Saturday, January 29, 2005

Inflation? Part 1

Companies have lots of cash on their balance sheets these days ($600 billion for the S&P 500), the result of excellent profit growth (19% in 2004, compared to an average of 6.5%).

It is quite surprising that companies would keep all that cash around, especially when interest rates are so low. Why not invest in a project with a positive real rate of return?

It turns out that, instead of choosing to invest in new capacity, many companies are instead choosing to invest in existing assets through mergers and acquisitions.

Industry consolidation is improving pricing power, and this is yet another factor that reminds me of situations where inflation has come about.


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