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"Record Corporate Cash And Profitability" Are Lies: Here Is The Truth

One of the best and easiest rules of thumb in recent years to determine just how clueless any one financial pundit is, was to ask them if US corporations have record cash. If they blindly recited the conventional wisdom, which is dead wrong, and said yes, US corporations are loaded to the gill with cash (even though we have repeatedly shown that this is simply incorrect in "Corporations Have Record Cash: They Also Have Record-er Debt" and "Here's A Chart You Won't See On CNBC") one could henceforth ignore their hot air.

It was truly a great filter for so much of the financial noise out there.

However, since the number of people who still believe this lie has soared in recent months, it is our duty to conduct a public service announcement to show the truth.

Here it is, from Credit Suisse:

  • Cash levels have slipped relative to assets, while free cash flow yields are nearly back to 2007 lows.
  • Corporate cash levels in the US are still high relative to history, but have been worked down in recent years.

Keep in mind this chart shows gross cash. What it doesn't show is that the bulk of the cash on the asset side is the direct result of incrementa debt, as we showed before:

 

... not due to organic cash flow. In fact, as the next chart shows, corporate cash flow yield across the entire US market is now at the lowest level in the 21st century.

Credit Suisse' conclusion:

  • Overall, there appears to be less firepower to do M&A, buybacks, and increase

Which, among many other, is one further reason why the Fed simply can not hike rates: for an increasing number of companies the only source of cash is new, incremental debt. Because in a world in which there is little motivation to create cash flows organically when one can simply lever up (until one no longer can: see IBM and its stock buybacks), there are no cash flows, period.