It seems like one of the more common arguments for buying stocks, both now and in the past and presumably into the future, is the amount of cash on corporate balance sheets.
The argument goes that such cash represents pent up demand that will eventually be deployed into the marketplace. Once companies spend this cash, earnings and the market will propel higher. But is this really the case?
Such talk sounds good, but appears not to be true. There are a few reasons for this, many of which are outlined in this Big Picture article written by James Bianco.
First, cash on the sidelines is ALWAYS (almost) at record levels given that the number is nominal, meaning it is not adjusted for prices changes or output. If you look at the first graph on the link, the line is linear.
Second, since the number is nominal, we need to compare it to something else. The second graph on the link is liquid assets as a percentage of total nonfarm nonfinancial corporate business assets. This amount has a long-term downward trend, meaning that cash as a % of total assets has been decline since the early 1950’s.
I should note if we look at the last 30 years we are at a high in this ratio. However, given the high economic uncertainty and the fact the ratio isn’t astronomically high relative to historical standards, it is hard for me to compelled to believe this cash has to be put to work.
Lastly, I wonder how high corporate liabilities are. There are two sides to the balance sheet, so for instance, if I have $100 in cash, but I borrowed $90 of it, I am less likely to go crazy spending the $100 given what I owe.
I believe markets can move higher, I just don’t believe cash rushing in from business investment is a compelling reason why this market will go up.
