Thursday, February 14, 2013

Could the new round of mega mergers spark an economic Earthquake?

United Airlines recently announced it's merging with U.S. Airways. Berkshire Hathaway and Brazil's 3G just announced they're purchasing Heinz for $23 billion dollars. This comes in an atmosphere in which shareholders are increasingly telling boards of big corporations to put their cash hoards to work or give it back to the stock holders.

Corporations around the world are sitting on trillions of dollars because the global economy doesn't seem to be offering worthy investments in the minds of many. However, like birds on a wire, when one or two key players decide it's time to go back to the lawn and forage, the rest soon follow en masse.

Warren Buffet has said he's ready for yet another big deal. He likes to keep about $20 billion on hand, which means, even after the investment in Heinz, Berkshire still has about $12-$13 billion to shop with. Apple is sitting on a mountain of over $120 billion in cash. Many investors have decided that putting enormous stockpiles of dollars into money markets in this interest rate environment is a waste of capital.

This could upset the government's apple cart. First, if companies start spending their excess capital instead of buying Treasuries with it, interest rates are going to go up, which means financing the debt gets even more expensive. It also means that money is going to find its way into the hands of people who actually have an idea what to do with it. There could be a rash of new start ups, which is great for the economy, maybe not so great for the government.

If investors start to get the idea that equities are a far superior play than government debt, interest rates go higher, faster.

Of course none of this takes place in a vacuum. The government will see some benefit in increased taxes, but will that outpace interest rate increases? Will the government try to put the brakes on growth, should it occur? Can they stop that train, once it's left the station?

We could be approaching the point where all that "kicking the can down the road" finally catches up with the government. The fact is, even a thriving economy can't fix their balance sheet without massive changes that nobody in Washington D.C. is willing to make.

But it's not all gloom and doom. We could conceivably have a financial disaster in the public sector along with massive growth in the private sector. Where it goes from there depends on how everyone reacts to such a dynamic. I'm not even going to try to predict that.

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