Caterpillar came in with a huge upside surprise on its earnings today.
And that has people worried.
How on earth is it possible that domestic sales of construction equipment could have increased 92 percent?
Construction is recovering—but it is not anywhere near the level that could justify that kind of spending on equipment.
This shouldn’t really be a boom time for Caterpillar.
Even Caterpillar’s executives seem surprised. According to Caterpillar, rental dealers have rapidly increased their buying to replace aging equipment. This is essentially how Caterpillar’s competitors also explain their rising sales.
As Joe Weisenthal of Business Insider points out, the company is essentially explaining that dealers are buying in anticipation of a recovery that hasn’t happened yet.
What makes this troubling is that it has the basic markings of credit driven bubble. According to business-cycle theory, extended periods of artificially low interest rates induce businessmen to make long-term investments on the mistaken assumption that the low interest rates represents real savings in the economy. But because those excess savings don’t exist, the investments eventually go sour.
The worry is that companies that rent out construction equipment may be making this classic credit bubble mistake.
Caterpillar, for its part, doesn’t think that’s happening.
“Let's be clear, though, we do not think this is any kind of a bubble,” a Caterpillar executive said on its conference call.
Of course, when executives deny bubbles in the markets relevant to their companies, that’s not always a good sign. There were plenty of real estate people who denied we were in a housing bubble—right up to the moment it burst.
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