Corporate Cash Hoarding and The Great Recession

March 14th, 2011
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Contributed by: Michael R. Levin, The Activist Investor
How badly could the US economy could have used almost $1 trillion in spending and investment last year?

Blame abounds for the previously-dead-but-only-slowly-reviving economy: profligate Wall Street, a confused Federal Reserve, strapped consumers, and of course the clueless White House. How about US corporations and their leaders? They oversee a cash “hoard” (to use the term from Alan Reynolds recent Wall Street Journal op-ed “The Myth of Corporate Cash Hoarding”) that dwarfs the infrastructure and tax cut plans bandied about last year, and handily exceeds the 2009 stimulus package.

Yet, risk averse corporate executives sit on that cash, too scared to spend it. Then, they turn reckless, and these days wait expectantly to spend (or waste) that cash on value-destroying but ego-feeding mergers and acquisitions. To see this, merely think about their corporate balance sheets as we smart investors do.

The Federal Reserve reported at the end of October that US corporations (other than banks and other financial services companies) held over $1.9 trillion in cash and liquid securities, a 26% increase over the year-ago level and the highest level in almost 50 years. Wise investors ask, why do companies need cash at all, and how much do they truly require?

Corporations have two reasons to hold cash:
1. to fund fluctuations in daily, weekly, or monthly operations
2. to invest: in research and development, in growth.

Investors widely believe that risk averse managers routinely keep much more operational cash than makes economic sense. CEOs worry, needlessly, that they require many months’ worth of reserves when at most several weeks’ worth will do.

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Related People: Eric Jackson; Jackson Leadership Systems, Inc
Related Entities: Ironfire Capital US Fund LP
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