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The Myth Of Cash On The Sidelines Remains A Myth

Posted By James Bianco On December 13, 2012 @ 8:30 am In Think Tank | Comments Disabled

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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 [1] 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

[2]

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

[3]

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

[4]

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 [5].

 

Source: Bianco Research [6]


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URL to article: http://www.ritholtz.com/blog/2012/12/the-myth-of-cash-on-the-sidelines-remains-a-myth/

URLs in this post:

[1] March: http://www.arborresearch.com/bianco/?p=64201

[2] Image: http://www.ritholtz.com/blog/wp-content/uploads/2012/12/cash111.gif

[3] Image: http://www.ritholtz.com/blog/wp-content/uploads/2012/12/cash21.gif

[4] Image: http://www.ritholtz.com/blog/wp-content/uploads/2012/12/cash3.gif

[5] here: http://www.arborresearch.com/bianco/?cat=41

[6] Bianco Research: http://www.arborresearch.com/bianco/?p=70653

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