Corporate Cash Surges $236 Billion in Q3 to All Time High
Cause for Concern
Anthony Carfang, The Carfang Group
Corporations in the U.S. added $236B or 10% to their cash holdings during the third quarter according to data released by The Carfang Group and based in part on the December Federal Reserve Flow of Funds Z1 report. This follows a $161B surge in the second quarter. Corporate liquidity is now at an all-time high of $2.608T.
Corporate treasurers hold cash on their balance sheet to handle a company's day to day business needs, accumulate for longer term capital expenditures and projects as well as a precaution against business cycle uncertainty. Generally, the rate of return on cash is far lower than the return would be if capital were invested in the business. This cash is placed at low interest rates in bank deposits or in government and agency securities. Treasurers receive a somewhat higher rate in their money market mutual fund or commercial paper investments.
The six-month increase of nearly $400B in corporate liquidity is unprecedented and should be a cause for concern.
It is not coincidental that this is happening at the same time as major Federal Reserve intervention. During 2019, the Fed has paused its interest rate normalization, resumed its crisis era quantitative easing and has experienced dislocations in the repo market. It appears that corporate treasurers are raising cash and waiting out these unclear Fed signals. In addition, after a couple years of trimming the size of the Federal Reserve's post crisis balance sheet, the Fed is once again increasing its holdings. Recent turmoil in the cash markets has seen overnight rates on repurchase agreement shoot up to a high of 10%. Although that has abated, traders are concerned about what might happen at year end.
Globally, other central bankers are keeping their rates in negative territory. Implications include a lower return on invested capital for corporations and distorted balance sheets for commercial banks.
Both Basel III regulations and Dodd-Frank place specific requirements on banks in terms of what they can do with short term cash and the amount of capital required to support that cash. The surge in corporate cash, to the extent it flows into bank, triggers compliance issues for banks and likely inflates their FDIC insurance requirements.
Cash had declined throughout 2018, a period during which the central bank was raising rates. That year was also characterized by a high level of share buybacks and repurchases. Perhaps part of the recent spike is cash levels is due to a slowing of share repurchases.
This strong growth in corporate cash in Q3 was powered by a $190B increase in checkable bank deposits and currency, following a $100B increase in Q2. Money fund holdings by corporations were also up strongly, $36B in Q3 on top of the Q2 $20B increase.
At $2.6 trillion, cash holdings are up 41% over five years, far outpacing the 26% growth in nominal GDP in the U.S. Economists had widely expected the reverse, anticipating that companies would use their cash for capital spending.
Corporate cash holdings were equivalent to 12.1% of U.S. GDP. As the accompanying chart shows, that is close to its historic high and double the level of the early 1990s. To the extent that the amount of cash necessary to support a given level of economic activity is a measure of market (or regulatory) efficiency, amount is a cause for concern.
There are material changes in the composition of that cash total. Checkable deposits and currency now account for 46% of corporate cash, more than double the levels of a decade ago. On the other hand, money funds appear to have bottomed at about 20% of corporate cash, a level that flatlined in 2016 when the SEC instituted new regulations. That's more than half the level of a decade ago.
Earlier this year, I published Megatrends in Treasury, Money and Banking (https://www.thecarfanggroup.com/megatrends). In that article, I raised concerns about the growing impact of central bank policies. The historic five quarter decline in corporate cash which began in late 2017 is now dwarfed by the current surge. The underlying volatility of corporate cash balances amplifies my concerns. The current turmoil in the cash repo market could be an early manifestation of more serious problems.
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