This proxy for business investment spending continues to grow at impressive rates. New orders for capital goods are up at a 10.3% annualized rate over the past six months, and September orders were up much more than expected (2.4% vs. 0.5%). We've finally seen a new, all-time high for this series. This is undeniably good news, and it shows that businesses are indeed putting their record profits to work, albeit in a hesitatingly slow fashion: profits are up 50% from their Q2/08 levels, yet capex has only just broken new high ground. Yes, things could (and should) be a lot better, but the news today confirms that the economy is still growing and the fundamentals are still improving. We're not in another recession, and we're certainly nowhere near the recession/depression fears that are embedded in 10-yr Treasury yields and S&P 500 PE ratios of 13.
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ReplyDeleteScott,
ReplyDeleteI read an interesting article refuting the claims that regulations are at the heart of the post financial crisis malaise.
This chart was the theme of the story. If regulatory burdens, current and expected, are so bad, why would businesses invest at such a high rate relative to previous post recession environments?
Excelletn post by Scott Grannis.
ReplyDeleteHowever, I wonder if 13 p/e's are the new normal. After all, to pay 13 times earnings for an enterprise seems like more than a fair price to me.
Would you pay $130,000 for a share of bar that netted you $13k a year, and in which your control of management was weak? (And no free drinks, dude).
That's only 10 times earnings, and bars are a fairly steady business. (See Vigilante and Redleaf's book "Panic" for a review of the weakness of public shareholders). We know that public companies have a lease on life only as long as they are competitive.
When the Dow got to 20 and 30 times earnings in the 1990s, that struck me as very risky investing.
If we are becoming Japanned, look for low interest rates and p/e's for the indefinite future.
Big returns are probably more likely in China and India, but the investing there is very iffy. Perhaps look for safe stocks with good dividends.
The Earnings yield of the Hang Seng
ReplyDeleteIndex is 9.60%..the earnings yield of the Euro Stoxx 50 is 10.11%...
AGG...the I shares aggregate bond etf has a yield to maturity of 2.15%
Public: capex is rising at a pretty decent rate, but relative to the economy, capex is still very low. I don't think this chart supports the case that regulatory burdens are not holding the economy back.
ReplyDeleteScott/Public:
ReplyDeleteThe problem with measuring regulatory burdens is that they occur at local, state, federal and international levels.
Most structural impediments are in fact at local level, often by business groups wishing to limit competition.
Really, is there any reason lawyers are licensed? It happens in every state, driving up rates. Doctors are also licensed, despite the fact all states also license chiropractors (quacks) and force insurance companies to pay for the quackery.
To know if regulatory burdens and structural impediments have increased, you would need a local, state and federal review (and consider if shutting the border to immigrants is also a structural impediment). Land use regs are almost always local and repressive. See Newport Beach.
Meanwhile, since the 1970s, domestic finance and transportation have largely been deregged, while the domestic labor force has become de-unionized. We are also wide-open to imports of capital, labor (until recently), services and goods.
This reality of international trade almost eliminates "supply-side" concerns. If you are worried about the supply side today, you must have been terrified and screaming in the 1970s. (BTW, top tax rates hit 90 percent in the 1970s).
Today supply chains are instantly accessed through internet and global. There is no problem with supply. The Internet has radically reduced a huge structural impediment of knowledge and time it takes to source a good or service.
Thus the supply-side argument has become impotent since the 1970s. While we need always to reduce structural impediments, today impediments are probably less than at any time in history---thanks to the private sector and the Internet.