In response to Cash Cow: Who has the Cash, Who has the Debt, by Sector and Company I received the following email from Erico who says the cash situation is even worse than I presented it.
Erico Writes ...
Mish – I believe you overstated the amount of cash in your analysis. A lot of that cash for the banks is collateralized. Plus GS is certainly NOT a cash cow. I would invite you analyzing their cash flow statements over the last 10 years, so you can really see how much of a ponzi finance Wall Street has become. In the latest 10Q available, they “only” generated $2bn from operations.In case you missed that top link, please give it a look. It contains an nice interactive graphic about cash levels, using Tableau software.
Otherwise, keep up the great work!
Corporate "Cash" - Cheering the Asset and Ignoring the Liability
Erico is correct but actually I was aware of it.
Here is an analysis from Hussman that I meant to include last night but did not. This is one of the things that happen when you finish a post at 5:30AM.
Please consider Corporate "Cash" - Cheering the Asset and Ignoring the Liability
Four years ago, in There's No Such Thing as Idle Cash on the Sidelines, I observed:Raising Cash While They Can
"Investors should not believe that the “cash on the balance sheets” of corporations might suddenly be used, in aggregate, for new investments and capital spending. That cash on their balance sheets has already been deployed as loans to the Federal government and to other companies. Now, yes, if the government runs a surplus and retires its debt, in aggregate, or the other companies that borrowed the money generate new earnings and then pay off their debt, in aggregate, then those new savings that retire the T-bills and commercial paper then make it possible for the recipients to finance new investment, in aggregate. So as usual, savings equals investment, and new savings can finance new investment. But what investors often point to and call “cash on the sidelines” is really saving that has already been deployed and used either to offset the dissavings of government or to finance investments made by other companies. Once those savings have been spent, you can't, in aggregate, use the IOUs (in the form of money market securities) to do it again."
Now, as then, analysts are pointing to an apparent pile of corporate "cash on the sidelines" as if these holdings of debt securities somehow make new corporate spending more likely. In order to evaluate this argument, it's necessary to understand that what is being called cash is actually a stack of IOUs for money that has generally already been spent by other companies or by the government.
Don't get me wrong. At an individual company level, it's obvious that if DuPont has a bunch of marketable securities on its balance sheet, it is free to sell those securities and spend the money on new equipment and so forth. The issue is that somebody else has to buy those securities. At the end of the day, there is no less "cash on the sidelines" after that change of ownership than there was before.
Put simply, there is a lot of apparent "cash on the sidelines" because the government and many corporations have issued enormous quantities of new debt, often with short maturities, while other corporations have purchased it. It is an equilibrium. The assets that are held in the right hand represent debt that is owed by the left. You cannot call that pile of short-term marketable securities an asset without calling it a liability. The cash on the sidelines is evidence of debt incurred to fund economic activity that is already in the past. It will remain "on the sidelines" until the debt is retired. The government debt has been issued to finance deficit spending. At the same time, a great deal of corporate debt has been issued over the past year apparently as a pre-emptive measure against the possibility of the capital markets freezing up again.
I have previously address some of these issues myself. For example please consider my August 12, 2010 article Are Corporations Sitting on Piles of Cash?
The Wall Street Journal claims U.S. Firms Build Up Record Cash Piles
Note that I even referenced that Hussman post way back on August 12.U.S. companies are holding more cash in the bank than at any point on record, underscoring persistent worries about financial markets and about the sustainability of the economic recovery.Sideline Cash = Corporate and Government Debt
The Federal Reserve reported Thursday that nonfinancial companies had socked away $1.84 trillion in cash and other liquid assets as of the end of March, up 26% from a year earlier and the largest-ever increase in records going back to 1952. Cash made up about 7% of all company assets, including factories and financial investments, the highest level since 1963.
"Stockholders don't want them to keep sitting on cash at a zero return," said Paul Kasriel, an economist at Northern Trust. "They're going to use it," either to increase hiring and investment or to make payouts to shareholders in the form of dividends or share buybacks, he said.
That corporations are sitting in piles might be dandy if it were true, but unfortunately it is not an accurate representation, at least in an aggregate sense.
John Hussman mentioned the corporate cash situation in Cheering the Asset and Ignoring the Liability. ....
Corporate Cash Lie
The article Hussman referred to is one I have been meaning to link to for several days.
Please consider The biggest lie about U.S. companiesOr you heard it from Dallas Federal Reserve President Richard Fisher, who recently said companies were "hoarding cash" but were afraid to start investing. Or on CNBC, where experts have been debating what these corporations are going to do with all their surplus loot. Will they raise dividends? Buy back shares? Launch a new wave of mergers and acquisitions?
It all sounds wonderful for investors and the U.S. economy. There's just one problem: It's a crock.
A look at the facts shows that companies only have "record amounts of cash" in the way that Subprime Suzy was flush with cash after that big refi back in 2005. So long as you don't look at the liabilities, the picture looks great. Hey, why not buy a Jacuzzi?
According to the Federal Reserve, nonfinancial firms borrowed another $289 billion in the first quarter, taking their total domestic debts to $7.2 trillion, the highest level ever. That's up by $1.1 trillion since the first quarter of 2007; it's twice the level seen in the late 1990s.
So as you can see, I am very aware of these issues. I concluded the above piece with my own thoughts ....
So, in spite of what most are saying, corporations are not really holding tons of cash, ready at any moment to go on an investment or hiring spree.The closer one scrutinizes corporate cash, the less there is of it to see.
Instead, corporations burnt by inability to raise cash during the 2008 credit bust are simply taking advantage of market conditions to raise cash levels now, at attractive rates, while they can.
Corporations raise cash in two instances
1. When they can
2. When they have to
After the corporate bond blowup in 2008, companies are wisely focusing on #1, while they still can. How much longer the market is willing to allow debt financing at favorable rates remains to be seen. When it stops, equities are likely to get clobbered.
In short, except for a handful of companies, there is almost no cash that can be used for purposes mainstream media says.
Mike "Mish" Shedlock
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