Are Growing Cash Holdings A Problem?
The cash holding of Apple and other high tech companies are piling up. This is a practice often done by international companies because of foreign exchange variations. The funds are held in cash accounts [bank accounts] or cash equivalents [most typically bonds]. As noted below, there are more $7 trillion in bonds with negative interest rates.
Throw every “norm” out the window. This Keynesian, central banking world has everything so distorted that nothing makes sense anymore.
There are currently more than $7 trillion in bonds, worldwide, offering a negative interest rate. Wrap your head around that! People are actually paying trillions of dollars to give their money to mostly bankrupt governments with the promise they will receive less at a later date.
Treasury Bonds used to be described as having a “risk-free return.” Now they are “return-free risk”.
Moody’s Thoughts on Cash Holdings
Even rating agencies, such as Moody’s have commented on this build-up of cash and its equivalents as profit growth and the stock market stall.
Moody’s Investor “Services” (and we put “Services” in the proverbial air quotes, because these are the same people who called bundles of mortgages loaned to dead and jobless people Triple-A) made this statement in their Friday report: “Corporate America’s rising pile of cash is becoming increasingly important to investors as profit growth and the stock market stalls.”
Some Cash Holding Issues
You might be thinking, “Okay…so?” Well, here’s the issue…
Holding large amounts of cash – or even worse, cash “equivalents” (basically bankrupt government bonds paying a negative interest rate) is now increasingly unwise.
Consider currency risk. A company like Apple, with subsidiaries worldwide, likely holds numerous currencies including euros and Japanese yen.
The Eurozone, as admitted by almost everyone, is on the verge of collapse. And Japan too.
Apple’s market cap is currently about $500 billion. Nearly half of that is held in pieces of paper that could be valued at zero in just the next few years.
That ought to scare any company that is currently holding a lot of cash, or cash equivalents!
This, in fact, should be an investors biggest concern. You have nearly half the market cap of Apple being held in highly risky instruments. And then there is the bonus risk of having 30% more being absconded by the Internal Rape Service (IRS) [Dollar Vigilante’s definition] if Apple were to even repatriate that money to the US based parent company.
Does High Cash Holdings Equal Financial Safety?
These companies with high cash holdings are believing that they are in a safe financial position.
In other words, these large cash holdings are a major risk… and most people don’t even realize it.
If companies like Apple had any sense, they’d be diversifying out of fiat currencies into metals. But, they are not… mostly because the CFOs of these companies went to Keynesian business schools. They watch CNBC, and think that the Federal Reserve is here to “help”.
Those invested with Apple and other large corporations may think they have insulated themselves from the worst of the volatility because of their large cash holdings. In fact, in a way, Apple is now mostly a money market fund and they may have just risked billions on a failing system.
These CEOs and CFOs are operating under the belief that they are “too big to fail” as happened back in 2008. But, they are wrong! Upcoming legislation is already in the works to thwart that eventuality.
Even the US government is beginning to prepare for calamity. Only a few days ago, Congress introduced the “No Bailouts for State, Territory, and Local Governments Act.” The new bill prohibits any federal agency from funding ANY bankrupt city, state, or territory. The bill also prohibits the Federal Reserve from “financially assisting State and Local governments.”
Congress is well aware of a massive wave of defaults about to hit cities and states. Puerto Rico is just the beginning. We can see from this new bill that the federal government wants to make sure that every dime available ends up in its pockets. Nothing for cities or states. But the US federal government is just as bankrupt as they are.
Ultimate Concern For Cash Holding
If the legislation passes, and they’re not supporting the government as they’ve done in the past, companies with high cash holdings such as Apple will question their current practices. The companies will be looking for venues where their cash isn’t going to disappear.
Quotes and image thanks to dollarvigilante.com.