There’s a lot of talk these days about “uncertainty.” And frankly, it’s getting a little old.
The fiscal cliff remains unresolved — but now that Obama has been re-elected, it seems had to believe some kind of deal won’t get done. Europe’s a mess, but come on — Greece has been rioting since late 2008. And Iran is driving the Middle East to the brink of war, but that hasn’t been news for decades.
Isn’t uncertainty the very nature of the human condition? As a matter of fact, isn’t uncertainty the thing that drives small-cap stocks, startups and uber capitalists — cast in romantic phrasings like “creative destruction” or “disruption?”
The problem these days isn’t a lack of security in the future, but a decided lack in innovation. As a result, there are no good ideas to spend any money on.
Lots of Cash, Nothing to Buy
Some insist that corporations aren’t in a position to be anything but defensive right now. They have to be focused on efficiency rather than growth in a challenging economic environment.
Uh … then what explains this list of frenzied, big-ticket buyouts immediately after the financial crisis and resulting crash in equity prices?
- In January 2009, Pfizer (NYSE:PFE) announced a mega-merger with Wyeth for $68 billion. Soon after, in March 2009 rival Merck (NYSE:MRK) snapped up Schering-Plough for $41 billion. The moves were meant to tap into the drug pipelines of these respective companies and offset revenue set to disappear from patent expirations.
- In November 2009, Warren Buffett and Berkshire Hathaway (NYSE:BRK.A, BRK.B) burned $26 billion on Burlington Northern Santa Fe railroad.
- In December 2009, Exxon Mobil (NYSE:XOM) dropped $41 billion to acquire natural gas giant XTO and diversify its operations in the ultimate hedge against crude oil.
It seems uncertainty actually was a good thing, in a way, because it depressed asset prices and perhaps made these deals more practical than they would have been a few years prior. The problem now is that the logical or attractive companies have already been bought, leaving little left on the shelves worth buying.
That doesn’t stop some companies from impulse buys. Microsoft (NASDAQ:MSFT) dropped almost $8 billion for Skype in 2011 … but it has few other uses for its foreign cash hoard, anyway, so why not spend those disposable dollars? Just don’t act like that will turn Microsoft around in a post-PC age.
In 2012, the cupboards are bare for big deals that actually could bear fruit.
Time to Invest in Yourself, Corporate America
If companies could spend a huge amount of cash like that so soon after the downturn, clearly it’s not impossible for big stocks to part with big bucks. So if there’s a lack of options right now, why not invest in yourself?
Some companies are doing exactly that. The “Global Innovation 1,000” report from Booz & Co. highlights the companies spending the most on research and development. The latest figures are from 2011, and Toyota (NYSE:TM) topped the list with some $10 billion.
But U.S. firms are painfully lacking in the rankings.
- America’s General Motors (NYSE:GM) lags Toyota by almost $2 billion in research spending.
- U.S. chipmaker Intel (NASDAQ:INTC) is behind Korea’s Samsung.
- Pfizer is significantly behind Swiss pharma stocks Novartis (NYSE:NVS) and Roche (PINK:RHHBY) both in nominal dollars and in the percentage of revenue spent on R&D.
It’s worth noting that, according to perceptions, the three biggest global “innovators” are, in order, Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG) and 3M (NYSE:MMM). But between the three of them, they spent roughly $9.2 billion total in 2011 research — and that raises questions about whether their rock-star status is based on past success or true innovation happening right now.
The lack of big projects, big expansions or stunning new products (no, a fifth-generation iPhone doesn’t count as “new”) might be a sign that big stocks are simply watching and waiting rather than truly looking for the next big thing.
Breaking the Cycle
It’s cause and effect — a lack of business spending means a lack of jobs and a lack of consumer power. And most economists and politicians would assert that the cycle works both ways.
But theoretically, shouldn’t the reverse also be true — that consumers spending more will enrich businesses, who continue to grow and hire and spend? What happens when corporations break the deal; when consumers spend but businesses don’t?
That might be part of the problem we are seeing right now.
After all, businesses have some $1.9 trillion in the bank just sitting idle — or if you want to get creative with accounting, perhaps as much as $5 trillion in cashcounting other assets and overseas money.
After all, CEOs are darkly pessimistic while consumers are upbeat.
After all, America is stuck in seeking “efficiency” through cutting and not “empowerment” through big ideas, as a New York Times column puts it.
As to how we break this cycle and enrich both sides instead of just one … that’s anybody’s guess.
So if you’re a consumer wondering about the best investments right now, it might be worth looking inwardly instead. There’s a decided lack of innovation and opportunity in corporate America right now, so invest in yourself — start your own business, or noodle away on what could be the world’s next big idea.
Because based on the last few years and the current data, if you’re looking to corporate America for a bright idea that will spark to kickstart economic growth … well, you might be waiting quite a long time.
- Alyssa Oursler shows how our focus on efficiency, not innovation, has gutted wages for workers. (InvestorPlace)
- In other views, why “disruption” is sometimes a smoke screen for hubris — as in the case of Uber. (Pando Daily)
- Check out more of the “Global Innovation 1000” about R&D trends. (Booz & Company)
- American corporations’ could be holding more cash than Germany’s entire GDP. (The Atlantic)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he held a long position in Apple but no other stocks named here.