The wisdom of the common is to grab the cash hoard and distribute the loot; pacify the mob. Engage in a feeding frenzy….
(see link at end)…The cash pinnacles are far higher and more numerous than the debt canyons, and their damage more tangible. Never before in the history of the world has so much cash been hoarded in so many places by so many large organizations. Never before have so many opportunities been missed, so many careers wasted, because money is simply being put aside.
The cash hoards are a consequence of the debt crisis, but that is no longer a credible excuse. Before 2008, companies loaded themselves with debt. Then, in the worst months of the “credit crunch,” when overnight interest rates shot upward and banks stopped lending, companies packed their bank accounts in case credit dried up completely.
Canadian companies have piled up more than $525-billion in cash reserves – almost a third the size of the entire economy – up from little more than $150-billion a decade earlier. According to a recent analysis by the Gandalf Group, at least 45 per cent of Canada’s biggest companies are hoarding cash rather than investing in employment or capital….( to be continued)
It all seems so simple. But, this is the tricky issue of technological unemployment. And by nature, technological innovations when delivered to the market, to the consumer, tend to be deflationary and displace the nature of employment. When IBM’s Watson computer participated on the television program, Jeopardy, winning all the loot,it was a public wake-up call. When the Google Car drove through Nevada and California without a driver, it was an eye-opener that technologies like AI would be able to automate industries like trucking leaving potentially over two million in the pogey line.
( continued)…None of it is going into research and development, expansion of market share, new offices and factories or, crucially, on employing people. Nor is it going into tax revenues, since cash reserves – and some of the earnings that contribute to them – escape the taxman, giving companies an incentive to not invest. That’s nothing compared to the United States, where the Federal Reserve estimates that a staggering $5.1-trillion – an amount larger than the economy of Germany – is piling up in American corporate cash holdings.
In Britain, companies have accumulated almost $1.2-trillion in cash and deposits, equivalent to half the entire economy. And, no surprise, investment there grew by only 1.2 per cent last year, during what was supposedly a recovery. Indeed, it appears this frugality has tipped Britain into another recession. And this pattern sadly extends across Europe….( to be continued)
The truth is that if companies were to invest their surplus, it would unleash a wave of innovation that seemingly would have the equivalence of what the industrial age did for trades such as weaving, knitting etc. Just look at what digital download did to music stores. We could be looking at 20% unemployment. If not more. Better they keep thei
sh. America, through the Federal Reserve, as James Rickards pounted out in Currency Wars, has been inflating the economy, devaluing, but it can’t seem to master the cycle of innovation. The problem, is what to do with all those consumers, indebted, that can expect poorer income prospects and the social issues this will entail, when construction jobs, lawyers, techers, etc. are found to be redundant.
…Unemployment is threatening to cripple an entire generation in many countries. The worldwide food crisis has returned, for no good reason; with more investment, the world could produce more than enough food. There are serious housing shortages in most Western countries. The drive to reduce carbon emissions has stalled, due to a shortage of investment in nuclear and alternative-energy power sources….Read More:http://www.theglobeandmail.com/commentary/tear-down-those-mountains-of-cash/article4431702/
Some of this was foreseen by Aldous Huxley in Brave New World, and its been part of Macro-Economics at university level for thirty years, so the cycle is long before it filters into an enactment stage at street level. Modern production techniques, abetted by the theory of captitalism’s creative destruction, and human desire to change the status-quo have created this imbalance between production and consumption. And the credit cycle has seemingly been fatigued, even at historically low interest rates, of which the low rates are also problematic; operation Twist and lower bond yields do not seem to be deterring individuals from hoarding as well. And whether its Obama or Romney, these structural issues will remain.
( see link at end) Consider the chart below. Because many companies are sitting on cash equivalents large enough to distort the financial ratios, I have removed the cash from the equity and from the market value and reduced net income by 4% of the cash removed. Financial Analysts who fail to adjust for this non-employed capital will likely miss just how dramatic the current events are.
BV/Share EPS ROI Market to Book
Industrial Age Companies
General Electric 3.48 0.63 18.10% 3.1
Exxon 26.33 5.55 21.10% 2.7
Walmart 15.31 3.92 25.60% 3.3
Average 15.04 3.37 22.38% 3.0
Information Age Companies
MicroSoft 0.42 2.12 504.20% 54.5
Cisco 0.99 1.08 109.00% 13.6
Apple 24.24 14.03 57.90% 12.3
Google 31.22 20.44 65.50% 15.9
Average 14.22 9.42 66.24% 24.1