I subscribe to several daily business newsletters via e-mail. One is called Morning Brew. It is a trendy and very visually exciting newsletter that is focused on millennials but is also kind enough to let older gentlemen such as myself subscribe and read its content. In their June 11th edition I stumbled onto this, not so, fun fact:
Moody’s Investors Service said yesterday that the 928 U.S.-based, non-financial companies it covers claimed $1.7 trillion in cash and liquid investments at the end of 2018.
That’s an eye-popping number. But it’s also down 15.2% from a record $2 trillion in corporate cash a year earlier.
Driving the news: 2018’s drop in cash hoards serves as a master class in chain reactions.
Cash piles shrank because companies funneled record amounts toward share buybacks, M&A, dividends, and capital spending…
And all that happened because of the late-2017 Tax Cuts and Jobs Act. The tax overhaul dropped levies on foreign income so companies could put it to use instead of letting it collect dust in European banks like Gringotts.
And put it to use they did. Last year, capital expenditures leaped 12% to $851 billion, dividends climbed 6.7% to $412 billion, and net share buybacks almost doubled to $467 billion.
The top five cash-holders last year—Apple, Microsoft, Alphabet, Amazon, and Facebook (heard of ’em?)—held 33% of the total balance in 2018. Apple alone laid claim to 14.5%, a balance larger than the aggregate amount for every other non-tech U.S. sector.
Before the tax overhaul…
U.S.-based companies had slowly built up giant cash reserves in foreign countries, keeping profits at arm’s length from the frightful 35% corporate tax they faced when bringing it home.
Then in 2017, changes in the tax code opened the floodgates for what’s known as “repatriation.” The Commerce Department said companies sent $664.9 billion in foreign earnings back to the U.S. as dividend payments in 2018, up from $155.1 billion a year earlier.
Looking ahead…Moody’s Point is that companies will continue to put money to use paying down maturing debt, boosting buybacks, and upping dividends until there’s a reason not to. Look for those piles of cash to keep shrinking.
Go back and look at those numbers again. The graph is telling you that corporations were sitting on over 2 Trillion Dollars. Trillion, with a “T”.
Even with drawing down some cash, a mere 300 billion it tells you that American Corporations are sitting on a buttload of money.
After you digest that unsavory fact, make it a point to look at what they are spending their money on. It’s not spending money on employees and it is not spending money on making capital improvements / better products. These folks are spending money to make rich people richer and to fudge their own stock price/balance sheets. That is, in the long run, not a good thing for any of us. In fact, it could be setting the average person working in the US economy for a very hard fall, potentially even harder than the fall of 2008. From my standpoint, the so-called “good economy” that the orange fat boy brags about is not so strong at all – and bears a lot of resemblances to the superficial gains that were made in the US economy in the 1980s. Gains that seemed good at the time, but in the end screwed a lot of people. ( Remember that the Reagan years saw investors figure out how to make more money destroying companies than by building them up).
The data is now pretty clear; the tax cut bill from 2017 did not benefit the average American at all. The rich are winning, and the rest of us are losing.
Yes, there has been wage growth, but is weak, especially when you contrast it with the benefits the corporations have gotten. GDP growth is slowing and when you look at something other than the stock market, there are big warning signs flashing. (Check the bond markets). The trade war is impacting a lot of people, many of whom supported Trump – and he seems to have lost none of his ardor for crippling tariffs. And make no mistake about it – a tariff is a tax on US consumers.
And probably worst of all is how the orange monster wants to use the Fed to manipulate the game in his favor. That is outright dangerous and traders should not be allowed to set monetary policy. The Fed does not need to cut rates at this time. Put me down with Bloomberg, the tail should not be wagging the dog:
Actually, if the goal is to take out some insurance against a slump, there’s a better way to do it.
There’s little in the current economic data to support immediate stimulus. Nonfarm employers have added more than 150,000 jobs per month over the past quarter, ample to sustain full employment. The unemployment rate, at 3.6% in May, is as low as it has been in almost fifty years. Core inflation (which excludes volatile food and energy prices) remains between 1.5% and 2% — pretty much where it has been ever since the Fed announced its 2% target seven years ago.
The Fed has other ways to address issues in the economy – and it should not foreclose its options when a future recession hits ( which I hope happens soon to drive home the point that Trump created instability in the US and world economy). Don’t just look at your 401K – ask yourself if the economy is really structurally sound. The answer to that question is , “no”.
And the people who could change that are sitting on their asses and their 1.7 trillion dollars.