How To Invest $1 Billion Or Not

David Cay Johnston, whose trenchant analysis of tax policy is missed by the New York Times, recently wondered what he would do with $1 billion to invest.  His fantasies are more fiscally responsible than mine which include me spending that amount of money on a flying jet pack and an island in the Caribbean.

Writing in Tax Notes,  Johnston argues that the options for such a fortunate investor are few given the state of the financial markets and the economy.  The stock market is not the answer.   Consider that the broad S&P 500 Index produced a real return of minus 3.84 percent compounded annually from January 1, 2000, through the end of 2009. Investing in the widely followed metric would have been like throwing good money after bad.

“Every dollar you had in this broad market index on millennium day was worth just 71 cents a decade later,” Johnston says. “The market has drifted even lower, and that dollar you invested on millennium day is now
down to 69 cents. How low will it go?”

Of course, pessimists would answer the question “depends.”    Last week, investor Laszlo Birinyi said the S&P would reach 1,225 by year-end, down from the forecast of 1,325 he issued on March 29.  That’s up from the  1,052.88 level it is trading at today.

The theoretical wealthy investor would not find much solace in the real estate market either.  Abandoned, homes, apartment buildings and commercial and industrial buildings dot the American landscape.   A rich person should be able to find bargains galore but the problem is that residential and commercial property prices continue to fall.

Well, what about investing in business?  That’s no good either.  Retailers are shuttering locations as consumer confidence continues to wobble.   The restaurant industry, for example, is in sad shape.  Johnston points out that 1 in every 50 restaurants in Southern California closed in the last 12 months.   A safe investment such as a CD is a bad idea given that bank interest rates are barely competitive over a mattress or a hole in the back yard.

‘The one safe investment would be to pay off any debt, except that debt is now priced at historic lows, which should make long-term borrowing at fixed rates very attractive,”  he says. “American companies are sitting on a fantastically huge pile of cash — $1.8 trillion.”

That money — equal to $6,000 per American — will not be used to create jobs anytime soon because the most prudent use of the cash seems to be to do nothing.

Jon Berr