Increased Business Confidence: Will it Propel Growth?

Bubbles in the air…

by Ron D’Vari, CEO & James Frischling, President, NewOak


Last year’s run up in asset valuations, propelled by investor exuberance, has created a potential bubble that could burst. In order for valuations to hold up, general business confidence needs to increase and translate into increased capital spending.

Since the beginning of the credit crisis, companies have amassed more than $3 trillion in cash, built up by cautious capital investments inspired by economic uncertainty. First they were worried about global financial stability, precipitously falling U.S. housing prices and high unemployment. Following on those concerns were fears of a European slump, Asian slowdown and slower global growth. However, these anxieties are beginning to wane.

The moon, the stars and the planets seem to be lining up to drive the strengthening of business confidence globally. There are fewer concerns about Europe and Asia, partly because China and Japan are both pursuing pro-growth policies while hacking away at their structural issues. Furthermore, U.S. economic growth has proven durable, partially propelled by a solid equity performance while the Federal Reserve remains delicate with its decisions on tapering quantitative easing.

Increased capital spending will go toward replacing outdated equipment and information systems infrastructure. Despite significant under-investment in the past eight years, businesses are starting to see the need and the advantages to be gained by technology investments in big data, social media, and e-commerce.

The moon, the stars and the planets seem to be lining up to drive the strengthening of business confidence globally

Increased capital spending, combined with robust consumer confidence, will fuel optimism for durable global growth and will benefit the markets and asset valuations in general. We also expect continued improvements in the U.S. job market and expansion of the housing activities. These factors combined would certainly justify ongoing investor exuberance.

Improving Consumer Credit? Not For Student Loans

Consumers have learned a few lessons from the financial crisis. As a result delinquencies in credit card, autos and especially mortgage debt have all declined. The $1 trillion student loan market is the exception as balances and delinquency rates have risen to record levels despite the improving economy.

While data in the student loan market continues to be more opaque than other markets, the Federal Reserve Bank of New York reported that the share of loans delinquent for 90 days or more increased by nearly 12% in 2013.

The federal government is the risk-taker on the vast majority of student loans. Similar to the experience witnessed in the growth and risk-taking in the housing market, the rapid expansion of the student loan market, combined with the benefits afforded by government guarantees, is a source of concern. Regulators are on the lookout for abusive practices, with particular focus on student loan servicers and lenders working with for-profit colleges.

The rising delinquency rates and eroding quality of student loans isn’t an issue that is solely contained between the borrowers and lenders. Very much like the housing market, the government is on the hook for much of the losses and the creation of an indebted class of consumers will impact future buyers of cars and homes.

Not all student loans are created equal and a number of for-profit schools are being investigated for unlawful acts, primarily because the default rates of their students are a multiple of the industry averages.

The Consumer Financial Protection Bureau is concerned about the student loan market because of the misalignment of incentives and how the market may not be working properly. The Securities and Exchange Commission is looking for answers and issuing subpoenas. Follow the money because the next financial litigation battle is going to be an education about higher education.