Why are so many companies hoarding cash instead of investing?

[Stinky The Clown]

As I see it, for one reason: They fully believe that Deflation is coming.

I think, if we look around, we can all see it. Just walk down the aisles of a grocery store. Look at the price stickers. Peanut butter was (whatever) $7.97 for the humongo size Skippy. Now it is marked "New LOW price. $5.49".

Not "on sale". Not "special purchase" or some other euphemism. Just a new, far lower price.

Peanut butter was but example of many.

Looked at new HDTVs lately?

Back to school clothes?

In a deflationary period, the smartest thing to do is hold onto cash. You will be able to buy far more for your money a week from now, and even more a month or a year from now.

Remember car rebates? No one bought a car without them. When rebates stopped, the showrooms were ghost towns for a while.

The companies are hoarding their cash for this reason. They'll be able to buy our toil for far less in a year or two, when we're *REALLY* hungry and hurting.

[dkf]

1. Why invest when there is no demand?

The country is in a funk.

[global1]

21. And There Is No Demand Because Of The High Unemployment......

put the people back to work and demand will return. If people begin to get the confidence back that they have a decent job - they will again spend their money. Once they spend their money on those items that are now in short supply because manufacturers have cut back due to lack of demand - the manufacturers will have to make more product. Making more product will mean that more people will need to be employed to do so. People that are employed pay taxes. These taxes support the very programs that are now being squeezed because of lack of taxes.

It is not rocket science. Jobs fuel the economy. Until we can get the unemployed back to work we'll be in this funk of an economy.

[dkf]

33. Companies don't hire for no reason just to give random people a paycheck.

To think that they will is not very realistic.

[Spheric]

24. A large part of the country isn't just in a funk. They are broke.

As you point out, the economy is demand driven. Supply side economics is just an invention used to steal from the public. Nobody in their right mind builds it in hopes that someone might one day buy it. They build to supply demand.

Bottom line, without jobs to provide money, there can be no demand. See FDR for the solution.

[onehandle]

2. And those of us holding onto our 401k can only watch it shrink again.

Ten years ago I should have cashed out. I was kicking myself throughout the Bush years.

It started creeping back up and and was nearly back to 80% of what it was ten years ago earlier this year.

Now it's shrinking again and I am kicking myself once again.

I should have cashed out... again.

[Statistical]

17. Don't "cash out" (take money out of 401K and pay taxes + penalty)

Simply move assets inside the 401K.


Example your current 401K
$10,000 in stocks/stock funds

401K after changes
$4,000 in stocks/stock funds
$3,000 in corp bonds/cb funds
$2,000 in treasuries/t funds
$1,000 in cash/money market

Cashing out is foolish and prohibitively expensive (25%+ taxes and 10% penalty) however I will never understand why people think 401K = stocks.

Where do people get this idea?

You could put 100% of your 401K contributions into a T-bond fund and it would have less risk than CD at your bank.

[msongs]

3. sorry lads but there is NO deflation in so cal nt

[Statistical]

19. Housing prices have risen in CA over last 6 months?

Gasoline is higher or lower than it was 6 months ago?

[4lbs]

29. Actually, yes and yes.

Gas is now about $3.00 to $3.10 per gallon in Southern Cal.

Six months ago, it was around $2.70 per gallon.


Housing prices in San Diego have also increased significantly.

http://www.signonsandiego.com/news/2010/jul/27/home-prices-increase-13-pct-may/

[Merlot]

30. I"m paying 3.40 a gallon here in SoCal

where are you finding it for 3.10???

[4lbs]

31. Here in San Diego it hovers around $3 to $3.10 currently.

Back in March it was around $2.70 per gallon.

[OmahaBlueDog]

4. In a sense, we've been through a deflationary period

Look at Real Estate in most markets.

The HDTV is really a different phenomenon. Think calculators or personal computers. Electronic gadgets on the cutting edge are always expensive in the beginning. As demand rises, competition rises, and prices fall. In those cases, it's more like they were really overpriced to begin with.

Car rebates and 0% financing are yet another phenomenon. Changing marketplace expectations. The car industry says they'll give a rebate, and then people buy. Then the rebate ends. People say "I'll wait until they bring the rebate back." Sales fall, and the rebate, or some other gimmik returns.

By the way, I just spent a bundle on back to school clothes, thank you. Just doing my part to singlehandedly stimulate the economy.

There's something to what you say. Companys may be looking to conserve cash and purchase bargains in a deflationary environment. Some companies may be waiting for teetering competitors to stumble, and then buy them out at distress sale prices. However, I think many companies do have uncertainty over commodity prices -- especially fuel.

[ProdigalJunkMail]

5. in fairness...HDTV's are plummeting due to manufacturing

improvements and vast availability. i believe deflation may hit and the uncertainty is partly why companies AND people are hoarding cash. the problem is, we have a tremendous national debt...deflation would be a disaster for that debt. anyone holding debt is in deep shit if significant deflation becomes a reality...the Fed is going to have to do some serious juggling...

sP

[OHdem10]

6. The Business Community know and understand Globalization

is driving them to adjust to a new normal. They recognize
that the great majority of Americans will have their living
standards lowered. (will not be making the same level
of salary as in past.) To cope they have contracted or
pulled inward holding onto their cash. They appear to be
holding onto the cash to get themselves through the long
hard slog. From the very beginning economists told us
(Zander for one) there would be joblessness until after
2014. More like 2016 before we really feel it. We can choose
to ignore them (economists) and listen to the chattering
class strain over every little possiblity of hope. I am
not dissing hope. Hope based on reality is healthy.
Look, Business, no matter the size has to look out for its
own interest. Responding to Globalization they have
adjusted in such a way as to survive.

When other countries are in recession and worse, under AUSTERITY
PLANS, who is buying our products??????

[leveymg]

7. If it's a bank or big company, chances are those hoarded funds are public funds

If the Fed, Administration and Congress didn't attach strong enough strings, then maybe the American people should.

[sfwriter]

8. We've been forced into Angel Food...

I was getting it from a local church until one of them decided to challenge me on evolution, so now I get it from a community center.

Anywho... The price on that has been dropping and the last email I got said their suppliers were offering them amazing bargains. This is largely processed, restaurant grade food.

With our great capacity idled as we are sold a lie about scarcity, more and more product chases fewer dollars. Deflation is looking inevitable to me.

[Evasporque]

9. Gotta save to pay executive bonuses...nt

[burnsei sensei]

10. Because that's what they did in the Gilded Age. nt

[harun]

11. Everyone is in survival mode because the system is too corrupt.

[mia]

12. "Spreading the wealth" is not in their best interests. It's also

likely that they don't want a Democratic administration to get credit for a recovery.

[notesdev]

13. There's more to the story

The reason so many companies won't invest in the capital markets is because they have seen how badly others who have done so have been robbed by Goldman, JP Morgan, etc., while the federal government stands idle - or worse, actually helps the criminals in the commission and coverup of their crimes. You'd have to be insane to expose your money to those thieves (and the great majority of small investors who have fled the markets apparently agree).

The other part of the story is that although cash is at record levels, so are liabilities on the other side of the ledger.

The short summary of the behavior we are witnessing can be stated as "bracing for impact".

[mia]

15. "bracing for impact"

Your post says it all.

[Spheric]

25. +1 "Bracing for impact." /nt

[MadHound]

14. Lack of demand.

Companies aren't going to expand production or invest in infrastructure or labor until there is demand there. Of course there isn't going to be demand until people have jobs and start spending. Thus is born the vicious cycle we're in.

The government could change this situation by instituting a jobs program on the scale of those seen in the Great Depression, but apparently they would much rather invest in war.

Thus, we're stuck, in an ever shrinking vicious cycle.

[uponit7771]

16. They don't need the workers, there's demand otherwise there wouldn't be hoards of cash

[LiberalEsto]

18. The money's for political contributions

They'd rather buy politicians than hire people

[surrealAmerican]

20. Tight credit is part of the reason.

Since their ability to borrow is less then certain, they're building up a buffer of cash so they won't need to borrow as much when they are ready to expand.

[cbdo2007]

22. many companies were caught off guard and thought they were safe.

So they had a sh*tload of money invested before the 08' crash. When the market tanked, they all freaked out and had to lay off a bunch of people, so now they are stockpiling cash so they are in a better position if this happens again.

[jfkraus]

23. Because Demand is down.

There's no demand for goods and services, so companies are not gearing up.

[AllyCat]

26. Makes sense. My husband and I are trying to pay off debt as fast as we can

while still keeping something in case of emergency. It's tough with pay getting cut and daycare continuing to raise rates and give us no breaks when we work extra.

[phantom power]

27. I suspect a simpler model is just that unemployment is causing low consumer demand.

If you're a company who happens to have some cash on hand, but you look around and see that demand for your goods or services is not growing, you're going to sit on that money. No sense in spending it to expand your business, either by hiring, capital purchase, new construction etc.

[femrap]

28. All of the debt has to be

unwound...this debt has been building for decades.

The only 'new ideas/products' being developed are financial instruments that produce NOTHING.

As for tangible products, there doesn't seem to be anything 'new and must have.' It's as if our creativity and imagination has gone as far as it can go.

More sequels, more re-makes, nothing new.

I think companies are hoarding money just waiting to buy out their competitors or start-ups that may infringe on their market share. Pretty soon, there will be only 5 stocks to on the exchange: Big Pharma, Big Ag, Big Energy, Big Walmart, and Big China.

WASF.

[okieinpain]

32. me personally i think they are waiting until after the election to

see who wins.

[havocmom]

34. Thinkin it's the real estate they want

Or condos in some underground vault with all the comforts of urban life, but without the peons making traffic and begging for gruel.

And, no, I am not kidding.

[SKKY]

35. I read somewhere that the lack in demand is due to the fact that...

..., in addition to high unemployment, those who are working are re-evaluating their personal finances and either paying off bills or saving, and that once they feel comfortable again, they'll start buying. Not sure how much of that is true, but it seems plausable. It also seems like a smart thing to do in the long run.

[divvy]

36. One is the numerator, the other is the denominator

The numerator (top number) is the cost to do business
The denominator(bottom Number)is the total earnings before interest, depreciation, taxes, and amortization.

When the denominator does not grow or actually shrinks, then the numerator (spending) must be adjusted to keep the whole affair out of the toilet.

I hope this helps
divvy

[blindpig]

37. Easy fix...

WPA, CCC, something like that. Why is this option not even considered?

Because Capital rules and would not like the rise in wages that such policy would likely cause.

So much for government 'by, of and for the People'.