The Recovery is Dead

John Ransom
Posted: Apr 17, 2014 12:40 AM
The Recovery is Dead

There’s a damning number regarding our economy that Obama doesn’t want to talk about. It’s a number, but for him, would be lower. And, lower, in this case would be a good thing for the economy.

“Although estimates vary,” says Joel Kurtzman, a senior fellow at the Milliken Institute, “American companies have between $4 and $5 trillion in liquid assets, a sum greater than the size of the German economy.”

How is it that companies can now have more cash than anytime in history, while unemployment remains so high, inflation in many goods so low, and national income grows so anemically?

Oh, yeah. Democrats at work. Shhhh.

If all that was needed to bring us a juggernaut economy was more money, we’d be in boom times boys.

But alas, while more money is the Democrat recipe for success in everything-- and generally good in the corporate sense-- in this case it’s a telltale sign that something is wrong with policies coming out of Washington.

Because those high cash balance sheets are telling us a few things.

They are telling us that hiring isn’t an investment that companies want to make right now: Too much risk and too little reward they fear to bring people on the payrolls.

They are saying that companies would rather keep cash on the balance sheet than make investments in new plants and equipment and even sales.

Again, this is a matter of balancing against risk and reward.

Many corporate types are more concerned that they have enough cash for the next downturn, versus concern with putting liquid assets to use to generate return on investment the old fashioned way, by growing their base business.

Instead companies have been doing things like buying back their own stock and passing out dividends to shareholders, which the site ZeroHedge calls balance sheet arbitrage.

ZeroHedge observed last year: “Curious why there is a sense that [there] is no real corporate growth in the US? Because companies are simply not investing in growth, and are instead all engaging in cheap balance sheet arbitrage, which makes corporate equities appear richer. The problem is that the debt remains, and once rates finally do go up...”

But this year, thing won’t be so easy says ZH.

The site says that in 2013 stock buybacks in the S&P 500 equaled about half the money that the Fed injected via quantitative easing. But now that easing is tapering, companies won’t be able to manipulate earnings upward by taking stock off the street.

Fewer shares means higher earnings per share. It looks good at earnings season, but it’s not the best way to use capital.

A better way would be for companies to buy other companies.

“The cash accumulation among five giant tech stock,” says YCharts, “Apple (AAPL), Google (GOOG), Microsoft (MSFT), Oracle (ORCL) and Cisco (CSCO) – continues, with their combined positions now totaling about $400 billion.”

But despite Wall Street continuing to pitch tech giants about the advisability of putting that cash to use in merger and acquisition activity, mergers are sluggish.

“By number of deals, year-to-date M&A is down 8% compared to 2012 levels,” says Thompson Reutersnof 2013, “and is the slowest year-to-date period for deal making, by number of deals, since 2005.”

In 2014 so far there have been some high profile deals: Comcast has proposed a merger with Time Warner, which faces significant regulatory hurdles; Facebook has purchased WhatsApp for $19 billion by over paying for a company that has 450 million subscribers, yet only $20 million in revenue for 2013.

Both deals cry desperation in looking for ways to put capital to work.

But even M&A activity is not the best way to put capital to work.

Or at least M&A activity is not a sign of robust economic health.

“The anticipated M&A boom could begin,” writes Bob Doll, chief equity strategist at Nuveen Asset Management. “Favorable signals include recession-like nominal GDP, vast cash reserves on corporate balance sheets and a growing activist investor base.”

Agitated investors, overblown cash balances and sluggish GDP growth are not signs that a recovery is under way.

In fact, they are each signs that perhaps the best of the so-called recovery is over.

The best way to put capital to work is by hiring, we can all agree.

But until the politics changes in Washington, D.C. that’s not going to happen.

And we won't get another recovery until 2017.