Watching Obama and thinking about the Economy

President Obama is on TV right now talking about businesses that can not get loans to fund growth and operations at the moment. While government spending can stimulate the economy (or restrain it) only the private sector can create the jobs that add to the nation's productivity and increase the Gross Domestic Product.

I tend to believe that for the next 3-5 years, we are going to face a "Cash Driven" economy. The financial markets have been gutted (already reshaped but not yet restructured) and government bailouts are going be diminished as they lead to inflation in some way, shape or form.

Given these limitations, those enterprises and product/services that work well on a cash flow basis are at a distinct advantage to those that do not.

While laid-off workers struggle to maintain their households, the biggest hits in the current shakeout have been to individuals and institutions with invested "wealth". Whether those losses occurred in real estate, equity (stock) markets or the derivative financial products based upon those markets. We have to face the fact, that we have lost one-half of a generation worth of "wealth" in a six month period of time.

The initial roll-back in investing was to cash equivalents and better yielding bonds. The shift of this capital is what created the sucking sound as the floor repeatedly fell out of the market for real estate and stocks. The bond market can only support a modest amount growth before it becomes a diminishing returns game with supply already outstripping demand on the borrowing side.

By necessity money will move back into traditional equity investments. They are in the long-term the only places for large amounts of equity to be invested and generate inflation beating returns. However, reinvestment will require positive cash flow and will favor cash-positive real estate investments and dividend paying stock. Individuals and institutions cannot afford (in the short term) and will not accept (in the midterm) investments that do not return a real cash dividend.