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BEING STREET SMART by Sy Harding Is the Recovery Just An Illusion? July 16, 2010. There’s too much money happy to be right where it is, not
about to come out of hiding and provide fuel for the economy. Don’t ask me who’s got it all, but in spite of the bad times
U.S. households, afraid of the stock market and real estate, are sitting on
almost $8 trillion in cash (money markets and CD’s). Corporations, finally
making decent profits after the recession, but worried that economic growth is
slowing again, and already having idle capacity due to the recession, are not
spending their cash flow for new factories or equipment, but simply hoarding it.
America’s non-financial corporations are sitting on $1.84 trillion in cash, the
highest percentage of their assets in cash in almost fifty years. They won’t
even pay it out to their investors in the form of higher dividends to soften the
hit their investors are taking from declining stock prices, too concerned they
might need the cash to survive another economic slowdown. In the financial sector, the too-big-to-fail major banks,
flush with cash from the $billions of profits they’re making from their trading
desks, and the capital they were provided by the bailout plans, and still more
capital raised by selling additional shares to investors, are holding onto the
cash. They won’t act like banks and lend it out, either because credit-worthy
potential borrowers are scarce, or because they make more by using it for
proprietary trading and deals to become even bigger. Even hedge-funds, known as big risk-takers, are sitting on
unusual levels of cash. After losing big time in the 2007-2009 bear market, and
short-term in the current market correction, they are under pressure from their
investors to take less risk. Hoarded cash is a big problem for an economic recovery.
The economy needs consumers to spend on goods, so businesses
will spend for labor and supplies to produce more goods, creating jobs, making
banks more willing to lend if more consumers have jobs, and businesses are
making more assured profits. Each group needs the others to make the first move in a
financial catch 22. Consumers won’t buy because too many don’t have jobs.
Companies can’t provide jobs because consumers aren’t buying. Banks are happy to
stay out of it and use their cash to make acquisitions to become even bigger.
Investors are happy on the sidelines. Although making close to zero return on
their cash, at least they’re not losing money in the stock market. It took the government to step in last year and get things
moving by giving potential home-buyers cash to make down-payments on homes, cash
for clunkers to buy new automobiles, cash to financial firms that was used for
trading to bid up the price of stocks and commodities. Through it all not much non-government cash moved into play.
Most houses that were sold were to first-time home buyers who received the
rebates, or auctioned and foreclosed homes at bargain prices by those hoping to
flip them later. Most auto sales were just pulled ahead from future quarters by
the rebates. Once the rebates expired, housing collapsed, and auto sales are in
decline again. In spite of the impressive new bull market in stocks,
investors continued to pull money out of stocks and equity mutual funds all last
year. Lipper FMI reports that money finally started to flow into mutual funds
this year. But after $7.4 billion had flowed into funds during the 2nd
quarter, the flow reversed dramatically, with $11.6 billion pulled out of equity
funds in the week ended July 7. So is it a real recovery or just an illusion of one,
artificially produced by government spending but unable to stand on its own? Concern is growing that if it turns out the recovery is
stalling too significantly, what stimulus tools are left, with interest rates
already close to zero, massive amounts of mortgage-related assets already on the
Fed’s balance sheets from the bank rescue last year, quasi-government mortgage
giants Fannie Mae and Freddie Mac already in trouble themselves after being by
far the major lenders in the now stalled housing recovery, and Congress in no
mood for another round of stimulus efforts that would boost federal budget
deficits even further. It leaves mostly the hope that somehow or other the inflow of
cash and artificial stimulus last year jump-started confidence enough to feed a
continuation of the recovery on its own, and that this is only a minimum pause
to collect itself. But there is little evidence of that, with real estate sales
collapsed once the home-buyer rebate plan expired, retail sales, consumer
confidence, and manufacturing slowing even faster than economists can revise
their forecasts. My December 31 forecast for 2010 still stands, that problems in the real estate sector would return once the rebates expired, that consumers would hunker down again, and that investment profits this year can be really substantial but will mostly come from downside positioning, at least until the important market low I expect in the October/November time-frame.
Sy Harding is
president of Asset Management Research Corp, and editor of
www.StreetSmartReport.com,
and the
free daily market blog,
www.streetsmartpost.com. These reports reflect our opinions and are based on our best judgment, but no warranty is given or implied as to their accuracy. Past performance does not guarantee future performance.
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