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Ben Bernanke chooses bullying to push cash hoarders

Bank of Canada Governor Mark Carney famously chastised business managers last summer for sitting on vast piles of "dead money" that ought to be put to work in the economy or handed over to investors. It was a shot that didn't score points in corner offices but reverberated around the world, because the reluctant corporate spender is far from a uniquely Canadian creature.

Companies everywhere have stashed away record sums, waiting for brighter times of rising demand and mindful that the cash-rich weathered the Great Financial Meltdown in far better shape than their competitors. Across the developed world, corporations have filled their coffers with as much as $8-trillion (U.S.) in cash – nearly 60 per cent of it in the U.S. – according to one estimate. And when Mr. Carney moves to his new gig at the Bank of England, he will be able to dust off the same speech, because British executives, facing grim economic prospects, are even more hesitant about deploying cash than their Canadian counterparts.

Federal Reserve chairman Ben Bernanke has been urged to follow Mr. Carney's lead and do more prodding of the U.S. business crowd. But Mr. Bernanke seems to be succeeding simply by making hoarding too costly at a time when the economy is improving. Holding on to a lot of cash is costing companies money and opportunities.

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Ben the bully has been more effective than Mark the preacher. And investors should pay heed.

For one of the rare times in this penny-pinching, post-crisis era, more U.S. corporate finance managers expect to have less cash in their vaults at the end of this quarter than those who don't, according to the latest survey compiled by the U.S. Association for Finance Professionals.

"Companies are anticipating shedding cash during the opening months of 2013," AFP notes. The margin is small: 28 per cent expect to reduce cash and cash-like instruments, compared with 24 per cent planning to expand these balances. But it's a telling change. In the fourth quarter, 37 per cent of companies reported larger balances from the previous three months, compared with 32 per cent whose liquidity decreased.

The shift in business sentiment has serious implications for the markets, as spending picks up, dividends rise and merger and acquisition activity heats up. Corporate managers never liked the fact their cash earns nothing or that their Treasury holdings are costing them money. And now the more tight-fisted companies are being punished by investors for their continued frugality.

If corporate managers believe the U.S. economy is capable of getting back to 4.5 per cent nominal growth, "those projects that may not have incredible returns on investment but are better than zero now begin to look attractive," opines veteran market watcher Erik Ristuben. "It's not that executives are necessarily more optimistic about their economic circumstances. It's that they don't feel like they have a lot of other alternatives. You're seeing now that the [equity] market is differentiating between firms that are growing their earnings faster than their peers."

This is one reason why Mr. Ristuben, the ebullient chief investment strategist with Russell Investments in Seattle, is reasonably bullish about equity prospects this year.

"You didn't hear me talking last year about whether or not CFOs were finally going to be bullied into getting rid of their cash, because I didn't think we were there yet," he says, shortly after laying out his case to a group of investment advisers in Toronto. "But another year has passed, another year of negative returns. … If your cash holdings yielding nothing mean that you grow [profit] at a 1-per-cent slower rate than your peers who are growing at 5 per cent, that's a meaningful difference."

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Mr. Bernanke also appears to be bullying ordinary investors back into equities, although it's too early to tell if this is merely a short-term blip. Even as stocks have steadily rallied from the brutal lows of 2009, trillions of investment dollars remained on the sidelines, parked in money-losing cash and government bonds.

But mutual fund flows so far this year signal that wary retail investors are gingerly stepping back into the shallow end of the pool in search of positive returns. Their re-entry has been hastened by a bad case of crisis fatigue and a growing fear of being left out of the game.

Or as Mr. Ristuben puts it, people may have concluded "that worrying about the end of the world has not made them very much money in the last five years."

Still, he doesn't dismiss the genuine risks to his rosy outlook.

"I am absolutely very aware that there are a lot of threats to this scenario, and I would not bet the house on it," he says, before grabbing a cab to the airport, in the hope of getting out of the city before a giant winter storm wrecks his travel plans. "I'd keep owning bonds. If you need cash for liquidity purposes, absolutely hold cash. I'm just saying it's a much greater probability that equities will give you a better return than alternative asset classes. Not because things are great, but because they're okay."

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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