Monday, January 19, 2009

Maybe it's a duke or prince...

I guess cash is not the king any longer.  And it held the throne for less time than an Italian prime minister.
Now a slew of economists and business school professors lecturing at the annual TEPAP management course here in Austin this week are mincing no words: Refinance now. Trillions of dollars in federal bailout funds will eventually ignite double-digit inflation, said Ed Seifried, a professor emeritus of economics at Lafayette College. "You may never see long-term fixed interest rates this low again." Yes, they might inch a bit lower, but the downside potential is small. His advice: Do it this week.
Likewise, TEPAP director Danny Klinefelter is urging growers to convert their equity into long-term debt and eliminate their annual operating lines in the process. If that means they have to park the excess in ultra-safe interest-bearing checking accounts, so be it. You might earn slightly less on savings that you spend on interest, but consider the margin "an insurance policy," Klinefelter said. [More]
I have long felt that cash-worship was based more firmly in psychology as opposed to long-term business planning. Farm business advisers are similarly biased to cash because it's easy to measure and offers that buffet-table allure - you can always convert it to any other asset.
Except when you can't.  The prime example of this situation is farmland, or more particularly nearby or adjacent farmland.  The illiquidity of the land market is severe, since few parcels come on the market except when prompted by generational change.
I fully recognize my aversion to cash, but suddenly more economists in farm country are looking father ahead than 2009 and speculating on the possibility of significant inflation.  I won't belabor my comments that this is now very probable and may even be part of policy plans.  Consequently, this argument strikes me as sensible to a point.
Rates will likely stay lower for longer than many observers suspect, simply because of the power of the economic down-spiral we are now working through. Asset value losses of 40-50% will not be easily forgotten, and consumers may have truly absorbed an attitude shift concerning consumption versus savings.  As a result, I think it will take 2-3 years after we reach the bottom for them to begin looking for slightly better returns than absolute safety (T-bills) can offer.
This is good news for the government which is borrowing those deposits, and good news for farmers.  There may be less urgency than Danny expresses above. This is a small quibble, of course, as interest rates for long-term money probably can't drop too much further.  
[Why do I have a bad feeling I just put that prediction on paper?]

4 comments:

Brian, Clark Co. said...

The examples from the Dtn article seem to show farmers increasing cash by borrowing long term at fixed rates. Klienfelter "is urging growers to convert equity into long term debt", for example. This is done to raise cash, correct? Another farmer wants to convert bins already paid for with cash to long term leases, again raising cash. The conclusion I reach from that article is one should be borrowing long term at fixed rates, and not short term at variable rates.

John Phipps said...

brian:

I get the same message, it's just striking to me to see the phrase "equity to debt" from the farm press where debt has been a necessary evil.

I also think the turnaround will not be so rapid as to worry unduly about short-term rates. I hope I'm wrong.

Bottom line: if folks are willing to give me money for 4% for 30 years what does that say about expectations for cash as a way to grow wealth, never mind withstand inflation?

anonymous said...

Where can you get 4% money for 30 years?

John Phipps said...

anon:

My comment was an exaggeration but with the average 30-year fixed mortgage dropping below 5% nationally, that means there are likely a few 4.5% mortgages being made. And with the target being mentioned of 4.5% average...you get my drift.