Are You Ready For The Rising Tide Of Cash?

The Motley FoolIt is often said that when America sneezes, the rest of the world catches a cold. Well, five years ago America not only sneezed – it was almost knocking on death’s door.

But thanks to a hefty cocktail of economic steroids administered by Dr Ben Bernanke, America has probably staged one of the greatest comebacks since Lazarus. Such can be the power of Quantitative Easing, which sounds more like a powerful laxative than a crude monetary stimulant.

The power of money

Unfortunately, though, none of us can know for sure what impact Quantitative Easing could have over the long term, though many will hazard a guess. What we do know, however, is that it has shaken the US economy back to life. The facts are plain for all to see, and for economists to digest.

Employment in the US is steadily rising and its economy is gradually expanding. Some seem surprised that this is happening. But it probably would have been more of a shock if neither of those two things occurred. Money can be a very powerful stimulant.

The next step in America’s economic rehabilitation is corporate recovery. And we should not harbour any doubts about that happening too.

We know, for example, that US companies have been building their cash piles. It is reckoned that they collectively salted away US$130 billion last year. This brings their total cash hoard to over US$1.4 trillion over the last five years.

A big stash of cash

That is a seriously large stash of cash. To put it into perspective, it is equivalent to five times the size of Singapore’s economy. It is also 16 times more than the amount of money that the US Treasury has recently been pumping into the US economy every month.

So, we shouldn’t be too concerned about America scaling back its money-pumping activities. There is plenty of money sloshing around the system that is just waiting to be unleashed.

The cash held by corporate America has been generated through modest economic growth, tight cash control and a sturdy performance by American companies overseas. But I doubt if any of us can even begin to imagine what could happen when the money held in the coffers of US companies is discharged.

Some of the cash has already been spent on dividends; some on share buybacks and some on capital expenditure. But there is still plenty of gas left in the tank, which could spur global markets higher when it is deployed.

Can you hear the bell?

Unfortunately, none of us can possibly know when that might happen. But then, that is half the fun of investing. No one will ring a bell at the bottom of the market to let you know that the time is right to buy shares.

No one ever rang a bell when the Straits Times Index  (SGX: ^STI) touched 805 points in 1998 and then climbed to 2,479 points a year later. Nobody sounded the alarm when the benchmark index bottomed out at 1,213 points in 2003 and subsequently soared to 3,875 four years later. And again, there was no claxon call when the STI hit its recent nadir of 1,456 points in 2009 before its ascent to 3,454 points in May this year.

The next market surge could be as sudden and as dramatic as the rises seen in 1998, 2003 and 2009, though no one could possibly have predicted them in advance. Then again, Warren Buffett once said: “Predicting rain doesn’t count; building arks does“.

The boat that I row

So rather than trying to second-guess the bottom of the market by poring over Chinese economic growth numbers; analysing to death the US Non-Farm Payroll data and attempting to read the mind of Ben Bernanke, spend some time building an ark for your shares instead.

Think about constructing a robust portfolio of income and growth shares that could be worth more in five or ten years’ time. That is what investing is about.

The time to buy shares is when pessimism is rife. It is the best time to unearth good companies that are selling at reasonable prices. You may not always manage to buy the shares you want at rock-bottom prices. But as Charlie Munger cautioned: “A great business at a fair price is superior to a fair business at a great price“.

So, look for those great companies, which you have always wanted to own, that are selling at a fair price today. But beware of fair businesses that are selling at great prices. The tide of money from corporate America could lift all boats. But why settle for a leaking dinghy when you can own a luxury yacht instead.

This article first appeared in Take Stock – Singapore.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.