David Stockman, Dr. Lacy Hunt and I agreed on a lot of things last week at the seventh annual Irrational Economic Summit in D.C.
One of the key points that I have been harping on over the last year is simple: The recent tax cuts were destined to go into financial engineering to leverage earnings per share, not into new productive capacity that would create future jobs and earnings…
Why else do you think that Lacy Hunt’s acid test for productive investment – money velocity – keeps sinking despite the so-called recovery?
Couldn’t be clearer than this chart from Stockman’s presentation.
Just Look at the Data
When the tax cuts hit in the first quarter of 2018, real capital investment was at 8.5% growth. It not only went down, it plummeted to negative 1% just five quarters later in Q1 2019…
They could have at least faked a little investment for a year to make Trump look good!
Stockman, Hunt, and I all warned about this before it happened .
Companies do not need extra capacity. They already over-invested in the bubble boom that peaked in 2007. This recovery has been the weakest on record. In fact, from the top in 2007, the cumulative growth in GDP 11 years later has been a mere 19%, less than the horrific 1929-40 Great Depression at 20% – and we still have the worst ahead of us when this totally artificial bubble finally bursts.
And it went right where we all said it would go – the same place it already had been going, just faster with such a boost for no logical economic reason.
Dividends just kept drifting up as usual. But stock buybacks accelerated more dramatically since the beginning of 2018, and so did mergers and acquisitions – re-arranging the assets.
Why would anyone do anything else as zero interest rate policies and endless money printing gives incentives to do so easily and cheaply. Building plants and stores and warehouses is hard work. Buying back your own stock is just pushing a button …
And this is supposed to turn out okay?