When banks hold onto cash and the amount of liquidity in the economy-at-large rapidly dries up, companies historically have responded reactively (impulsively) in the short run (starting six months after a media-magnified cash crunch and continuing into a period where indications in the economy point very strongly toward general inflation. Companies hoard troves of cash out of an amalgam of fear and greed -- fear that no further credit will be available to fuel expansion or to address unexpected needs, and greed -- where cash is scarce, and asset values (exclusive of exchange-traded securities) are declining either because of a shortage of viable buyers or customers, or because of anticipated worsening in the economy.
The rating of the United States as a sovereign credit may have been downgraded, and many are speaking about the decline of the value of the dollar vis-a-vis other currencies, but this is of little real consequence within the community of dollar holders with an eye for bargains and arbitrage. You need ready cash in order to be able to secure distress-sale bargains.
Viewing cash as a commodity, which so many fail to do, makes it increase in value when it is in shorter supply, and when it can be used to purchase even more than before in terms of larger-ticket income-producing assets, equipment, et cetera.
It might be well worth your while to have a look at an article just posted on The InfoSphere Business Alerts! Blog. The article can be accessed at http://infospherebusinessalerts.blogspot.com/2011/10/companies-hoarding-cash-no-self-banking.html.
The conventional wisdom would have us believe that corporations (as investing entities) would be fleeing dollars as a store of value, and running to invest in gold, or oil stocks, or FOREX. The fact of the matter is that Corporate America knows that large reserves of cash are wonderful to have in an economy where prices of many assets, supplies and resources are temporarily depressed. Expect corporations and large organizations, both US and international, to be piling up cash reserves until the prices of assets seem to have truly "bottomed out," or after the first few months (three to six months, generally speaking) of reports of rising general inflation.
Were I to hazard a guess, I believe that corporate self-banking, especially in US Dollars, will continue for at least another year to a year-and-a-half, and that reasonably-profitable small- to mid-sized companies are already starting to follow the example of the cash collectors...companies like Apple, for example.
Ironically, this self-banking in response to the contractionary credit environment is actually helping to support and bolster the value of the US Dollar. And that, friends, readers and colleagues, is not necessarily a bad thing.
Douglas E Castle [http://aboutDouglasCastle.blogspot.com]
InfoSphere Business Alerts And Intelligence [http://InfoSphereBusinessAlerts]
Tweet
No comments:
Post a Comment