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Tsunami Of Cash Just Waiting To Be Invested at Trader’s Narrative





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Money market asset levels fluctuate much less than their equity counterparts. The general trend for cash holdings is to increase steadily every year. There are some cyclical effects for bear and bull markets. As people become fearful in the face of a bear market, they horde money and as the become convinced they are losing money by not being invested in a bull market, they reduce their cash holdings.

This bear market has given us a lot of unprecedented market situations. We are now seeing a rare exception to the norm of equity fund assets dwarfing money market assets. This has been caused by a double whammy. As the stock market has been pummeled mercilessly, losing 60% of its value since late 2007, the asset value of equity funds has shrunk. And on the other side of things, retail and institutional investors consistently raised their cash assets. In September 2008 I pointed out that there was an unmistakable stampede towards cash as retail investors hoarded cash. Not surprisingly then, in November 2008, we saw a rare occurrence: more assets sitting in money market funds than in equity mutual funds:

money market fund assets compared to equity mutual fund assets 2008 2009
Source: Bloomberg Chart of the Day

The last time this happened was 16 years ago, in September 1992. The data for April isn’t available yet but I’d bet it shows money market fund assets almost equal to equity fund assets. Not because people have put the cash to work but because the market has been able to hang on to gains and thereby increased the value of the equity assets.

But as Jason Goepfert of SentimenTrader points out, this is not an automatic buy signal for the market: A Major Buy Signal! Well, Maybe… All we can definitively say is that there is a massive load of cash just sitting on the side, waiting.

A build up of cash is normal in a bear market but before we can transition to a bull market it needs to be put to work. As people become convinced that the worst is behind us, they start to take more risk and begin to put their cash into the market. So unfortunately, just noticing a massive pile of cash doesn’t really help us unless we can somehow pinpoint when and with what intensity this billowing mass of liquidity will start to be invested in the stock market.

But to give you an idea of the sheer monstrosity of the potential tsunami of cash, consider this: it currently represents 50% of S&P 500 total capitalization. Needless to say, that is jaw dropping. As it is put to work, even in a trickle, it will put an impregnable floor on almost all equity indices and then drive prices higher. When that may be, can not be determined by this metric itself but by other technical, monetary and sentiment measures.

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8 Responses to “Tsunami Of Cash Just Waiting To Be Invested”  

  1. 1 dacian

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    Hi,

    thanks for this new post.

    Those money sitting on the sidelines might go in stocks, but it’s not sure at all. It’s about sentiment. In 2006 there were less money on the sidelines, still people were betting more on stocks. How’s that?

    On the other hand, those who’ve been washed out twice in the last 10 years might not be ready to take the same risk again.

    While I understand that when there are no other sources of incomes for big banks they still need to come from somewhere (9$ billions in profit for a big US bank last quarter from trading), I have news for these banks. The more they push this time, more we hoard. Lots of those money on the sidelines will be used to pay debt and repair balance sheets.

    Look at Japan; a secular shift in attitudes towards risk and debt is under way. So I’m not betting on that pile of cash it will find its way into the markets ;-)

  2. 2 Michael

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    Dr. John Hussman has addressed this “misbelief” in the past. While there is no doubt that there is substantial amounts of cash in money markets, there is even more debt. You see, this cash is not “free and clear”. There is an absolute boatload of new debt that has been created over that same time period. Now you know, don’t buy into the misunderstanding that there is all of this cash looking for a place to go. There is not. All of that”record amounts of cash” is unfortunately offset by “record amounts of debt”.

  3. 3 Babak

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    dacian, we’ve already de-leveraged a lot but there was also a lot of psychologically damage. Not the same as the Depression but this was a brutal bear market and it will leave a mark.

    Michael, is the debt Hussman refers to margin in trading accounts or all encompassing debt in the economy? The cash is there, of course, but as you and dacian point out, it may have more pressing places to go to than the market. That was also my point when I mentioned that this is merely potential, it doesn’t guarantee anything.

  4. 4 Michael

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    Babak, I’m still trying to find Hussman’s study on cash sitting in money markets related to debt outstanding. I believe he published it just after the new year, I just haven’t had time to dig through all of the info yet. It was a great piece and something I have yet to hear anyone else address.

  5. 5 dacian

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    Here it is (the post by J. Hussman)

  6. 6 Ed Mullins

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    Hussman’s arguments are really not the right analogy to today’s equity markets (he’s really making a different but very valid point about the applicability to economic activity). Think about it, if Hussman’s point applied here, then “cash on the sidelines” would hold relatively constant as a ratio of aggregate equity valuations … when in fact we see a fair amount of movement (i.e., inverse correlation) concurrent with rising or falling equities. Sooo … high “cash” levels here could be significant.

  7. 7 dacian

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    Here is another point, different from Hussman. I persoanlly agree with Mish.

  8. 8 Saunders

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    Was usefull one, thank you

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