A Case Study on Cash

From Annaly Capital Management

There has been a lot of discussion recently about corporate cash levels, both in newspapers and blogs. Back in June, the Fed published the 1Q 2010 Flow of Funds report that shows corporations are sitting on $1.8 trillion of cash.

A recent article in the Washington Post suggests that this balance sheet cash is actually pent up capital expenditure waiting to happen, and blames the hoarding behavior on uncertainty over new regulation and the likelihood of higher taxes going forward. This seems like a reasonable assumption, when you consider the current low level of net domestic investment. This measure, gross domestic investment less consumption of fixed capital (or depreciation), is now at levels comparable to the mid-1980s.

However, John Hussman of the Hussman Funds debunks the idea that this is cash waiting to come off the sidelines. We should quote from this piece directly (emphasis is his own):

“Interestingly, some observers lament that corporations and some individuals are holding their assets in "cash" rather than spending and investing those balances, apparently believing that this money is being "held back" from the economy. What is preposterous about this is that the "cash" that companies and individuals are observed to be holding is primarily in the form of government securities and base money created over the past couple of years, which somebody has to hold at every point in time until those liabilities are retired. This is not money that is waiting to be spent. It is a stack of IOUs representing resources that have already been squandered, and now somebody has to hold these pieces of paper until they are retired.”

This is an interesting point, and reminded us of a favorite “cash on the sidelines” chart of ours which shows money supply versus total credit market debt outstanding. We decided to scale the aforementioned $1.8 trillion of liquid corporate assets by the total credit market debt owed by those corporations, with predicable results.