Corporate profits, corporate cash piles and corporate share prices are record high. Yet corporate investment is at historic lows across US, Europe and Japan.
Contrast below the rise in US corporate profits to GDP with the decline in US wages to GDP and the proportion of the population working:
Companies have cut costs to boost profitability, whilst (and because) revenues have remained persistently weak (which fits with demographic trends). As a key part of the cost-cutting has been jobs and wages, this naturally creates a feedback loop back through weaker consumer spending to corporate revenues. Ultra low interest rates have also helped boost company profits.
Recall from my post Tower Of Sand (HERE) that corporates have been borrowing a lot of cash and engaging heavily in share buybacks, buying shares from the open market and destroying them. The result is an increase in share price, and earnings-per-share (as there are less shares in circulation). No increase in revenue or profits but a payout to the stock investor. Shares rise, investors are rewarded and thus inclined to buy more, and that has played a key part in 2 years of over 80% multiple expansion versus less than 20% earnings growth. Buybacks escalated into the end of 2013, to a level last seen in 2007. Note that buybacks peaked just after the stock market in 2007.
The ratio of corporate investment to investor-payout is now historically low. Companies in Europe, Japan and the US have remained fearful of investment in plant, equipment and technology due to economic uncertainty, particularly new tech and R&D which requires high funding without any certain return. Hence they prefer to sit on cash piles, and keep investors happy with buybacks. In the short term, this shores up their position, but it is at the expense of their future, and, aggregated across all companies, the economy’s future. Without investment, future growth and future jobs are severely compromised.
Investment was high and investor-payout low in the 1970s. A boom followed 1980-2000. Investment has been low and payouts high in the 2000s, so the future is bleak.