Mark,
That was a well thought out post on your part. I am continually impressed by the collective intelligence possessed by many of the posters here on SI, and especially on this thread.
The cost of capital is rising (higher corporate bond spreads) while excess capacity (US and Global) seems to remain...
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A more positive note, apparently productivity gains have helped lower the cost of labor 2.2%. This may help offset higher capital costs, leaving overall profitability unchanged.
Take note that productivity gains are achieved at the risk of increasing excess capacity. Whenever a company can squeeze costs from producing facilities, work-flow processes and final product delivery, that also means that the same cost savings procedures can be applied to excess capacity facilities, thereby increasing any levels of excess capacity beyond predictable current/future needs or end user demand (for the company's product or service).
And therein lies the rub. As various companies find ways to squeeze out profits and/or lower costs, that necessarily means that there is less need to increase CAPEX spending for additional gains in profits or margin. A firm can remain highly competitive without increasing its business spending, thereby almost ensuring that a vicious cycle of CAPEX non-spending will continue for the short term future.
CAPEX spending, or self-investment if you prefer, will not resume until there exists some sort of very major technical advancement that would give a firm employing this new (as yet unidentified) technology some sort of a cost advantage over its competitors, at which time the competitors would have no choice other than to use the new technology themselves, or risk loss of market share.
Since a new technology such as this is not readily visible today, (to me) this suggests that CAPEX spending will be limited to maintenance items, such as replacing broken down PCs (or workstations), or perhaps migrating to the next version of software, things along those lines; simple and low cost expenditures.
Also keep in mind that much of the cost savings we have seen to date for most firms comes primarily from only two sources: reduced CAPEX spending and reductions in staffing levels (layoffs). This bodes somewhat ill for the near and long term futures because it shortchanges a company's abilities to quickly respond to future demand increases or expansion (growth).
Accordingly, I'd discount ML's report somewhat given that they have a highly vested interest in the resumption of a wild bull market. From my perspective, things still look extremely bleak, at least for the foreseeable future (say the next 4 quarters at an absolute bare minimum).
KJC |
