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The "Money On The Sidelines" Fallacy
It seems these days any time a pundit is cornered by facts indicating the deplorable state of the economy, the traditional fall back is "...but the tons of money on the sidelines is just waiting for a 0.003% pullback to pour back in."
It makes sense to consider this argument.
I present Exhibit A: a chart of the Net Wealth of US Households. This is defined as the total amount outstanding in U.S. money market Funds and the total market cap of U.S. listed stock. All else being equal, one can see why the administration is so concerned with the market decline impact on the psychology of the U.S. consumer: confidence is the name of the game. Net Wealth declined from a peak of $22 trillion to just under $12 trillion in early March, and now, compliments of the bear market rally, has bounced higher to $15.4 trillion, a 30% decline from the peak.
Of course, and much more troubling, is that "all else" is nowhere close to being equal. When considering consumer wealth, one also has to look at the right side of the balance sheet, and as the Fed's Flow of Funds Report indicates, consumer debt has not budged, and has stayed essentially flat as the equity market: the key component of consumer wealth has gotten decimated.
Exhibit B: Total Household Debt:
Alas it does not follow the chart in Exhibit A, not even closely. So the question is: what has been the bottom line impact on household "equity": i.e., taking the debt component of balance sheet and superimposing it vis-a-vis net wealth. The result is scary.
Exhibit C: Household Equity.
From the end of 2007 through Q1 of 2009, household equity has declined by 94%. Is it surprising that today's GDP number would have been a complete debacle if the consumer had been left alone to prop the U.S. economy, on whom 70% of the economy is reliant? Obama pulled a Hail Mary with the stimulus: without it there would be no debate America is in a depression right now. The only remaining question is how long can Congress and Senate extend such Subsidy programs as Cash for Clunkers before the rest of the world throws up in America's protectionist face.
But back to the money on the sidelines.
Exhibit D indicates the historical progression of the market cap of U.S. listed stocks versus money held in Money Market accounts.
What becomes immediately obvious is that the positive correlation between equities and money markets was purely driven as a result of cheap leverage. As households used up their rapidly "appreciating" homes as HELOC-based piggy banks, they invested in the market, only to see that capital get destroyed while putting more and more cash away in safe (well, safe only until a global run on money market accounts occurs, such as the one that was barely avoided on September 19th of 2008) places such as money markets. Most interesting is the correlation between Money Market totals and the listed stock value since the March lows: a $2.7 trillion move in equities was accompanied by a less than $400 billion reduction in Money Market accounts!
Where, may we ask, did the balance of $2.3 trillion in purchasing power come from? Why the Federal Reserve of course, which directly and indirectly subsidized U.S. banks (and foreign ones through liquidity swaps) for roughly that amount. Apparently these banks promptly went on a buying spree to raise the all important equity market, so that the U.S. consumer who net equity was almost negative on March 31, could have some semblance of confidence back and would go ahead and max out his credit card. Alas, as one can see in the money multiplier and velocity of money metrics, U.S. consumers couldn't care less about leveraging themselves any more.
The truth is that money market accounts, which currently hold about $3.6 trillion dollars, will not decline much more, as this is the only perceived safe haven for U.S. household capital. The U.S. consumer has seen how volatile the equity market is and is unwilling to transfer substantial amounts of capital from safe to risky investment vehicles. The fact that household equity has declined by 94% is also a very critical concern. And, even if Money Market accounts get depleted and all capital moves to stocks, it is obvious that without Federal backing the market will never even get back to 2007 levels purely as a function of capital flows.
The only motive the households would have to invest more freely in the markets is if their underlying debt were to decline. And as the Z.1 indicates it has been flat at $13 trillion for over 2 years now. Of course, banks would have no interest in taking impairments on household debt as that would mean their balance sheets are solidly capitalized - a lie that is being perpetuated by the likes of the GAAP, the FDIC, the regulators and the Federal Reserve. So while U.S. consumers and U.S. banks are stuck in this vicious loop, it is foolish to make any judgments that the money on the sidelines will spark any additional rallies.
If pundits wish to find out where any new equity buying interest will come from, they need to look at the same place that was responsible for the market move over the past 4 months - the New York Federal Reserve.
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Best post today.
Thank you.
Amen, cheers cheers TD. Good stuff.
Agree lizzy.
The "Household Equity" chart tells a story not told anywhere else. And if Americans have $3.6 Trillion in money market accounts, they need it to counterbalance their debts, as shown by that chart. Why in science's name would they risk it in these casino markets?
Excellent piece. The equity market model of giving nothing back in dividends and selling hope for capital appreciation is over, those firms still stealing from the equity cookie jar are in denial -it's not coming back like Themis said.
One reason is that unemployed or retired people need cash to live, and if they have any surplus then fixed income and excellent dividend stocks with good cash flow would be the only logical home. Now all the benchmarks look funny since the 3, 5, and 10 year average return figures don't look good.
I like your ideas and thoughts. While chat and sohbet with my friends talking about it.
This is an excellent refute to a rather lame pump. Additionally, the argument is made that most Americans are invested in the market. So, if this is a government sponsored attempt at reflating the market, and I don't really have a clue if it is, the reality is that the vast majority of Americans may have money in the market, but it's an ungodly small amount. If I work at Wal-mart 30 hours a week ( a common practice to keep workers part time) and make $9.25 an hour, and I add $10 a week to my 401K, what the fuck does a rising stock market do for me? Where is the wealth on the sideline? There is no fucking wealth on the sideline. This ties in with the argument of a few months ago that corporate executives are selling in droves and that is anecdotal insider information. A fucking joke. They are selling because they need to raise cash becaue the wealthy are unwinding. Why the hell would I sell after a market crash? Because I need the money.
I'll say something else. The rising savings rate is a myth as well. It's COMPLETE BULLSHIT. The rising savings rate is a misinterpretation of the data telling us more money is being allocated to paying off debt. There is no rising savings rate except in the mind of dumb fucks trying to convince us everything is a-okay.
you sound silly ! Keynesian program Will be the Cause we've all of this shit !!!.!!! the relaxation of one's publish is simply rubbish !!!.!!!. Keynesianism will be the worst of colleges of economic system, but of program you acquired indoctrinated through the authorities that will be the greatest, and get your self why was that !!!.!!! simply because what Keynes proposed Straight permits the Authorities to possess a significant Weight Watchers Coupons function within the economic system each when there's development and exactly where there isn't any development !!!.!!! my personal private belief is the fact that Keynes would be a damn moron, which there ought to be a separation of authorities and economic system, the same as there is really a separation in between politics and religion !!!.!!!
On NPR this morning they were discussing the sorry state of the economy. A lady interviewed thought things were getting better because the stock market was doing better. I am thinking a lot of people are thinking that as well when they drive by store after closed store and house after for sale (or rent) house.
Well GS's bonuses are up too so the economy IS getting better. But only for 2 or 3% of Americans!
Here's why they're doing it...
http://thetaildoesnotwagthedog.blogspot.com/2009/07/in-end-tail-does-not...
NPR=Sheeple
(also reminds me of the popcorn "balls" skit on SNL with Baldwin)
You ran across somebody less than intelligent listening to NPR. That rarely happens. I mean,think about it, it's hard work to just understand what they're talking about most of the time for people like that. It puts them to sleep.
Anyone else who has been listening to NPR knows as much about the financial scandals as people here. They just don't fixate on it full time. They were people who cared about fucked-up things in the world long before this mind-boggling affront in the financial markets, so they've got full plates. And they aren't traders.
Too bad the financial community can't seem to get it done by itself.
Is there more than a thimbleful of collective honor among them?
March 12, 2007
The "Money Flow" Myth and the "Liquidity" Trap
John P. Hussman
http://www.hussmanfunds.com/wmc/wmc070312.htm
As I used to teach my students, if Mickey sells his money market fund to buy stocks from Ricky, the money market fund has to sell some of its T-bills or commercial paper to Nicky, whose cash goes to Mickey, who uses the cash to buy stocks from Ricky. In the end, the cash that was held by Nicky is now held by Ricky, the money market securities that were held by Mickey are now held by Nicky, and the stock that was held by Ricky is now held by Mickey. There may have been some change in the relative prices between cash, money market securities and stocks, depending on which of the three was most eager, but there is precisely the same amount of “cash on the sidelines” after that set of transactions as there was before it.
perfect explanation.
Yeah, most in the MSM don't get it. I even tried to tell Jim Jubak of all people that he was wrong in using the "cash on the sidelines" argument and he replied:
"one of the falacies of your argument, TradeKing, is that you say that if I buy shares, the seller takes the cash and is now on the sidelines. So the net effect is zero. In a market with rising demand for stocks, however, that seller doesn’t stay in cash but buys shares with his or her cash and is willing to pay a higher price for the shares in that new buy."
They just don't get it.
http://jubakpicks.com/2009/07/28/the-big-test-how-long-will-it-take-this...
This falacy is a pet peave of John Hussman (hussmanfunds.com).
It's pretty easy to refute: Say Dick has $100k in a MMF. Jane has 1 share of BRKA.
They trade. Now Jane has $100k "on the sidelines." Dick has the BRKA.
Now say, 12 months from now, Jane wants BRKA again, and it's trading at $50k. Dick is bummed out and worried that the stock is going even lower, so he sells and $50k goes from Jane's MMF to Dick's MMF. Jane still has $50k in her MMF.
At all times, the $100k sits "on the sidelines." All that changes are opinions of what a share of BRKA is worth.
Here's how Hussman puts it:
As I used to teach my students, if Mickey sells his money market fund to buy stocks from Ricky, the money market fund has to sell some of its T-bills or commercial paper to Nicky, whose cash goes to Mickey, who uses the cash to buy stocks from Ricky. In the end, the cash that was held by Nicky is now held by Ricky, the money market securities that were held by Mickey are now held by Nicky, and the stock that was held by Ricky is now held by Mickey. There may have been some change in the relative prices between cash, money market securities and stocks, depending on which of the three was most eager, but there is precisely the same amount of “cash on the sidelines” after that set of transactions as there was before it.
Hussman is exactly right, Speculator - money does not 'move from the sidelines into the market', it simply moves THROUGH the market from buyer to seller'.
JH is the nearest thing the US has to a properly trained economist; I've been reading his material since about 2000.
It was in one of his Weekly Market Observations from 2001 in which he pointed out the two pieces of Greenspan Prognostication that explain why Greenspan HAD to become a bureaucrat: put simply, if Greenspan had to rely on his market nous to make a living he would have starved in the gutter. Had he not fastened to the public teat he would have been pushing as shopping cart full of precioussss and muttering at the moon.
Greenspans' two most diabolical calls (in a career that impoverished clients so badly that Townsend Greenspan had to shut up shop for lack of clients) are shown in my favourite chart... in this post.
Cheerio
GT
GT's Market Rant
Great charts and commentary, ZH.
Any money that IS on the sidelines isn't waiting for 0.003% pullback - but a 50% pullback or CNBC full of headlines like "Equities? Forget it".
The post is nice and fine other than the 2.7 T in added value made up with 400B MM movement. There is absolutely no relationship between these two. A one dollar increase in one share of 1billion shares adds 1B in market cap but really cost just 1share*110% of the price.
I stumbled on the same place. TD, please, don't open yourself up for easy critic. If CNBC had any brain they would have picked this one up as a case of a stupid blogger pushing negativity at any costs... IMHO, what can be compared is flows between money funds and mutuals / brokers.
You both missed it...read it again...thinkharder....
Doing my best but so far I fail to see how increase in cap of $2.3 trillion equates to $2.3 trillion of purchasing power...
With the SLP and HFT machines building in their commission cut and pushing up prices through bids - it could act like leverage. If you had a big spread on stocks and an upward bent, the original $2.3 trillion could push up market caps by more than $2.3 trillion since the last trade is moving up the "value" of all shares.
I agree 100% on the moves to date and the comparison between the net money market movements and the remaining being filled in by the government prop desk.
Tyler ...great post....facts do suck....them pesky things that destroy confidence ...or I mean lies...
Remember that "closed round table with the fed"
OK boys this is what I want you to do....here is the money go out and hit the bid on everything or we will all be bankcrupt....
great visual on the mm vs. cap. paging Liesman
Actually shocked that CNBC didn't invite Westbury to describe why we didn't get his +3% print today. This probably encapsulates better than enything the sorry state of the economy. Old theme, good look
> Where, may we ask, did the balance of $2.3 trillion
> in purchasing power come from?
Ummmm... market cap is a combination of the number of shares and how much people are will to pay for them. The fact that market cap increased by $2.7 trillion doesn't mean that people spent $2.7 trillion on those shares. Mostly it reflects that people are much more optimistic than they were March 6th, 2009.
So you are going from the "Money on the Sidelines" fallacy to your own fallacies.
uhm yeah that is called the market e.g. the point. pump on from same people fondling themselves a litter harder
sh....ite. We are living deep within a fiction. Buying time. Every time I hit this realization I feel the panic coming on.
This is a slow-motion train wreck, we only get to know the real outcome years from now. What happens if it turns out they *didn't* buy enough time?
Humans have been in this position a few times. We sometimes wonder at the empty ruins they left behind and ask "what happened here?"
What happened was... they ran out of time.
cougar
"on a long enough timeline...."
well, time or resources.
Great post, my sentiments exactly. The numbers don't add up and it appears that this market push is the last act of desperation. What's interesting is China has come to the same conclusion and is rocketing their exchange as well. The US and China are competing for remaining global investment, we are both fabricating/massaging economic statistics, and trying to stimulate domestic demand through the cheapest method (inflated stock prices where "leverage" can work by increasing all share prices at the last price).
Hey does anyone else remember how a little while back they were trying to push money market funds to invest in equities and to utilize margin? I wonder how that's progressed.
I heard that NPR report this morning as well. I thought it was telling however that the woman was a retiree; whereas the other intervees (who offered a significantly more downbeat opinion than her) were of working age.
Good point, for the retiree who is probably living off a stock portfolio, the economy is getting better. for a person working towards retirement, it is not:
either they are not working so not contributing, or
they are working, their 401k match has been cut, and they have to pay more to buy into an overpriced market.
Indeed.
Equity prices correlate to consumer confidence correlate to consumer spending. That has been the formula used previously to save those that have constructed the PSYOP currently under way.
The sad fact is that the US consumer cannot "save" it this time. They can't. However, officials cannot pull out now without causing pain to the institutions that have been the recipients of trillions in largess from both administrations and to those that find themselves caught in a dollar trap.
Interesting times indeed.
Good work TD
2.3 trillion created by increasing equity prices? That's phantom money - you don't need the fed for that.
Whatcha got under the foil, Mr. Party Pooper? Some party poop?
Best post I've read in a month. Thank you Tyler for bringing the best ideas on the table!
As I have preached on my blog - They can NOT let the market get away from them. This is all they have left as any form of salve to keep the wounds closed. If the market goes, so does EVERYTHING. Thus, all of the bullshit manipulation is getting the blind eye treatment and all the while it appears the rest of the world does not give a shit if we cheat or not as long as everyone remains calm in the streets. When the market goes, so does everything else with it. IMO, everything from April 20 has been bullshit gains.
Exactly! The only entity capable of tanking the market, at this point, is Asia (by dumping their dollar toxic assets). And that would be a declaration of war (if Big Ben doesn't keep up with Renminbi/Yuan swaps).
I disagree. Everything from March 18th has been Fed-induced gains.
Agree - Here's specifically why they're doing it http://thetaildoesnotwagthedog.blogspot.com/2009/07/in-end-tail-does-not...
I still think that fall we had In February and early March was as engineered as this rally the past few months.
When they see the dollar and treasuries need some major support again they'll tank the markets. If you asked the regular nontrading guy on the street when the market hit it's low I'm sure most of them would say it was the end of last year. It has alot to do with perception.
No, that was the real deal, after that the Fed and the banksters vowed no more. The Fed is supporting the market by letting the banksters borrow money from them for free. They gun it up and then collect as counter parties on all the inverse ETFs. This is sustainable as the Fed has infinite $$$.
Interesting you note that specific date. I do also!!!
Any way to chart household net worth vs. net wealth?
Thank You
You say confidence is the name of the game and I agree. Most of your readers, but maybe not all are aware of the origins of the phrase "Con man". It is short for confidence man. As such, CNBC and their ilk are all, literally, con men...by definition and like most con men, they are full of themselves, convinced of the righteousness of their mission. It's really funny if you think about it.
Back to GDP. The ramp up of gubmint spending has to be permanent, because if it's not apparent yet it will be soon enough that the US consumer is dead. I argue this all the time with a friend who, BTW is a rabid CNBC watcher. He talks about how consumer spending will pick up and I ask him how that can happen? He doesn't have an answer, but he isn't bright enough to connect the dots.
And so it goes. The goal of Wall Street is to part a fool from his money. It's nice to know some things still work.
In march I wrote a little piece about rising stockmarkets this summer and the spark of inflation caused by it.
The math is simple:
I own a 1$ stock, I sell it to you for 4$ so if we where everybody, there would be 5$ in the world. But the day you buy it, you have a 4$ stock and I have 4$ in the bank. Meaning there is 8 dollars in the world.
So the remaining money, is in fact worth as much as all the money in 2007. We value it otherwise. So when like now the stockmarkets are growing again, we revalue our cash again, creating a lot more.
And now the REAL problem for the FED is: GET OUT THE STIMILUS BEFORE THE DOW HITS 10.000, this because if all the money and the stimilus and tarp is also revalued, we will have a HUGE surplus, creating the inflation. This is also why I believe that the stockmarkets and moneymarkets will start rising ABOVE the levels of 2007.
And while everybody thinks this will make them rich, they need to start to exit their $ into other currency stocks (euro, japan). Those stockmarkets don't rise that fast because they didn't inject those hughe amounts, but they also aren't going to have such strong inflation as we will.
I predicted the dow to be at 10.000 this summer and everybody called me nuts, but seemingly I'm the only one that made a big profit at the firm.
Next will be the dow at 15.000, and then the clock starts ticking. Meaning you have till about 12 to 13.000 to get out of the american stock market and invest in foreign currency. And this rise can go really fast people. Once we cross the 13.000 the dollar will start to be noted at 1.6 vs 1 euro, and then it will go fast to 2$ vs 1 €, 2.5$ vs 1€ sparkling the Stagflation. (inflating prices, deflating demand).
GOOD: the stock markets will keep rising
BAD: Don't stay to long because of greed before you go into other currency
I believe your premise is askew. You first need five dollars to buy five dollars of stock first. You can't buy a five dollar stock with nothing. So if you had five dollars to begin with, it is a transfer of money, not a creation of money.
not all money is gone he, what is mean is:
I bought a stock at 1 dollar
You still have 4 dollar
I sell you that stock for 4 dollar
You now have a 4 dollar valued stock, and I got 4 dollar
We started with 5 dollar, and now we have 8 dollars
This is just an asset bubble whichever way you want to call it
IF that's all the money in the world, why would the price go up? It's not following anyone else's lead, because there was no other money to cause it. If the value appreciates because of the perceived performance of company it's in, then the value that is expended on that performance increase accounts for it. Still just a transfer, at least in theory. There may be some created and destroyed, but the 'balance' effect is just like the 'balance' effect of a check that isn't cashed yet. The keynsians extend that to imply (without calling it this) that writing more checks is ok as long as people accept them as money and not everyone cashes them at the same time. Just like the argument that people give about printing money: as long as it's in reserves at the fed, it's not 'in the economy.' Might as well give out monopoly money. Oh wait, california did.
I think you would have four dollar minus what you paid for the stock, I would have a stock worth 4 dollars. But for me to have four dollars I need to sell it to someone willing to give me four dollars. All I have is a certificate for one share, not four dollars.
the real magis starts in act two. You go to the bank and borrow, say, $3 against your stock... fractional reserve system...
the real magis starts in act two. You go to the bank and borrow, say, $3 against your stock... fractional reserve system...
Good point - that way rising stocks could create buying power and inflation. However, unlike the home ATM I doubt that there is much borrowing against stocks for consumption so directly that would not cause inflation.
But let us take it a step further (thinking aloud here) - you borrow against your stock and buy more stock, and thus, the person who sells you his stock increases his cash balance leading to greater potential for inflation. So yeah - in a round about way rising stock values could pressure consumer prices provided margin debt exploded.
If you are saying an asset bubble can trigger inflation, then you are correct. We had huge inflation during 2002 - 2006, since it costs a lot more to buy shelter, but the govt didn't recognize it since it used OER in CPI.
To your premise that stock markets could exceed 2007 levels within a few months - you might be right, as measured in USD, we could see S&P 2000 by the end of next year.
But this type of inflation isn't going to hurt us, it will be the hyperinflation of a currency crisis that will really kill us.
The name of the game these days is preserving your wealth - the amount of goods and services you can buy. Staying in the USD is not a good way to preserve wealth.
Not sure an asset bubble can trigger inflation by itself - i.e., impact money supply. You need an increase in cash balances - potentially, by credit extended by a fraction reserve system.
At Eur=$1.6, bad things will be made to happen.
when eur=1.6$ i will buy some homes in south florida .... and no, im not kidding ..
Is household equity just the equity consumers own in their home or are there other things involved?
TD defined as total assets (cash plus equities) less household debt. It's not real net worth as it does count real estate and other stuff. More like liquid net wealth. On the other hand I don't think it factors in foreign holdings of US equities which would make numbers look worse.
This is an excellent piece. It highlights that fallacy that there is somehow a constant (or at least moderately stable) value to wealth.
Contrary to that assumption, some $10 TRILLION disappeared in the last couple of years as housing and stock market prices dropped like rocks--not to mention that debt HAS remained about constant. Ooooff!
So, splain it to me again, Lucy, how that "cash on the sidelines" is creating $3 trillion in wealth in the last four months.
What cash I've got is staying on the sidelines. Thanx again for this excellent piece.
by staying on the sidelines, you'll lose twice.
By staying in dollares you lose three times.
I have wealth in sterling thinking of going the other way and holding liquid in dollars by end of august
AND CNBS says you guys are worthless. When was the last time CNBS had a presentation like that?
I bet if you had Charlie Gas-bag read that after a 4 martini lunch, his head would explode.
We're in a race of will, or a chicken game between the US and China, will the US spend it's self out of a recession before the Chinese pull the plug?!
I wouldn't be on either side cause it's a loose/loose scenario either way.
We're fu^&ed
Own gold silver, and storable food
Twinkies and cheetos have an unlimitied shelf life. They will last longer than MREs.
Cautiously optimistic is replacing green shoots.
So the name of the FED's game is everyone needs to get on board and stay there. If the FED manages to keep everything stable, then the partners (foreign and domestic) will feel the urge to take a little extra. Much like the piranhas that only eat pieces of fin, yet the fish stays alive. Too many start eating and the fish sinks and dies. So the FED needs to keep everything stable and rock the boat a little at the same time to keep everyone honest.
Bingo! And this is why you might expect to hear new bad enough to let the market retreat before august 12, and if the markets don't react again at the end of august. Personally, I don't think the bad news scenario won't work.
CNBC contines to tout the massive amount of money on the sidelines. They usually quote from Charles Biderman at Trimtabs.com.
Now that Biderman has come out and said that there is little money on the sidelines, CNBC continues to tout that there is money on the sidelines however they don't quote Trimtabs anymore
CNBC = Cheerleadering it's worst.
Any wonder ? Their viewership is down 28%.
TD< you're so right. can't wait to jump on the -.003% pullback. LOL
TD,
did you see that the Govt changed the GDP calculation stats today to make #s look better?
tripps
Liesman said today to a Goldman analyst at the close .....i kid you not ......verbatim: [' You (GS analyst) might chuckle at this but benanke has got to fool some people some of the time" - both laugh in agreement.] Amazing - they know the rouse, they talk about the rouse and appeal to those that don't want to miss out on the momentum
Lovely piece, except for a couple of errors which have been pointed out above and a strong undercurrent that seems purely ideological. There seems to be persistent desire on this blog both in TD's posts and in the comments to get the government out of the economy as quickly as possible because it "artificially" props it up. I am deeply confused by what seems to be an irrational desire amids seemingly rational people. Especially when, as the piece acnowledges, without the stimulus, depression would be what we have now. Artificiality aside, does anyone here want to experience an actual depression? If so, why (and is this some kind of masochistic desire to cleanse oneself of all evil through suffering)? And if not, who gives a damn if the government's involvement distorts the markets, if that involvement also happens to save us from breadlines and general mayhem?
I read all of the arguments made in this piece as reinforcing the arguments of the likes of Krugman and other Keynesians. If the consumer is to stay on the sidelines for some time, busy repairing the household balance sheet, then the government stimulus should stay around (and be expanded if needed) for exactly as long as it takes to bring the consumer back from oblivion.
Inflation is a worry, to be sure. But on the balance sheet side it has a beneficial effect of reducing real debt burden. And it's not a worry while the reduction in consumer demand remains far greater than any stimulus could ever hope to be. 5 years from now - maybe. But to me at least it seems like an easy trade off to make for avoiding outright depression.
"does anyone here want to experience an actual depression?"
We are going to have a depression, we just have a choice of having a hyperinflationary one or a deflationary one. I would rather see the latter, but Bernanke is leading us to the former.
Why? Because a deflationary depression would reward the responsible at the expense of the irresponsible. A hyperinflationary depression will just increase the wealth gap.
ghostfaceinvestah,
"Because a deflationary depression would reward the responsible at the expense of the irresponsible."
as somebody who was responsible and said no when offered an idiotic, 30-year fixed mortgage in 2007, i have to agree with you on which depressionary scenario i would prefer. as a member of the rapidly disappearing middle class in the US, I am saddened to also agree with you on which scenario the bearded, bald one appears to prefer.
Because if the government just fu^&ck off, we'll have a chance to get out of the Next Great Depression in 2-3 years, if the Gov. persists we'll have 10-20 years of 0(zero) growth 9% unemployment and no Hope(tm. Obama) do see better days in our life
Neophiliac, can you find a communist forum for your views please?
With 600,000 people laid off this month and every damn month this year so far, spending trillions of taxpayer money on unions and Goldman Sachs apparently has not done jack shit but it will bankrupt our country for good in a lot less time than you and the other cowering sheeple can believe.
What SHOULD be happening involves pitchforks and torches. That is how we will regain this country from the politically connected scum and central banker interests that have stolen it.
For you to put 'artificially' in quotes as though it is an entirely foreign concept to you that the government has inserted itself into every asset of the formerly free market shows how unbelieveably unaware and clueless you are.
- 600,000 people getting laid off looks very impressive, but it's not that impressive when you have a workforce about 200 times that size.
- No one likes giving banks money, but if one has learned one thing from this recession it's that Lehman should have been saved. The bank had it's roots in the entire worlds financial system.
You can trash talk Neophiliac all you want and go ahead and call me a Communist as well if it makes you feel better, but he is the one of the few that seems to understand basic economic principles and the Keynesian way to prevent a complete downfall.
If you want your country to decent into the Stone Age then please do so without bringing the world along with you.
All this assumes that a deflationary deflation is unhealthy - perhaps not sure. It is just a way of liquidating malinvestments made in the inflationary boom that preceded the depression.
Stimulii would just put off the day of reckoning - not spread it out over a longer time as many seem to think. And you cannot put it off forever since that requires accelarating inflation and at some point money ceases to be a transaction medium.
you sound stupid ... Keynesian system IS THE REASON we have all this shit ... the rest of your post is just garbage .... Keynesianism is the worst of ALL schools of economy, but of course you got indoctrinated by the government that is the best, and ask yourself why was that ... because what Keynes proposed DIRECTLY allows the Government to have a major role in the economy both when there is growth and where there is no growth ... my own personal belief is that Keynes was a damn moron, and that there should be a separation of government and economy, just like there is a separation between politics and religion ...
you're intermixing classic keynesian with neo-keynesian theory. how can you say "Keynesian system IS THE REASON we have all this shit"? classic keynesian's believe government should act like a parent. not to permissive (i.e. point in case when W said, "wall street got drunk" who was there to lock up the booze?) but not to restrictive. There has to be a middle ground and your argument is just a rant based on your interpretation of Keynesian economic which you probably read in Cosmopolitan.
well said.
Finally someone who gets it.
there are many reasons to keep the government
out of the economy and to allow the economic
correction to take a natural course.
1. artificial interventions merely kick the
can down the street - they do not bring
economic healing.
2. a preference for government intervention
necessarily requires a reduction in private
enterprise. this becomes a death spiral because
the government will eventually eat its seed
corn. centrally planned economies must necessarily
end.
3. the only way to clear toxic investment is to
liquidate it....like gangrene, or tree
husbandry bad parts must be pruned and burned
to preserve the health of the organism...
4. price distortions and market interventions
cannot continue indefinitely....distort price
signals corrupt investment decisions.
5. government intervention will not save us
from breadlines.....we are already in a depression -
the medicine and quackery have not worked....
and with negative marginal productivity of debt
the cure will induce further iatrogenic
malpractice...
6. the government cannot replace private demand
for the reason cited above and doing so wreaks
even further economic break down. further more
that debt must be repaid and will either suffocate
or prevent a recovery....
7. if too much credit and pulled forward demand
caused the collapse, adding even more to an
exhausted consumer and business will not revive
him.
8. your point about inflation is either ignorant
or evil. why is debasing currency and someone's
loan portfolio a good idea for you?
it's because you are a crook and a profoundly
immoral person. one person's debt is another
person's income and it is the soundness of
that relationship which must be preserved for
economies to operate to everyone's benefit.
the build-up of such toxic
personalities is another reason for the collapse
of the economy....all economies must be morally
based else they never emerge or disintegrate....
9. speaking economically, (as opposed to morally)
the introduction of
inflation introduces distortions in price signals
and further creates distortions in purchasing
and investment decisions which in time accumulate
to the point of toxicity.
depressions are not pretty but people who drink
too much will suffer a hangover and that's the
price you pay.....
people like you want to eliminate moral hazard
which
in turn makes rational economics impossible and reduces
a nation to poverty....wealth is not built on
ignorance and foolishness...honest prices are the
only way to avoid that end.
this post is a fine example of the poison
informing policy making and the reason for the
reeling of this nation....the worst is yet to
come.
Your thesis seems to be that it makes sense for the government to deteriorate its own balance sheet (that is, to pass debt to future generations of taxpayers), "while" consumers repair private-sector balance sheets. It's nonsense because it stems from a false premise.
Government CAN NOT 'stimulate' an economy, any more than extracting equity from your house can 'stimulate' your life. You can buy a short-term 'pop' in your expenditure (the corollary of increasing G in GDP) but you're doing yourself longer-run damage to a value which is a fortiori greater than the value of the increase in expenditure..
Every dollar spent by government requires (roughly) $1.25 in contemporaneous tax collections - due to the waste inherent in monopoly (all monopolies produce lower-quality products than would be produced by a competitive market for the same good - that is as near to axiomatic as makes no odds: from justice to defence to welfare, government monopoly provision means lower quality at higher cost).
IF the dollar is a deficit-spent dollar, then the cost of that dollar (in terms of taxation required to fund it) is the present value of all future payments on the bond required to finance it. This will - again, a fortiori - be higher than the contemporaneous tax amount.
Both monetary and fiscal policy REQUIRE 'money fooling' in order to work. In other words, fiscal and monetary policy will only lead to an increase in permanent income if people are too stupid to realise that they (the taxpayer) are 'on the hook' one way or another.
And last - but by no means least - people are starting to be averse to the idea that government has a RIGHT to expropriate resources at the point of a bayonet, simply in order to (pretend to) offset the malignancy resulting from its own mismanagement of the price of credit (I know, the Fed is not a government entity, but it serves Washington's purposes).
As an akratist (someone who thinks that in the absence of a contract, no individual has an obligation to submit placidly to the depredations of the paraiste-political class) I find your faith in the parasites to be really quite touching - like the faith of a child in the Tooth Fairy, or the faith of half-thinkers like Krugman in "Gang Rape as saviour" (i.e., that "50%+1" can do whatever they like to the rest of the society, whether the rest of society likes it or not - as if numerical superiority sanctifies slavery, murder and theft).
Cheerio
GT
GT's Market Rant
I am really not going to bother with your views, because they are mainly wrong.
1) there is nothing wrong with deflation at all. It means people with savings have more free money to spend, cheaper energy, etc.
2) the fear of deflation is put there by people who have an interest in making sure there isn't deflation (bankers) it is just a PR stunt that you have bought into.
3) Japan has had deflation for many years because of the size of their bubble. the deflation did not cause the stagnation, the size of the bubble did. If we have deflation it is also the cure for a bubble that we are only attempting to reflate. In the end there are two ways to get over a credit crisis.
2) deflation
1) hyper inflation and currency destruction
The fed has chosen path one to help out wall street, this punishes hundreds of millions of americans savings. The fed is a private bank consortium. To confuse what they do for their own benefit and what is good for the american people is a fatal mistake. I suggest you read about he fed. Why do you think they are so afraid of an audit? Because they want to hide the fact that they do not work for our benefit. If you believe what you wrote I feel sorry for you.
If you don't believe what I said about deflation, look up the name Ingo walter. He was my econ professor and when I reached the conclusion above he made a point if saying that I was right. The people who screwed the economy are going to benefit from a more screwed up economy while hundreds of millions of americans have their lives ruined. Think Argentina!!!
I don't believe what you said, not because of Ingo dingo do, or who ever. Deflation is a horrible thing. Go back to your econ 101 book and look up PPP. In a deflationary environment only wealth deflates not the total sum of assets and liabilities. What happens to balance sheets in a deflationary period, whats happen to overall spending? Deflation usually makes consumers wait for purchases, which halts production, which leads to lay offs, which lead to a drop in income, which leads to consumers waiting to purchase, and so on. Also deflation leads to higher rates of cash hoarding leading to a liquidity trap. In a closed society such as the former Soviet Union, yes deflation is good, being that no one had any real worth.
It is possible that you mean dis-inflation, which there is nothing wrong with. But that is for another lesson.
I'm afraid it's you who is wrong. Deflation does give consumers pause, certainly, while savings go up. But no consumer is going to forgo their purchase indefinitely and will buy when the price is right, and when the utility they will enjoy from the product is worth more than the money saved by waiting. Which is an important dynamic that has been lost from the economy. That's certainly a tough reality for a company to adjust to, but it's an important economic pressure for more innovation.
Contrast that to a hyperinflationary depression in which all incentive to save money is lost. Everybody's debt goes down relatively with the currency which sloshes around in huge amounts, but its mostly worthless, trust is lost, wheelbarrow money, no incentive to produce anything.
We need deflation, period.
TD--B-B-But Yves over at Naked Capitalism says the recession ends in the last quart of 2009 / beginning 2010?
What in the FRAK?!?
It's my understanding that a significant amount of the stimulus money is not yet in the economy...how has that made a difference?
Only one way out: Tangible Assets. Put your money into ZH T-shirts. (and pay with a credit card.)
At least ammunition isn't losing its value....
This "money on the sidelines" bit makes me sick every time i hear it. I heard it today. I am an advisor, and we have wholesalers coming in all the time telling us why now is the time to buy their funds. I have heard this from them countless times, as well as on CNBC as everyone else has. I say it is an inherently flawed argument. Specifics aside, all of that money will never see the stock market. When the market is doing well there is money "on the sidelines." I have clients who use money markets as place to park cash that they will use to buy all sorts of things...not just stocks. And believe you me...clients are not interested in stocks these days. They have been burned too many times in recent memory. They are asking more and more about bonds and other income producing securities. Sure some of that money will end up in the stock market, but to quote the dollar amount as a reason the market will go up is ludicrous.
I've got lot of money on the sidelines. They are tied up in dark pools.
So much of the sideline money has flown into credits... 1,7 tr $ alone in Q1 2009... And thats buy and hold with these Credit Spreads...
TD. this is a veeeery bad post.
first of all, net wealth of US households is not equal to US market cap + MMF, since US stocks can be owned by foreigners and US households have other financial assets besides stocks and MMF (e.g. bank deposits). you can find better proxies in FoF which you use to derive the liabilities, making some adjustments like deducting the value of theoretically derived equity that households hold in their own businesses.
secondly, as smb on the blog has already mentioned, an increase in mkt cap <> decrease in MMF. surely an inflow of $400bn would drive prices increasing mkt cap disproportionately, this is a bubble 101 and i'm at loss on how you could miss this.
pls spend some more time on the topic, as this is a super-annoying bullish argument.
one of the things to look at would be historic levels of cash in institutional investor portfolios.
and btw, a lot of the money from MMFs went into credit this year, though BustaKeaton's number for Q1 is waaay off mark!
Test...can u hear me now?
great work TD
any money I have is never going into this corrupt system my children will be taught not to trust wall street or politicians
THANK YOU!!!! I've been wondering about this for some time, and figured it was all balderdash, but you do a great service in putting numbers to all the vagueness. Mark it eight!
At what point is the finance crowd going to admit that markets are not efficient (in the economic, or more traditional engineering sense of the word), they are only loosely based on "fundamentals", and prices are ultimately a reflection of what people believe, which can be easily affected by emotion, or propaganda?
All this is just the equivalent of trying to explain why Eagles fans cheer more loudly, based on regression fits of Donovan McNabb's body mass index.
I'm sorry that zerohedge, and its readers, have likely suffered significant financial pain as a result of the last four months' rally, but hoping that people start making rational decisions with their money isn't going to make it happen.
Great article and great thread of comments
A few thoughts:
Net worth of households leaves out Real Estate values which are down by 20 to 50%.
Money on sidelines, ie money market funds, probably includes a high percentage of tax deferred accounts like IRA'a and 401's that would probably be going to repair consumers balance sheets if not for the tax consequences. Same holds for equities.
"Inflation" generally applies to the overall price level, but a 2% target rate allows for a lot of specific market fluctuations. Right now, the stock market is inflating while real estate is deflating. Yet trillions of $s in asset values have hardly any impact on the measurement of inflation. While the reflation of the stock market is due to actions by the Fed and Treasury, perhaps a great deal of the deflation in home values is due to their negligence.
The thread started by Neophiliac was entertaining. Granted a bit of a Keynesian boost would probably help, but the devil really is in the details. Fact of the matter is our beloved government can't even handle last years budget, much less the trillions the dems want to steal from our unborn grandchildren.
If, by chance, our "beloved leaders" really are closet communists, what do you suppose their hidden agenda would look like? Not only would they seek to control means of production (auto industry, cap and trade), the financial system, and all health care (to complete their dominance over the population), but also media (the necessary propoganda machine). Not only would they seek to create a ruling elite and eliminate any non-conforming wealthy power sources, but they would also try to reduce the middle class to the generic masses. Ask yourselves why is there no emphasis (even Keynesian efforts) to create jobs now? Why is the "stimulus" deferred to 2010? Are they expecting the economy to rebound enough to satisfy the masses during the mid-term elections?
Sorry, I got off topic. I hate it when that happens. (Not really.)
Back to household debt. Given declines in portfolio's, declines in MMF's, declines in home equities, relatively static levels of household debt (and banks clamping down hard on HELOC balances), rising unemployment (with no apparent engine of job growth on the horizon), and a rising tide (if not a tsunami) of foreclosures yet to come, where does that leave the consumer?
Will the smart companies be building inventories in anticipation of a big demand rebound? Will the dumb companies have money or credit to survive past the 3rd quarter? I really need to end this drivel, just having difficulty finding a good ending. Oh, I know:
"Its the economy, Stupid!"
If you want to wonder why the fed doesn't want the audit, take a look at this.
A few people said it like Ben the Bald. Money can't leave the sidelines. If the money market funds declined $400 billion it is becajse the money no longer exists or has move to other type accounts. The primary luse of money in accounts is to service debt, for living expenses and for just plain old liquidity. Advice is that a person save 50% of his annual expenses as an emergency fund. The idea that money sits in accounts waiting to pounce on investments is plain stupid. It is a maria Bartaroma money is going out of stocks in to bonds statement. Who is bringing the money to the stock market so the one taking the money out of the stocks can put it in the bonds?
The great secret of all this matter is that cash in accounts is the only substance that can be used to pay the debts tha back the cash. Being the problem we have today is that those that owe the debts are not the same as those that have the cash and not how much cash is on the sidelines in general to buy stocks, this will not solve itself.
Tyler,
This was surprisingly good, given the title. So, what happens when the Fed and Treasury have to "craft" a comprehensive exit strategy, and remove the unlimited liquidity lines available at the Fed's credit lending facilities once a "sustainable recovery" is under way?
This stock market rally is nothing but a mother goose fairy tale.
And all the Kings men and all the Kings horses couldn't put the Humpty Dumpty stock market back together again.
The 3rd phase of the bear market will begin promptly when the Fed falls behind the curve on the inflation front and then has to begin to remove the excess liquidity in the financial system.
Charles Kramer, head of the IMF’s North America division, said in an interview on Bloomberg Television that the lender predicts the world’s largest economy will start “recovering decisively” by the middle of next year.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aVY5gFyU_mSk
Thanks for the heads up on the timeline Charles, I think I will duck decisively out of the stock market in 2H 2010!
TD,
I hate leaving anon comments when I forget to login like I just did in the post above
If 'money on the sidelines' is a fallacy,
is 'the market is overbought' also a fallacy?
This is a good thought provoking post. If I read the Net Wealth chart correctly, it is cash plus equity value essentially and does not show percentage of cash vs. stock market value. ICI reports money fund assets total $3.634 trillion as of 7/29/2009. The full cap total market value for the Wilshire 5000 Index is $10.79 trillion as of latest report (6/30). That places cash percentage at 33%.
http://disciplinedinvesting.blogspot.com/2009/07/where-will-investors-in...
I do agree the liability side of investor balance sheets is an issue as we continue down this deleveraging cycle. So an important question is what will drive growth in the U.S. I believe it will be those firms that have exposure to developing or near develop markets, i.e. China, India, etc. The weak dollar will serve as an additional tailwind for earnings as well.
David
This post is excellent!
WilliamBanzai7
""Ummmm... market cap is a combination of the number of shares and how much people are will to pay for them. The fact that market cap increased by $2.7 trillion doesn't mean that people spent $2.7 trillion on those shares. Mostly it reflects that people are much more optimistic than they were March 6th, 2009. "
Good point, I agree with this. The market has been bid up, but it doesn't mean that 2.7 trillion changed hands.
If I were the government, and the Chinese exporters, I wouldn't worry about the US consumer's net worth, I would worry about their income. In tough times and with no housing bubble to let you borrow from your home equity (as if you had any left), people shift to spending no more than what they are bringing in. Therefore a higher savings rate is now getting measured. Pay off your debt, control your spending and you may survive if you still have a job and don't get hit by health problems. So right now boosting the equity markets (if it were possible) is not going to do much to increase consumer spending so it's futile.
Great Work, Tyler.
5***** to all contributors
Have you forgotten about China's aim to convert US treasuries into US assets? They're in a dollar trap and the gov't has already expedited investment approvals for foreign asset investment. Last time I checked there's 2 trillion in China's foreign reserve, 70% in USD.
In general, I don't think US household wealth and money markets fund alone can answer the question of 'sideline money'.
I am having a hard time understanding just how the equity market rallied resulted from banks having more money. how are the banks supporting or encouraging the equity market move?
Great analysis. However, it looks to me the "net" wealth is the equity of the American household. Why deduct debt from it again?
I have to ask a stupid question. Tyler, did you forget to add into the net worth calculation the asset value of American homes to gross against backing out their mortgages? That would kill the thesis?
"Where, may we ask, did the balance of $2.3 trillion in purchasing power come from? Why the Federal Reserve of course, which directly and indirectly subsidized U.S. banks (and foreign ones through liquidity swaps) for roughly that amount."
Come on, asset markets are all about *valuation*. Stock market can go to 0/infinity without any money flowing to/from money-market funds. Just take away all the buyers/sellers and you get that situation.
"The money that came out when the Nasdaq bubble burst went into housing"
Where did all the money that came out of the Madoff bubble go?
No such thing.
/JN
"... The Fed's balance sheet ballooned from $900 billion just five months ago [Sep '08] to more than $2 trillion, by buying outright, or swapping the pristine credit of U.S. Treasury debt for the questionable paper held by troubled banks, brokerages and insurance companies. One of the marketplace's most strongly held beliefs is that the U.S. dollar is on the verge of an imminent collapse and gold is set to soar because of the Fed's historic and irresponsible balance sheet expansion... We agree about the irresponsible part, but not about the near-term direction of the dollar and gold... The reason is that there are way more debt dollars than cash dollars, with about $52 trillion currently in total market credit. As this enormous mountain of debt implodes, it is swamping all efforts to inflate. Of course, the Fed has explicitly stated that it will keep trying. Its initial effort was akin to trying to fill Lake Superior with a garden hose... But $2 trillion still won't do the trick of stemming a contracting pool of $52 trillion. The only real effect is that taxpayers get hosed... Obviously not all of the $52 trillion is compromised debt, but the collateral underlying this mammoth pool of IOUs is decreasing in value, placing downward pricing pressure on the value of related debt, which wont show up in the Federal Reserve figures for many months. A reduction in the aggregate value of dollar-denominated debt is deflation, which is now occurring... Eventually the value of credit will contract to a point where it can be sustained by new production. At that point, the U.S. dollar may indeed collapse, as gold soars under the weight of the Fed's bailout machinations. But deflation must run its coursef first." The Elliott Wave Financial Forecast - January 30, 2009.
"The U.S. consumer has seen how volatile the equity market is and is unwilling to transfer substantial amounts of capital from safe to risky investment vehicles."
And you come to this conclusion...based on what evidence?
Personally, I have >$100K still sitting in a mma from Dec 2007. And another $340K in my credit union. I have been slowly putting some of the >$100K to work in the stock/bond market over the last few months...on select (fairly- or undervalued stocks, high-dividend stocks, some corporate bonds). Contrary to what you may think, not every stock on the exchange is overvalued.
In addition, although I'm retired, I have a number of employed friends who tell me they are still routinely contributing to their 401k monthly (with corporate matching funds)...this money is being pumped into equities and bonds, each and every month. I know, technically this isn't "money on the sidelines (i.e., in a mma)...but it's still money going into investments on a monthly basis. Some people (like my friends) don't pay attention to every tick of the stock market...they just consistently contribute to their retirement account (via investments in stock and bond mutual funds, mostly) as before "the crisis," and assume (rightly or wrongly, I don't know, we shall see) that the sum total will be higher when they're ready to retire in ten or fifteen years.
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wont show up in the Federal Reserve figures for many months. A reduction in the aggregate value of dollar-denominated debt is deflation, which is now occurring... Eventually the value of credit will contract to a point where it can be sustained by new production. At that point, the U.S. dollar may indeed collapse, as gold soars under the weight of the Fed's bailout machinations. But deflation must run its coursef first." The Elliott Wave Financial Forecast - January 30, 2009. 70-516 | 70-519 | 70-523 | 70-526 | 70-528 | 70-536 | 70-542 | 70-547 | 70-562 | 70-564 | 70-573 |