Monday, July 25, 2005

Is the Federal Government: the best investment opportunity in the U.S.

On CNN/Money there is the headline:


Irrational anxiety on Wall Street stating: " Investors are worrying a lot lately. Are they ignoring strong earnings and reasonable stock prices?" Maybe investors still don't fully trust earnings reports.

The economy has been growing for three years now. If wage and salary income is stagnant, then this growth in income must be accruing to rents, interest, and profits. And yet we find that the match between buyers and sellers of corporate shares of stock is fairly evenly matched as evidenced by little net change in the major indices (DJIA, NASDAQ, and S&P). Investors (savers) are not eagerly seeking to share in ownership of listed companies. These business firms, although profitable are not eager to invest in new capital or capacity. Economists do point out that the balance sheets of these companies are quite strong – strong in that they are sitting on massive amounts of cash (One pundit asked if a particular computer company was truly a member of the high-tech industry or a credit union). This cash however is not sitting in the form of greenbacks stashed away in safety deposit boxes. Instead prudent financial managers of these firms maintain liquidity and asset safety by buying Treasuries (i.e., federal government debt instruments).

Presently the Federal government represents the best use of savings and investment funds – an unusual characteristic for the U.S. economy over the past 3 – 4 years. This is evidenced by the fact that short-term and medium-term yields on treasuries have held constant and longer-term yields (an on the 10 year note) have near historical lows (4.2% as of October 8, 2004). One would expect that with the federal government borrowing an additional $2 trillion since May 2002, that interest rates and yields should rise. But, there is little competition for loanable funds. The private sector either has few investment opportunities or savers are seeking the safety of government liabilities given a continued distrust of equity markets (given recent experience with Tyco, Worldcom, Qwest, Sunbeam, and others). Is preference for lending to the public sector rather than the private sector desirable in what most people consider to be the best example of a market-driven economy on the planet?

9 Comments:

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