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Dead Money

May 10, 2013

Drama. The term “dead money” was recently coined by Mr. Mark Carney, the incoming Governor of the Bank of England and Chairman of the G20’s Financial Stability Board, and also the distinguished expatriate to a similar job at the Bank of Canada, to describe the cash that is locked up in corporate vaults pending new uses, such as business or technology development; Thomson Reuters estimates that $6.7 trillion swells their purses, and that is more than twice what it was a decade ago (Reuters, May 9, 2013, Analysis – “Dead money” for shareholders a pall over investment hopes).

Of course, all money is “dead” if it fails to obtain a non-negative real rate of return, that is, a return that is positive and exceeds the rate of inflation, which, we allow, could itself be negative in a deflationary economy, without disturbing the meaning of a non-negative real rate of return.

The global GDP (Gross Domestic Product) is about $80 trillion a year, and others have estimated that the “financial economy” or the “paper economy” of securitized assets is about ten times as large, or $800 trillion (please see our Post, Numbers 20:12, August 2012), which begins to make $6.7 trillion look like a very small number on which to pin our industrial hopes.

So what does it mean? Should companies just give it to their shareholders as dividends (so that they can spend it or re-invest it), or buy back their shares so that their shareholders can sell their stock for more money (and spend it or re-invest it)?

We don’t think so because “the pyramids were not built with tablespoons and cups of sand, or discretionary spending, to celebrate the dead”, by way of a metaphor, but by a larger vision that probably had to deal with quite a lot of unemployment in the absence of war, but remained fit and ready, should war befall them.

We can actually calculate our “state of readiness” by calculating what we have called the “Coase Dividend” (nomen patria Ronald Coase, Nobel Laureate in Economics, 1991, and of the theory of firm (1937), among other current relevancies to corporate governance, externalities, and social welfare in the last decade), and we did so some time ago for the Dow Jones Industrial Companies, which have a current market value of about $4.4 trillion, and less than what the world of companies is “hoarding”, so to speak (please see our Post, The Coase Theorem & The Coase Dividend, March 2013, and Exhibit 1 and 2 below)

Mr. Coase observed that the process of business development has a “worth” that accumulates to the balance sheet, but it is not an accounting entry that can be directly related to the expense of obtaining it, because the benefit is uncertain and, actually, an investment – the purchase of risk – that begs to show up on the balance sheet:

“In order to carry out a market transaction it is necessary to discover who it is that one wishes to deal with, to inform people that one wishes to deal and on what terms, to conduct negotiations leading to a bargain, to draw up the contract, to undertake the inspection needed to make sure that the terms of the contract are being observed, and so on. These operations are often extremely costly, sufficiently costly at any rate to prevent many transactions that would be carried out in a world in which the pricing system worked without cost.” – Ronald H. Coase, 1960, The Problem of Social Cost, Journal of Law and Economics.

It’s probably a safe assumption that about half (but no more than half) of the world’s $6.7 trillion of “dead money” is buried in the U.S., and that about 1/5th of that is further suborned to the interests of the Dow Jones Industrial Companies (such as General Electric, IBM, du Pont, Intel, Cisco, and so forth; please see Exhibit 2 below), so that the Dow companies might have $670 billion of “dead money” on their books.

The Coase Dividend is $178 billion, and approximates 10% of their net worth, but is less than 5% of their market value and only 2% of their total assets, $8.4 trillion, which, by our rough calculation, contains $670 billion of “dead money” which is four times the amount of the Coase Dividend:

Exhibit 1: The Coase Dividend™ – Summary for the Dow Jones Industrial Companies

The Coase Dividend - Summary

The Coase Dividend – Summary

(Please Click on the Chart to make it larger, and again, if required.)

Exhibit 2: The Coase Dividend™ – Dow Jones Industrial Companies – 2013

The Coase Dividend - DJI

The Coase Dividend – DJI

(Please  Click on the Chart to make it larger, and again, if required.)

So, what does that mean? Absent the “work” that is done, and gone, but capitalized in the Coase Dividend, a relatively paltry $178 billion, none of these companies would exist; and to obtain it as a result of their efforts, they have engaged $2 trillion of fixed assets (net plus the accumulated depreciation) and, currently, carry $226 billion of inventories and $6.6 trillion of debt (used primarily to fund plant & equipment, inventories, and the work to produce it and get it to market), and a deemed market value of equity investment of $4 trillion (please see Exhibit 1) that remains “locked up” in these companies to receive dividends of $117 billion per year.

If we take out of the total assets what the companies “own”, namely, their plant & equipment (gross fixed assets) and their inventories (which includes finished products, work in progress, and materials and supplies), what’s left is their “dead money” of $670 billion (which they also own, but it’s not linked to “production”); and, in the context of the other side of the balance sheet, their total liabilities and net worth, net of the dead money and what they own, is ($8.4 trillion less $2.3 trillion less $670 billion) or $5.4 trillion (in very round numbers) of some kind of “money” spread over the total liabilities and net worth, in some way.

Where did that $5.4 trillion go? What is it? That’s right – $1 of Coase Dividend has cost $30 ($5400/$178) to produce and engaged $13 of tangible assets ($2300/$178) to produce it.

We can expect, then, as already demonstrated, that as the companies engage their “dead money”, they will produce $16 billion ($670/$43) of new Coase Dividend, which is an 8.75% increase in what they already have ($178 billion rising to $194 billion, in the fullness of time) and that it will have the leverage effects that we have already noted (please see the ×CD line of Exhibit 1); for example, we can expect that the total assets will increase by $800 billion ($16×47.2) as they spend and apply this money; the total liabilities by $640 billion ($16×37); the net worth by $160 billion ($16×10.2); what they own by $205 billion ($16×(5.9+5.6+1.3)); and the market value by $360 billion ($16×22.3), for a nearly 10% increase over the current market value and an increase to the dividend yield of nearly 10% (($117 + 0.7×$16)/$117); that is, for example, a 2% dividend yield will rise to 2.2%.

One would think that this “dead money”, in the right hands, is more of an enchantment than a corpse, and is unlikely to stay dead as the companies continue to develop as they have demonstrated in the past, regardless of what new challenges await them.


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