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?
— Brett Arends, The Biggest Lie About U.S. Companies
One of the powerful memes floating around this confused market environment has been cash-rich companies versus cash-poor consumers.
The notion of companies sitting on huge piles of corporate cash has also been a bullish staple. For example, from the July 19th WSJ:
In what may signal an important shift, some chief executives say they are ready to start spending the mountains of cash they have stockpiled over the past year, despite lingering worries about the global economy.
Many companies, stung by the financial crisis, have hoarded cash as a cushion against continued economic turmoil. But their curbs on spending and investing have been damping economic growth.
At the end of March, nonfinancial companies in the U.S. were sitting on $1.84 trillion in cash and other liquid assets, up 26% from a year earlier…
In The Biggest Lie About U.S. Companies, Arends — keying off the legwork of financial analyst Andrew Smithers — essentially calls bullshit on this “getting ready to spend” idea, accusing the mainstream financial media of latching onto an optimistic story line that isn’t supported by the data. To really get the full picture, you have to look at assets and liabilities.
“Central bank and Commerce Department data reveal that gross domestic debts of nonfinancial corporations now amount to 50% of GDP,” Arends says. “That’s a postwar record. In 1945, it was just 20%.”
So if corporate cash levels have hit their highest since the 1950s, as WSJ and Bloomberg have previously reported, so too have corporate debts.
But what’s it mean, Gene? Are corporations still in good shape to spend? What of the global corporate bond boom? And does this increase the odds that big business is on the cash-hoarding, hunker-downing, deflationary deleveraging train just like the little guys?
p.s. Off topic but related, how bizarre is this?
[...] the notion that corporations can ìstrip mineî for profit indefinitely, even as they hoard rainy day cash in the same manner as the banks, is not remotely [...]