CORPORATE CASH HOLDINGS
Recently there has been a claim that corporations are holding large sums of cash rather than investing it because they are fearful of Obama’s “socialist policies”.
But if you compare corporate retained earnings to the GDP GAP lagged one year it looks like the debate should be over why corporations are investing so much. This determinate of corporate retained earnings implies that corporations are actually holding much less cash than the traditional relationship implies they should be.
Commenters are saying this analysis should use cash flow rather than retained earnings.
OK, here is a chart comparing corporate cash flow to retained earnings.
The net cash flow data shows essentially the same pattern as the retained earnings data. It
does not make any difference except at the last couple of observations where the cash flow data is turning down. So the only difference really contradicts the argument that Obama is scaring corporations into hording cash even more than the retained earnings data does. It shows net cash flow as a % of profits falling over the last two quarters — just the opposite of what would be the case if Obama was scaring corporate decision makers.
Both series show that corporate decision makers appear to be much less concerned than they were at a very comparable point in the Reagan administration when the GDP GAP was about the same.
Putting on my CPA hat for a moment, Retained Earnings is a measure of retained capital and has no direct connection to cash balances.
Krugman had a recent column making the same point which has been obvious to anyone who has been sentinet since mid 2008. Of course that does not stop the Kudlows of the world from arguing for tax cuts to get the economy going. The bottom line is that absent demand and a lack of capacity, you are quite right that it makes no sense for business to invest at all. That means we are down to the tapped out and unemployed consumers, exports or the government to provide the demand that will get the whole system going. Again, it does not take a rocket scientist to figure out where we have the best chance.
Not sure I understand how this chart shows that corporate coffers are not as full as claimed. Also haven’t many major corps increased dividends this year because of their cash positions?
Save-the-rustbelt — technically you are right. To get from my measure to your measure you have to account for deprecation. But since depreciation is largely a bookkeeping entry rather than a actual cashflow, I would argue that my measure is a much more meaningful measure of how corporations are allocating their actual cash resources.
My point is that given the large amount of excess capacity in the economy the large corporation cash holdings are perfectly norma and to be expected l. I’m sure you agree with that.
save-ther-rustbelt — technically you are right. But to get from my measure to your measure you have to adjust for depreciation. But since deprecialtion is larely a bookkeeping entry, I would argue that my measure is a much better measure of what corporation are actually doing with their cash.
spencer has not said that corporate coffers are less full than claimed. He has shown that however full corporate coffers may be, they are less full than the normal relationship with GDP would suggest.
The point is to show a strong fundamental explanation for business behavior, one that doesn’t rely on politically convenient (and largely unfalsifiable) claims about private decision-makers attitudes toward the Obama administration.
I’m NOT an accountant, but I did keep the books for a small business once and had to read up on depreciation. It would seem to me that over short periods — a few years — it would be fairly constant as I would think that in most cases it consists mostly of writing down stuff that was bought years ago at the maximum rate allowed by law. You or Rusty can feel free to correct me on that if I’m wrong.
You are right. That is why I said it is largely a bookkeeping exercise.
Amen to that.
i don’t think this relationship demonstrates what you think it does.
investment comes out of retained earnings.
nothing in this metric can tell you to what extent earnings are being used to hoard cash or to invest. you are thinking in cash accounting, not GAAP.
further, it leaves out bowwowing. up until may, you saw vast borrowing that has mostly been used to shore up balance sheets and storm rig firms for rough times, not to invest heavily.
gievn how low dividends are at most firsm, all you have really doen is demonstrate a realtionship between gdp and earnings, hardly a shocking discovery…
i don’t think this relationship demonstrates what you think it does.
investment comes out of retained earnings.
nothing in this metric can tell you to what extent earnings are being used to hoard cash or to invest. you are thinking in cash accounting, not GAAP. when i invest in a new factory, that does not hit the income statement until the factory goes live and depreciation starts.
further, it leaves out borrowing. up until may, you saw vast borrowing that has mostly been used to shore up balance sheets and storm rig firms for rough times, not to invest heavily. that is also cash hoarding. i have been a professional investor for coming on 20 years, and have never seen so much cash on balance sheets and so little going to invest in new opportunities.
gievn how low dividends are at most companies, all you have really done is demonstrate a realtionship between gdp and profits, hardly a shocking discovery…
why use retained earnings as oppose to cash balnces as your metric?
As KHarris ponted out, I’m not saying that corporate cash holding are not at record levels
All I’m doing is pointing out that the large corporate cash holding is a normal cyclical development that happens every cycle at this point.
It is also one reason bank lending is so weak–as corporations do not need to borrow.
Morganovich, if you have been in the investment game 20 years that means you have never personally seen a severe recession like we has in the early 1980s or just experienced. I suggest you study that period more than rely on what happened in the last two very mild recessions.
Here’s a timely posting from Michael Perelman at EconoSpeak that mostly addresses the same issue spoken of here and making reference to Yves Smith’s recent opinion piece in the NY Times. It’s worth taking in and I’m so pleased that Michale makes reference to the “good cop/bad cop” scenario I;ve tried to focus on that makes up our (not)two party system.
“Inducing the Madness of Crowds.”
And when Greece goes totally down the tubes we’ll see the results of making the working class pay the debts of the super rich. Or should that be the taxes of the very rich? Yes, pension reduction is always the smarter move than taxation enforcement. It must be true. It’s covered in the NY Times: http://www.nytimes.com/2010/07/09/business/global/09drachma.html?_r=1&ref=business
The Yves Smith NY Times link: http://www.nytimes.com/2010/07/06/opinion/06smith.html?scp=1&sq=Yves%20Smith&st=cse
that’s a weak answer that dodges all the criticism of the methodolgy.
nice try pal.
it’s obvious why you are a blogger and not an investor.
sometimes you get the answer you deserve.
are you actually sentient? can you pass a turing test?
i suspect you are a spambot.
Funny, I thought the obvious thing was the chip on your shoulder. Oh, what a might drubbing is “you’re not an investor” – as if you actually know anything about spencer’s business activities. Also seems to partake a bit of the “investor as hero” nonsense that is common in the business press.
If you had bothered to figure out what spencer wrote, instead of trying to attribute spurious meaning, it might just dawn on you that there isn’t much difference between your position and his. You say there is lots of cash on balance sheets and not much investment. spencer says there is lots of retained earnings on balance sheets, and that retained earnings are one accounting step away from cash. (You of course, want to quibble about what KIND of accounting – sheesh!) He has elsewhere shown that capacity is falling at a record rate, which is pretty near to saying not much investment is going on.
So, drop the “I’m an investor” pose, which doesn’t have anything to do with whether you have something valuable to say, and join the conversation for real.
If coberly is a spambot what would that make morganovich? Hmmmm…….
again, loads of ad hominem and no substance, which seems to be the halmark of this board. go back and read what i wrote. there are very specific methodological criticisms in it that not one of you has even tried to refute, instead choosing to pick silly fights.
my point is that spencer cannot make the claims he has made based on the data he has produced. all it demonstrates is a link between GDP and earnings. it shows nothing about cash positions and completely misses the fund raising portion of cash raising, focusing only on retained earnings, which is only part of the picture. it’s akin to arguing that increased hospital visits are a sign of a flu epidemic without actually counting flu cases. he has demonstrated exactly nothing. it’s a flawed methodology.
retained earnings are simply not a viable proxy for cash balances. retained earnings can be used for many purposes and cash balances can be and are increased without retaining earnings. we both argee that cash is increasing now, my point is that the current situation is not comparable to the historical data he produces and that therefore his conclusion that now is not any different than then is not supportable from his data.
he has provided no actual evidence for his view that this is nothing unusual, whereas i spend a great deal of time speaking to corporate managements and investors with 30 and 40 year track records and can tell you that they are all concerned about the the economy and perhaps even more so about the unpredictable regulatory and tax environment. such uncertainties froze investment in the 30’s just as they are doing now. for an excellent read on the topic, i reccomend amity schlae’s book “the forgotten man”.
answer the subsatnce, and perhaps i’ll take you (and spencer) seroiusly, but dodges like “well then you have not lived through a serious recession” just won’t wash. i too am an avid student of economic history. arguing that experience in finance and investing is somehow a handicap and whatever that rant about “hero investors” was supposed to mean are just silly. do you fire your doctor because he’s got too much med school and too much experience evaluating patients?
the 82 recession was also notably different in a very important way: interest rates were VERY high, going as high as 18% as volcker broke the back on the inflationary cycle. this means that the rewards for holding cash were substantial and provided at a great deal of incentive to do so. an 18% rate is a helluva risk free hurdle for private investment to overcome. rates today are essentially ZERO. thus, investing in virtually anything would seem preferable that sitting on cash that cannot even keep up with inflation. the fact that so many are willing to sit on big cash piles that earn nothing rather than invest is extremely instructive about just how little confidence there currently is. it’s one thing to get paid 18% to wait, but 0.14% in 3 month t bills and less in most money market accounts? chosing that is a sign that you are focused on cash preservation and nothing else.
there were good financial reasons to hold cash in 1982. 18% return is not to be sneered at. the converse is true now. there is no finincial reason to hold cash. the real rate of return is negative. so there must be another reason, no?
from the WSJ-
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.
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.”
that’s what spencer is missing. a 26% increase in cash balances year to year did not come out of retained earnings. the current level is very, very high and on a ROIC basis, utterly unprecedented. you could get 4-5% return in 1963. now you get 0.14%.
everyone who could rasied piles of money and no one is spending it despite getting a neagtive real return sitting on it. this is an unpreceedented occurance in the US. not even the 30’s were like this.
Morganovich may or may not have a substantive argument, but the comment he made, to which I was replying was exactly the sort of comment that he complains about. All noise.
I wasted my time replying to him substantively on another thread. He did not reply. He doesn’t have the intellectual stamina for a real discussion.
if corporations are leery of investing “because of Obama’s socialist policies,” and not because of the unregulated banks fiasco, i say to hell with em. Lets have some real “socialism.” They will adjust to that.
Because what they are calling socialism is a modest attempt to save them from market based crooks.
Obama has not shown any stomach for even a degree of allowing citizens to protect themselves from the hazards of the business cycle, much less anything that approaches government ownership of the means of production.
fair enough. my response to spencer was not the sort of tone we should be striving for. his patronizing attempt to slip out of the issue was weak rhetorical dodge, and it annoyed me. that said, nice of you to jump in and lower the tone as well. perhaps you’d benefit from some of your own advice?
i note that i have not seen a single substative refutation of any of the quite detailed arguments and facts i laid out above.
if you’d like to post something useful, i’m happy to read it. but if you are just interested in grandstanding, well, happy trolling.
“Obama has not shown any stomach for even a degree of allowing citizens to protect themselves from the hazards of the business cycle,”
this doesn’t make any sense. i can’t even parse that. citizens are supposed to protect themselves from the business cycle. it’s called prudence. further, how could disallowing them from doing so be anything other than governmental interference into private economic decisions and statism? i’m going to presume you were trying to say something else, as that comment doesn;t seem to make any sense at all.
and let’s keep in mind that it was this democratic congress and this president that have overseen literally unpreceedented investments in finance, autos, and numerous asset classes. they have made private mortgage lenders tools of stste policy through forced loan repricing and forbearance. they overturned decades of settled bankruptcy law with GM and chevy to favor political donors. they are flowing infitnite money into freddy and fannie which they have, tah-dah: NATIONALIZED in an effort to clean up the mess caused by CRA.
they are still crowding the private lenders out of the market.
regulations for banking are in flux. regulations for taxation and foreign investment are in flux. no one understands what the health care bill means yet, even the guy who passes it, but it’s shoving a lot more cost onto employers.
the list goes on and on.
socialism or no, this much uncertainty freezes investment. this is precisely what hoover and FDR did in the 30’s and it’s having the same effect.
like a lot of people… maybe most people… maybe even me… you can’t see beyond your own projection of yourself on the movie theater of your mind.
you began your latest comment with what looked like it was going to be an effort to return to good manners, and then blew it in the next breath.
but i’ll try this much… i have been trying to point out to people here for a numbe of years that Social Security is insurance for workers paid for by workers. lots of people can’t get that. they see the word “tax” and they go blind. of course it’s a tax. but it’s a rather unusual kind of tax in that the taxpayer gets his own money back and never quite loses his claim of ownership. you may want to object to that. i would recommend you sit down and think about it for awhile. it might be worth the effort.
then i go on to try to pont out that Medicare, or even “universal medical insurance” could be organized around the same priniciple: it’s simply insurance. and to complicate it just a bit, the premium has two parts: first is the premium you pay to cover your “expected” health care costs, and second is the premium you pay to cover your “expected” inability to pay the first premium.
the answer to “protecting yourself from the business cycle” is not “prudence.” it’s “insurance.”
your luck may not have run out yet, so you think you have been smart and prudent. but it is a strange thing that millions of peple stop being smart and prudent and become too stupid and lazy to find a job all at the same time and always in response to some business event that no sane person would imagine they had any control over.
i have my own complaints about the obama health care bill.
I don’t recall seeing any of morganovich’s comments aside from those made on this specific post, but nothing he said here had anything to do with (your perception of his objection to) Social Security or Medicare. Talk about projection!
From what I can tell, morganovich’s objections are that he believes that Spencer is claiming something to the effect of “lots of people are saying that apple inventories are high, but if you look at the historic inventories of organges at this point in the business cycle, you can see that organge invetory levels are typically high, and therefore those people are wrong”.
kharris takes issue with his objections to the different accounting regimes, but as an investor, morganovich is used to looking at GAAP accounting for specific companies and (from my interpretation) spencer’s role as a strategist has him more comfortable in the aggregated data of BEA – which is cash based. Considering CEOs are incentivized by GAAP metrics, here too, morganovich has a solid point.
Further, he’s made substantive points that are supported by data and his experience – the latter of which was deningrated. “In my experience I’ve never seen more cash on balance sheets” I assume is a valid statement, and yet spencer refutes it, because 20 years of experience seemingly isn’t enough for him – apparently the only people who are qualified to refute spencer are economic historians or those who have investment careers that started in 1980 or prior.
And you go own to parse the difference between “prudence” and “insurance” as if there’s a big difference between the two, when the latter is simply a more formal obligation to be the former.
It’s not worth arguing with Cobberly. She never has any facts, just anger and political ravings.
I think you are right on in your posts.
i can’t account for your inability to follow an argument. but here is a bit of help… m’vich complained that he couldn’t understand something i said… though in typical style, he claimed that i was making no sense… so i tried to bring him up to speed on a long running position of mine that most of the folks at AB would have been familiar with. that doesn’t mean you would have been, because like a lot of people you only come by to express your Truth and don’t read, think about, understand, or remember what anybody else says.
as for prudence v insurance
people of your ilk often mean by “prudence” is that the unlucky had it coming because they were lazy immoral stupid or imprudent. yet when someone offers an insurance system that would see them through times of being unlucky, people of your ilk insist that that is communism and the only way people are allowed to be prudent is to buy a sure thing on the stock market, which you just happen to be offering at a special one time only, special for you, low low price.
your statement still doesn’t make sense. i’m sorry you get so offended when someone points that out, but it really doesn’t. your amplifiactions have not cleared it up, only raised new issues.
what you seem to be arguing is for the government protecting citizens from the business cycle, not citizens protecting themselves. the goverment has been going wild protecting them. look at the multiple increases in the duration of unemplyment insurance, health care requirements, loan forbearance etc. that’s a ton of protection. but it has costs. that money comes from somewhere.
“but it’s a rather unusual kind of tax in that the taxpayer gets his own money back and never quite loses his claim of ownership”
that’s not true. the money is not held in escrow. it’s pooled and spent now. putting money into a 401k means you’ll get your own money back. paying into social security is done in the hopes that someone else will be paying later when you get yours, an increasingly unrealistic assumption as the SS system is now in deficit and such surplus as there has been since the 80’s has been borrowed and spent by other government agencies. SS has no “trust fund” just a pile of IOU’s. you have no “ownership” of anyhting.
further, unlike somehting you actually own, your claim to SS can be restructured at any time. they can (and should) rasie the age at which you get it. they can (and will have to) slash your payments once the surplus is exhausted in another 20-25 years by the CBO’s own (in my poinion optomistic) estimates. they can means test your access to it making it an entitlement. you have no actualy guarrantee of what you will get, when you will get it, or even if you’ll get it at all. as insurace policies go, that’s a pretty lousy one.
the SS funds have been grossly mismanaged. as i showed you before, if you took that money and put in bonds then bought an annuity at 65, you’d get 7-9X as much money per month. if SS is insurance, it’s a horribly overpriced policy. the only reason any rational person would choose it in preference to private saving is compulsion.
a promise of SS is not property, it’s just a promise from the governemnt that can and will be broken. the money will be gone and not enough new money will flow in to meet the obligations under paygo. the demographics make it inevitable. payments for life after 65 was one thing when the average life expectancy was 65, but now it’s 86. so, instead of zero average years of payments, we have 21. that funding gap will break the system as the boomers retire. the math is clear enough that even the CBO and the SS admin agree.
i expect to get nothing from SS. it’s not insurance, it’s an entitlement, and one that cannot be supported in its current incarnation. the answer is to split it into accounts that do give ownership and prevent pillaging by other agencies. count on it for your retirement if you like, but i wouldn’t reccomend it.
i used to be a math teacher so i am used to people not understanding what i say, no matter how hard i try.
i am also quite used to them blaming the teacher.
if you could read past your own projections you might have noticed that i have not gotten offended. even tried a little self deprecation. talk about a waste of time.
the money for insurance comes from the premiums paid by the insurees. a point i keep trying to make.
not “the government.” not “you.” not “the rich.”
in the case of Social Security that is already the way its done. it should be the case in Medicare, and of course should be more clearly the case in unemployment and welfare. but people who can’t think, think that a block of sound like “government” actually means something when they stick it into a sentence about something they don’t understand.
“the money is pooled and spent now.” you mean like stocks and bonds? like bank deposits? like any other damn money that is “saved” and “borrowed”? proof that a person can be an investor and not know the first thing about money, not to say investment.
your comments about social security are so ignorant, let me refer you to my earlier posts. i do get tired of saying the same thing over and over again. you simply don’t know a damn thing about Social Security, or money, but we already discussed that.
no cobberly, it’s nothing like bond or shares of stock.
if i buy a share of stock, i own it. it may wind up worth more or less, but it’s mine. i can sell it.
try selling your social security benefit. you can sell a life insurance benefit. there’s a whole market for it. but not SS. why? because it’s not your to sell. you own nothing.
you are taxed or compelled to pay a mandatory premuim if you prefer that description that includes you in a system. but there is no part of social security that you can point to and claim to own. all you have is a promise that money will be paid to you later. the amount of money is determined by a formula that can be changed without your consent and further, that automatically ratchets down if income does not meet outlay (once the surplus has been eliminated which is anticipated in 20-25 years by the CBO and the SS admin).
that’s not ownership, it’s pooled risk, but what can you say you own? to what asset can you point? stocks, bonds, and bank accounts are held in your name. they are property. social security is a benefit, not property. i’m astounded that you cannot seem to tell the difference.
you certainly do a great deal of name calling and angry grandsatnding for someone who isn’t offended. i fear your accusations of projection are, in fact, projection. “methinks the lady doth protest too much”.
if you want to be taken seriously, a presentation of facts or at least logic would be useful. absent that, your are just venting spleen and vitriol. i don’t expect you will if the “facts” are the ones from our last discussion, but hope springs eternal i suppose.
Ah well…coberly does get cranky. But for here you really need to do your homework first morganovich, you are not offering anything new to the argument…one click away are some good starters to your questions.
don’t mistake cranky for a failing grade. i can give you an F without the least bit of vitriol… on my part.
if you were honest we could talk about our different takes on what it means to “own” an asset… like a claim on social security. but you have your own understanding and not me or god himself can budge you from it. i am just tired of wasting my breath. you can find my answers to your “questions,” on other threads, which are catalogued somewhere, or you can come back some other day and start out being more polite and i may risk another try at educating you.
Is this still true NOW? Please rerun the numbers. Thanks.