The same culprits that came out of the woodwork last summer to predict impending recession are back at it. The amount of airtime being given to these folks, after they so missed the call last year, is amazing.
I was stopped by a business owner on the street who had just read the latest edition of one of Canada's noteworthy news magazines and was visibly upset -- not by the dark prognostications, but because of how negatively biased it was. I suggested it might make good lining for a bird cage.
One of the reasons I have been loath to join the doom-and-gloom crowd in recent weeks has been the state of corporate finances in North America. We have just come off multiple quarters of strong earnings performance, leading to bloated cash balances among firms. In the U.S. alone, the cash hoard is close to two trillion dollars and climbing. Canadian firms are enjoying decent profit growth as well, although the drag from the lofty Loonie is being felt. Bottom line, this latest go round of negativity has nothing to do with a lack of earnings or liquidity, as we dealt with in 2008. Quite the opposite in fact.
This is all about waiting for firms to open the taps and start using their burgeoning sacks of cash. Similar to households, companies are more likely to build cash positions when there is economic uncertainty. This makes the difference between a firm staying afloat and getting capsized by a rogue recession wave.
Politicians on both sides of the pond, in their bungling of fiscal affairs, have caused the uncertainty that has prompted firms to build cash; however, smart CEOs will recognize that there is a limit to political ineptitude and that the tough fiscal decisions will inevitably have to be made. This realization will be one catalyst for spending cash, whether it's in the form of increased hiring, expanded capital investment, mergers and acquisition, raising dividends or simply buying back stock. The latter two will become particularly important in my opinion this half.
After seeing $6 trillion dollars of equity market valuation wiped out from the mess of the past several weeks, investors are understandably peeved. Retirement plans are being brought into question because of the decline in equity assets and severely depressed yields on fixed income paper. Investors know that companies have no control over the interest rates they are getting on their 'safer' securities (other than running a strong business and having a solid credit rating), but they can do something about yield on common stock. The longer firms resist the temptation to put earnings to work in expanding operations, the louder the call will be for dividend increases as compensation for the perceived added risk in holding stock in this environment. I would expect the call for share buybacks to also get even louder, particularly for those companies that either don't pay dividends or are on the low end of the dividend scale.
Since the start of this quarter, only 23 companies on the S&P 500 have announced share buybacks, according to Bloomberg statistics. This compares with 47 firms in the second quarter and 48 buybacks during the same period a year ago. While there is no guarantee that an increase in share buybacks will turn the bearish market around, it could protect against further significant (negative) technical milestones. That said, the more positive deployment of cash would be towards operations and not dividends or buybacks.
If uncertainty regarding the political ability to stabilize US and European fiscal situations proves transient, and firms start to look at increasing capital spending and beefing up payrolls, it becomes a win-win. Share valuations will be enhanced, but future revenue and profit growth will as well, providing for a stronger basis for dividend growth than simply the paying out of nervous cash hoards.
Brian Binley: One That is Easily Deceived
PIMCO: Treasuries reflect likelihood of recession
FACT CHECK: Recession Is Culprit In High US Debt
GLOBAL MARKETS-Gold sets record high, global stocks slip further
Here, with deregulation, the market was supposed to regulate itself. That did not happen. Instead we bailed out and rewarded the masters of fraudulant accounting and intentional lack of due diligence in underwriting standards. No market discipline where it was needed. So the system is working backwards, sucking resources from the non-rich majority and sending them to the international financial elite. Canada wouldn't be that dumb, surely. At this point, financial aid to the majority just increases the federal deficit.
We're in reverse Robin Hood mode. Being cheery and optimistic doesn't solve it. Since fundamentals were not fixed 2007-08, the problems will continue, and the Fed will keep encouraging speculation to keep oil and commodity prices high. Why invest when you can make more by gambling?
Look at a chart of MS, BAC or even GS.
Look at the European banks.
The entire western banking system is still insolvent and much of that insolvency has been shifted onto the backs of taxpayers.
This has NOTHING to do with sentiment or confidence and everything to do with the foundations of our economies collapsing under the weight of exponential debt burdens.
However, we can have a Great Renewal. We can immediately hire people to do 'infrastructure' (including millions of miles of bike/horse paths; clean up all our streams/rivers/ocean; tear down derelict buildings/parking lots and create urban farms; replant millions of acres of diversified forests/grasslands and hedgerows. Instead of extracting everything we need to reclaim the phrase 'growth economy' and grow a healthy planet so we can just survive in this changing climate and the results of overuse and pollution.
Wake up.
Seems to me you're blaming business for the financial mess, rather than the politicians who deserve the discredit. And you then suggest the political action of more spending on "infrastructure."
But I don't see how tearing down "derelict buildings/parking lots" applies to infrastructure, nor do urban farms (who would own these farms anyway and why should the government give them a handout?), nor does planting of forests, grasslands and hedgerows (and on whose land - should we give them this free "service"?). How exactly do horse paths contribute to the economy as "infrastructure"? Isn't that a government favor to a small segment of the population?
In summary, you blame the wrong agents for the financial mess, then encourage more government spending (which got us into the financial mess, the debt and the deficits) to reward political interests similar to the failed stimulus.
That is 3 times in almost as many years, that Main Street equity investors have gotten crushed. This time it was a brutal violence beyond anything imaginable.
"Taps" are not going to open up until Demand, that's Main Street, stops being crushed in every way imaginable. The Consumer can't de-leverage when he's paying more at the pump, more at the supermarket, more for simple healthcare, with states and municipalities waiting in the wings to save their butts by cutting services and raising taxes.
Unemployment is only below 12%, because the employed workforce % of the population has fallen below 1984. Wages are dropping and the Philadelphia Fed's outlook on business just missed estimates (+3%) by 8 standard deviations.. -30%.
There is only so much pain and risk people can stand.
I don't have a crystal ball like you and will start to put tiny bits of cash in good companies, but either Bernanke pulls a rabbit out of Jackson Hole, or this mutha and earnings are gonna crater.
If someone out there knows, please reply.
You ask why Congress doesn't see the value of spending money here rather than in the wars. Note that we spend about $700 billion in the wars, plus we have a deficit of $1,645 billion. Even if we quit spending money on the military, we'd still have a trillion dollar deficit. And we plan to have those kind of deficits for the forseeable future. We owe nearly 100% of GDP.
If I were a business owner, I'd expect taxes to rise such that it will no longer be profitable to produce in the US. It's obvious why companies aren't hiring - the government is making it very difficult to have a profitable business in the US. Government over spending just makes it worse.
Read the link and it sounds a little too dream-like to me. I think one of the most dangerous illusions of wealth is that it creates an aura of control. Yes, you can more perfectly control the environment immediately around you with great wealth but ultimately, as the French aristocracy found out in its isolation in the Ile de France, the vageries of poor policy and ineptitude catches up. There's that old saying: "You can run, but you cannot hide". I think there's a real conflict between wanting to isolate yourself vs. the realities of trying to maintain control over events that may threaten one's fortunes. Nation states exist, and so our affiliations (citizenship) with them because they are the most effecient means of providing for a common defense. If the super wealthy become Men Without A Country, they will find that the acquisitive will confiscate their productive assets and they (the rich) will have little or no recourse. They may be able to hire defense forces to protect their enclaves, but they will find the world sweeping past them and that they made themselves irrelevant. There are many more truisms and platitudes that apply. "Possesion is 9/10ths of the law, No Man is an Island, etc. The theory works if the rest of man-kind can be stripped of ambition. That's not the kind of hand I'd like to draw to.