Investing Blog

The Best Quantitative Easing Hides in Corporate Accounts
by Jordan at Investing Blog

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Non-financial companies in the S&P500 are now holding more money than ever, some $1.1 trillion in cash. This comes after some of the heftiest bond issuance ever in 3Q 2010.

Deutsche Bank found that not only are corporations borrowing more money, they’re just holding on to it after they get it, or making all cash acquisitions following a lengthy period of net positive debt issuance.

Among S&P500 firms, purely cash acquisitions are up 75% over last year, nearly as high as in 2006. There are two reasons for this activity. First, companies have been borrowing for quite some time, often borrowing more than they need because rates are so low. Second, cash is better than giving up stock because equity prices relative to earnings remain depressed. Who would want to give up shares of stock at their lows when with a modest rebound they could be worth 20-30% more? Then again, I guess we should entertain the flipside: who wants stock when the markets are so turbulent? ;)

Getting Money Back into the Economy

Among the first change in policy should be an agreement not to change policy. In at least some respects, money isn’t flowing because investors, corporations, and cash rich people are afraid of changing rules. They’re afraid that a new law may be passed which bans this or that, or which makes their tax burden higher or requires them to file new paperwork to do a simple business transaction.

Next, investors have to have confidence that the markets will set interest rates, not the Federal Reserve. I think we all know that interest rates are artificially low which, despite being good for consumption spending, isn’t all that great for investment. Has anyone taken a look at bond yields? Even your savings account interest rates? In the toilet!

We’ve got a very simple problem. The risks are high and the rewards are low. When this scenario presents itself, investors and companies opt for guarantees over speculation. The risk isn’t worth the reward, and the reward isn’t worth the risk! Four percent a year isn’t going to cut it! I think, Bernanke, they call this a liquidity trap.

About Jordan

Jordan is the web master of www.investingblog.org, a site dedicated to skillful investing, news and recent trends. You can read the original article here.

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