Guest Post: Are Businesses Quietly Preparing For A Financial Apocalypse?

Tyler Durden's picture

Submitted by Dan Steinhart of Casey Research,

Are Businesses Quietly Preparing for a Financial Apocalypse?

By Dan Steinhart, Casey Research

 

US corporations are sitting on more cash than at any point since World War 2.

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 the most 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.

That's the bad news. But here's the good, if paradoxical, news:

Even with all of this corporate slack, earnings and profit margins are very healthy, and stocks have performed quite well. Case in point, the S&P 500 is up 15% YTD.

Why the disconnect?  

Well, the rising margins and earnings are easy to explain: corporations have cut costs over the past few years, becoming leaner and more efficient. This also partially explains higher stock prices.

But I think there's another contributing factor to rising stock prices: the downright terrible outlook for bonds. Our analysis of stocks vs. bonds indicates that stocks are by far the better investment today.

“The overriding reason is simple: at near zero interest rates, bonds offer almost no upside and catastrophic downside”

Simply by virtue of not being bonds, stocks have done well.

Back to that pile of corporate cash. There's no question that it's a waste today. But today's waste is tomorrow's potential. 

Corporations aren't going to sit on that cash forever. Eventually conditions will be such that they'll either want to or have to invest in new projects.

Perhaps inflation will be the catalyst – corporations can tolerate losing 1.7% per year today. But if the inflation rate heats up to, say, 4%, you can bet that corps will be scrambling to deploy that now idle cash into whatever mediocre projects they can rustle up.

“When that happens, they have $1.4 trillion in cash ready to go. No need to negotiate a loan. No need to issue equity to raise funds. They have all the fuel they need. The gas tank is full.

So while the economy has plenty of problems, and stocks are a far better bet than bonds, lack of cash is not one of them.

Companies are ready to invest and grow. They just need an economic and political environment conducive to doing so.

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ACP's picture

Or the civilian, non-business version, which is called the "Street Sweeper."

flacon's picture

I just (Charlie) MUNGERED in my pants.

krispkritter's picture

I'm all in physical: inventory, land, PM's, etc.  To me, 'investments' other than something I can touch are a recipe for disaster. Kudos to you guys that still trade. I exited 2-11; they froze trading that exact AM and cost me more than I should have spent.

http://www.youtube.com/watch?v=4TlPo0yCSa4

I barely trust the credit union I transact with...

Slightly Insane's picture

You are prudent, now that you have been "educated" (a.k.a. "burned").  I am in similar position, and have froze hiring.  It is "hunker down" and wait to see what the "idiots" deliver.  At one end of the spectrum, I am "John Galt", at the other, I'm ready to deploy Capital, but it certainly will not be if Obama get's re-elected.  At that point, I'm going to say "adios amigos" ..... "voy con dios", if the Marxist in chief gets a second round to punish the slaves.

DoChenRollingBearing's picture

Things in Peru have been going very well for us, but we do see China's slowdown coming, and that WILL affect Peru (raw material exporter to China -- BIG TIME).  So, our cash levels are higher and we have been paying down debt (actually, the debt is only to me).

I have either started or been one of the founders of four businesses over the years.  The first three failed (all US-based).  ONLY our business in Peru has succeeded.  After 21 years, we are doing just fine.

If Obama gets re-elected, it will affect our business down there marginally, if at all.  Here?  NO WAY I will ever start a US business ever again.

prains's picture

i hear washingistan is the place for start ups just bring enough seed money to cut a lot of grass

mick68's picture

 

 Yep, go get your hyper inflated stocks backed by worthless fiat paper boys!!

 

No thanks, I'll sit this one out with my own little stash of physical precious metals and when the SHTF I'll have more "money" than these corporations and their worthless fiat.

Kumara's picture

I agree, krispkritter, I don't trust investments either. The last thing I was forced to invest in which was actually a success was in a Ricoh aficio sp c431dn, because I needed it for school. It was tangible and it still works. Other than that, like Dali used to say, "I don't trust anything I can't taste".

Tommy Gunner's picture

Same.  I made that move in 07.  I don't even keep 100k in a bank account - what cash I have I stick in bank boxes with gold. 

In asia we have guarantees like in the US but good luck with getting your cash out before it is confetti if there is a collapse. 

Oh - and I am travelling a lot these days - always business class and no expense spared - I figure fuck it - I have enough gold to be good when this all hits and we are living in a hellhole of a world - so might as well enjoy the last months/year - just back from a few weeks in italy - off to thailand for 17 days end of the month - probably do argentina in the new year. 

max2205's picture

They are concerned about payroll. They want to endure the next ten years of THE LONGEST EMERGENCY.

I am no English major, but this is the worst worded post on ZH

Temporis's picture

I cant tell if your bragging, lying, or just completly delusional.

Im guessing delusional...

philipat's picture

Most of that cash is sitting in accounts in tax havens, into which is was "Transfer-priced" to avoid taxes. IMHO, the greater reason it sits there is that the Corporatocracy is just biding its time until things get so desperate that their part-time employees in Congress have enough cover to engineer yet another "One time" tax free repatriation.

Slightly Insane's picture

Not exactly correct.  Not a  tax haven, that's for fucking sure.  It's called "fucking capital preservation" ... nothing else.  In a "statist economy" ... cash is still the best alternative for a business.  Businesses are definitely looking at several things; a) shit going off the cliff, b) being able to pay the bills, c) capital deployment (unlikely as to the six ways to sunday that shit can go wrong).  Cash is a "tax haven" that does NOT PAY SHIT!  (i am a small business owner who has taken it up the poop shoot).

SafelyGraze's picture

back in the day, that "money" would have been metal.

where did the corporations keep it? 

safes, on site?

banks?

at least the current system alleviates these concerns about securing physical metal.

libor-benchmarked short-term repurchase agreements between insolvent entities-calling-themselves-banks are a lot more secure than physial metal.

 

RockyRacoon's picture

Actually, there is an answer to your question.  The preserved capital was kept in banks, and in most cases in the form of physical gold.   That is why the gold "confiscation" worked so well.  It wasn't the intention to gain much from regular citizens digging up their gold in the back yard and turning it in because that gold as well was kept in bank vaults.  Easy stuff!   A bank that went belly-up meant more than losing your deposit in the form of currency; it meant you lost your gold.   Remember when bank robbers would be met by armed citizens?  They weren't waiting around for the cops because the money the robbers were taking was THEIR money, not gov't guaranteed fiat.

zhandax's picture

This may be stretching the question a bit, but 'back in the day' corporations were owned by Rockefellers, Carnegies, Mellons, etc and a lot of their personal gold was on deposit at Swiss banks.  I wouldn't be surprised to hear that a nice chunk of their corporate booty was there as well.  That's where today's tradeable supply of St Gauden's double eagles came from, Swiss bank vaults.  Ever wonder how there are enough in mint condition to only sell for a hundred or two over spot?

RockyRacoon's picture

You are 100% correct.  Gold coinage left the U. S. by the boatload.  Those "old gold coin hoards" that were touted as "just discovered" when gold was legal to own came from those European old-money stashes.

SafelyGraze's picture

[this space formerly occupied by triple post]

OldPhart's picture

Corporate Controller for 34 private companies here, in mining, ready mix, steel, steel fabrication, real estate, and concrete recycling.

We have been on austerity measures since 2007.  No one has had a wage or salary increase, we cut hourly administrative workers to 35 hour work weeks, and we reduced positions.  We felt the tremor in the force and were proactive in our response.

In 2005/2006 we purchased over 100 new trucks, Ready Mix and Haulers, and financed them five years, about 7.5%, at about 1.2 million.  We had other notes for plant improvements, etc.  We focused on getting those paid off quickly and managed to eliminate them in 2010.

Since 2007 we went from roughly $90 million combined down to about $25 million this year.  Our employee count dwindled from roughly 500 to less than 300.  We had some extemely severe cash crunches that were only relieved by the owners ponying up over $5 million, and some windfalls from Workers Compensation Refunds.  (We haven't had an accident in ten years.  We've been phenomenally safe.)

We have a line of credit for up to $2.5 million, however we've maintain a balance of about $700k after we paid it down.

We turned the corner in 2011 in beginning to see increasing cash returns.  And this year, those 'shovel ready jobs' apparently started to kick in and we've seen a substantial increase in government work at the federal, state and county level.

In April the owners, and they are active in the private, family, company as President and CEO, announced that they would begin to issue bonuses based on profitability and that the quarterly bonuses would be for all levels down to the over-stressed hourly workers.  If all bonuses meet the profit schedule then all employees would see a 1/3 boost in earnings.

Our cash is not in a tax haven, nor is it off-shore.  It is maintained at the local bank down the street.  I would say that most of the survivors of the last four years are companies like the one I work for.  We're not Wall Street, we're not on an exchange, nor do we plan to be. 

We remain the mom and pop outfits that are ignored by the press, the government, the financial elite and every day assholes that conglomerate some claim that businesses are all a bunch of cheats.  We don't cheat at anything.  We pay our vendors, with 2% discount, within 10 days and the rest within 45.  We purchase 99% retail and pay full Sales Tax, Fuel Tax, and any other tax up front and we are predominantly in the failed State of California (we have operations in Arizona and Nevada). 

We/I don't cheat.  If we're owed a refund, we claim it (though the State of California has sat on two years of fuel tax refunds due to us).

We are letting our cash accumulate for a couple of reasons.  We expect that, regardless who wins the election, we are going to see costs from the government, at all levels, to increase in the form of taxes and inflation.  We expect that there will be competitors and other businesses that will ultimately fail in survival and we may be able to make a cash purchase (no financing, no interest, no payments).  We think we may pick up two companies in the coming carnage.

I expect that, even if an economic miracle occurs, and there's some weird sort of change in our national economic collapse, we will continue our austerity for at least another five years.

This Depression isn't going to fade away, my projection is we have a minimum of ten more years of misery.  We building a hoard to get us fifteen years without using a fucking bank.

 

Middle_Finger_Market's picture

Mexican silver and spanish prostitutes bitchez. 

lolmao500's picture

Don't worry, Romney is gonna be elected and everything will be solved.. mwahahahahahaha

Al Gorerhythm's picture

If they don't hold it, they don't own it. It's the law.

The Shootist's picture

Thunderdome. Five disputed owners of PM's enter, only one leaves with the physical.

Piranhanoia's picture

105 owners. And that numbered bar belongs to them.

Eternal Complainer's picture

...and it's not any of the five but rather some crooked JPM

SilverRhino's picture

And the one leaving with the phys tests it and finds it's 75% tungsten.  

JPM Hater001's picture

Amen brother that's exactly what I was thinking the whole way through.

Some quick math for the publicly educated amongst us...
1.4 trillion in US dollars is undoubtably a lot to paper

But that's about it...

zhandax's picture

Since, according to  the fed, only $1.09 trillion is in FRN, 1090 tonnes, if all in Franklins.

Buck O Five's picture

You didn't hold that, someone else held that for you

Slightly Insane's picture

Dude, or dudess, I certainly hope you are correct.  If you have ever lived under a Marxist regime, you would know what I know.  Sure as shit things will get solved, and then again I doubt it.  The folks that do not know what a good Marxist will do to an economy, have yet to learn about extinction of property rights (already happening), and confiscation of wealth (soon to arrive at your door step).  Yeah, Romney may not appear much different then Obama, but you have not come to an understanding between a Capitalist and a Marxist.  If it goes  to Obama, then I bet that capital destruction will continue un-abated like a  two dollar whore with stds aboard a battleship.

DeadFred's picture

Most people who run businesses aren't stupid

Harbanger's picture

It depends, that's why sheep need to be cornered, some are benefiting from Govt candy.  I personally know farmers who are voting for Obama only because they're being paid not to produce.  They're bitches, I know they would sell their souls, eventually I will own their ass and their posterity.

Slightly Insane's picture

No, actually you won't own their asses.  They will have become property of the Government, and will be affectionately known as "Democrats".  (Your farmer associates, will effectively be called "Komrades" after the election).  In my area, we do identify these "parasites".  We have ways of dealing with them.  We know who they are.

Coke and Hookers's picture

They will become a part of the dependent class like those folks who got free sail fones from Obama. The primary goal of any 'autonomous' government is to increase the dependent class to a majority, thereby ensuring its eternal existence. The middle class will become an eternal minority suffering eternal slavery to feed the government, its owners and its dependent class. It's a neat system.

Harbanger's picture

eventually I will own their ass and their posterity.

Harbanger.

flash338's picture

If me and a few million others had a job, they might have reason to invest that money

LetThemEatRand's picture

If they were paying workers instead of hoarding cash to ensure their future bonuses while the ship sinks, there would be no impending implosion and you would be able to find a job.  When we talk about companies become "lean," it means primarily that they have cut workers, workers' salaries, benefits, etc.  I wonder why the middle class is shrinking and the economy is steadily going down the toilet.

TrulyBelieving's picture

You, lter, say that as if you believe businesses owe their workers more than what was contracted for. If you had any idea of why someone would go into business then you might understand why these businesses hold onto their earnings just now. They would gladly start some project for profit if the market were willing, but because of uncertain new laws, more taxes and possible downturn in the economy, it makes more business sense just to wait this one out. 

hannah's picture

tru - yada yada yada....these business's that 'owe us workers nothing' borrowed all this cash for FUCKING ZIRP...! they do owe society something. their 'profit' is a loan that the taxpayer will end up paying because they will use it for executive pay and cocoon til they run out.

NidStyles's picture

When are you going to learn? No one owes you anything.

walküre's picture

there's nowhere to run, nowhere to hide

doesn't matter how many millions or billions someone sits on

Winston of Oceania's picture

Paying workers to do exactly what? Sweep floors until orders start to roll in the door? Collectivists would just love that, then Old Uncle Joe, er Sam can come in and nationalize it for them huh? hump...

nmewn's picture

"Free" mandated shit will fix it...no doubt...lol.

Meesohaawnee's picture

bravo. a voice of common sense..what i read trasnlated into a grand wealth transformation

Pants McPants's picture

If it's really that simple, why aren't you putting your money where your mouth is?  Set an example for other companies to follow.

Otherwise STFU.