Are Businesses Quietly Preparing for a Financial Apocalypse?

Published on October 10, 2012 by admin   ·   No Comments

Dan Steinhart/Casey Research

US corporations are sitting on more cash than at any point since World War II.

That’s without including banks. I’m only talking about nonfinancial corporations – the ones that sell goods and services and make the economy go.

Those businesses hold $1.4 trillion. In absolute terms, that’s the most ever. In relative terms, it’s themost since World War II.

As investors, we can infer quite a bit from corporations’ inability (or unwillingness) to deploy their cash.

For one, it indicates that business have assumed a very defensive stance.

Cash, of course, is a buffer against uncertainty – the uncertainty that business slows for any reason. Management wants a healthy cash reserve with which to pay the bills and remain liquid should anything unexpected happen. I think we can all agree that this is prudent, and a good business practice.

But $1.4 trillion? That tells me that businesses are not just a little jittery about the future. They’re prepared for an apocalypse.

Think about this, it’s important;

• 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.

It’s a bad omen that corporate management would forego a collective $14b per year. Clearly, by their judgment, the risk of investing in new projects outweighs the reward – the exact opposite of the conditions needed to produce healthy economic growth.

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