Why Cheap Money Hasn’t Led To A Corporate Spending Boom (#GotBitcoin?)
Weak economic growth made new factories unappealing, while disruptive technologies didn’t involve much investment. Why Cheap Money Hasn’t Led To A Corporate Spending Boom (#GotBitcoin?)
One of the great financial puzzles of the past decade has been why companies didn’t load up with the cheapest money in history to invest more.
There are lots of theories, most of them wrong: low investment was because cash was used for share buybacks instead; because shareholders are short-termist; because of monopolistic behavior; because CEOs are greedy.
There is a twin alternative: weak economic growth made new factories unappealing, while the disruptive technologies where investors wanted to spend money didn’t involve much investment.
To see how hard it is for cheap money to leak into the real economy via companies, look at the winners and losers in the stock market. Shareholders rightly worried about the economy as it bumped along at the slowest average growth in more than half a century, while getting excited about new disruptive technologies. Companies reliant on developed-world economic growth to expand offered a poor prospect and so were starved of capital, while cash poured in to new tech—much of which was spent on things that don’t count as investment, such as programmers, brand-building and customer subsidies.
The winners in stock markets were the lowest-risk companies, those with solid operations able to trundle along no matter what, and the fastest-growing companies, the likes of the FANGs, Facebook, Amazon, Netflix and Google, now Alphabet. Both groups have easy access to capital, but shareholders only encourage the second group to spend it—and new technologies mostly don’t need much capital.
Investors typically buy the shares of safe “quality” companies because they want to minimize risk. Shareholders don’t choose visionaries to run Nestlé, PepsiCo or Procter & Gamble, and excitement is strictly incremental. Part of the appeal of quality stocks is that they aren’t likely to splurge shareholder cash on the CEO’s vanity projects, fitting the academic finding that companies with lower capital spending have tended to outperform over the long run.
Shareholders (and CEOs) who don’t see great expansion opportunities have still taken advantage of cheap debt, but in a purely financial way. This follows the private-equity model of levering up and buying back stock or paying special dividends. Investors can then recycle that money into other stocks (or spend it).
This can go too far, as Warren Buffett discovered with Kraft Heinz, which loaded up on debt and spent too little maintaining its brands. But in general safe, boring companies don’t have wonderful opportunities to expand that would justify borrowing a lot, while the plodding economy has meant fewer opportunities than usual for cyclical companies.
Growth stocks are the precise opposite. Give a founder-CEO money, and the chances are they have got a moonshot idea ready to spend it on. That is the point of growth companies. Unfortunately, risky fast-growing companies are best financed with equity, not debt—although the extraordinary conditions of the past decade have led some growth companies, such as Netflix, to pile on debt.
The big growth-stock winners of the decade have been the FANGs and similar disruptive tech companies. But it is important to remember that shareholders have been willing to back other growth stories when they appeared to be working—and much of this did leak quickly into the real economy, albeit a lot of it outside the U.S.
The biggest mistake in terms of dollars wasted was that investors encouraged miners to use cheap money to dig ever-bigger holes in the ground when they were carried away about Chinese growth. When China slowed, the CEOs were booted out and mining investment (and stock prices) collapsed.
Cheap money also poured into debt-financed shale oil wells in the U.S., only for much to be lost in a wave of bankruptcies when the oil price plunged.
And investors have created a series of mini-booms and busts when a new narrative suggested growth potential in buzzy stocks: alternative energy, 3-D printing, London luxury flats, rare-earth metals and, perhaps most extreme, anything bitcoin-related. Why Cheap Money Hasn’t,Why Cheap Money Hasn’t,Why Cheap Money Hasn’t,Why Cheap Money Hasn’t,Why Cheap Money Hasn’t