Skip to comments.Are Businesses Quietly Preparing For A Financial Apocalypse?
Posted on 10/10/2012 7:55:36 AM PDT by blam
Are Businesses Quietly Preparing For A Financial Apocalypse?
Stock-Markets / Financial Crash
Oct 10, 2012 - 09:15 AM
By: Casey Research
Dan Steinhart, Casey Research writes: US corporations are sitting on more cash than at any point since World War 2.
That's without including banks. I'm only talking about nonfinancial corporations the ones that sell goods and services and make the economy go.
Those businesses hold $1.4 trillion. In absolute terms, that's the most ever. In relative terms, it's the most since World War II.
As investors, we can infer quite a bit from corporations' inability (or unwillingness) to deploy their cash.
For one, it indicates that business have assumed a very defensive stance.
Cash, of course, is a buffer against uncertainty - the uncertainty that business slows for any reason. Management wants a healthy cash reserve with which to pay the bills and remain liquid should anything unexpected happen. I think we can all agree that this is prudent, and a good business practice.
But $1.4 trillion? That tells me that businesses are not just a little jittery about the future. They're prepared for an apocalypse.
Think about this, its important; If these businesses could conjure up even the most marginal of projects to earn a meager 1% return, they would generate $14 billion profit. Instead, they're sitting on the cash and earning near zero for a guaranteed after-inflation loss.
It's a bad omen that corporate management would forego a collective $14b per year. Clearly, by their judgment, the risk of investing in new projects outweighs the reward the exact opposite of the conditions needed to produce healthy economic growth.
That's the bad news. But here's the good, if paradoxical, news:
Even with all of this corporate slack, earnings and profit margins are very healthy, and stocks have performed quite well. Case in point, the S&P 500 is up 15% YTD.
Why the disconnect?
Well, the rising margins and earnings are easy to explain: corporations have cut costs over the past few years, becoming leaner and more efficient. This also partially explains higher stock prices.
But I think there's another contributing factor to rising stock prices: the downright terrible outlook for bonds. Our analysis of stocks vs. bonds indicates that stocks are by far the better investment today.
The overriding reason is simple: at near zero interest rates, bonds offer almost no upside and catastrophic downside
Simply by virtue of not being bonds, stocks have done well.
Back to that pile of corporate cash. There's no question that it's a waste today. But today's waste is tomorrow's potential.
Corporations aren't going to sit on that cash forever. Eventually conditions will be such that they'll either want to or have to invest in new projects.
Perhaps inflation will be the catalyst corporations can tolerate losing 1.7% per year today. But if the inflation rate heats up to, say, 4%, you can bet that corps will be scrambling to deploy that now idle cash into whatever mediocre projects they can rustle up.
When that happens, they have $1.4 trillion in cash ready to go. No need to negotiate a loan. No need to issue equity to raise funds. They have all the fuel they need. The gas tank is full.
So while the economy has plenty of problems, and stocks are a far better bet than bonds, lack of cash is not one of them.
Companies are ready to invest and grow. They just need an economic and political environment conducive to doing so.
Romney is elected in a land-slide!
In addition, Bernanke and the FED have flooded the world with US Dollars. The comment above makes me think - indeed, if inflation takes off, it will take off very quickly, because there is an ocean of money ready to be deployed to chase rising asset prices.
That also means that interest rates will have to spike very quickly to combat any surge in inflation.
Businesses may be starting to do it now, but I have been preparing for the last 2 years.
That said, there is plenty that the new administration can do in late January to improve the climate. In particular, reverse the imposition of new and ever-more-costly regulations, so that ROI analysis actually means something. Once that happens, watch the money spigots open full flood. In my opinion.
And if Obama wins? Then prepare for thin times.
the economy issues are fully bipartisan..they are NOT particularily Democrat or Republican.
Unless there is MASSIVE deregulation...ala Reagan...and detaxation...NADA.ZIP....
If interest rates go up 2% or more (I've read that) the US can't make their debt payments.
Once the dollar velocity goes up, though, be prepared for inflation from all the QE crap.
Don’t fool yourself.
Even if Romney’s elected in a landslide, there’s much unpleasantness that lies ahead.
(but you knew that)
On a sixteen-terabuck national debt, once a 2% rise works its way into the rolled-over short-term bonds that make up the bulk of the debt, that’s another $320 billion per year that the Benbernank will have to print.
Remember the old Dunkin’ Donuts “Time to make the donuts” ads?
I’d like to see one with the Benbernank’s face ‘shopped in, with the caption “Time to print the dollars”.
They’re sitting on cash waiting for the results of the next election...
I do think Romney understands the nuts and bolts of the economy more than any President in recent memory. While I am not convinced of his true conservatism, I do think he truly values a robust economy and wants to try to “fix” things. As much as a President can...the power of the Presidency is way overstated regarding the economy.
If we do have another financial disaster looming (and we do, just a matter of 3 years or 20 years, I feel better thinking Romney might be at the helm. Even though I would have rather had a better nominee, life is funny, he might prove to be exactly what we need. The Lord works in mysterious ways.
"(but you knew that) "
I am expecting a positive bump though.
And print it they will. I’ve always maintained that the only rational endgame for the politicians involves massive inflation and repayment of our debt in Monopoly money. There won’t be any Volcker to jack up interest rates either; they intend to keep rates low and let inflation do what it will. There are always more debtors than savers, and so that is who the politicians are forced to pander to.