Lack of Growth Opportunities Remains THE Big Issue

Whew!  My wife Dawn and I have made the cross country trek from Santa Fe, New Mexico to New York City and I begin my new responsibilities as a Content Director at the CFA Institute on Tuesday.  And, more importantly, Verizon, sidelined by a workers strike, has finally installed super fast fiber optic Internet in our apartment.  Fantastic!  So back to the blog…

Today I wanted to focus on the biggest issue facing the U.S. economy.  It’s not the unemployment rate and it’s not the U.S. government debt crisis.  No, instead, it is the lack of innovative ideas.

[By the way, I am finally being joined by a chorus of investors including PIMCO’s Bill Gross.]

As I have been highlighting since the late autumn of 2010 U.S. companies are sitting on mountains of cash.  Seemingly these businesses are bereft of growth opportunities.

Ironically, the Federal government debt crisis led to a decrease in yields on U.S. debt as nervous investors bid up the price of those same, downgraded, bonds.  It was reported that many of the buyers were corporate treasurers trying to earn yield on their cash positions.  Yet, the buying from all investors was so great in some instances that the real interest rates actually went negative for a little while.

What does it mean when real interest rates turn negative?  First, real interest rates are simply nominal interest rates less the inflation rate.  The idea is that, yes, you earn interest when you lend your money to someone.  But that interest rate, at the very least, has to compensate you for the rise in inflation.  If not, then effectively you are paying for the privilege of having your money borrowed.

So could there be any greater evidence that U.S. businesses are running out of innovative ideas than when they actually pay the Federal government for the privilege of borrowing corporate money?

To recount what has been enumerated many times, U.S. businesses could:

• Invest their mountainous cash balances in innovative projects to help grow their revenues or to save themselves expenses – but they aren’t
• Hire new employees to relieve the strain on an overall workforce whose productivity is slipping (perhaps due to being over worked for the last 2+ years) – but they aren’t
• Buy back shares of their own stock on the open market, thus increasing the returns to the remaining shareholders – but they aren’t
• Pay dividends to their shareholders and let shareholders figure out where they can earn a return higher than less than zero – but they aren’t

Unfortunately, the above list is not receiving attention from the business press.  Instead, the stock market declines and the possibility of recession brought on by the U.S. government debt crisis has been the focus for the last three weeks.  But the debt crisis is not THE issue.

After all, hypothetically, if the economy were growing at 50% + each year the U.S. government would have massively increased tax revenues.  Those dollars could then be used to pay down the debt.  Duh!

As an investor, which we all are, we have to ask ourselves one simple question at all times: in what investment can I earn the highest risk-adjusted return right now?  Right now, investing in U.S. publicly traded businesses looks to be a low risk-adjusted return.  After all, if you give them your money, they are taking it and investing it in bank deposits that are, in some cases, earning negative rates of return.  Ouch!

Obviating against this is that most U.S. companies are trading at remarkably low prices right now as measured by price to earnings (P/E) ratios.  As an investor I would place my attention on the following, in order:

1. Looking at my personal financial situation, am I paying someone an interest rate right now?  If so, use your investment dollars to pay down your debts in order of interest rate.  Paying off a credit card at an 18% interest rate is a quick way to earn 18% rate of return on your money.
2. If I have no debt – my recommendation in all situations excepting house, car and education – then I would look to invest in myself.  Is there a skill set that I need to have to make myself a competitive in the job market?  Is there a way of making myself more productive by increasing my ability to tap my right brain’s creative and intuitive powers (hint: what investment will help me relax and rejuvenate?)?
3. If I feel that I have invested in myself then I look at all of the other investment possibilities:
   • Local real estate whose value might be increasing faster than a savings account
   • National real estate whose value might be increasing faster than a savings account
   • Local businesses that need my capital to be launched to improve my community
   • National businesses that need my capital to be launched to improve my country
   • International businesses that need my capital to improve my world

Right now I am personally looking at U.S. businesses that continue to invest in their future growth and looking at ways of investing in less liquid investments, like real estate.

Sorry that it has been so long since my last post, please forgive me.

Jason