Yesterday the Federal Reserve released its quarterly Flow of Funds data, current through September 2011. One of the more popular headlines from this data concerns the record amount of “cash on the sidelines“. Through Q3 2011, nonfarm nonfinancial corporate businesses held $2.11 trillion in liquid assets on their balance sheets. As the argument goes, this must be a sign of pent-up demand just waiting to be unleashed on the market.

Liquid assets held on companies’ balance sheets is a nominal number, much like the nominal level of GDP, that rarely decreases. Of course cash on the sidelines is at a record nominal level, it usually is. This series must be compared to other balance sheet items for relevance. The chart below shows liquid assets as a percentage of total nonfarm nonfinancial corporate business assets since 1952. By this measure, the “cash on the sidelines” argument is far less compelling.

When examined over a shorter time frame, as shown below, the percentage of cash on the sidelines is at the upper end of its range of the past 30 years. Given the uncertainty in the markets, rampant volatility and the lack of good investment opportunities, this should not come as a surprise.

While it is true that cash on the sidelines, as defined above, is at its highest level in roughly 30 years, should this be taken as a sign of pent-up demand that could lead to a huge rally once unleashed? We would still argue it is not. If and when investment opportunities become more enticing, we will see these levels fall from 14.24% to the historical norm of the past 30 years of 10%-11%. It is not as though companies currently have 40% of their assets in the form of cash waiting to be invested, as was the case in the 1950s.

Source: Arbor Research

Category: Corporate Management, Think Tank, Valuation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

7 Responses to “The Myth Of Cash On The Sidelines – An Update”

  1. Lyle says:

    I would contend since 2008 and to a lesser extent this year (at least in Europe) prove that you can not always borrow when you need to many are making a change to have a cushion to ride thru periods when banks and the like are not lending. Its interesting that in the 1950s when the meme of borrow borrow borrow was not as big (because everyone was well aware of the 1930) cash reserves were even higher.

    Given the recent demonstrations a CFO would be foolish not to ensure that the company could ride thru a several month period with no access to borrowing without having to go bankrupt. This is done by having more cash on hand to take care of the issue. Note that Bank of New York Mellon started charging companies for having to much cash in the bank.

  2. rd says:

    How much of this cash is sitting in other countries and available for repatriation if tax policies encouraged it? How much is available to spend in the US now?

    One idea that I think should be strongly considered is to allow companies to deduct dividends as an expense when paid, so that double taxation of them does not occur. That would be a vehicle to repatriate cash to the US and immediately pay it out to sharehodlers. This would then either increase the overall asset pool of a wide array of people and entities (individuals, pension plans etc.) or be part of a cash flow stream that would get spent in the eocnomy almost immediately.

    The S&P 500 dividend yields are near record lows. An extra 1% or so of dividend yield would likely benefit the economy significantly which would increase demand, thereby increasing corproate revenues and earnings. It is unlikely to happen until the penalty of repatriating cash and paying dividends drops significantly below its current tax cost (almost 50 cents on the dollar right now). A reasonable compromise would be to allow for full deduction by the corporations and then tax dividends at either the marginal tax rate for ordinary income or at 20%-25% (instead ofthe current 15%), whichever would be lower for that specific individual.

  3. Moopheus says:

    rd–table F.102 in the report lists earnings held abroad as part of the assets, and the number given is on the order of $200 billion.

  4. maynardGkeynes says:

    I thought that the myth is that there is any such thing as “cash on sidelines.” This is because, as soon as someone uses cash to buy a stock, it creates a precisely equal amount of cash in the account of the seller of the stock. Thus the amount of “cash on the sidelines” is always a constant in this regard. By itself, it cannot move the market or signal anything meaningful about “pent up demand” for stocks.

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