Some people and institutions still have money, but they don’t know what to do with it after finding out they will earn only about 1-percent interest to save it.
Some people and institutions still have good credit, but despite being offered very low rates to borrow money, they don’t feel good enough about the long-term picture of this country to pull the trigger on anything.
And most people and institutions don’t have any money left and their credit is trashed, and they are waiting around for the government to do something to save them.
Under a typical historical background, the current low-interest-rate environment would have capital sloshing around the system looking for a place to go. At 1-percent interest, there is no incentive to save, and at 7 percent or better on investments and projects, there is every reason to get after it. That doesn’t seem to describe what is actually happening today, however.
People are grudgingly putting money in the banks and feeling bad about how little they are making on savings. How many new, large-scale projects have you seen lately? If it’s not government-backed, like wind farms, it isn’t getting launched.
Equities and gold are the only asset classes that have gone up this year. In almost any part of the world, you can spend a little less on a basket of stuff than you would have a year ago. Real estate is still heading lower. Big, durable asset prices are lower today than a year ago. Business is slow, and people are ready to make a deal. We won’t stay in this state forever. Something will have to give.
There is a real philosophical question that comes out of the current dilemma. How and where do you place your capital? There are a few major factors to consider.
First, while I do not want to sell gold or equities right now, their impressive runs over the past several months give me pause about making long-term commitments to them. Second, the tax environment is going to get a lot more difficult. We have to plan accordingly.
Third, any project that is not driven by either Apple or a competitor should not be dependent upon a general upsurge in consumer activity or spending. Robust levels of high-paying, high-quality jobs may never return to America again. Last, look for a government angle. This extremely unfortunate trend of bigger, more powerful government is global and long-lasting.
I realize some of you might think I’m nuts for staying in the stock market. Dubai is close to defaulting on its bonds. Taxes are going higher. Employment is going lower. These fears are real and they may be partly responsible for the reason the markets are holding together on lower and lower volume. The low volume has caused us to respect these fears and we are sitting in positions we can get out of quickly if we need to. For now, the stock market looks like it can hold itself together for a few more months, though staying bullish has to be almost a weekly decision.
One of the strongest messages the broad market is sending us today is that investors are looking for liquidity. That’s the main reason excess cash has gone into the stock market this year. People don’t like the idea of locking money up for several years and the only thing that will change their mind is some sense of greater security. That security may come from a better job market or even higher stock prices, but the fear of illiquidity will stay with us until people simply begin to feel better about the long-term future of this country.•
Hauke is the CEO of Samex Capital Advisors, a locally based money manager. His column appears every other week. Views expressed here are the writer’s. Hauke can be reached at 203-3365 or at email@example.com.