Goldman Observations On Money On The Sidelines

Tyler Durden's picture

With the Treasury portion of QE ending in 3 days (October 29 is the last scheduled POMO for this iteration of QE), and the MBS problem refusing to go away even as the Fed only has $400 billion in dry powder left to keep mortgage rates palatable, the question becomes where will new forms of liquidity come from in order to satisfy the parabolic run up in the market. As traditional conduits of risk transfer are still shunning stocks, with equity mutual funds yet to report a positive fund flow number for 2009, the question of whether there really is any substantial money on the sidelines to take over for the Fed's liquidity dump takes center stage. Goldman Sachs presents one analysis according to which there is $600 billion of potential equity allocatable capital from individuals, institutional investors and companies. Yet with unemployment hitting 10% shortly, and still massive corporate debt loads needing to addressed, one wonders if Goldman is premature in its optimistic outlook.

Here is how Goldman outlines the various forms of potential new money flow into stocks:

  • Individuals: $350 billion of potential money flow into equities
    We expect $600 billion of outflows from the $1.9 trillion of taxable money market mutual funds owned by individuals, with 50% going to stocks split between equity mutual funds and direct share purchases. Robust outflows YTD have benefited bond funds but have not yet benefited equity funds. An additional $50 billion could flow from savings to the US equity market.
  • Institutions: $150 billion from hedge funds and foreign investors
    US mutual funds no longer hold large cash positions as a percentage of total assets. If hedge funds modestly re-lever it would total $50 billion of equity inflow. Foreign investors buy $100 billion of US stocks annually.
  • Corporations: $100 billion net flow from buybacks, M&A, issuance
    Non-financial corporations hold $760 billion in cash, reflecting the severe cutback in all forms of capital spending. We expect $250 billion of cash M&A, buybacks, and pension spending offset by $150 billion in issuance.

The primary observations here are that more than half of the projected stock purchasing power is expected to come out of retail sources, with the logic being that money market fund returns are sufficiently unattractive to force even more money out of MMs and into stocks. Goldman expects a $1 trillion decline in taxable money market assets over the next year (from $3 to $2 trillion).

A summary of net flows by sources into various asset classes over the past 3 years paints a mixed picture.

Yet while it is very debatable just how willing a stressed, tapped out and still very leveraged consumer would be to throw their money into a market that now trades at a forward P/E multiple that nobody in their right mind would call a bargain, Goldman does share the following insight about mutual funds, which it would appear no longer have the massive purchasing power they did in the beginning of the year.

Equity mutual funds no longer hold large cash positions as a percentage of assets.
The ratio of cash to total assets rose to a high of 5.5%; it has now corrected to 3.9%, near the record low of the past decade. The S&P 500 is up 20% YTD and up 60% from the March low, but US equity mutual funds have had $9 billion of net outflows YTD. US equity mutual funds need inflows in order to have net demand for US stocks.

Hedge funds continue to operate conservatively with low leverage ratios compared with history. We estimate $50 billion in net equity purchases could occur if industry leverage rises closer to the long-term average. From a gross money flow perspective, the impact of increasing leverage would be to generate perhaps $110 billion of new long and short positions. We do not expect a return to the super-leverage levels of prior years.

Thus the Goldman argument would go that retail would bypass mutual funds entirely, which has been the case so far in 2009, and approach the market directly. We believe this argument requires a significant leap of faith into the naivete of the retail investing class after the biggest portfolio wipeout in many generations.

For these and many more detailed observations on how Goldman is presenting the case for over half a trillion in equity purchases still to come, we refer readers to the report below.

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Daedal's picture

Wait until the optionARM resets kick in, we'll see how much side-line money is left.

Anonymous's picture

There is a large protest outside Goldman's office in downtown Chicago.... Anything similar in other cities?

Daedal's picture

I work 2 blocks away, going out right now. Will report back shortly.

Anonymous's picture

I do not think so; however, I saw in HuffPo amongst the photos of Chicago protests that there were a few shots of a group of people in NYC protesting outside LB's apt at 15 CPW. One person had a squid effigy --- how is that for a visual?

Anonymous's picture

Didn't they just make the case for a top? Retail investors = dumb money. Retail investor = last to the party. Retail investor = only party with sideline money.

As a non-retail investor then you'd want to sell into any rally because there is no one left to buy but dumb money.

rhinotrader's picture

I hope this a good analogy/conspiracy theory. The NFL said that the Patriots/Bucs game sold out in 6 minutes. They also said that 1 in 6 Brit's are NFL fans. WTF? That is a lie that is comparable to the recession is over and bank stress test. Big powerful govt's and corporations lie constantly.

Anonymous's picture

Who in their right mind would put money into the stock market after this incredible betrayal?

sladner's picture

Take a look at MMF assets after adjusting for money supply growth over the last 20'll see that there is just about the "correct" amount in MMF's.

vreporter's picture

"Potential" flows have a different meaning now - than before.

These flows have NO INTEREST in coming back in spite of the losses they may have already realized. They are now disciplined enough not to try and make it back.


They will remain on the sidelines for a much longer time than this "recovery" has offered them!

Dixie Normous's picture

People will bypass funds and go directly to AMZN, buy their HP computer, download the latest and greatest from MSFT, and watch streaming movies courtesy of NFLX.

The new economy, not to be confused with the equity markets.

Anonymous's picture


A senior administration official said on Sunday that after extensive consultations with Treasury Department officials, Representative Barney Frank, the chairman of the House Financial Services Committee, would introduce legislation as early as this w...eek...

The measure would make it easier for the government to seize control of troubled financial institutions, throw out management, wipe out the shareholders and change the terms of existing loans held by the institution.

Anonymous's picture

I had thought that these powers had been proposed for the Fed, not the government.

Anonymous's picture

Finally(if Frank's statement is true)they can't hide behind the TBTF argument. So now who is the turn on?. Well, I am sure that GS is studying that proposal for now to see if it has to apply for a GSE charter instead of a bank charter. Or else, may be the market is in jeopardy. Having said that,how about the 10 y yield going back up to 3.5 for the first time (I think since May)?

Hansel's picture

Goldman Sachs has gone full retard.  They are trying to argue that the people who have stayed on the sidelines through the entire run up are now going to decide yields on MMFs suck and they should buy equities.  And hypothetically if they are right, $600 billion is ~4.5% of the S&P 500.  Goldman is looking for bagholders.

lizzy36's picture

yep, their year end in nov.  time to take off risk.

time123's picture

It is not just a question of how much money is in the sidelines. It is also a question of how willing the people who have it are to put it back into a market that is still controlled by insiders.

When insiders on Wall Street make their billions through knowing things the public does not, it is at the expense of the retail investor. And that investor may not be willing to risk it any more, unless she gets convinced that the playing field is level again.

The only solution may be to just go with the flow when it comes to the market. Watch the timing signals to figure out when to get in and when to get out. You may not have any inside info, but you can observe its results on the market through its movements, and take advantage of it both on the upside and the downside.


P.S. I get my timing signals at

dnarby's picture

OK, I signed up... IMO you really need to clean up your site, it looks fine, but trying to understand the signal is difficult.

I use timing services, and I don't want to read through a bunch of stuff to get to where it says long, short or cash... I want that on top, and right below that I want how long the signal has been in effect.

Also, timertrac or some other way to verify your performance is key. Otherwise most of us will just wait to see how the free service works before laying out any coin.

Also, while you do make some points, it might be nice to get a little more transparency (tell us a little about yourself), because you're coming off a bit like you're just here to pitch your service (I have no problem with this, but others might).

Just my $0.02.

Hammer59's picture

Anyone shrewd enough to have cash-on-hand right now---hoarded and liquid, is too savvy to buy into this stock market. Q3 revenues were terrible, except for silly and superfulous companies such as AAPL, GOOG, AMZN.  This moribound stock market is going nowhere without Joe Sixpack and Sally Soapopera, and their either broke or in debt. Distressed real estate is looking real good right now.

dnarby's picture

I have a feeling that RE will look even better in 5-6 years.

Right now short, cash and metals are the only thing that looks good to me (and I'm not too sure about metals short term, they seem to be selling off with stocks).

Ned Zeppelin's picture

I believe that this research note have made a very serious omission in regards to the funds held by Santa Claus, the Tooth Fairy and the Easter Bunny, all of whom have cash and are ready to invest.

Who are these jokers kidding? This is a serious waste of paper and carbon dioxide.   There is no interest on the part of J6P to get into this market, if they have no already turned their 401k investments off, they have changed to bond funds. No one in their right mind trusts the stock market right now.

Anonymous's picture

J6P retard here. I'll put my 401k back into stocks again after someone turns off GS's magic HFT machines, preferabbly with a sledgehammer. I may not understand all the financial stuff, but I understand how 3 card monte works.