Corporations are stronger today than they’ve been in years, true or false? Most of the pundits say the answer is true, with a slight caveat.
The pundits warn that forces around the world can temporarily (and they emphasize temporarily) slow down what appears to be an approaching Golden Age.
We were at the precipice, the argument goes, and we survived which made us bigger, stronger, and obviously smarter. Really???
Let’s start with cash on the books. Most corporations are loaded with the money. The Bernanke ZIRP policy has created a terrific opportunity for CFOs to milk the credit markets at interest rates only dreamt of.
Arguments abound about a tax holiday for overseas cash, which theoretically could be used in order to add jobs.
Unfortunately, that was already attempted under George W. Bush, and it only led to stock buybacks, merger and acquisition activity, dividend payouts, but no jobs.
Will it be different this time?
I doubt it.
However, I’m far more concerned about the debt that was created in order to raise all that cash. Everyone forgets the hardy abundance of money was not created through sales, but through borrowing.
Keep in mind; borrowing denotes payback and interest charges. At a ZIRP policy level it’s easy to maintain heavy cash balances.
In spite of this, what happens when interest rates eventually rise, and the $7.5 trillion worth of loans start to demand payback?
Ladies and gentlemen, the $7.5 trillion-plus is not free money, there are strings attached. Sorry to say that drunken binges come with a cost due, making all that cash not as free as it appears.
Next, the resurrection of layoffs.
Contrary to the artificially induced unemployment rate, companies such as American Airlines (AMR Corporation), Novartis International AG, and PepsiCo, Inc. continue to announce new strategies in order to improve the bottom line.
A nifty sales campaign, a new product, or a different price point might be refreshing.
Regrettably, these companies are reverting back to the tried and true pink slip. Over the years, it was the fat, then the muscle, and of course with enhanced technology and productivity most companies are now able to cut the bone. Finally, most corporate insiders recognize the so-called Golden Age is only a figment of both Wall Street’s and the mainstream media’s imagination. Instead of embracing the new age and loading up on their company’s stock, most insiders are selling at a pace we haven’t experienced since the market’s 2,000 point decline last summer.
Therefore, in my opinion, the harmful combination of heavy debt, layoffs, and insider selling all add up to quite a bit of tarnish on that co-called new Golden Age.