In a recent post, "Economy Going Nowhere: Listen to the Deal Makers", I argued that there was a dearth of merger and acquisition activity because of the prevailing attitude of dealmakers.
Now, we get further information that economic growth and corporate profits are expected to remain weak for quite some time.
Henny Sender writes in the Financial Times:
"Global mergers and acquisitions are at their lowest levels since the first half of 2004, according to data from Deallogic. The Americas was slightly better-merger activity was up 4 percent compared with the first half of 2012. Announced deals are down 20 percent from last year, according to Credit Suisse."
For one, economic growth is tepid and is expected to remain so for some time. The year-over-year rate of growth of real GDP was 1.6 percent for the first quarter of 2013 and is expected to remain at or below 2.0 percent for the next four to six quarters.
"Moreover," continues Ms. Sender, "revenues aren't growing for most companies while all the easy operational fixes have been done…"
Furthermore, analysts are arguing, the Federal Reserve's quantitative easing is actually contributing to the slowdown of deals.
It is very attractive to borrow at the rates now existing in the debt market. But for a private equity firm, for example, a crucial question concerns the cost of money when it is time for the private equity fund to let go of the companies it would be buying right now.
Furthermore, prices of companies are high because of the exceedingly low long-term interest rates. In five years, at the time the private equity fund would be seeking an exit from the acquisition, long-term interest rates are likely to be much higher, lowering the value of the acquired firm.
Artificially low cost of debt means that the price of a potential target goes up today with the fear that when the price of debt rises in the wake of the Fed's planned tapering, the buyout firm won't b be able to sell at a much higher price tomorrow because the next buyer's cost of capital will be higher.
Writes Ms. Sender, the head of buyouts at one major private equity company says, "Nobody wants to bet the ranch now because where the Fed is setting the 10-year today isn't going to be where the market sets it is the future. Since I don't know what the long-term cost of capital is, I have to be conservative."
Further, Ms. Sender writes, "companies are reluctant to sell divisions because they tell buyers they don't know what they would do with the money. They don't feel like investing in the business and they can't earn a decent return on the money while their projects are on hold. And in many cases, they have bought back a lot of their shares already."
But this tends to cycle back in terms of economic activity. Low economic growth is holding back M&A business, but the slow M&A business contributes to low economic growth.
Policymakers are in a bad situation. And, as the economist John Taylor writes in the Wall Street Journal, "A growing number of economists, former central bankers and senior government officials -- including Martin Feldstein, Paul Volcker, Allan Meltzer, Raghu Rajan, David Malpass and Peter Fisher -- have now concluded that the Fed's policies are not working."
Later in the article, Taylor adds, "More policy makers and economists are coming to realize that the Fed's unconventional monetary policy is not working. Yet there is also a sense that unwinding is too costly right now and can't be reversed."
In other words, Mr. Bernanke and the Federal Reserve are damned if they do and damned if they don't. All the unconventional monetary policy the Fed has imposed on the economy over the past three years or so has not worked in terms of stimulating a more rapidly growing economy and lower rates of unemployment, and it has placed the Fed in the middle of a huge dilemma.
The Federal Reserve has no good path to follow. Continuing to inject massive amounts of funds into the economy is not producing the economic growth the officials at the Fed had hoped for and it is producing bubbles and helping the wealthy to get wealthier.
And over the past week or so, we saw what is ahead for us if the Federal Reserve begins to "taper" off its purchases of securities. Tapering is not going to help the less wealthy.
One shudders to think what might happen if the Federal Reserve ever begins to act like a classical central bank again!
In all the policy actions of the Federal Reserve over the past three years or so, the one thing that seems to be constantly missing to me is the Fed paying any attention to what participants in the market place are doing.
Right now, the Fed continues to pump funds into the banking system. Buyout funds and others continue to sit on their hands. Other holders of wealth apparently are making lots of money in the credit bubbles that have been created. The economy continues to grow modestly. Under-employment remains around the levels achieved in the late 1970s and early 1980s. But the Fed appears to be tone deaf.
Policy makers need to pay attention to the people making the money. However, the tendency has been to be critical of those that are making money. They must be doing something bad.
It is too painful for the policy makers to think that the people making the money might be doing so because of the opportunities that they themselves have created.