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.
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 CDs). 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 dollars 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.
Disclosure: No Positions