Patriotism Before Profit? Don't Even Ask

02/09/2011 12:33 pm EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

If you wonder who’s really running America, look at who’s calling the shots … and who’s asking for mercy. Bet on the side with more money, writes senior editor Igor Greenwald.

He joked about charging them commission for his salesmanship overseas, but everyone at the US Chamber of Commerce knew the score: President Obama needs big corporations’ help a lot more than they need his.

They’ve already got the extension of the tax cuts and the payroll holiday, accelerated depreciation and rock-bottom interest rates. He still needs them to start hiring in earnest, and to invest in the US after years of profitable neglect.

Hence Monday’s hard sell, complete with the appeals to the executives’ patriotism as well as self-interest. “Ask yourselves what you can do for America,” the president beseeched a group that has spent millions on ads against some of his most cherished initiatives.

In any case, it was no sale. To favor the US for patriotism’s sake would be to breach boards’ fiduciary duties, pointed out Chamber officials. And that $1.9 trillion in cash sitting on corporate balance sheets? Let’s just say that share buybacks don’t require health insurance or 401ks.

With corporate margins and profits at a record high and corporate balance sheets ostentatiously rich while public ones are hopelessly swamped, never has Big Business wielded this much power, not even in the laissez-faire days of Ronald Reagan and George W. Bush.

When Corporate America Roamed the Earth

Corporations have steadily reaped the benefits of replacing costly American workers with cheaper foreign ones and of supplying the faster-growing emerging markets. Now the very yardsticks of their success, share prices, are getting an admitted extra fillip from a Fed devoted to pump-priming.

PIMCO’s Bill Gross recently had this to say in a Barron’s roundtable:

“Corporations are probably at the peak of their domination. They dominate versus labor in terms of their ability to export jobs and production overseas. They dominate now in terms of Washington, given the Republican electoral victory and the Obama administration's moving toward the center. They even dominate with regard to the Supreme Court, as evidenced by the recent ruling removing limits on corporate donations to election campaigns. This is all good for the market, but not for Main Street in the long run.”

At about the same time, noted portfolio manager Jeremy Grantham devoted an entire missive to “the undue influence of corporate America on the government, and hence the laws, taxes, and social policies of the country.”

The president who a year ago castigated “fat-cat bankers” for taking “reckless risks” in pursuit of quick profits and massive bonuses” might agree, if his ex-J.P. Morgan chief of staff hasn’t persuaded him otherwise yet.

But this is not last year’s Barack Obama. “I understand that you’re under incredible pressure to cut costs and keep your margins up. I understand the significance of your obligations to your shareholders. I get it,” the president told business executives Monday.

Where to Place Your Bets? Hmmmm
Meanwhile, corporate tax receipts are down by a third since 2008, and federal tax receipts as a percentage of economic output are at their lowest point in 60 years. Federal spending is up, of course, driven by Medicare and son-of-stimulus. But it is not the only reason the deficit now packs thirteen digits.

Click to Enlarge

And even as business recovers, government coffers will be paying the price for the Great Recession for years to come. The next $50 billion of General Motors (NYSE: GM) profits are tax free, thanks to the ever-generous Uncle Sam. In all, GM will save $45 billion in taxes over the next two decades, according to The Wall Street Journal. Tenet Healthcare (NYSE: THC) is sitting on $2 billion in net operating losses to be offset against future profits. JDS Uniphase (Nasdaq: JDSU) has $9 billion of such losses aiding its bottom line. And so on.

There’s only one implication of all this for investors, but it’s a big one.

Equities represent stakes in a thriving economic ecosystem making more money than it knows what to do with. To call this paradise Corporate America would be deceiving because it’s global in scope and distinguished by disdain for national allegiances. In contrast, holding Treasury bonds requires a bet on the long-term management skills of a struggling government saddled with all the people who got kicked out of paradise or never gained entry in the first place.

Put like that, the choice is easy, is it not?


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