doesn't pay dividends, you're not investing, you're speculating.

couchand 12y ago
Then again, as long as we're appealing to authority, Warren Buffet isn't a fan of dividends.
AnthonyMouse 12y ago
> I once heard a professional investor say that if you're buying stock that doesn't pay dividends, you're not investing, you're speculating. You're speculating either way. Nobody will guarantee you a dividend.

pjc50 12y ago

For heterodox economics without the signature Zerohedge apocalypse hype, try the ftalphaville blog: http://ftalphaville.ft.com/ http://ftalphaville.ft.com/