Full of Cash and Hungry for More

The Daily Reckoning U.S. Edition

Home . Archives . Unsubscribe

The Daily Reckoning | Saturday, March 23, 2013 What will the world do with all its cash... Readers weigh-in on crony capitalism and a lack of leadership... Plus, all this week’s reckonings archived for your bracket-busting enjoyment... --------------------------------------------------------------- The Embarrassing FACT We Found on Page 210 of the White House Budget... On Page 210 of Obama's latest budget, we found a fact that should embarrass... or enrage... every single American. It doesn't matter if you're a Republican or a Democrat. What exactly did we find? Click here to find out. Joel Bowman, reckoning today from Buenos Aires, Argentina... No time for garrulous preambles this weekend, Fellow Reckoner. We have 100 guests flying in from a half dozen countries around the world to attend a wee celebration we’re hosting here a week from today. That’s a lot of steak. A lot of wine. A lot of “¡Salud!”s...and a lot of sore heads... We’ll have more about all that when the big day rolls around but, for now, let us turn the mic over to Doug French who is, as the title of his essay suggests, in the mood for cash. Please enjoy... [NB. This column originally appeared in these pages on Monday, March 18, 2013.] The Daily Reckoning Presents... I’m in the Mood for Cash By Doug French “Cash is king,” was once the old saw. The saying became passé in boomtime. Nobody wanted to hold on to cash. There were stocks and real estate to buy, not to mention big screen TVs and granite counter tops. Besides, the PhDs at Federal Reserve stay up late at night figuring out how to make money less valuable. Ben Bernanke and his colleagues keep printing the stuff to solve what they fear the most: insufficient aggregate demand and liquidity traps. But for all of the Fed’s stimulus and the central bank’s desire to nudge people and businesses out of cash and into riskier assets, the cash hoards still pile up. The Economist reported last November that companies have been supplying cash rather than using it since 2008. Firms in the S&P 500 are holding close to a trillion dollars in cash on their collective balance sheets, an increase of 40% from the dark days of 2008. President Obama has businesses scared to death of investing. Instead cash is sloshing around in banks around the globe. In fact, banks themselves are swimming in liquidity. The loan-to-deposit ratio of America’s banks is a decades-low 70%. Plus, banks still have nearly $1.5 trillion parked at the central bank in excess reserves. You can get a sense of the significance by looking at the Fed’s data on money velocity. It serves as a measure of how quickly money moves. Lower velocity means higher demand for holding on to the stuff. This cash hoarding is a worldwide phenomenon. Companies in Japan have increased their liquid assets by 75% since 2007 to $2.8 trillion. Canadian firms have $300 billion sitting on their balance sheets, a 25% increase from 2008. When he was a governor for the Bank of Canada, Mark Carney told those companies to “put money to work and if they can’t think of what to do with it, they should give it back to their shareholders.” What’s enticing companies to leave so much money sitting around in demand deposit accounts, money market funds, or treasuries? Usually you might say that they earn more interest this way. But not so. Interest rates have never been lower. Lower rates would seem to discourage cash hoarding. Banks were hungry for money during the boom. Today, they are doing all they can to get rid of deposits. The central bank’s zero interest rate policy has compressed interest rate margins at banks. Banks can’t pay less than zero for demand deposits, so as lending rates and treasury rates have decreased, interest rate margins have been flattened. The fact is loan demand is still not up to boomtime levels, and, “The response has been to eliminate some unprofitable deposits,” writes business reporter Jeff Blumenthal, “effectively showing certain customers the door by adding fees or increasing pricing on certain products.” Still the deposits pile up. At the end of 2008, the total amount in loans and leases in America’s banks stood at $7.9 trillion. Four years later that total stood at $7.7 trillion. The total of Commercial and Industrial loans hasn’t grown at all, standing at $1.5 trillion at the end of 2008 and 2012. Meanwhile deposits at federally insured institutions have grown from $9 trillion at year end 2008 to $10.8 trillion at the end of last year. In his book Conquer The Crash, Robert Prechter explains that while the Fed may have an agenda to stimulate, “the ultimate success of the Fed’s attempts to influence the total amount of credit outstanding depends not only upon willing borrowers but also upon the banks as willing lenders.” It’s not just Keynesians like Ben Bernanke who think low rates equal animal spirits. Followers of the Austrian Business Cycle Theory claim that interest rates set below the natural rate tempts entrepreneurs into investing in higher order goods. These are goods involved in production, say land and factories, rather than consumption goods. As the Austrian story goes, these lower rates fool entrepreneurs into believing that consumers are saving, thus pushing down interest rates, instead of spending their money on consumer goods. Entrepreneurs start projects that are more “roundabout” and ultimately won’t be completed because the resources won’t ultimately exist to complete them. Another effect of artificially lowered rates is the distortion of the appreciation of risk. According to Tyler Cowan, Interest rates forced below the natural rate will lead businessmen to make risky investments (defined as “long-term, costly to reverse, high- yielding, and having returns highly sensitive to the arrival of future information”), that leads to clusters of entrepreneurial error. The Fed is desperate for businesses to make investments and hire people, whether they result in entrepreneurial errors or not. The stated plan is to lower borrowing costs for businesses so that borrowers will seek and be granted loans to do projects that require increased hiring. However, the results have been terrible. The headline unemployment rate still hovers near 8%. Three million fewer Americans are employed now than in January 2008. Median household income has dropped 9% since the end of 2007. GDP growth since 2007 has been just over half a percent annually. Here we are four plus years after the financial crisis and businesses are still building or at least holding onto precautionary assets. The Federal Reserve has done most everything in its power to ignite the animal spirits that would make businesses let loose of their reserve assets and put them to work more productively. While the Fed can create money and lower interest rates, it can’t change social attitudes. With 100 years of central banking under its belt, those operating the Federal Reserve give the impression that its PhDs can set this interest rate or create that amount of money and fix whatever ails the economy by spurring lending, borrowing, and in turn hiring. However, as Prechter reminds us, bullishness for lending and borrowing “cannot be set by decree.” Leave Wall Street and talk to people on Main Street, and you quickly learn that consumer sentiment is dismal. College graduates are underemployed or can’t find any jobs. There are as many as 20 million homeowners that are still underwater on their homes. A record number of people buy their groceries courtesy of food stamps. The negative psychology has created an extraordinary demand for liquidity, as evidenced by decades-low money velocity. The wariness of business to invest and instead hoard cash is a reflection of this negative mood. Try as he might, Ben Bernanke can’t do anything about it. The monetary authorities may have the will, but the negative social mood holds the sway. It’s the market’s way of thumbing its nose at the great and powerful. Doug French for The Daily Reckoning This is what happens when Hollywood meets Wall Street... Even though it reads like a script from a Clint Eastwood movie — an action adventure story if ever there was one — it could very well be your ticket to explosive short and long-term gains. Because it’s a story about dirty money, espionage and American subterfuge. It’s about counterfeit drugs, international intrigue and deceit. It involves the Department of Defense, our military might... and a congress-authorized sting operation... It’s about Senators John McCain, Carl Levin and the hearings they conducted... It’s about a company that has already, in one swift stroke, become our nation’s avenging angel, and potentially one of the greatest wealth-building machines of our time. And it’s about... well, why don’t you just read the whole story here for yourself. ALSO THIS WEEK in The Daily Reckoning... The Fed’s Interest Rate Madness By Douglas French March Madness is now in full swing. Fed Madness continues apace. The NCAA basketball tournament (which started earlier today) wouldn’t be very interesting without the 35-second shot clock forcing teams to shoot the ball. Forget slam dunks and three pointers, without the shot clock the game would be pass, pass, pass, while the clock would tick, tick, tick. The talents of big stars would be neutralized by opponents milking the clock. Bracketology? No one would care. Secretive Family, Solid Investment By Chris Mayer It’s one of the largest family-controlled banks in the US. I am sure this small fact had a lot to do with it skating through the banking crisis without any trouble or need for a government handout. Not only that, but it actually took advantage of the crisis by picking up busted banks while the government paid it to do so. Intrigued? What follows is the remarkable story of this secretive bank. An Infinite Amount of Money By John Mauldin I am often asked, “How can anyone not see the problems of growing debt in the US? Why can’t we get a consensus to change?” Part of the problem is that too many in power just don’t see the impending crisis that you and I see, or at least they don’t see the need to act now. That is changing — or so I thought until I read a most inexplicable statement by the billionaire entrepreneur mayor of NYC, Michael Bloomberg. This is the sort of thing that causes me to despair. Hi Ho Silver: Making the Case for This Precious Metal By Jeff Clark Even though the newsletter I write for Casey Research is focused primarily on gold, our metals investments cover all the precious metals, and when warranted, some base-metals plays too. And with the markets in the state they are, I want to say something about silver...My talk at the Vancouver Resource Investment Conference in January was titled Is D-Day for Silver Approaching?, and highlighted the delicate balance between supply and demand. Bye bye Fort Knox For more than 75 years Fort Knox has been a global icon of American wealth, power, and fiscal security — but that may soon change... It looks as though a new ‘Fort Knox’ is being created — and it isn’t in America. Can you guess who’s building it? Click here now to find out! The Weekly Endnote... And now, it’s over to a few readers for some thoughts, ideas and rumors... First up, Reckoner David writes... I know that John knows this but the debt situation is really just the symptom of our current malaise. Yes, the talk of debt infinitum is so patently ludicrous to be immediately discarded to the rubbish heap of stupid ideas. There really are two factors that prevent a solution to fixing the debt problem. The first is the presence of crony capitalism or casino capitalism or just plain corruption. Call it what you want but it prevents any real solution to the country’s problem as solutions unavoidably cause some adverse financial pain to someone with power. The second factor is the lack of a true leader with a vision for this country. This lack of vision is also intertwined with the first one but not necessarily so. I think we chose someone for president without any real world experience to form a vision. Don’t get me wrong; there really wasn’t much of a real choice between candidates in either 2008 or 2012. Maybe a tad better in 2012. When you have crony capitalism combined with a lack of leadership, the present situation is what you get. Will it change in the foreseeable future? Not till we get money out of politics. Someone wrote recently that America is in that awkward state where it’s too late to work within the system and too early to shoot the bastards. And on the subject of leaders, Reckoner John chimes... Oddly, our leaders perceive that they can, indeed, have something for nothing. When new debt is created, or money is printed by the Fed, that does not, in fact, create new goods and services. Someone who provides those goods and services gets that new money. The sum total of the community’s wealth does not increase, but those who have access to this new debt and money are able to take a share of the community’s wealth they did not earn by providing their own goods and services. Sounds like government to me. And on another, somewhat related topic, Reckoner Ernie wonders... One of your recent missives noted on this fact: corporations, as a whole, are hoarding more cash than ever. And it wondered why this was so. Two common & conventional reasons I’ve heard to date are: [1] there is nothing useful for the company to buy as its ability to supply easily matches its customers’ demand; and [2] as future government regulations & tax burdens are unclear, better to have a reserve of in-case money. While I think both these reasons are true-enough in some situations, I believe the most common reason is also the one most unspoken of. I believe these companies are insuring themselves against a future ‘debt-rollover crunch’. Most corporations hold debt-to-equity ratios of 0.5 to 1.5; outstanding corporate debt worldwide reaches in the trillions of dollars. Most debt issued to businesses run on 5 to 10 year terms. These medium-length loans often finance projects which will take much longer to generate the cash needed to fully repay their loan. So the expectation is the loan will be ‘rolled-over’ perhaps 3 or 4 times before the operations generates the cash to fully repay the loan. Unlike home mortgages where the principal is paid-off during the life of the loan, most business loans are interest-only until the final payment. It is only in that final payment that the original principal is returned as a ‘balloon payment’. During the Great Depression, somewhere around 50% of all US companies defaulted on their debt. Credit for new-loan rollovers just did not exist during that time. Today, if I was a CEO and I had millions of dollars of potential principal-payment due within a few years, I know I’d be making as sure I could that I would be able to meet those obligations with my own cash. Otherwise I’m at the mercy of bankers. I could find myself unable to find anyone willing or able to roll my debt ... and I’d be forced to default. Compared to bust, it’s ‘cheap insurance’ to hoard cash. Or in other words, senior business leaders worldwide see a possible ‘credit crunch’ ahead ... and they are doing what they can now to prepare for this possibility. And of course they aren’t going to be telling you this ... after all it’s ‘bad business’ to tell anyone (especially the media) that you are scared! Like your work. Keep it up. DR: A tip of the hat, good sir. --- Feel free to email any thoughts you have on the matter to the address below and... ..enjoy your weekend. Cheers, Joel Bowman Managing Editor The Daily Reckoning ---------------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your Editor at Large at joel@dailyreckoning.com Additional articles and commentary from The Daily Reckoning on: Twitter Facebook DR iPhone APP The Daily Reckoning is committed to protecting and respecting your privacy. We do not rent or share your email address. To end your Daily Reckoning e-mail subscription and associated external offers sent from Daily Reckoning, feel free to cancel your free subscription here. By submitting your email address, you consent to Agora Financial delivering daily email issues and advertisements. Please read our Privacy Statement. For any further comments or concerns please email us at dr@dailyreckoning.com. If you are you having trouble receiving your Daily Reckoning subscription, you can ensure its arrival in your mailbox by whitelisting the Daily Reckoning. 2013 Agora Financial, LLC. 808 Saint Paul Street, Baltimore MD 21202. This work is licensed under a Creative Commons Attribution 3.0 Unported License. Reproduction, copying, or redistribution (electronic or other wise, including on the World Wide Web), in w hole or in part, is encouraged p rovided the attribution Daily Reckoning is preserved. Attribution must include a link to the original article url located on http://dailyreckoning.com. Nothing in this e-mail should be considered personalized investment advice. A lthough our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice.We expressly forbid our writers from having a financial interest in any security they personally recommend to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of a printed-only publication prior to following an initial recommendation.Any investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.