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Thursday, January 23, 2014 3:49 PM


Liquidity Insurance


In contrast to silly reporting yesterday regarding an alleged but nonexistent corporate cash pile that could be used for capital expenditures, here is a far more realistic report: US Corporate Capex to Grow at Slowest Rate in Four Years

Total capital expenditure by the non-financial companies in the S&P 500 index is forecast to rise by just 1.2 per cent in the 12 months to October, according to Factset, a market data company that compiles a consensus of analysts’ forecasts.

In aggregate, analysts’ forecasts indicated the slowest growth in capital spending by the largest US companies since it declined in 2010, in the aftermath of the recession of 2007-09.

Nick Nelson, an equity strategist at UBS, said: “Chief executives and chief financial officers have been battle-scarred by 2008-09, when they couldn’t get financing when they wanted it. So they are running their businesses with much more available cash than in the past.
Cash Cow Capex Thesis vs. Liquidity Insurance Thesis

Nick Nelson has it correct.

I made a nearly-identical statement yesterday in a comment regarding my post False Thesis of the Day: Huge Cash Pile Puts Recovery in Hands of Corporations; Cash Cow Revisited.

"Cash is just not going to be used for the way Deloitte suggests. In 2008 and 2009, credit virtually dried up. Viable companies nearly went under because they had no cash. Much of the cash on hand is nothing but insurance against the same thing happening again. That's the intended use for much of the alleged cash. It is not really available to expand businesses."

A quick check shows I wrote the above as a comment to a subsequent post, also from yesterday.

Is Nelson reading my blog?

Since I stated the above in a comment, and on a different post, the most likely explanation is Nelson and I came to the same conclusion independently.

Cash on hand is not intended for expansion, for multiple reasons.

  1. Businesses have no reason to expand.
  2. The recovery is quite long historically, growth will slow.
  3. The cash is really debt, so realistically it's already been spent.

Nonetheless, the cash does provide cheap liquidity insurance against a credit crunch.

Capex Proponents

Others don't see it that way.

For example, Mark Zandi of Moody’s Analytics said: “All the preconditions for much stronger business investment are in place.

Doug Handler of IHS Global Insight said he expected growth in spending on plant and equipment to pick up from 3 per cent last year to 7 per cent this year.

Mark or Doug, care to make a token "bragging rights" bet of $250 to our favorite charity?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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