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Cash is King: US Corporations Continue to Hoard Cash at Record Levels
Pinnacle Digest writes: In today's guest post by Dan Steinhart of Casey Research, the focus is on our petrified economic environment which has US corporations sitting on more cash than at any point since World War 2.
He is referring to nonfinancial corporations – the ones that sell goods and services and make the economy go. These companies currently hold $1.4 trillion in cash equivalent.
Cash, Steinhart explains, is simply a buffer against uncertainty. It is a normal business practice to hold a percentage of your company’s assets in cash, for operating purposes alone, companies need cash. It becomes even more normal for cash levels to rise if you feel a downturn in the economy is approaching. US corporations having a record amount of cash on hand suggest they believe much worse is in store, for their individual company and the economy as a whole. US corporations are telling us that they are not buying into a recovery and preparing for a long, drawn out storm.
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.
The fact companies refuse to take any risk and have chosen to forego a collective $14 billion per year in free money is revealing. It reveals Bernanke’s plan to get the economy rolling thus far has failed. It’s easy to understand, with interest rates at record lows, that there is little incentive for the creditor to lend money. With that stated, the fear of losing money year after year to inflation will become a factor.
Despite the lack of investment, stocks are up on the year and earnings are growing. A key reason for this is that stocks are a far better investment than bonds. This has forced many investors, searching for yields, into cash heavy corporations.
The threat of inflation will at some point scare these companies into doing something with their cash. Perhaps not all of it, but losing 2-3% annually is a tough pill to swallow.
Now imagine for a moment, if these companies had an economic or political environment more favorable and worth investing in.
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