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THIS IS WHAT'S TRADITIONALLY BEEN the silly season in the news business, that slow period ahead of Labor Day when everybody's still on vacation and before the kids head back to school. And with most of Washington shut down, no news from the nation's capital usually is decidedly good news.
These days, the news vacuum has been filled with some of the most absurd commentary ever seen. With the thermometer hovering at July-like 90 degrees-plus over much of the nation in late August and early September, one is tempted to think it isn't the heat but the stupidity that's causing the spate of ridiculous commentary.
Take, for instance, the assertion that, in effect, folks such as my mother-in-law are causing unemployment to rise. This mystified me because she's always been a one-woman stimulus program with her indulgence of her grandchildren.
But like millions of other retirees, she's been pouring her savings into bond funds, which, it was asserted in a column on a financial news site, has the effect of killing jobs.
That's because the influx of money into bond funds is driving down yields, including those on corporate bonds. Companies, in turn, are lured into issuing billions of bonds at record-low interest rates. Thus armed with carloads of cheap cash, the companies use it to fund a surge of takeover activity. Those mergers and acquisitions then lead to layoffs, and so Grandma ends up boosting unemployment with her bond-fund purchases.
You can't make this up, or at least I can't as I lack the bizarre imagination to conjure this explanation of high unemployment.
In constructing this scenario, it doesn't occur to this fabulist that, rather than low interest rates spurring corporate management to make reckless acquisitions, depressed bond yields and takeover activity both are symptoms of the deflationary conditions that have followed the collapse of the credit bubble.
As has been widely reported, companies are sitting on a pile of liquid assets. That is because they have more cash than profitable investment opportunities, especially for internal growth. One alternative is to grow by acquisition, say by expanding into associated business.
So, you see Hewlett-Packard (HPQ) outbidding Dell (DELL) for 3PAR just months after the former scooped up the moribund Palm. Had there been great growth prospects in H-P's core businesses, would the computer and printer maker gone on its acquisition spree? As for the mass sackings by former chief executive Mark Hurd, they took place before the recent bond-fund boom.
Grandma, the supposed enabler of this corporate craze, actually is at the leading edge of the demographic wave that needs income from their investments on which to live. She previously could get high, risk-free returns from her bank—a global institution that plunged into the seemingly lucrative market of lending to American consumers, including subprime mortgages. So, I suppose, she is culpable on that score as well, by this line of reasoning.
The Baby Boomers who follow her (demographically) also need income-producing investments as their retirements draw ever closer. But, despite the influx of cash into bond funds in the past year, they remain relatively underinvested in fixed-income assets. While bond funds have seen a $382 billion in inflows in the past 12 months, in contrast to the $18 billion outflow from equity funds, stock funds still hold nearly twice as much as bond funds--$4.9 trillion to $2.5 trillion. (All those numbers come from the latest monthly data from the Investment Company Institute as of Aug. 31.)
What's painfully obvious is that corporations and savers alike face diminished opportunities for returns. That is the result of the bursting of a credit bubble and the resulting debt deflation. The quest for higher returns in the bond market isn't the cause of this trend, but the effect.
Comments? E-mail us at online.editors@barrons.com
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