Comment

Most market watchers still subscribe to the belief that corporations hold record amounts of cash on their balance sheets just waiting to unleash into the economy.  In March we pointed out how the Federal Reserve revised away nearly half a trillion dollars from corporate balances sheets.

One of the more popular headlines from this data concerns the record amount of “cash on the sidelines.”…The Federal Reserve has revised estimates of how much cash companies are holding. The blue line in the chart below shows the latest release while the red lines shows the previous estimates…Where did the cash go? It disappeared as the Federal Reserve is now saying it never existed in the first place.

As of Q3 2012, nonfarm nonfinancial corporate businesses held $1.74 trillion in liquid assets on their balance sheets (blue line), still well below March’s pre-revision figure (red line).

Click to enlarge

Liquid assets held on companies’ balance sheets is a nominal number, much like the nominal level of GDP, that rarely decreases. 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 (blue line), especially after revisions (red line).

Click to enlarge

When examined over a shorter time frame, as shown below (same chart as above, shorter time frame), the percentage of cash on the sidelines was revised (red line) from the upper end of its range of the past 30 years to the middle (blue line).

Click to enlarge

We have argued in the past that the potential of excess cash on the sidelines to help buoy the markets once invested was minimal. After considering the latest revisions, this becomes even more true.

For an updated look at all of our charts from the Federal Reserve’s Q3 2012 flow of funds report click here.

 

Source: Bianco Research

Category: Think Tank

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.

2 Responses to “The Myth Of Cash On The Sidelines Remains A Myth”

  1. mpappa says:

    Does this explain debt issuance to buy back stock or to pay dividends. Would you know the ratio of dividend coverage that is all cash for the S&P 500?

  2. [...] –Cash on the Sidelines: James Bianco says the idea of corporate cash sitting on the sidelines is a myth. “Liquid assets held on companies’ balance sheets is a nominal number, much like the nominal level of GDP, that rarely decreases. 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… We have argued in the past that the potential of excess cash on the sidelines to help buoy the markets once invested was minimal. After considering the latest revisions, this becomes even more true.” [...]