The Decline of American Investment??

Many politicians and economists talk about the decline of corporate investment spending into long term capital projects. This article from Verdad Capital describes why this story may be more complicated than it appears.

Excerpt from the article below:

1. “First, as our economy has grown more prosperous and efficient, the cost of capital goods has declined. Economists estimate that the cost of machinery and equipment has fallen about 40% in developing economies, led by a 90% drop in the cost of computing equipment.”

2. “Second, the decline in fixed investment reflects a shift in the economy from manufacturing to technology and pharmaceuticals. Since 1980, healthcare and technology have gone from 18% of US equity market cap to 34% while energy, materials, and industrials have fallen from 50% to 19%. Healthcare and tech firms spent a combined 60% of all R&D expenditure in 2018, while industrials, auto, chemicals, and energy added up to 31%. And while fixed asset investment has declined, R&D expenditures have sharply increased. The share of revenues corporate America invests in R&D has increased significantly from 1.3% of sales in 1980 to 2.7% of sales in 2015.”

“So most of the decline in investment isn’t a story of rapacious capitalists destroying our economy, but rather a more productive and technologically sophisticated business world that doesn’t require as much spending on machinery and equipment.”

To read the entire Article click the link below:

The Decline of American Investment

What are Money Flows saying about the Equity Market

There is a saying from Sir John Templeton that "Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria."

I think you can use Fund flows as a guide to that sentiment. The chart below shows how much money has gone into bond funds versus equity funds since 1984. What's striking is how much more has gone towards bond funds since 2009.

Looking at this it's hard to believe we are close to euphoria. We may have pullbacks and corrections but if sentiment is a guide this market has room to run.

People make a common error of overestimating the frequency of "inflection points"

From Bloomberg’s Joe Weisenthal:

And finally, here’s what Joe's interested in this morning

Yesterday Tracy Alloway and I interviewed Philip E. Tetlock, an expert on forecasting and making predictions, for an upcoming episode of our podcast. It won't be out for several weeks, but there was one comment that jumped out at me as being particularly timely and relevant. Tetlock said people make a common error of overestimating the frequency of "inflection points" in whatever they're studying. So for example, geopolitical forecasters are likely to overstate the odds of an imminent regime change or coup in any given country, despite those events being extremely rare. Part of the problem is that simply saying "the status quo will probably persist for the time being" comes off as boring and doesn't win you any glory and doesn't get you much attention in the media. Anyway, I was thinking about this with respect to the market and the economy right now. The post-crisis era has been characterized by an exceptionally long, stable period of moderate growth and cool inflation. It's a cliche, but it's basically been a "goldilocks" environment for investors. Right now we're in a period where people are starting to wonder if this is coming to an end. The fact that the Fed might ease policy is one reason they're anxious. The surge in negative-yielding sovereign debt is another. The trade war is also a huge wild card. And yet on the flipside, if you look at Friday's jobs report, with 224,000 jobs created and wage growth failing to accelerate, it certainly looks like the stable and cool economy remains with us. While there are all kinds of crosswinds and headline risk and everything else at the moment, perhaps people should be open to the idea that really not much has changed from what we've seen virtually non-stop since 2009.