7 ms·

Keeping large cash on hand for highly rare black swan events is a pretty inefficient allocation of capital. If all companies kept enough cash to not earn revenu

by wpasc 7y ago

Keeping large cash on hand for highly rare black swan events is a pretty inefficient allocation of capital. If all companies kept enough cash to not earn revenue for months and pay all expenses for a once in a hundred year event, then a significant portion of money in all the U.S. economy would just sit as cash and not be allocated to investment, hiring, etc. Just a counter argument.

skannamalai 7y ago
This is true in theory. But in practice that revenue/profit often is allocated inefficiently anyway in the form of excessive exec compensation and stock buyback programs when valuations are high. Such as when your stock is trading at a high multiple. So the company is trading cash (which has a book value) for stock (which also has a book value but is probably overvalued) which juices the stock price in the short term. But stock assets vs cash are far more volatile to shock and thus provides less operating flexibility for big companies. Imagine if you had that substantial cash reserve. This would be an opportune time to buy back shares on the open market after taking care of operating expenses. One reason cash reserves don't often exist is "activist" investors and private equity who calculate (book value - market cap) as their potential upside from buying undervalued shares and stripping the cash assets before dumping the remains. Anyway it's an complicated mix. I'd like there to be more emphasis on sustainable valuation growth from some adminstration and the SEC, but I don't know enough to suggest solutions to improve governance.
6gvONxR4sf7o 7y ago
Maybe there could be some form of insurance.
dlp211 7y ago
Holding cash does not mean that it isn't allocated to investment. The airlines wouldn't be putting it under their mattress. They would be depositing it with a financial institution that would then be able to use the increased reserves to provide more capital to various actors, ie: investment.
- glass_of_water 7y ago
  But if a rare, global event like this happens and companies' emergency funds are mostly investments, isn't everyone going to try to liquidate their investments, crashing prices to a level where those investments aren't worth enough to keep them funded through the event?
  - dlp211 7y ago
    If everything stopped, that would be an issue, but in reality there is still a ton of economic activity happening. As far a big businesses go, there are a handful of industries that are being impacted by this pandemic and if they were slowly drawing down on cash reserves over the next 6 months or so that probably isn't terribly harmful. Also, this is why Central Banks exist.
kqvamxurcagg 7y ago
The airlines have given billions back to their shareholders over the last ten years. They should now be approaching their existing shareholders for cash (rights issue) rather than approaching the government. The current share price of these companies is only being held up due to the expectation of free money from the government. As others have said, they are privatising the profits but socialising the losses.
dopamean 7y ago
Except some of them spent that money not on investments or hiring but on stock buy backs. So maybe that was a bad use of capital?
viklove 7y ago
Yes, that is why we share the risk with this handy concept called insurance.
the8472 7y ago
I don't think it's correct to label this a black swam event. Pandemics are known to occur repeatedly, we had lesser ones in the 20 years and major international organizations were planning for them. The whole world were looking at china and with a seeing did nothing, including the airlines. Well, not everyone, just most. Some countries did shut down travel to and from china immediately and instated screening. Had airlines shown the same foresight as those countries they could have shut down service to china as a "supportive measure" for the containment and enjoyed continuing profits in the rest of the world. They didn't. Perhaps this is a matter of biases and misaligned incentives. In europe airlines were even flying empty just to retain their airport slots. But biases and incentives just mean you're very much aware of the black swans in front of you, you're just ignoring them willfully. Relabeling these things as black swan events does a disfavor to everyone because they can just throw up their arms and say it was higher force instead of reflecting on the deeper structural issues instead of just working on specifically pandemic-related ones.
bantunes 7y ago
> a pretty inefficient allocation of capital Why? If it would help with scenarios like this, what's the argument for it being "inefficient"? Should we only think of the happy path on our books? The reality is that these costs are offset to the customer, in the name of increased profits. I wonder how different pricing would be for airlines (and other businesses) if they didn't rely on revenue to bail them out of market fluctuations like this, and smaller ones they're sure to experience during the year. The economy lately is like a Formula 1 engine that is designed for acceleration and short 15,000 RPM bursts of insane speed but only lasts for a few months of use.

by wpasc 7y ago

skannamalai 7y ago

This is true in theory. But in practice that revenue/profit often is allocated inefficiently anyway in the form of excessive exec compensation and stock buyback programs when valuations are high. Such as when your stock is trading at a high multiple. So the company is trading cash (which has a book value) for stock (which also has a book value but is probably overvalued) which juices the stock price in the short term. But stock assets vs cash are far more volatile to shock and thus provides less operating flexibility for big companies. Imagine if you had that substantial cash reserve. This would be an opportune time to buy back shares on the open market after taking care of operating expenses. One reason cash reserves don't often exist is "activist" investors and private equity who calculate (book value - market cap) as their potential upside from buying undervalued shares and stripping the cash assets before dumping the remains. Anyway it's an complicated mix. I'd like there to be more emphasis on sustainable valuation growth from some adminstration and the SEC, but I don't know enough to suggest solutions to improve governance.

6gvONxR4sf7o 7y ago

Maybe there could be some form of insurance.

dlp211 7y ago

Holding cash does not mean that it isn't allocated to investment. The airlines wouldn't be putting it under their mattress. They would be depositing it with a financial institution that would then be able to use the increased reserves to provide more capital to various actors, ie: investment.

glass_of_water 7y ago
But if a rare, global event like this happens and companies' emergency funds are mostly investments, isn't everyone going to try to liquidate their investments, crashing prices to a level where those investments aren't worth enough to keep them funded through the event?
- dlp211 7y ago
  If everything stopped, that would be an issue, but in reality there is still a ton of economic activity happening. As far a big businesses go, there are a handful of industries that are being impacted by this pandemic and if they were slowly drawing down on cash reserves over the next 6 months or so that probably isn't terribly harmful. Also, this is why Central Banks exist.

kqvamxurcagg 7y ago

The airlines have given billions back to their shareholders over the last ten years. They should now be approaching their existing shareholders for cash (rights issue) rather than approaching the government. The current share price of these companies is only being held up due to the expectation of free money from the government. As others have said, they are privatising the profits but socialising the losses.

dopamean 7y ago

Except some of them spent that money not on investments or hiring but on stock buy backs. So maybe that was a bad use of capital?

viklove 7y ago

Yes, that is why we share the risk with this handy concept called insurance.

the8472 7y ago

I don't think it's correct to label this a black swam event. Pandemics are known to occur repeatedly, we had lesser ones in the 20 years and major international organizations were planning for them. The whole world were looking at china and with a seeing did nothing, including the airlines. Well, not everyone, just most. Some countries did shut down travel to and from china immediately and instated screening. Had airlines shown the same foresight as those countries they could have shut down service to china as a "supportive measure" for the containment and enjoyed continuing profits in the rest of the world. They didn't. Perhaps this is a matter of biases and misaligned incentives. In europe airlines were even flying empty just to retain their airport slots. But biases and incentives just mean you're very much aware of the black swans in front of you, you're just ignoring them willfully. Relabeling these things as black swan events does a disfavor to everyone because they can just throw up their arms and say it was higher force instead of reflecting on the deeper structural issues instead of just working on specifically pandemic-related ones.

bantunes 7y ago

> a pretty inefficient allocation of capital Why? If it would help with scenarios like this, what's the argument for it being "inefficient"? Should we only think of the happy path on our books? The reality is that these costs are offset to the customer, in the name of increased profits. I wonder how different pricing would be for airlines (and other businesses) if they didn't rely on revenue to bail them out of market fluctuations like this, and smaller ones they're sure to experience during the year. The economy lately is like a Formula 1 engine that is designed for acceleration and short 15,000 RPM bursts of insane speed but only lasts for a few months of use.