A wave of pessimism has swept over the economy, IF you think November Data is bad wait until January!
US Capital Spending Plummets To Recession Levels
Back in April, we did an extensive analysis of what, in our opinion, is the primary reason for the slow burn experienced by the US, and global economy, and why virtually every liquidity pathway used by central banks is hopeless clogged: the complete lack of capital expenditures at the corporate level, and lack of (re)investment spending. Specifically we said that in both the context of Japan’s plunging corporate profitability over the past 30 years despite year after year of record budget deficits, and its implications everywhere else, that “we get back to what we have dubbed the primary cause of all of modern capitalism’s problems: a dilapidated, aging, increasingly less cash flow generating asset base! Because absent massive Capital Expenditure reinvestment, the existing asset base has been amortized to the point of no return, and beyond. The problem is that as David Rosenberg pointed out earlier, companies are now forced to spend the bulk of their cash on dividend payouts, courtesy of ZIRP which has collapsed interest income. Which means far less cash left for SG&A, i.e., hiring workers, as temp workers is the best that the current “recovering” economy apparently can do. It also means far, far less cash for CapEx spending. Which ultimately means a plunging profit margin due to decrepit assets no longer performing at their peak levels, and in many cases far worse.” Today, with the usual six month or so delay, this fundamental topic has finally made the mainstream media with a WSJ piece titled “Investment Falls Off a Cliff: U.S. Companies Cut Spending Plans Amid Fiscal and Economic Uncertainty.”
In the meantime, here is the pretty WSJ chart proving the collapse in CapEx:
WSJ: US Companies Generating ‘Investment Cliff’
Companies in the United States are reining in investment plans at the fastest rate since the recession, posing another hurdle to the lukewarm recovery.
Half of the country’s 40 largest publicly traded corporate investors have announced plans to trim capital spending this year or next, according to a Wall Street Journal analysis of conference calls and securities filings.
Investment in equipment and software, a key metric of corporate health, stalled in the third quarter for the first time since early 2009, The Journal said, and corporate investment in new buildings has fallen.
Q3 Earnings In One Chart
A shockingly low 30% of S&P 500 firms beat revenue expectations in the prior quarter and while Bloomberg’s data suggests around 65% beat earnings expectations, the in-period adjustment of expectations (analysts ratcheting down earnings as the season progresses) naturally biases this to look rosier. The critical question is – how much more fat is there to cut? With Sales (and outlooks) so weak, how many more jobs need to be cut to meet margin expectations? 2013 top- and bottom-line (+13.6% EPS growth) expectations remain magnificent in their optimism – do you believe in miracles?
Chart: Bloomberg Chart of the Day
SCHORK: Don’t Blame Hurricane Sandy, The Economic Downturn In October Is Real
Factories can’t run without fossil fuel feed stocks.
Which is why oil market guru Stephen Schork leads off his Monday note discussing explaining his jaundiced view that Superstorm Sandy alone caused October manufacturing data to fall off.
… the U.S. factory complex has now failed to grow or has contracted in five of the last eight months.
Yet, in spite of the dismal track record of the previous seven months, somehow, as the Fed claims below, the contraction in economic growth for October was all the fault of Hurricane Sandy.
Industrial production declined 0.4 percent in October after having increased 0.2 percent in September. Hurricane Sandy, which held down production in the Northeast region at the end of October, is estimated to have reduced the rate…
The Fed’s Nuclear Balance Sheet. Stand Back: This Baby’s Going to Explode
This so-called ‘cliff’ is really just the first in a series of steps. The US budget is arguably the most distorted in the Western world. Greece and Japan may have higher debts, Italy and Portugal may have worse growth prospects – but for sheer budgetary insanity, the US is probably the world leader, combining huge current deficits with vast unfunded promises to retirees, and welfare entitlement program recipients. You don’t need to take my word for this. TheIMF states, ‘under our baseline scenario, a full elimination of the fiscal and generational imbalances would require all taxes to go up and all transfers to be cut immediately and permanently by 35 percent. A delay in the adjustment makes it more costly.’
The political ructions of the next few weeks will simply constitute the first scenes in a drama that will run for the next ten or fifteen years. And what’s more, this is a play where we already know the ending. Taxes will have to go up. Spending will have to come down. No other outcome is available: just ask the Greeks.
And meantime, there is a monetary time-bomb charged and ticking. A bomb which is being constantly primed with further explosive, further destructive force. Remember that the economic catastrophe of 2008 was created by loose monetary policy, the indisciplined expansion of credit and a market where increasingly shoddy securities were sold as investment grade assets. You might think that a logical reaction would be the steady tightening of policy and encouraging a climate of credit discipline.
Too Much Risk In The System: Shadow Banking System Larger than at the Start of the Financial Crisis
‘Shadow Banking’ Still Thrives, System Hits $67 Trillion
One of the Main Indicators of Financial Danger Has Increased
The failure to regulate the shadow banking system was one of the causes of the financial crisis.
As we noted in 2009, the Bank for International Settlements – often described as a central bank for central banks (BIS) – slammed the Federal Reserve for failing to rein in the shadow banking system:
How could such a huge shadow banking system emerge without provoking clear statements of official concern?
Years later, the Fed and other regulators have allowed the shadow banking system to grow even bigger.
As Reuters notes today:
The system of so-called “shadow banking,” blamed by some for aggravating the global financial crisis, grew to a new high of $67 trillion globally last year, a top regulatory group said, calling for tighter control of the sector.
A report by the Financial Stability Board (FSB) on Sunday appeared to confirm fears among policymakers that shadow banking is set to thrive, beyond the reach of a regulatory net tightening around traditional banks and banking activities.
The study by the FSB said shadow banking around the world more than doubled to $62 trillion in the five years to 2007 before the crisis struck.
But the size of the total system had grown to $67 trillion in 2011 — more than the total economic output of all the countries in the study.
The United States had the largest shadow banking system, said the FSB, with assets of $23 trillion in 2011, followed by the euro area — with $22 trillion — and the United Kingdom — at $9 trillion.
The U.S. share of the global shadow banking system has declined in recent years, the FSB said, while the shares of the United Kingdom and the euro area have increased.
We Are Reaching A Peak Debt Situation
Quantitative addiction and the allure of low interest rates – US paid $454 billion in interest payments alone in 2011. Equity in real estate for households cut in half.
Today I was looking at the total public debt outstanding and the current figure seems surreal. The total public debt outstanding is now up to $16.27 trillion. We’ve been on this path for many decades of spending more than we earn but the problem is we are reaching a peak debt situation. It is hard to say how much debt is too much debt for a country but a generally agreed upon figure is when the debt goes above 100 percent of annual GDP then issues begin to arise. The US fortunately is able to get incredibly low interest rates on world markets by a variety of methods including having the Fed use quantitative easing techniques. Given the size of our debt, low interest rates are sold as an aid to US households but the reality is that a more important reason is to keep payments on interest lower. What are the consequences of too much debt?
According to CNSNews.com, the Obama administration has posted a total of 6,125 regulations on its reguations.gov website during the past 90 days. Our politicians are clueless and they simply don’t understand what they are doing to the business community.
from CNS News:
It’s Friday morning, and so far today, the Obama administration has posted 165 new regulations and notifications on its reguations.gov website.
In the past 90 days, it has posted 6,125 regulations and notices – an average of 68 a day.
The website allows visitors to find and comment on proposed regulations and related documents published by the U.S. federal government. “Help improve Federal regulations by submitting your comments,” the website says.
The thousands of entries run the gamut from meeting notifications to fee schedules to actual rules and proposed rule changes.
Here Come The ‘Stock Market Vigilantes’
Says BofA’s Ethan Harris:
Historically the bond market has been a disciplining force for policymakers. When the Fed was too soft on inflation or the fiscal deficit was out of control, interest rates spiked higher. In our view, this has changed and today the stock market is the disciplining force for Washington. Stocks have generally endorsed Fed policy. We estimate that stock prices rose a cumulative 15% in the past three years in response to Fed announcements or actions. While some investors have misgivings about what the Fed is doing, the overall market likes it. By contrast, the stock market is giving a clear no-confidence vote to fiscal policymakers. This was particularly clear when the TARP bailout plan failed to pass and at the end of the debt ceiling debate.
Today, the stock market “vigilantes” are gathering again. In early September we argued that “there is a high risk of a risk-off trade in the markets after [the Fed meeting on] September 13.” We argued that market focus would shift from Fed and ECB easing to fiscal policy risks. In the event the Fed meeting did mark a turning point in the markets, and with the election over and the fiscal cliff taking center stage, the downward pressure has accelerated. This weakness has occurred despite better news on the economy and an unremarkable earnings season.