What Apple's $17B Bond Issue Says About Repatriation, ZIRP and QE
As is well known now, Apple Inc. recently raised $17 billion in a debt offering. Across short to long-term maturities, the deal was heavily oversubscribed.
One of the world's foremost innovators, investors lined up for income streams underlay by the technology giant's impressive sales. Apple did this despite having $144 billion in cash on its books, and the fact that it did exposes policies - from repatriation taxes, to zero interest rates, to quantitative easing - as either irrelevant or harmful.
About repatriation taxes, conservatives who should know better have been opining for several years that a U.S. economic rebound is as simple as reducing or eliminating the tax on repatriation of cash held overseas. It should be said up front that most taxes on income and earnings are a barrier to growth, but the repatriation tax is not one of them.
As this column argued back in 2010, "dollars" are everywhere around the world, and because they are so is credit. Assuming a tax on repatriation, the simple answer for companies presumed to be low on dollars necessary to expand and create jobs stateside would b the raising of debt as Apple has done. Such a move would allow for the accession of credit without creating a taxable event.
It would also be a necessary path to building up growth capital. Indeed, with or without a repatriation tax, investors watch closely how companies deploy their capital. For firms with large cash balances to simply bring cash back to the U.S. for expansion without possessing growth-oriented ways to deploy the funds would be the path to investor flight from those same companies. Businesses can't just spend their cash balances in order to create jobs; rather their spending must have a strong economic basis.
Specifically, companies eager to put their cash to work must be able to prove that the returns they can gain on it will be better than market returns that could be achieved through the lending of their funds to other institutions seeking growth. Absent putting their initiatives up to the market's microscope, they would once again potentially cause investor flight from their shares.
Importantly, a dollar deposited anywhere in the world is a dollar lent. Banks don't take on liabilities in the form of deposits only to sit on the cash. Instead, they turn those liabilities on which they must pay interest into loans (assets) that will provide an income stream greater than their cost of holding the liabilities on their books.
Looked at in terms of repatriation, dollars held overseas are by definition not locked up overseas; thus starving the U.S. economy of dollars. In reality, any dollars on deposit anywhere are being lent to firms in need of credit, or are, and as evidenced by Apple, being put to work through bond or stock offerings.
About repatriation taxes, conservatives' hearts are in the right place about reducing taxes, but the repatriation levy was and is a non-factor when it comes to companies expanding, or for that matter, not expanding. Once again, money saved is money lent, and to the extent that those dollars are not returning to the U.S. for local expansion, it's because investors and companies both to varying degrees view the U.S. as an unattractive place to put capital to work at the moment.
Looked at in light of the Fed's zero interest rate policies, it's broadly assumed by the commentariat that zero rates mean easy money. No, they don't. That Apple's debt offering was so oversubscribed explains why.
For companies like Apple, investors are clearly desperate to achieve exposure to their ongoing income streams. That they lined up so aggressively to buy what Apple was offering to some degree points to a barren market for quality debt issuance.
Apple will pay above 3% on 30-year debt for example, but does anyone want to guess what a small business would pay for similar funds? It's presumably not possible to quantify, but assuming there's a market for this kind of debt issuance, it's a fair bet that the cost of 30-year credit is enormously high for all but the bluest of blue-chip companies.
One obvious reason for this has to do with simple price controls. The Fed is attempting to make credit cheap by decree. But imagine if Mayor Bloomberg were to decree Park Avenue rents abnormally cheap. If so, the naïve might say it's inexpensive to live on Park Avenue, but good luck finding one of those low-cost dwellings. Credit is no different. Government officials can set whatever rate they want, but those with credit don't have to offer it up at those low rates. The better guess is that artificially low rates, much like artificially low apartment rents, lead to scarcity of both. Applied to small businesses, they're going to pay a high rate of interest for credit no matter the Fed's adolescent decision to decree credit cheap. In short, the Fed's rate policies are a credit deterrent, not a driver of easy money.
Moving on to quantitative easing, explicit in such a policy is the view that the economy lacks enough of the lubricant - dollars - necessary to move forward. But as evidenced by the ease with which Apple raised $17 billion, dollars are plentiful. The problem now has to do with what Amity Shlaes touched on in a column from this week. Specifically, there's a lack of trust in the marketplace with regard to the quality of the dollar, and as such, the ability of borrowers to pay back that which is lent to them. Money is rarely tight, this is especially true in a world awash in dollars, but when policy favors devaluation of those dollars, a lack of trust makes dollar credit rather difficult to find.
Quantitative easing, while explicit when it comes to creating more dollars, is implicitly about devaluing those same dollars. As history shows clearly, currency devaluation coincides with limp economic growth. It does because growth is a function of investment in new ideas, investors are buying future currency income streams, but if policy favors devaluation investment is naturally going to flow away from new ideas and into inflation hedges (think commodities, land, art, rare stamps and coins, etc.) least vulnerable to devaluation. If you're an investor, why place your funds at the mercy of an economy weakened by currency devaluation, not to mention that any currency returns will come back in debased form?
In response some will reply that Apple raised $17 billion with ease. Yes it did. But then Apple has been one of the few companies to truly thrive and expand amid 12 years of policies under the Bush and Obama administrations meant to devalue the dollar (Bush and Obama), restrict trade (Bush and Obama), boost regulations (Bush with Sarbanes-Oxley, Obama with Obamacare and Dodd-Frank), and raise taxes (Bush and Obama through spending which is a backdoor tax, Obama through actual tax increases). The economy remains weak, and as is always the case, it's a policy phenomenon. Apple has risen above the economy-suffocating policies of the last twelve years, and better yet has thrived despite it. Credit is easy for Apple as a result, but the Cupertino, CA technology firm is surely an outlier.
Back to U.S. companies more broadly, they don't suffer a repatriation tax; rather they labor under domestic policies that make capital migration toward the states a dangerous concept. The Fed's policies of zero rates and quantitative easing are exacerbating the horrors of those same policies. If we get the Fed out of the way in concert with a reduction in the barriers to growth presently put in place by the Obama administration, a lack of dollar credit and subsequent investment in U.S. initiatives will quickly become yesterday's news. And all the hand wringing over irrelevant repatriation taxes will quickly disappear.