Category Archives: Corporate investment

15/12/19: Under the Hood of Irish National Accounts: 3Q 2019 Data

CSO have released the latest (3Q 2019) data for the National Accounts. The headlines are covered in the release here: and are worth checking. There was a massive q/q increase in GNP (+8.9%) and a strong rise in GDP (+1.7%).

Official value added q/q growth figures were quite impressive too:

  • Financial & Insurance Activities value added was +5.7 percent in volume, all of which, judging by the state of the Irish banks came probably from the IFSC and insurance premiums hikes
  • Professional, Administrative & Support Services +5.1 percent (this sector is now heavily dominated by the multinationals)
  • Public Administration, Education and Health sector lagged with a +1.5 percent 
  • Arts & Entertainment +1.8 percent
  • Construction grew by much more modest +1.3 percent 
  • Industry (ex-Construction) fared worse at +1.1 percent 
  • Information & Communication increased by 0.8 percent over the same period
  • Meanwhile, more domestic-focused Agriculture recorded a decline of 3.2 percent 
  • Distribution, Transport, Hotels & Restaurants posted a decline of 1.0 percent.
On the expenditure side of accounts:
  • Personal Consumption Expenditure increased by 0.9 percent q/q
  • Government expenditure increased 1.2 percent.
Not exactly the gap we want to see, especially during the expansionary cycle, but public consumption has been running below private consumption in level terms ever since the onset of the recovery.

With this in mind, here is what is not discussed in-depth in the CSO release. CSO reports a measure of economic activity that attempts to strip out some (but not all) of the more egregious effects of the tax optimising multinational enterprises' on our national accounts. The official name for it is 'Modified Domestic Demand', "an indicator of domestic demand that excludes the impact of trade in aircraft by aircraft leasing companies and trade in R&D service imports of intellectual property". Alas, the figures do include intangibles inflows, especially IP on-shoring, income from domiciled intangible assets, and transfer pricing activities. Appreciating CSO's difficulties, it is virtually impossible to make a judgement as to what of these three components is real (in so far as it may be actually physically material to Irish enterprises and MNCs trading from here) and what relates to pure tax optimisation.

With liberty not permitted to CSO, let's take the two categories out of the aggregate modified demand figures.

So, this good news first: Modified Total Domestic Demand is growing and this growth (y/y) is improving since hitting the recovery period low in 3Q 2018. 

Bad news: growth in modified domestic demand remains extremely volatile - a feature of the Irish economy since mid-2014 when the first big splashes of the Leprechaun Economics started manifesting themselves (also see last chart below).

Not great news, again, is that domestic growth is not associated with increases in investment (first chart above, blue line). 

More good news: in levels terms, adjusting for inflation, Ireland's Modified Domestic Demand has been running well-above pre-crisis period peak average levels for quite some time (chart below). Even better news, it appears that much of the recent support for growth in demand has been genuinely domestic.

Next chart shows y/y growth rates in the headline Modified Total Domestic Demand as reported by the CSO (blue line) and the same, less transfer pricing, stocks flows and IP flows (grey line). 

Starting with mid-2014, there is a massive variation in growth rates between the domestic economy growth rates as reported by the CSO and the same, adjusting for MNCs-dominated IP and transfer pricing flows, as well as one-off effects of changes in stocks (inventories). There is also tremendous volatility in the MNCs-led activities overall. Historically, standard deviation in the y/y growth rates in official modified domestic demand is 5.68, and for the period from 3Q 2014 this is running at 5.09. For modified demand ex-transfer pricing, IP and stocks flows, the same numbers are 6.12 and 1.62. 

Overall, growth data for Ireland has been quite misleading in terms of capturing the actual tangible activities on the ground in prior years. But since mid-2014, we have entered an entirely new dimension of accounting shenanigans by the multinationals. Much of this is driven by two factors:
  1. Changes in tax optimisation strategies driven by the international reforms to taxation regimes and the resulting push by the Irish authorities to alter the more egregious loopholes of the past by replacing them with new (IP-related and intangible capital-favouring) regime; and
  2. Changes in the ays in which MNCs prioritise specific investment inflows into Ireland, namely the drive by the MNCs to artificially or superficially increase tangible footprint in the Irish economy (investment in buildings, facilities and on-shored employment) to provide cover for more tax-driven FDI.
Time will tell if these changes will lead to more or less actual growth in the real economy, but it is notable that the likes of the IMF have recently focused their efforts at detecting tax optimising activities at national levels away from income flows (OECD approach to tax reforms) to FDI stocks and firm-level capital activities. By these (IMF's) metrics, Ireland has now been formally identified as a corporate tax haven. How soon before the OECD notices?..

17/9/19: Flight from Fundamentals is Flight from Quality: Corporate Risk

Great chart via @jessefelder highlighting the extent to which the bond markets are getting seriously divorced from the normal 'fundamentals' of corporate finance:

Corporate debt has expanded at roughly x2 the rate of growth of corporate earnings since the start of this decade. And corporate bond yields are persistently heading South (see: and investment for growth is falling (see: Which continues to put more and more pressure on corporate valuations. As a friend recently remarked, at 2% interest rates, the game will be over. It might be over at 2% or 3% or 1.5%... take your number pick with a pinch of sarcasm... but one thing is certain, earnings no longer sustain markets valuations, real corporate investment no longer sustains financialized investment models, and economy no longer sustain real, broadly-based growth. Something must give.

7/7/19: Investment for growth is at record lows for S&P500

Interesting chart via @DavidSchawel showing changes over time in corporate (S&P500 companies) distribution of earnings:

In simple terms:

  1. Much discussed shares buybacks are still the rage: running at 31% of all cash distributions, second highest level after 34% in 2007. On a cumulated basis, and taking into the account already reduced free float in S&P 500 over the years, this is a massive level of buybacks.
  2. 'Investment for growth' - as defined - is at 51% - the lowest on record.
  3. Meaningful investment for growth (often opportunistic M&As) is at 38%, tied for the lowest with 2007 figure.
S&P 500 firms are clearly not in investment mode. Despite 'Trump incentives' - under the TCJA 2017 tax cuts act - actual capex is running tied to the second lowest levels for 2018 and 2019, at 26% of all cash distributions.

13/9/16: U.S. business investment slump: oil spoil?

Credit Suisse The Financialist recently asked a very important question: How low can U.S. business investment go? The question is really about the core drivers of the U.S. recovery post-GFC.

As The Financialist notes: “Over the last 50 years, there has usually been just one reason that businesses have slashed investment levels for prolonged periods of time—because the economy was down in the dumps.”

There is a handy chart to show this much.

“Not this time”, chimes The Financialist. In fact, “Private, nonresidential fixed investment fell 1.3 percent in real terms over the previous year in the second quarter of 2016, the third consecutive quarterly decline.” This the second time over the last 50 years that this has happened without there being an ongoing recession in the U.S.

Per Credit Suisse, the entire problem is down to oil-linked investment. And in part they are right. Latest figures reported by Bloomberg suggest that oil majors are set to slash USD1 trillion from global investment and spending on exploration and development. This is spread over 6 years: 2015-2020. So, on average, we are looking at roughly USD160 bn in capex and associated expenditure cuts globally, per annum. Roughly 2/3rds of this is down to cuts by the U.S. companies, and roughly 2/3rds of the balance is capex (as opposed to spending). Which brings potential cuts to investment by U.S. firms to around USD70 billion per annum at the upper envelope of estimates.

Incidentally, similar number of impact from oil price slump can be glimpsed from the fact that over 2010-2015, oil companies have issued USD1.2 trillion in debt, most of which is used for funding multi annual investment allocations.

Wait, that is hardly a massively significant number.

Worse, consider shaded areas marking recessions. Notice the ratio of trough to peak recoveries in investment in previous recessions. The average for pre-2007 episode is a 1:3 ratio (per one unit recovery, 3 units growth post-recovery). In the current episode it was (at the peak of the recovery) 1:0.6. Worse yet, notice that in all previous recoveries, save for bubble crisis and most recent Global Financial Crisis, recoveries ended up over-shooting pre-recession level of y/y growth in capex.

Another thing to worry about for 'oil's the devil' school of thought on corporate investment slowdown: slump in oil-related investment should be creating opportunities for investment elsewhere. One example: Norway, where property investments are offsetting fully decline in oil and gas related investment. When oil price drops, consumers and companies enjoy reallocation of resources and purchasing power generated from energy cost savings to other areas of demand and investment. Yet, few analysts can explain why contraction in oil price (and associated drop in oil-related investment) is not fuelling investment boom anywhere else in the economy.

To me, the reason is simple. Investing companies need three key factors to undertake capex:
1) Surplus demand compared to supply;
2) Technological capacity for investment; and
3) Policy and financial environment that is conducive to repatriation of returns from investment.

And guess what, they have none of these in the U.S.

Surplus demand creates pressure factor for investment, as firms face rapidly increasing demand with stable or slowly rising capacity to supply this demand. That is what happens in a normal recovery from a crisis. Unfortunately, we are not in a normal recovery. Consumer and corporate demand are being held down by slow growth in incomes, significant legacy debt burdens on household and corporate balance sheets, and demographics. Amplified sense of post-crisis vulnerability is also contributing to elevated levels of precautionary savings. So there is surplus supply capacity out there and not surplus demand. Which means that firms need less investment and more improvement in existent capital management / utilisation.

Technologically, we are not delivering a hell of a lot of new capacity for investment. Promising future technologies: AI-enabled robotics, 3-D printing, etc are still emerging and are yet to become a full mainstream. These are high risk technologies that are not exactly suited for taking over large scale capex budgets, yet.

Finally, fiscal, monetary and regulatory policies uncertainty is a huge headache across a range of sectors today. And we can add political uncertainty to that too. Take monetary uncertainty alone. We do not know 3-year to 5-year path for U.S. interest rates (policy rates, let alone market rates). Which means we have no decent visibility on the cost of capital forward. And we have a huge legacy debt load sitting across U.S. corporate balance sheets. So current debt levels have unknown forward costs, and future investment levels have unknown forward costs.

Just a few days ago I posted on the latest data involving U.S. corporate earnings ( - the headline says it all: the U.S. corporate environment is getting sicker and sicker by quarter.

Why would anyone invest in this environment? Even if oil is and energy are vastly cheaper than they were before and interest rates vastly lower...

18/4/16: Capital Gains Tax & Investment Distortions: Corporate Data from the U.S.

In our MBAG 8679A: Risk & Resilience:Applications in Risk Management class we have been discussing the links between taxation, optimal corporate capital structuring and investment, including the decisions to pursue M&A as an alternative strategy to disbursing cash to shareholders.

Lars Feld, Martin Ruf, Ulrich Schreiber, Maximilian Todtenhaupt and Johnnes Voget recently published a CESIfo Working paper, titled “Taxing Away M&A: The Effect of Corporate Capital Gains Taxes on Acquisition Activity” (January 26, 2016, CESifo Working Paper Series No. 5738: The paper links directly taxation structure to M&A decisions and outcomes.

Per authors, “taxing capital gains is an important obstacle to the efficient allocation of resources because it imposes a transaction cost on the vendor which locks in appreciated assets by raising the vendor’s reservation price in prospective transactions.” Note, this is an argument similar to the effects of limited interest deductions on mortgages and transactions taxes on property in limiting liquidity of real estate.

“For M&As, this effect has been intensively studied with regard to shareholder taxation, whereas empirical evidence on the effect of capital gains taxes paid by corporations is scarce. This paper analyzes how corporate level taxation of capital gains affects inter-corporate M&As.”

Specifically, “studying several substantial tax reforms in a panel of 30 countries for the period of 2002-2013, we identify a significant lock-in effect. Results from estimating a Poisson pseudo-maximumlikelihood (PPML) model suggest that a one percentage point decrease in the corporate capital gains tax rate would raise both the number and the total deal value of acquisitions by about 1.1% per year. We use this result to estimate an efficiency loss resulting from corporate capital gains taxation of 3.06 bn USD per year in the United States.”

I am slightly sceptical about the numerical estimate as the authors do not appear to control for M&A successes. However, since the lock-in mechanism applies to all types of re-investment projects, one can make a similar argument with respect to other forms of capex and investment. One way or the other, this presents evidence of distortionary nature of U.S. capital gains taxation regime.