capital investment

The Coming Boom?

© Can Stock Photo / devon

We wrote more than a year ago about the steady if slow growth of the economy. Just as a slow-burning fire might last longer than a raging conflagration, we expected that the economic expansion would persist longer than some commentators believed.

Another way to say it is, a bust is less likely without a boom first. The excesses that build in boom times usually contribute to the bust that follows.

For the first time in a decade, conditions may be ripe for a boom. The improvement in small business sentiment and increased money flowing into the equity markets had us on the lookout for signs of a boom. Then the tax law passed.

The tax law has pro-cyclical features that may strongly encourage economic growth now, but plants the seeds for a later slowdown. There may be political aspects that contribute to this syndrome, too.

Businesses investing in long-lived capital investments will be able to deduct the full cost up front, instead of taking smaller depreciation deductions over many years. This increases the financial attractiveness of projects; capital spending is likely to rise. A dramatically lower tax rate on corporate income, combined with a feature to bring overseas money back to the US, are further inducements for more business activity.

For two administrations in a row, the signature achievement of each has been done on a partisan, party line vote. When the minority party becomes the majority party, that achievement gets attacked and the unwinding begins. We’ve seen it with the Affordable Care Act; some Democrats are pledging to undo the tax law as soon as they are able.

So the favorable treatment of capital spending begins to phase out in a few years, and corporations may ‘get while the getting is good’ before the law gets weakened or unwound. These conditions might begin to affect things precisely when excesses from the boom have created more potential for a slowdown.

Boom, then bust. We know how this works. Clients, we will continue to monitor all of this, and work to take advantage of our thinking. No guarantees.

If you would like to discuss any of this in more detail, or have something else on your agenda, please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

The opinions expressed in this material do not necessarily reflect the views of LPL Financial.

All investing, including stocks, involves risk including loss of principal.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

 

Traveling by Miracle

© Can Stock Photo Inc. / andyb1126

Next month I will be traveling again, to and from a conference. I’ll be going by miracle.

More specifically, air travel. I’ll fly on planes that cost about $80 million each. The planes are part of an airline company fleet that cost about $19 billion dollars. Of course, planes are useless without airports—and we spend another $19 billion per year on airport capital improvements in this country.

The planes and airports would not do us any good without the people who fly them, load them, change the sparkplugs, and do everything else it takes to run an airline. My airline spends $6 billion on the help each year. (OK, maybe planes do not have sparkplugs, but you get my drift.) Another $4 billion goes for fuel.

I’ll have breakfast in Nebraska and lunch in San Diego. A few days with colleagues and consultants, experts and peers, listening and presenting (a first for me, this year!): a priceless experience. Then back to Nebraska.

If I had to drive or take the train, the travel would take days and days. Instead, I get the use of these billions of invested capital and all those talented people to do the trip in hours instead of days.

All this for a few hundred dollars. It is traveling by miracle. The company that serves me lives in mortal fear that the next company will figure out a way to serve me better for less money, so it is on a perpetual quest to provide even better value for my buck. As a customer, I’m really doing well in this transaction.

If I choose, I can be more than a customer. I could also be a percentage owner of the aircraft maker, the energy company that provides the fuel, and the airline itself. I could lend these companies money by buying their bonds, and collect interest from them.

On my journey, I will probably meet at least one person who complains about the service, or a slight delay, or the crying baby, or the security procedures. But I’ll be counting my blessings that I was born to this place and age, and enjoying the miracles around me.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

Investing: A Moral Good?

© www.canstockphoto.com / rocketclips

It is unquestionably good that we have farmers to raise our food, shopkeepers to bring the things we need within reach, nurses to nurture us back to health, and so forth. We know instinctively that any pursuit that benefits others, or helps to meet the needs of society at large, is a worthy pursuit.

Is investing in the same category as worthy labor? Some people tend to think it is not. We offer the following perspective for your consideration.

Many of us have known route drivers for overnight and package delivery companies; long-tenured ones become part of the fabric of a community, well known to all. They clearly perform a worthy service. Yet how valuable would their efforts be without the trucks, planes, terminals, software systems, and the rest of the capital investment that supports their jobs? How much delivery could get done if the only equipment was handcarts?

The two largest such companies have billions of dollars of assets invested so that hundreds of thousands of employees have the tools and resources they need to do their jobs. This capital at work, about $100,000 per employee, is what makes the efforts of the workers so valuable. Where did the money come from?

Companies issue stock and bonds to finance their capital investments. The buyers of those investments, the investors, are ultimately the ones who provide the tools used by the workers to increase the value of their efforts.

And who are these “investors?” We know hundreds of them personally. They are workers saving for retirement, the retired, widows, families saving for college expenses, and everyone else trying to put money away for a rainy day or leave a legacy.

So do these friends and relatives and neighbors deserve a return on their investment? Presumably we all agree that a return on investment is only fair.

People at work and investments at work are to the world as teachers and classrooms are to education. Both are needed, both are useful. In the sense that necessary and useful things are good, both are worthy.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investments involve risk and may lose value.