Uncertainty: No Excuse for Hoarding

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.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (21)

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  • Report this Comment On June 30, 2011, at 6:01 PM, xetn wrote:

    Morgan: I agree with a lot of what you have to say in this article. There is always uncertainty. But there is also a new wrinkle; and that is the anti-business bias in the present administration. Practically no one has any experience; they are mostly attorneys, and bureaucrats. Nothing basically wrong with either except the idea of a profit motive.

    One interesting thing Obama mentioned in his speech was "taking a look at regulation". With some 80000 pages of regulation (not counting Obamacare) we could use a huge reduction in this overhead. Many of the regs were fostered by big corps/banks to prevent or lessen competition.

    What ever the reason for the regs, they are a huge burden on business (by a 2005 study regs cost every man woman and child over $6000 / year). That is the cost of compliance and of course, increase costs with out any benefit to the consumer.

  • Report this Comment On June 30, 2011, at 7:45 PM, copadomundo wrote:

    The difference between uncertainty in the past and uncertainty today is a matter of degree.

    In the past, uncertainty (excluding outliers like market crashes, 9/11, etc.) meant not knowing if inflation would be 2% or 4%, if labor costs would go up 3% or 5%, if the price of oil would rise by $20, and so on. Yes, there was always the uncertainty of the outliers, or Jimmy Carter taking office, but there was confidence one could survive these events while awaiting a better day.

    Now, however, we have the uncertainty of the direction of the country as a whole. Simply put, as of today we don't know if the country will return to its (relatively) free market history or if the US will become a nanny state like France, the UK or even Sweden. This next election will likely decide that outcome for at least the next decade.

    In the past, unpredictable outliers were the main "uncertainty." This time, though, we have an election only 16 months away that could mean the demise of many industries through nationalization. So, given that short time horizon, coupled with the current economic climate, isn't it prudent for management to hoard resources until this very predictable uncertainty clears? I say yes. It really is different this time.

  • Report this Comment On July 01, 2011, at 3:42 AM, electron1 wrote:

    "(relatively) free market history"

    had to laugh at that one.

  • Report this Comment On July 01, 2011, at 8:01 AM, JCashForever wrote:

    Not to get too preachy, but it's easy to spend someone else's money...or tell them how they should. If a small businessman or CEO of a large corporation doesn't want to spend his hard-earned profits, I'm not going to give him a hard time about it. It's their money not mine.

    Oh and BTW, Henry Blodgett is probably not a good role model for someone who "gets it". As a leading villain of the 2000 tech bubble, his sophomorically hypocritical rah-rah recommendations of "growth" tech companies with no profits, no revenues, growing debt, but with very low cash-burn rates were (at the least) unethical and (at the most) unlawful 10 years ago, and judging by his immature dialogue with Prof. Meltzer, he hasn't grown up very much in the intervening years.

  • Report this Comment On July 01, 2011, at 1:37 PM, astuber9 wrote:

    Interesting comment from JCashForever about Blodgett's past. Overall, I agree with Morgan. The uncertainty line is the biggest BS, overused excuse I hear from Republicans all the time. It's impossible to refute, there is always uncertainty. I'm not saying you close your eyes and jump in at any time, but you cannot stay on the sideline forever.

  • Report this Comment On July 02, 2011, at 12:45 AM, skypilot2005 wrote:

    Here's a related story about "Hoarding":

    Great Recession Cooks Friedman and Keynes

    http://finance.yahoo.com/banking-budgeting/article/113063/re...

    Sky Pilot

  • Report this Comment On July 02, 2011, at 9:39 AM, skypilot2005 wrote:

    A quote from the above:

    "Unfortunately, housing remains so weak and consumer spending so fragile that U.S. business owners are reluctant to hire new workers. And banks, stung by the financial crisis, are hoarding cash to meet more stringent capital requirements rather than lending.

    No wonder money is sitting on their balance sheets rather than circulating in the economy, as Friedman's theory predicted it would.

    The Fed's easy money policy is also weakening the dollar and creating some food and energy inflation, which in turn crimps domestic demand as consumers pay more in the grocery store and at the pump. And although stock prices have risen, the gains have been offset for many by the decline in home values."

  • Report this Comment On July 05, 2011, at 2:46 PM, wan2bretired wrote:

    "Politicians call for ..." Yes we should all follow their advise since they are such good fiduciaries of our money (taxes). If only we could print money to pay our taxes with!

  • Report this Comment On July 05, 2011, at 3:36 PM, hveagle wrote:

    Well thought out, well-written, Mr. Housel. But it seems to me that, as others have commented, "uncertainty" and its potential effects are not the same across the board -- industry, company size, and degree matter.

    I think that it's safe to say that, at some level, short-sighted perception and animal spirits are at the root of some hoarding (the same are to blame for excess spending/leveraging in "better" times), but in many cases, the decision to build up the cash reserves is well reasoned c/b analysis.

    Couldn't the same be said for individual investors? It's usually not a horrible idea to invest in cash, and sometimes it's a brilliant idea.

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