War On Savers: What Do You Do With Cash Earning Nothing?
It pays to be a debtor in America. In the land of the Federal Reserve where your savings are constantly diluted by the printing of billions of dollars on a daily basis, your savings are literally losing purchasing power every minutes. Wonderful.
Coupled with a debased currency is a world of ultra low interest rates where you can’t even earn a nominal return. This impacts the bond market, and as the WSJ recently discussed, retired Americans dependent on bonds returning a yield are getting killed because they can’t get any yield on their savings and bonds. Interest on savings and bond returns are the foundation of many retired Americans. When the rates drop, the “income” drops for these people.
So, you have a situation where the Fed is printing money to fund the government (which much of Federal spending is entitlements) while at the same time hurting the recipients of entitlements (retirees). Quite the solution!
Now, I’m a long way from retirement and so are many of you, so the problem is a bit different. Instead of being dependent on higher rates for income, we seek yield to grow money. With low returns on savings, it makes it harder to initiate a compounding interest cycle that produces real wealth. In fact, like I said already, our savings probably have a negative real return after inflation/debasement.
It makes it necessary to either be more aggressive which usually takes the form of investing in stocks (hmmm, could we have maybe hit on the Fed’s ultimate strategy?), but is this the smartest thing to do? I hate dumping money into stocks just because everyone else is doing it, and that is definitely what is going on right now – I’m very wary of the market when the masses are so bullish.
In order to earn a real return, you have to find a way to get those extra points of return that used to be automatic just by saving. One way to do that is market timing. Market timing is very hard, and most advise against it for good reason. It’s not impossible, but the vast majority fail in the attempt.
The other option is to save more and put away more in order to offset the lack of return. This means having a lower standard of living and lifestyle in order to sock away more money on a regular basis. This sucks of course but for many this might not be avoidable if they desire to accumulate any money.
The other interesting discussion point is the corporate balance sheet. For my entire investing life, I’ve always put a value on the companies with no debt and a bunch of cash. In today’s world, the tech companies are often these companies. Apple, Inc. (AAPL) is of course one of the best examples of billions and billions in cash and zero debt.
With the current environment, however, I now question this. Holding $50 billion in cash isn’t necessarily the best strategy right now when that cash is literally losing value.
Consider a company like McDonald’s Corporation (MCD) that does have some long term debt. As you can read here, the company recently sold 10 year debt at 3.5% and 30 year debt at 4.875%. That is an insanely low cost of capital usually reserved for the likes of the U.S. government. The McDonald’s management has shown a very statute management of cash and capital by using the debt market for additional liquidity.
In today’s economy, I might actually prefer a management that knows how to return cash to shareholders and acquire an insanely low cost of capital for liquidity and for funding growth. Obviously, too much debt can be a problem, but companies like Wal-Mart Stores, Inc. (WMT) and McDonald’s have plenty operational cash flow to cover the debt.
Apple on the other hand is sitting on a crap ton of cash and doesn’t return any of it to shareholders. Apple has everything else in the world going for them, and it’s not exactly the biggest negative in the world, but with that said, today, I want the management of the companies I invest in to understand the capital markets and know how to leverage the current environment to the advantage of the company, while maximizing shareholder return.
If all of this is just nonsense to you, and is frustrating and too complex to worry about, well, you can thank the inflationary policies of the United States led by current Fed Chair Ben Bernanke. I doubt he cares what you think though.