The Royal Appointment
Corporate balance sheets are swelling with cash, while individuals are paying down debts and saving at historically high levels. Why the rush to fiscal prudence? Has the former infatuation with credit turned to cash?
If I were to have a tombstone upon my demise, I am sure my students would inscribe the epitaph: "Cash is king". Yep, for a quarter of a century, I have been proclaiming that cash is the universal language of successful personal and corporate transactions. It talks, while the rest walks. A little jingle in your jeans can smooth out the bumpy ride.
Since the onset of the great recession, we have witnessed the power of cash. It saved Ford, while GM and Chrysler avoided being snuffed out merely by the voodoo currency printed by the Fed. Insolvency claimed the lives of many less politically charged business entities during this economic debacle, not to undermine the unprecedented hazards in housing and consumer debt.
Historically, corporations were criticized for carrying too much cash on their balance sheets, since the return that cash would generate in short-term instruments was unsatisfactory for shareholders. In theory, if the company does not have a sufficient pipeline of good investment options, it should return the cash it would invest on behalf of the shareholders to the shareholders. Give them their money, and be done with it. But that's just theory.
How much is too much? Today, the threshold seems to be much higher than it was a few years ago. Investors are much more comfortable with corporations holding large amounts of cash and making equity intensive strategic purchases when juicy cash flowing opportunities present themselves. There is a renewed reverence for liquidity and solvency, and from a variety of stakeholder perspectives, this is healthy.
Personally, after 25 years of talking to the blackboard about the money monarchy, I am downright giddy with the recent royal appointment of cash... (and the fact that if one lives long enough, he/she will eventually be right).
Posted on Mon, June 11, 2012
by Tim Moffit filed under