Asked what was holding them back from spending record levels of cash, a group of chief financial officers at a recent Wall Street Journal conference was fairly unanimous: uncertainty.
"Politicians are calling for companies to spend this 'excess' cash on new operations that would create jobs. But CFOs ... say the cash is a necessary cushion in an uncertain economic and regulatory environment," the Journal wrote.
Part of me gets this. It's tempting to wait until the future becomes clearer before investing. You won't hire an employee today if you don't know what they'll cost next year.
But part of me doesn't buy it. Not because you can find other surveys that show the overwhelming concern of businesses today is lack of demand -- by one poll, the percentage of businesses claiming government red tape is the biggest obstacle is on par with the long-term average. And not because repatriation taxes are a reason so much cash is being hoarded.
I don't buy it simply because there's always uncertainty. You never know what an employee will cost two years from now. You never know what regulations await in the future. You never know what tax rates will be five years from now. Uncertainty isn't black and white. All that exists is the perception of uncertainty, and that perception usually isn't drawn up by a careful analysis of the future. It's typically an extrapolation of the recent past -- often a terrible mistake.
Think about it. What kind of certainty are CFOs after? The certainty that existed in 2006, when the economy looked unstoppable and Ben Bernanke had effectively declared recessions a thing of the past? In hindsight, the economy was never more uncertain at that point. All that existed was a false sense of certainty extrapolated from the recent past.
Maybe they want the certainty of 2007, when the regulatory environment looked predictable as far as the eye could see? Maybe they're longing for the certainty that existed between 2000 and 2002, when the Congressional Budget Office predicted the federal government would be debt-free by 2006? Maybe they're looking for the certainty of Oct. 26, 1929, when economist Irving Fisher famously declared the market had reached "a permanently high plateau." Three days later came the largest crash in history.
A chief complaint among many businesses is that they won't hire because they don't know what health-care costs will be in the future because of President Barack Obama's health-care bill. But the fact is, we don't even know who will be elected president next year, or which party will control Congress. We never do. Just as uncertain as the potential costs imposed by the president's plan is whether the plan will be repealed next year, only to be revived by another administration, repealed again, and brought back in different form. It's a never-ending cycle of uncertainty. And it's nothing new.
Economist Hyman Minsky did some of the greatest work on uncertainty, if by accident. Minsky is best known for his theories on debt bubbles and their inevitable collapse (the point where economies begin deleveraging is called a "Minsky moment"). Inherent in his work is the idea that stability is destabilizing, and vice versa. A feeling of certainty causes people to take on lots of debt, which plants the seeds of a period of perceived uncertainty as the bubble bursts and the economy unravels. Yet during that unraveling, deleveraging and increased savings plant the seeds for a strong recovery -- and a period of perceived certainty. Uncertainty isn't only a matter of perception, but it's often mistaken for the normal swings of the business cycle.
Some business managers get this. Business Insider CEO Henry Blodget and Carnegie Mellon professor Allan Meltzer recently duked out the uncertainty question:
Henry Blodget: I run a small business. We are beset by uncertainty. It sucks. But the uncertainty is, 'What is the economy going to do over the long haul?' We don't give a moment's thought to what the administration is going to do.
Allan Meltzer: Well, don't you worry about what your tax rate is going to be?
Blodget: Absolutely not. I know taxes are going to be higher than I want them to be. Everyone would love lower taxes. But a marginal increase of 4 or 5 points in a tax rate is not going to change a [business] decision at all.
Meltzer: But what about energy costs? Finance costs? Health-care costs?
Blodget: So, is the government going to guarantee to keep those costs low for me? Of course not. Yes, those are things that you think about, but it's not a policy worry.
More broadly, successful businesses and investors get this. The most profitable time to invest is when everyone else refuses to. That usually happens when cries of uncertainty are the loudest. How many businesses aren't investing today because they don't know whether the return will be 10% or 12%, but will be spending cash with abandon when "certainty" returns and economic growth has pushed potential returns to, say, 5%? I don't want to think about it. But it's a lot.
Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.