HUMMONEY - Is Credit Worthy? (Perspective)

--- By Greg Lewin 

Credit: Belief or confidence in the truth about something.

People who lose confidence in the value of the US currency may choose to buy gold.

People who lose confidence in the political system may choose to not vote.

People who lose confidence in the economic system may choose to stop looking for a job.

And bankers who lose confidence in the health and welfare of businesses and entrepreneurs may choose not to grant credit.

In the most recently reported 3^rd quarter, the 18 biggest commercial banks in the U.S. earned almost $17 billion dollars, with almost half of those profits coming from drawing down loss reserves. It would seem logical that if a bank sensed that things were a little less risky they would then carry lower reserves against loss and therefore choose to lend more.  Yet everyone is perfectly aware that lending continues to be virtually nonexistent.

Corporate balance sheets are widely reported to have historically high levels of cash on their balance sheets generating almost no returns in our low interest rate world. Yet investment in capital, research and new employees continues to be very disappointing.

And the US Federal Reserve keeps flooding our economy with newly printed dollars in an effort to get interest rates close to zero in order to discourage savings and encourage spending, yet no one wants to spend.

Credit, belief, confidence.  As investors, if you really think about it, it’s almost all you really have! We rely on company managements to share with us their appraisals of the future, we look to our elected officials to make sound policy choices and we look to other investors to behave rationally. But when the messages are unclear and behavior seems not quite right we stop spending, we refuse to invest, lending shuts down and we might even chose to buy some gold.

Remember, as investors you must marry the fundamental prospects of that which you invest in with judgments of valuation of the assets or companies you are investing in. And the ultimate arbiter of the value of that asset or business is the after expense and after tax cash it can return to investors. In the vast set of circumstances it takes years to generate enough cash to produce attractive returns. And if its years it takes then it is confidence you need. So maybe we should wait for those who professionally dispense credit to exhibit a little confidence before we volunteer our own.

---The views expressed here are of the author, HUMMoney contributor Greg Lewin; currently a General Partner at TLF Capital, an investment management firm. During the past 26 years he has been a senior money manager or partner in Wall Street firms including Neuberger Berman, Charter Oak Partners and Sailfish Capital.