"Corporate and Individual Investors Choose Liquidity Over Long Term Investment"

Sydney M. Williams

Thought of the Day
“Corporate and Individual Investors Choose Liquidity Over Long Term Investment”
October 8, 2010

This morning the New York Times quotes the yield on the FINRA-Bloomberg High-Yield Index at 8.00%. A little less than twenty-two months ago that index yielded just in excess of 25%, suggesting returns on the index of 300%. – a remarkable comeback, especially considering that the economy still struggles, employment remains high and the government’s debt has increased at a rate that virtually mimics the return to high yield securities. From the depths of their March 2009 lows, stocks have rallied 74%, not bad, though not equal to that of high yield bonds.

At the same time cash remains high, both in money market funds, on corporate balance sheets and in other liquid assets. On the other hand, as former Fed Chairman Greenspan mentioned in an interview yesterday, corporate fixed investments are at record lows. It all suggests that cash is available, but investors are interested in liquidity as opposed to the type of long term investments – R&D, infrastructure, etc. – needed to make the kinds of improvements our economy needs to grow and flourish in a globally competitive world. Despite the trillions of dollars government has thrown at the system, they have failed to instill the confidence necessary to rebuild the economy.

The Federal Reserve’s next meeting will be November 2 and 3 – after the election – at which time they will likely decide as to whether to implement further quantitative easing. If recent experience is any guide, it would seem that any further easing is more likely to further debauch the Dollar, rather than help the economy.