The Fed Is Crushing Corporate Investment

U.S. and global companies may be sitting atop piles of cash as the stock market hovers near all-time highs, but total capital expenditures likely will fall over the next two years.

Reductions in capital expenditure in heavy spending commodity sectors, such as energy and mining, will drive down inflation-adjusted spending by 2 percent in 2013 and 5 percent in 2014, according to Standard and Poor's.

Capital expenditures, the money used by businesses to purchase or upgrade physical assets, are one of four ways that companies typically spend profits.

Despite stocks soaring over the last few months, mixed feelings over the global economic recovery, falling commodity prices, and profit margin pressures are holding back company spending on much-needed project development for future growth, according to the ratings agency.

It would be bad news for the economy that is finally showing signs of life should this trend continue.

Recent months have reflected increasing capital goods orders, rising automobile sales, and upticks in other forms of consumption growth. Business investment excluding aircraft and defense was up 1.1% in June, its third monthly gain in a row. However, orders for core capital equipment fell 0.9%.

While the media continues to peddle half-truths about the primary drivers of such delays in capital spending (Congressional spats over fiscal cliffs, budget resolutions, and Obamacare), everyone has failed to understand just where the source of Capex uncertainty lies.

It's time to place the fault where it rests: On Ben Bernanke's lap.

It's the Fed's Socialism, Stupid

It's time for the Federal Reserve to make its grand exit from the markets.

Since 2009, the rugged expansionism of the Federal Reserve has fostered a broader economic malaise that resulted in a new normal of reduced hiring, fiscal mismanagement, and no clear capital expenditure trend other than short bouts of optimism followed by stark reality.

At the beginning of the year, the financial media blamed the Fiscal Cliff negotiations for the fact that capital expenditures had been falling.

While $1.78 trillion was on the collective balance sheet of non-financial companies at the time, the press was arguing that companies weren't willing to invest it, because of the fiscal battle. Seven months later, with the Fiscal Cliff gone and the budget showdown still long off, we're still dealing with the same problems we had, and no one wants to confront reality.

We'll, here's the problem.

The reality is that the Fed's zero-interest rate policies and cheap money have crushed private investment markets for the better part of four years. Companies have elected to spend their money on the short-term interests of shareholders like dividend payments and stock buybacks, rather than invest in the long-term.

As a result, this has facilitated a much slower jobs market and less hiring, despite stocks heading to all-time highs and confidence bubbling over from the cheerleaders at CNBC.

Right now, everyone wants to blame some meandering healthcare bill or discussions about fiscal uncertainty regarding whatever Washington is voting on right now. (Every day we listen to the media tell us that stocks went up on any number of daily factors, when in reality, even the brightest financial sector CEO will tell you that no one has a clear understanding of why stocks rise and fall).

The reality is that the Federal Reserve has crept into the corporate planning office and essentially forced companies to look more toward the short-term than the long.

The short-term view was already a problem to begin with, as the desperation to beat earnings and clear bonus checks remained a Wall Street priority since a nation of should-have-been doctors read Liar's Poker and decided they were destined to make millions as stockbrokers.

However, the Fed has only driven Wall Street to even worse short-termism as companies are forced to focus more on short-term internal rate of return (IRR) opportunities. The only question is, what awaits the markets after the Fed's complete exit, and how will this impact long-term planning.

Prospects for the Future

The media will eventually come to understand that Bernanke's policies have done very little to instill confidence in the long-term. For these reasons, it's critical that investors harness an investment strategy that allows them to capture the profits driven by short-term minded companies.

For any level of uncertainty, we recommend that you utilize an allocation model like the one created by our Chief Investment Strategist, Keith Fitzgerald.

Keith's 50-40-10 model provides a portfolio designed to weather any storm or uncertainty, while capturing high levels of return with limited downside. This model allows investors to harness global blue-chip companies that pay strong dividends, and sets sharp trailing stops that reduce risk and ensure greater security over the long-term.

Hopefully, the economic indicators will begin to provide a greater return to more company investment as they look toward the future. However, companies will need to begin to walk on their own after a much-needed exit from the Fed and a change in philosophy away from short-term interests.


About the Author

Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.

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