Banks Hate Share Buybacks
From Goldman to Bank of America Merrill Lynch, we keep hearing voices complaining about corporate share buybacks. They worry that there hasn’t been enough capital expenditures, or CAPEX.
To that end, in a recent note to clients, BofAML’s Global Research Team found that the most recent cycle has seen appalling levels of business investment.
This is a very common and mistaken view.
Simply put, to misunderstand this point is to absolutely misunderstand everything about the 21st Century economy, along with the biggest trends to date and for the foreseeable future.
The last decade has been dominated by the New Silk Road. China was able to re-enter the global economy thanks to the Internet’s vital communication links through which Western capital could harness Chinese labor.
[Read: Has Asia Entered Into a Currency War]
The Internet created real-time communications and removed the obstacles of geography. Better and faster visibility to supply and demand was a godsend. Businesses no longer had to tie up as much money in capital goods. China became the supplier to meet that just-in-time demand. The results speak for themselves: inventory-to-sales is down almost 20% since the Internet began. Of the .2T in business sales, that’s 0B that isn’t locked into capital goods and can be freed up to be more productive elsewhere.
(For more on this, please see Moneyball’s white paper deep dive.)
Increased Economic Stability
From the Fed to mainstream institutions, conventional economists flat-out don’t understand the depth of change wrought by the Internet.
While Fed governors scratch their heads and wonder why the GDP is so shallow, they also fail to appreciate the other half of the equation: that business cycles are also running longer. That’s not coincidence; better managed inventory and capital goods investment means less volatility, which means longer but shallower business cycles. We like price predictability. Supposedly the Fed does as well.
[Hear: Robert Johnson on His New Book – Invest With The Fed]
Unfortunately, it also removes the Fed’s #1 lever in the supply chain: stimulate spending and investment by creating inflation. In the pre-Internet economic models favored by mainstream economists, inflation acts as an economic driver because goods get more expensive in the near-future, so businesses are incented to buy today. In the past it led to stockpiling and near-term growth.
But in the 21st Century economy, with the global supply chain and strong inventory management controls, businesses are less susceptible to being hoodwinked into stockpiling. Without stockpiling, the economy grows shallower but it also grows for a longer duration because future demand isn’t being pulled in to dodge inflation.
More Basic But Ignored: CAPEX Disregards the Shift to OPEX-Based Cloud Spending
50% of CAPEX is in IT spending, both hardware and software.
The single biggest development over the past decade has been the cloud.
- Less aggregate IT spending as it gets consolidated: One of the dirty secrets from my days at Cisco is that customers always bought more than they needed. The same goes for Intel, Oracle and all other IT vendors. Then customers began to migrate from owning to renting IT via the cloud. That temporarily boosted Cisco’s sales because the cloud required massive infrastructure investment. Now, on the downslope of that build-out, IT spending is drooping.
- OPEX not CAPEX: Businesses are renting IT via the cloud and in other ways. That’s OPEX dollars and, by definition, it gets 100% ignored in the calculations of business investment in CAPEX.
This is a very welcome development. It’s efficient and leads to better margins and cash flow. It leads to greater flexibility. It’s another pocket of profitability. Mainstream institutions are completely missing it. Worse, they are complaining about it.
It’s really simple: mainstream economists like Bank of America Merrill Lynch don’t understand the data they are using to build their world views.
