Corporate myths.

    1. Corporate ceo' s are changing how they run their companies in order to defeat Obama in 2012.

    No. Measured on a scale of 1 to 100 the extent to which  growing the next quarter's EPS  affects their policies  scores about 99. Or 100..The extent to which their interest in defeating Obama in 2012 affects their policies  scores about 1.25%.With a favoring wind. If the Great Interferer In The Sky offered  the  Fortune 500 ceo's a cast iron  guarantee that Obama would be defeated in 2012 , if they would just  accept a decline of a penny a share in the next quarter's EPS , the offer would be rejected by about,oh ,say   500 of them.

    (Ceo's of non publicly traded companies might take Him up on it. But who cares),

    2. Corporate ceo's are delaying investments because of  uncertainty about 2013 tax rates.

    IfGallup or Pew or Zogby  or whomever questioned every Fortune 500  VP  whether they'd heard their ceo discuss potential profitable investments  being  delayed while waiting for some political statement about  2012 or 13 tax levels,,out  of the  20,000 junior execs the number who would had heard such a discussion would be ,let's see, ah yes,zero.

    Certainly there will have been a falling off in " prestige" projects. Fountains by the entrance, that sort of thing. Of projects to make a buck. Zero 

    Rates go up and rates go down.And American corporations have a shopping list of potential investment projects which is a multiple of the amount they have to spend. They never get far enough down the list so it's relevant to worry about future tax rates,

    Businessmen have a lively interest in defeating Obama and any other democratic candidate. But it pales into insignificance compared to their interest in being securely  positioned in that cohort of tax payers to whom Obama has just given a reprieve .

    That's why they went into business instead of politics.

    That's why no decision is ever made to reduce  profits as a way of defeating  Obama..  

    .

    Comments

    Interesting speculation, but how do explain given all the ups and downs of the economy why non-financial companies have the largest cash hoard in 51 years (7.4% of assets which amounts to 1.94 trillion dollars) at a time when interest rates are so low that this means they are getting almost nothing in return for just sitting on it?


    Could it be that hey are meeting current and projected demand with their current workforce and facilities?


    In normal times this kind of money is spent on things like research and development, acquisition of other entities, and other investments which create higher returns than interest rates of bank accounts and short-term CDs.  None of which has to do with current and projected demand.  The basic explanation is that the economy is so shaky, these kind of endeavors are too risky.  Yet when one looks at the recessions over the past 50 years, this kind of accumulation has never happened.  So it would lead one to believe that while concern over consumer spending etc is definitely a factor, there might be something else at play here.

     


    According to Galbraith in The Great Crash  the  Depression was also a case of an " investment strike" . After 1937 when FDR  decided to reduce the deficit. Sounds familiar?.

    As for right now, my explanation is lack of current demand.

    Most businessmen's idea of  Long Term Planning is thinking about the fall.. If there's buyers today, they'll approve a project  that might take 5 years to payback

    (-because of construction  not  the projected returns-  no one approves an investment where payback is longer than 3 years from cut over.)

    If not, not. Maybe  what Keynes meant by "animal spirits".


    That is my conspiracy theory Trope. I look at hiring practices and with all this money they are not hiring a commensurate number of new peeps. Although, if you wish to make money you need to get the right people and the right number of people in place.

    So I am not so sure about this conspiracy theory. I do know they are amassing huge amounts in tithing to get more repubs into office.


    In normal times this kind of money is spent on things like research and development, acquisition of other entities, and other investments which create higher returns than interest rates of bank accounts and short-term CDs. None of which has to do with current and projected demand. The basic explanation is that the economy is so shaky, these kind of endeavors are too risky.

    Your second sentence is in conflict with the first.  The reason people have spent money on these projects and acquisitions in other times is because they believed that they would eventually bear fruit and make money for their companies.  And the reason similar investments are now seen as too risky is precisely because demand projections are so very low.

    if you work at a company that saw retail sales fall 40% in 2009, and you read the papers and know that millions of your potential customers are still suffocating under mountains of debt, still stuck in underwater mortgages, still recovering from the catastrophic loss of retirement savings that they now need to rebuild, then it is pretty hard to justify an investment in expanded production and more workers.  Almost 10% of us officially are unemployed, while the real unemployment rate is much higher.  Those people aren't buying much stuff beyond the necessities.

    In this environment, the opportunities for growth through investment and expanded production are limited.  There are people who have lots of money.  But those people are saving more of it than ever before and looking for safe vehicles.  If we put some of that money in the hands of people who are desperate to buy stuff, businesses would have a reason to expand again.

    I suspect businesses have also developed an extremely conservative mindset about their cash-on-hand, because of the enduring traumatic memories from the panic-inducing credit freeze in 2008, when companies feared not being able to get enough overnight cash just to stay in business.  That's why they sock more of their cash away in a mattress than they did before.

    We could add that the systems of labor protection in this country have been decimated.  So for any manager who decides that the path to increased profitability lies in extracting the work of 10 people from a team of three or four, there is nothing standing in his way.  Pretty soon, I expect to see us hiring child labor again.


    Good question Trope. Maybe because they do not see the economy or rather the consumer incentive improving enough in the near future to make it worth their while. Why make investments in your (or some one else's) company if you do not see it paying off anytime soon.


    Yes, this is the general reasoning for how this has come about and I believe explains this accumulation in large part.  But one wonders why similiar accumulations didn't happen during recessions like the 1973-1975 recession (peak unemployment 9%) and the 1981-1982 recession (peak unemployment 10.8%) when our recession peaked at 10.2%.  The GDP decline was higher in this past recession, -4.1%, compared to those other two, -3.2% and and -2.7%.  It is important to note that the '81-'82 recession followed the short 6 month recession of 1980 which peaked with unemployment of 7.8% and a GDP decline of -2.2%.

    (As a matter of perspective, the Great Depression peaked with 24.9% unemployment and saw a GDP decline of  -26.7%)


    Ah, history.

    I'm attracted to the expression that 'the only thing we learn from history is that we never learn anything from history'.

    Actually in The Great Crash, Galbreath described an investment strike a lot like today's. Particularly after FDR was persuaded in 37 that Mr. Market would like him to reduce the Deficit!

    Maybe the explanation is in psychology, not  historical precedents. Businessmen seemed to have  thought pretty much the same since Adam Smith, or the Merchant of Prato.


    Trope, a very interesting discussion. This "recession' scared the crap out of most companies in terms of their "cash"--there were moments when credit was completely frozen. No company wants to be in that position again--which, imo, upped the premium on holding more cash. One of Obama's objectives in the investment write off is to get that cash working and hopefully a large chunk of that will be geared to "green" improvements.

    I think your overall thesis about Corporate outlooks on taxes is true, in fact it's kind of a principle not to make business decisions on the basis of tax consequences. Corporate managers are tasked on product development, market expansion and maintaining profit margins. Companies rarely hire ahead of demand, though incentives might change that. But the thrust when coming out of a recession is to lever profits by not hiring, which is what has been happening, and one of the reasons for excellent corporate profits right now.

    That's not to say Corporations won't lobby for favorable tax treatment and push the envelope whenever they can.

    The great problem on unemployment is that the small businesses and micro businesses don't have the easy credit terms of giants and the corollary, the community banks don't get the same deals the monopoly banks do. Thus the real engine of growth is being stymied.

    As I've argued  before, I think the best leverage and the best arguments Progressives have in  a single issue is that of making the large banks competitive again by separating them into smaller pieces. It has been argued that there is no economy of scale fort a bank beyond the level of $100 billion in assets. Yet Jamie Dimon, overseeing $2T in assets, only seeks to be larger.


    I read somewhere that the great old architectural firms used to carry their staffs during slow times, but that such firms lost so much money and that so many went belly up during the great depression that hire-and-fire became the accepted terms of employment. So I'm wondering if a similar change may have happened, or is happening, during this great recession, which is technically over, but doesn't seem over..


    Donal, I'm not sure I'm understanding the question. But I think the idea of carrying employees during slow times went out the window a while ago for just about every profit making enterprise. At the same time it's my impression that companies will do everything to hang on to key technical and sales people. I think it's more the direct production people and retail folks who are waiting to be recalled, and also "staff" people.


    I'm just wondering if the recession portends as great a change in business as usual as the depression.


    Those "non-financial" companies are exposed to debt liability that is directly related to the value crash of 2008:

    According to the Federal Reserve, nonfinancial firms borrowed another $289 billion in the first quarter, taking their total domestic debts to $7.2 trillion, the highest level ever. That's up by $1.1 trillion since the first quarter of 2007; it's twice the level seen in the late 1990s.

    So the cash they have on hand could be a lot like the pillowcase of bills one holds on to while evading sweeps made by cops.

    Another element demonstrating the dominance of the financial market is how institutional investors are not pumping cash into venture capital funds. The move isn't the eschewing of risk as such. The recent crash apparently was not violent enough to shake the fairie dust off the shoulders of Goldman Sachs and his merry men.

    When thinking about the demand for tangible products, I wonder if the growth of on-demand manufacturing is changing the behavior of investment. If one can avoid the risk of projecting growth and yet take advantage of growth when it happens, who wouldn't choose that over the risk of overproduction?


    Moat, I think most manufacturers operate on "just in time" and most retailers are really keeping inventories low. This may prove to be a boon to Obama. In this "tight" situation, a small increase in demand can have a great multiplier effect as manufacturers and retailers scramble to fill orders.


    It also could prove a boon to me in terms of lining up work. [$+;-\> 0] = greater good.

     

    I agree with you that a multiplier effect would occur if demand were to increase. But what makes that the case also doesn't penalize the investors who do not have to anticipate that growth to participate in it. A cumulative wait and see attitude increases the amount of inertia that has to be overcome to start a production boom.


    It can go in the opposite direction. So far corporations are holding back but if a real bell cow announces stepped up investment, it could trigger a horde of me-toos.

    If over- investing is the CFO'S  bete noir,loss of market share is that of the chief Marketing  Executive. And of the Board


    So, there are at least two markets in any deal. One market tends to take over the results of another.

    Edit: That last sentence should have been a question, not a statement.


    Bell cow was wrong. . It's less likely that  public announcements  will trigger the investment turn around than it'll be rumors or corporate espionage

    .In a real show down between the CFO and VP Marketing my guess is Marketing wins.And should . If you over -invest in this quarter maybe you can offset later. But if Charlie Competitor  beats you to the market  you may never recover your investment. First cat licks  the cream..   

    So when the investment damn breaks, there'll be a lot of companies trying to get ahead of the stream.

      


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