Last Thursday the Federal Reserve released its quarterly Flow of Funds data, current through December 2011. One of the more popular headlines from this data concerns the record amount of “cash on the sidelines.” Through Q4 2011, nonfarm nonfinancial corporate businesses held $2.23 trillion in liquid assets on their balance sheets. As the argument goes, this must be a sign of pent-up demand just waiting to be unleashed on the market.
The chart below shows liquid assets as a percentage of total nonfarm nonfinancial corporate business assets since 1952. By this measure, the “cash on the sidelines” argument is far less compelling.
via The Myth Of Cash On The Sidelines – An Update | The Big Picture.
Could it be even worse?
– Asset valuations have increased significantly (50 years), yet the percentage of liquid assets has not grown proportionately.
– Assets have devalued as a consequence of the GFC. This may account for the relative increase in liquid assets as a percentage of asset value.
– 10-15% looks rather low. Having said that, I would love to have 10% in liquid assets.
– Alternatively, business now attempts to “work” all assets so that amount on the side line is bound to have declined over the last 50 years.
– The chart does show technical signs of a major turn (up), double bottom 1991/2001, higher low 2009 and breakout above 1984 high. But what does this mean?
I wonder what the $liquid asset chart looks like, normalised for inflation?
kind regards
Shawky
Because it is a ratio between two asset classes that are equally affected, we don’t have to adjust for inflation.