Wednesday, April 30, 2014

The Economy - Cash

There is a meme that is being repeated across the financial media. It is that corporations are awash in cash. That there is a huge hoard of cash sitting on the sidelines just waiting for the opportunity to be invested and spent. Is that true? Part of it. There are many corporations declaring that they have a ton of cash in the back. If you look closer, you see things just a bit different. First, a lot of the cash is held overseas and will either be help there, spent there, or brought back to the U.S. with a high tax bill. Second, most of the corporations with large amounts of cash also have a large amount of debt. In fact, corporate debt is at a record level. As long as interest rates remain low, this is not much of a problem, but what if rates begin to rise? Now that is the issue at hand. Yes corporations have a lot of cash, but they also have the largest amount of debt ever. If rates change (and they will) the cash on the sidelines will have to be spent servicing or paying off debt. So in essence, there is no cash on the sideline. the meme is false and things will not end well once interest rates start to rise.

By the way, individuals are in no better shape. So the expectation that consumers will start spending once things get better is also false. Things will eventually get ugly because there is an economic storm coming. It is not a matter of if, but when.

What do you think?