I want to focus on the infrastructure investment topic and some of what Joe Kernan said during this episode that I take some issue with, specifically his statements about how wonderful and efficient the private sector is at deploying capital, as opposed to the government (aka, public) sector. Readers remember: don't confuse public-sector with publicly-traded private companies in this upcoming discussion.
Joe said [as closely as I could type it while watching the video] the following:
If you have a [private sector] business, ... whether you exist depends on you watching your P's and Q's and watching every penny, and not overpaying for things, ... you go out of business if you don't do that.... [a private sector business] treats capital frugally like it should be treated.Joe was telling Mr. El-Erian something along the lines of "... I'm just talking about a theoretical argument about whether government is as effective at deploying capital as much a the private sector.", and the fact that Joe clearly believes that the private sector is fantastically effective at deploying capital.
Private-Sector Capital Deployment Efficiency and Effectiveness? Sure...Joe, you must be joking!
What world are you living in? Surely you are not referring to the private businesses whose stocks adorn the Dow Jones, S&P or Nasdaq indices. You need only look to any of your guests, El-Erian included, to quickly see how insane your bit about "treating capital frugally" is in this modern private-sector world, especially among the publicly-traded private sector businesses. You are simply living in a dream land.
For starters, IF private sector firms were at all concerned about the effective or efficient deployment of capital, you wouldn't see them issuing pay packages worth tens or even hundreds of millions of dollars to senior executives (like, e.g., Mr. El-Erian reportedly received at Pimco, a subsidiary of Allianz). And, I am waiting for someone to tell me how it is effective deployment of capital to secure such awesome talent that can only be had for these enormous sums, and how their superhuman management abilities deserve such pay — you know, their super-human ability to pay the average person in the organization one-three-hundredth of what they make, while laying off masses of those average persons because employees are just a terrible waste of capital when that money can go to their pay instead. But, this insane executive-pay is just the starting point in a long list of inefficient deployment of capital in private firms.
How about all the cash parked overseas now by major companies? Trillions! And, even if it is sitting in negative-yielding government bonds, or otherwise near-zero-yield instruments, somehow that is effective or efficient use of all that capital? Go ahead... make the obvious arguments over how it is more effective to park such massive sums overseas than to pay taxes on it in the USA, yada, yada... well, the tax-code is certainly partially to blame, but then again, it ended up this way because these same corporations lobbied elected officials in order to write the tax law as it stands. This needs to end. Total ineffective deployment of capital on a grand scale.
Then come all the share buybacks that are being done to further enrich top insiders that have incredible pay deals tied to stock price. Share buybacks are truly saying that a company has nothing better to do with excess funds than buy back their own shares, if you believe they really have nothing better to do with it.
But, therein lies the problem, the stats clearly show that corporations DO have better things to do with their capital and they are obviously not treating it frugally, as they should per Joe K's commentary. Stock prices are soaring, yet they do stock buybacks while their stocks are already at very high values (hmmm.... that sounds a bit like "overpaying" to me), but the internal core business capital investment is now at an astonishing low — things like investments in machinery and equipment — the lack of which is contributing to overall productivity slowdowns in the USA economy. As this article on SeekingAlpha pointed out, courtesy of the National Bank of Canada's Economics and Strategy economist:
"Borrowing by corporations for the purposes of stock buybacks instead of investment in machinery and equipment does little to enhance an economy's capacity for growth. We're getting more evidence of that in the US where the average age of fixed assets is the highest in half a century and productivity growth is the weakest on records."Gee, that sure sounds like truly effective use of capital, Joe! I think otherwise. Surely we can do better.
Corporations are sitting on mounds of cash, but yet instead of investing in core business assets (CAPEX), they waste their cash on stock buybacks, over-inflated executive compensation packages, and other unconscionably conspicuous deployment of their capital in ways aimed at self-enrichment and short-term stock price over long-term productivity and sustainable long-term returns to the average shareholder.
Somewhere along the line it has even become an accepted norm, apparently, that a full 10% (or more) of all corporate profits will go to just the few top C-level employees. Seriously. Just pull up Google Finance and look at a few companies' total net profit values and compare it with what the top insiders are taking in compensation. It is truly appalling. Need some examples? You can choose nearly any company... they all look similar (thus, I am not saying any of these companies are worse than any others... most all are terrible these days in this sense):
- Try Lifeway Foods on Google Finance, which shows 16.16 million shares outstanding, EPS of 12 cents per share (thus making total earnings of just under $2 million USD). Now, go to Reuters and look at some of the top player's pay packages and share sales... a mere 3 individuals took home $3.3 million in basic compensation according to Reuters. Wow! Great use of capital guys! Ever heard of the average shareholder? If you directed two thirds of your inflated executive pay towards the corporate bottom line, your entire business would be in the black! And, presumably the share-price would go up quickly if a profit was attributed to shareholders and not just the entitled few insiders. And, you all own shares, which makes it even more crazy that you are unwilling to risk your cash pay for just share appreciation. What makes you all worth such great pay when your average shareholder has lost 50% in the past year? If you have so much capital that paying such salaries is the only efficient thing to do, perhaps you should consider the average shareholder first, or maybe some capital improvements for expansion or productivity improvements?
- Gee, let's look at Capstone Turbine on Google Finance,... wow... Reuters shows 4 guys pulling $2.2 million in basic compensation from a firm that loses money in a big way (net income: -$25 million annual). Unreal. Again, don't any of you overpaid self-rewarding insiders see anything even slightly wrong with this situation? Don't worry: Joe K. thinks you private sector guys are doing wonderful with your precious capital, if he truly includes you in his statement today.
- And, as to not leave out some big players, how about the likes of Chevron (G-finance site),... Google shows them losing 40 cents/share over past 4 quarters, or roughly $760 million dollars. But, as you might now expect, the top insiders are doing wonders with that precious capital: there is a nice $50 million dollars in otherwise useless capital that just had to be handed out to the five people that Reuters lists Chevron executive compensation for. Couldn't $50 million do anything at all to otherwise improve efficiency, even if it were R&D looking into efficiency gains?
There are so many examples of poor use of capital in private organizations, and their "overpaying for things" (something Joe claimed they can't do and survive), that I could go on for weeks (and not only regarding excessive pay packages). But, clearly Joe Kernen's appreciation of the private sector, and it's alleged ability to so effectively deploy capital, is due to some fantasy view he holds of modern corporate America versus a completely different reality. Is the public sector really so terrible at capital deployment compared to all this? Maybe. But the bar set by the private sector doesn't really seem terribly high.