A very interesting article by Randall Forsyth in Barron’s discusses the problem conservative investors are having right now. Economists are worried about inflation down the road if the government chooses to monetize its debt. But the current problem for investors is deflation.
Deflation has driven interest rates on cash to near zero. Interest income is $50 billion lower than a year ago. The recession has caused corporations—many of them financials—to cut dividends as well. I was surprised to learn that overall dividend income is down 25% from a year ago. And it is projected to get worse.
This can’t have a positive effect on consumer spending. And when consumer incomes drop, tax revenues also drop, which puts more pressure on the national deficit.
Investors are also in a bind. The best yields are available, as always, on the riskiest paper. Most of the time, if CDs and Treasurys have reasonable yields, the “widows and orphans” investors ignore high-yield debt. But under the current circumstances, I suppose there is a risk of investors stretching out their risk parameters to reach for yield. Given that bond mutual fund sales have recently been running at five times the level of stock fund sales, I’ve got to wonder whether all of that cash is ending up in an appropriate place on the risk spectrum.
