Deflation Winners

Are American high tech companies the big winner from the current bouts of deflation? Is the US itself a winner? Remember, deflation changes all the rules we've been used to. You've got to think upside down now that cash is king, at least temporarily.

Fred Wilson points out that companies like Microsoft, Google, and Apple have loads of cash and no net debt. He speculates that the others will emulate Microsoft and do massive stock buybacks at the their current relatively low trading prices. That would be a pretty boring use of all that cash. Remember that traditional companies in our economy – phone companies, for example – run on mountains of debt. Debt's hard to get now (how's that for an understatement?). Debt you've already got is hard to roll over. Is there an opportunity here?

Well, the high tech companies have been fretting that the phone companies will become gatekeepers on the Internet and suck value and tolls out of the exchanges between the high tech companies and their customers. Should Google just buy AT&T? Or supply it with financing? Should Intel begin making the guts of cars and Microsoft supply operating systems for them? I'm sure there are better and more exciting ideas than these but we are in a time when the nouveau cash rich can run rough shod over the debt-ridden legacy companies even though the two are not usually thought of as direct competitors.

And what about the US itself? Certainly we've got plenty to worry about in our own market meltdowns; most pundits first reaction was to say that the financial crisis was a step in the downfall of the US? If so, how come the dollar is going up against almost every currency except the Yen? We worried that foreigners might not be willing to finance the borrowing that the US is doing (wisely or unwisely) to prop up markets. Well, the foreigners voted with their money and the interest rate on US bonds keeps going down – for short term US notes the real interest rate is below zero: Uncle Sam is being paid to hold the world's money.

I have a theory about that. See, cash is king but what's cash? Most of us don't keep it in our mattresses. It's not gold because that goes down in times of deflation. It used to be money in the bank counted as cash but people have gotten so nervous about banks that even the strongest are being partially nationalized. Money funds now have a limited guarantee for old deposits in the US but not much of the rest of the world. So what's cash? Turns out for many people it's an IOU from the US – all antiAmericanism aside for the moment.

Hmmm…

Deflation Primer is a related post.

Comments

[longggshot]

Google and particularly Microsoft should use their cash to corner the market for funding innovation(startups) in silicon valley and beyond.

[Tom Evslin]

Fred:

You're right, of course, that Apple buying at&t as a backend for iPhone makes sense. Although that would still perpetuate a closed system.

I'm not so sure about defending stock even though I tried with both personal purchases and company purchases at ITXC. Now think that most focus on the stock is shortsighted and usually futile so concentration should be on the business behind the stock.

[fred wilson]

more likely apple buys AT&T since it's Apple's network now

Google should buy t-mobile since its the most open carrier

but i also think they need to defend their stocks when investors are throwing the baby out with the bathwater