Each and every day, a veritable smorgasbord of CEOs are trotted out before our very eyes to spew forth their company’s vision and how it’s all looking so rosy. Of course we hang on every word as gospel and react accordingly. Similarly, a rise in consumer sentiment is more ammunition for bulls to argue that animal spirits are here and we can go back to the old re-leveraging ways of spending-more-than-we-have (or ever will have). There’s only one problem – when push comes to shove and real capital has to be put to work, its not happening! Expectations for capital expenditure(investment in growth and maintenance) has plunged in the last few months, while at the same time, consumer sentiment has surged (no doubt led by an ebullient equity market and inherent recency bias). As we wrote previously, in an environment of soaring liquidity and free money, thehurdle rate on new investments collapses, as does the requirement to invest in CapEx, both growth and maintenance. In fact, as we have shown over the past year, the age of the global asset base has hit a record high across the world, both in the developed and developing countries, leading to record low return on assets on record low assets (and record debt encumbrance, but that’s a different story). And since companies are forced to dividend cash to shareholders at a record pace (in lieu of fixed income in a ZIRP environment), there is less and less cash left to support CapEx spending (or hiring!).
UMich Consumer Sentiment vs Philly Fed Capex Outlook
So what do CEOs see in the future that consumers do not? Everything
The consumer remains on a path of ‘it must mean-revert’ – unable to comprehend the new normal that CEOs are dealing with – and sooner rather than later, the personal cashflow will slow/cease (or become ever more encumbered to the state).