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Guest Post: The Cash On The Sidelines Myth Lives On

Tyler Durden's picture





 

Submitted by Pater Tenebrarum of Acting Man blog,

It's Not a Bullish Argument – It Isn't an Argument at All

JP Morgan stock market strategist Tom Lee is frequently interviewed by the mainstream financial media and well known as a staunch bull over the past several years. Obviously he has been right so far, but that tells us nothing about the future (by contrast, we have been skeptical for at least three years, although it should be noted that our skepticism relates to the very real risks the market poses and is not a 'prediction'). It also tells us little about his qualities as a forecaster, since the market advances almost 67% of the time (a side-effect of continuous monetary inflation, which is the by far biggest component of the stock market's nominal advance over the past century). There are many perma-bulls out there who are hailed as prescient 'bottom callers' in the media, but if you're bullish all the time, you simply can't miss eventual bottoms. Moreover, you will be right 67% of the time, which is a quite comfortable win rate for a forecaster. Many of the former 'Ruykeyser elves' provide good examples for this principle. So we will have to wait and see how Mr. Lee handles a complete cycle.

One might be inclined to conclude that given that it is the correct stance for two thirds of the time, that it is actually a good strategy to be bullish all the time. However, in secular bear market periods it is only a good strategy for the forecasters themselves, but certainly not for anyone else. Anyone who bought the market in 2000 in the form of a broad index like the SPX and simply held on is still down in real terms fourteen years later, in spite of the nominal new highs that have been achieved in the meantime. It would have been far better and less nerve-wracking to just hold treasury bonds, and even better to hold gold (of course holding gold was a bad idea between 1980 and 1999, but this only shows that every investment class has its season).

Moreover, the buy-and-hold strategy would have included two truly nerve-wracking drawdowns of 50% and 58% respectively, which were among the worst bear markets in all of history. It is easy to say for the guys on TV that people should just hold through such massacres – it's not their money after all. However, one needs a 100% gain to make up for a 50% loss, so this is no trivial matter, especially not for people close to retirement. Getting caught in such a drawdown of course makes no sense if one is young either – it is just as nerve-wracking and hard to recover from, but obviously one has more time and therefore more opportunity to make up for losses.

It is an incontrovertible fact that the most recent bull market has been driven by massive monetary inflation, just as its two predecessors have been (the true money supply has increased by roughly 90% since 2008, and that is not counting money that has 'leaked out' from the US). It is therefore definitely appropriate to exercise the utmost caution, since we know how asset bubbles driven by monetary pumping must inevitably end. Cash, or rather money, is the topic we want to briefly discuss in this context.

In Tom Lee's most recent interview, he asserts the following:

“This could be only the middle innings of what could be one of the longest bull markets in history," Lee said in a "Squawk Box" interview. "There is a lot of firepower to fuel this rally. There is a lot of cash on the sidelines, consumers have delevered."

We take great exception to the first half of the last sentence, as it contributes to the dumbing down of CNBC's viewership. It is deplorable when such long discredited myths are propagated by so-called experts.

Let us think about this statement for a moment. What is 'cash on the sidelines' even supposed to mean? We submit that it is a meaningless concept. All stocks are owned by someone at all times, and all cash is held by someone at all times. When people trade stocks, all that happens is that the ownership of stocks and cash changes hands. There is as much 'cash on the sidelines' after a trade concludes than there was before. There are no owner-less orphan stocks flying about in the Wall Street Aether, waiting to suck up cash.

In other words, the 'cash on the sidelines' argument is a really bad argument, or rather, it's not an argument at all.  There is one tiny kernel of truth to it, which we discuss below.

 

The Proper Approach

There are nonetheless ways in which the topic of 'cash' (or rather money, since most money is held as deposit money these days) provides useful information for the purpose of market analysis. As indicated above, the pile of money extant in the economy is after all indeed growing, and it has done so at a breakneck pace over the past few years. The central banks and the commercial banking system are actually the only sources of additional 'sidelines cash' if you will. However, this does actually not mean that any increase in the money supply will guarantee rising asset prices. Rather, bubbles require very high money supply growth rates, and often they require accelerating growth rates (there are leads and lags involved, so this is not always immediately obvious).

What asset price bubbles cannot stomach is a slowdown of the money supply growth rate below a certain threshold (this threshold is obviously not a fixed quantity). Regular readers know that we usually refer to the money supply aggregate TMS-2 in these pages (the broad true 'Austrian' money supply) as the most reliable aggregate to follow. Casey Research has recently posted a chart that shows an overlay of the growth rate of TMS-2 with major financial market events. This shows empirically what we already know from sound theory: namely that a decline in the growth rate of the money supply is the decisive factor bringing on financial crises and bear markets.

Here is the chart, which also indicates where approximately things stand at the moment:

 


 

TMS change

The annualized rate of change of money TMS-2 and major crises. As can be seen, there considerable lags involved. A good rule of thumb for the lag time is four to five months per expeirence (i.e., how long it takes for large changes in the money supply growth rate  to affect economic activity and asset prices) – click to enlarge.

 


 

Are there any other indicators one might want to follow in the context of the 'how much money is there to drive asset prices' question? The answer is that yes, there are several. However, these indicators are merely telling us something about the sentiment and positioning of various groups of investors. Changes in these indicators have of course no bearing whatsoever on the amount of money extant in the economy. The money supply is wherever it is at any given moment (it currently grows every day, albeit at a slowing rate), while these indicators are all over the place. However, Tom Lee has very likely referred to one or more of these indicators. We infer this because he certainly didn't mention the money supply and whenever analysts broach the 'cash on the sidelines' myth, these are the data they are as a rule talking about. In one sense there is a kernel of truth to the idea: individuals can certainly alter the allocation of their income between consumption, cash holdings and investments. If they as a group want to hold less cash and more investment assets, money will decline in purchasing power relative to such assets, ceteris paribus.

The first data point we want to look at are retail money market funds. These merely tell us how much of their investable savings members of the public have stashed in 'safe' money market accounts. In other words, this number indirectly tells us something about the public's willingness to invest in assets considered either risky or safe. Below we show two charts relating to this money market funds: the percentage of Rydex assets held in money market funds (a sentiment measure of active small stock market traders), as well as retail money funds in toto and where they currently stand historically. Note that the second chart shows a dollar figure, so given the decline in money's purchasing power, it is in even worse shape than it looks on a superficial level.

 


 

Rydex money market assets

Rydex money market fund assets as a percentage of all Rydex assets have hit their lowest level since March 2000 at the end of 2013. Not a propitious indication with respect to the 'cash on the sidelines' myth. Rydex traders sure seem to be as 'all in' as they ever get – click to enlarge.

 


 

Retail money funds, NSA

All retail money funds (NSA) -  over the past 18 months. They have been mired near the lowest levels in 16 years – click to enlarge.

 


 

There is certainly no indication whatsoever that the public currently has a strong preference for safe money market investments. The public has in other words likely already piled into 'risk', including stocks.

Another indicator that is worth examining is the amount of cash held by mutual funds relative to their assets. As a 'signal' it has not been very useful for quite some time now, but it nevertheless tells us something about the sentiment of fund managers. As a long term chart reveals, the previous  secular bull market was undergirded by a great deal of skepticism on the part of this group, and it ended when its skepticism vanished into thin air in late 1999/early 2000. What do these luminaries currently think? They are at their most bullish in all of history, and as fully invested as they can possibly be.

 


 

MuFu cash

Mutual fund cash – fund managers were deeply pessimistic in the first decade of the last secular bull market, and when their pessimism gradually unwound in the 1990s, the bull market went into overdrive and became the biggest bubble in terms of valuations ever seen. Right now this group harbors exactly zero skepticism and is invested up to its eyebrows – click to enlarge.

 


 

Finally, one can also examine margin debt, which shows us the extent to which investors are prepared to speculate with borrowed money. It is well known that margin debt currently stands at a record high, but below we show a chart from Doug Short that gives us a close-up of the investor net credit situation at the NYSE, which is at its most deeply negative level in history.

Apart from the fact that the entire 'cash on the sidelines' argument is extremely flawed on a fundamental level, it is in our opinion quite dubious for a market expert to invoke this myth in view of such data points. This is not the picture of 'fuel for a bull market in its middle innings', it is rather a warning sign with an exclamation point.

 


 

NYSE-investor-credit-SPX-since-1980

NYSE credit balances are deeply negative and investor 'net worth' is thus at its lowest level ever. Fuel for a bull market certainly existed in late 2002/early 2003 and again in late 2008/early 2009, but by now margin debt has expanded to truly vertiginous heights. Not even the tech mania of 2000 can any longer hold a candle to this – click to enlarge.

 


 

The Only Source of Additional 'Sidelines Cash'

Apart from individuals altering the allocation of their surplus funds – which is something a few of the above charts are giving us indirect information about – money supply growth is the only way in which additional cash can become available for investment in the stock market. Money is either created via inflationary lending on the part of the fractionally reserved banks, or by the Fed directly, in permanent open market operations (or 'temporary' ones that are continually rolled over). 'QE' is also a kind of permanent open market operation, and has been the major source of money supply inflation since the 2008 crisis. Note here that 'QE' creates both excess bank reserves and new deposit money, as the primary dealers the Fed buys assets from are legally non-banks, even if most of them are subsidiaries of licensed banking institutions (if the Fed buys securities directly from a bank, only excess reserves are created).

Money supply growth is clearly the main driver of stock prices. It would be a refreshing change if prominent market analysts had the intellectual honesty to occasionally point this fact out.

Here is a picture of all the actual 'sidelines cash' created over time – with the period since 2008 highlighted:

 


 

TMS_2-complete-LT-sidelines

Money TMS-2. Here it is, the 'sidelines' cash. All of this newly created money of course continues to exist and is held by someone. In that sense, it is therefore always 'on the 'sidelines' – click to enlarge.

 


 

Conclusion:

The 'cash on the sidelines' myth has more lives than a cat. No matter how often the logical fallacy underlying it is pointed out, Wall Street continues to propagate it. Nevertheless, money and credit are of course extremely important factors in the analysis of asset markets. The above provides what are hopefully a few useful pointers as to which data one should keep an eye on in this context.

 


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Thu, 02/13/2014 - 22:02 | Link to Comment fuu
fuu's picture

Dead myth bounce.

Thu, 02/13/2014 - 22:06 | Link to Comment BigDuke6
BigDuke6's picture

That's the power of the Fed for you, and it's why the market is so conflicted at the moment between celebrating economic recovery and lamenting the Coming of the Dreaded Taper.

Quantitative Easings 1,2,3 have been such a gravy train for America's rich over the past four years that they would love unemployment to stay high so it would keep going, but every now and again they think: oh yeah, growth = profits. Maybe it's Good not Bad.

Rich people set marginal asset prices because they are the marginal traders, speculating entirely with OPM (other peoples' money). It isn't the long-term pension funds, big or small. The rich run the banks and hedge funds and derive their wealth from bonuses, which are much more reliable than trading profits.

That's modern America: massive wealth accruing to the few as a result of monetary stimulus from Helicopter Ben.

 Low and middle class incomes are not yet rising. 

ak

Thu, 02/13/2014 - 22:14 | Link to Comment RaceToTheBottom
RaceToTheBottom's picture

This financial crime was perpetuated by Greenspam, Bernank and now, the Yellen, in addition to a non functioning Congress.

Thu, 02/13/2014 - 22:31 | Link to Comment USofAzzDownWeGo
USofAzzDownWeGo's picture

are you antisemetic?

Thu, 02/13/2014 - 22:34 | Link to Comment BigDuke6
BigDuke6's picture

that translates to "someone jews don't like" these days

Thu, 02/13/2014 - 22:07 | Link to Comment bearwinkle
bearwinkle's picture

I've got cash on the sidelines but it ain't going anywhere, well except PM when there is a fire sell. Maybe when I see s&p 400 I *might* think of getting in but until then let them eat themselves. 

Fri, 02/14/2014 - 07:44 | Link to Comment GrinandBearit
GrinandBearit's picture

There always was a fire sale at $1180.  If you're still waiting, I think you missed it.

Fri, 02/14/2014 - 10:13 | Link to Comment Harry Dong
Harry Dong's picture

I'm waiting for silver at 15...or 25. But not in this 20 range. 

Honestly, I'd rather buy on the up at 25... And maybe this recent swing will do it.

Fri, 02/14/2014 - 11:46 | Link to Comment SAT 800
SAT 800's picture

Repeat after me until it starts to sink in; Buy Low, Sell HIgh. Just say it over and over again until it starts to sound familiar. If you actually did buy into a wave to $25; you'd be proving you're a complete market illiterate.

Thu, 02/13/2014 - 22:07 | Link to Comment LetThemEatRand
LetThemEatRand's picture

I hear Aaron Hernandez left some cash on the sidelines.

Thu, 02/13/2014 - 22:08 | Link to Comment SilverIsMoney
SilverIsMoney's picture

LOL yea that cash on the sidelines is a great pile of PMs you fucks are never getting back from us without a fight!!! HAHAHAHAHAHAHAHA!!!

Thu, 02/13/2014 - 22:08 | Link to Comment Spungo
Spungo's picture

Wouldn't cash on the sidelines be a bearish indicator? I don't know about you guys, but I would want to sit on cash if I thought the market was going to tank. If I expected it to go to the moon, I would be all in.

Fri, 02/14/2014 - 11:49 | Link to Comment SAT 800
SAT 800's picture

No it would not. The Bearish Indicators are the high margin loan numbers and the very high invested status of the hedge funds and mut ual funds; bull markets end when the last buyer has entered the market. This article is absolutely guaranteeing that the bull market in stocks is over. Over, Over, Over. Done. Finished.

Thu, 02/13/2014 - 22:47 | Link to Comment skwid vacuous
skwid vacuous's picture

that smug little fucking asshat Tom Lee was on CNBS yesterday... while squirming in his chair for a reason to buy stox ... he said ... wait for it ... there's alot of C.O.T.S.

edit: he's already quoted above, sorry -but bashing the little fucker is too easy  

Thu, 02/13/2014 - 22:14 | Link to Comment EconomicGenocide
EconomicGenocide's picture

Would it not be great if we could discuss who is the problem as much as we can discuss what is the problem!!

But rules are rules,,,,,,,,Jesus found that out the hard way!!

Thu, 02/13/2014 - 22:35 | Link to Comment USofAzzDownWeGo
USofAzzDownWeGo's picture

are you antisemetic?

Thu, 02/13/2014 - 22:17 | Link to Comment LetThemEatRand
LetThemEatRand's picture

Cash on the sidelines?  Maybe that's code for slamming gold and silver over the weekend.  Sunday morning, coming down.

Thu, 02/13/2014 - 22:20 | Link to Comment explodinghead
explodinghead's picture

I know its off topic but anyone else see this? And if its true I don't know how ZeroHedge would miss it.

John Corzine was named today by President Osama as Czar of the MyRA program.

Thu, 02/13/2014 - 22:31 | Link to Comment fuu
fuu's picture

It started on Free Republic under key words probable and satirehttp://www.freerepublic.com/focus/f-chat/3117570/posts

It was then picked up by every site that can't read on their own.

Thu, 02/13/2014 - 22:31 | Link to Comment Grande Tetons
Grande Tetons's picture

I have not heard of this. I would doubt that it is sourced news event. 

Thu, 02/13/2014 - 22:51 | Link to Comment therevolutionwas
therevolutionwas's picture

yup.  saw it as an aside on some site or another.  just a side note on the ongoing ponzi government.

Thu, 02/13/2014 - 22:23 | Link to Comment Spungo
Spungo's picture

There's tons of cash on the side lines. Warren Buffet is sitting on something like 20 billion in cash. I'm sure it's because he thinks the market will go up to infinity.

Thu, 02/13/2014 - 22:25 | Link to Comment Uber Vandal
Uber Vandal's picture

Perhaps the best way to play this might be to simply remove one's capital, plus one half of any gains, and let the other half of the house money (gains) ride in the casino.

The only problem then is one's money on the sideline in a money market account is not safe for it can "break the buck" as it did in 2008.

 

Fri, 02/14/2014 - 12:05 | Link to Comment SAT 800
SAT 800's picture

So that half your money can suffer large losses? Either a given market demands your attention and participation; or it doesn't.  T he posted article describes a market that's done now; cooked; you can stick a fork in it. No, you don't leave half your money in it and watch it go down; unless you're incredibly stupid.

Thu, 02/13/2014 - 22:34 | Link to Comment Spungo
Spungo's picture

"Perhaps the best way to play this might be to simply remove one's capital"

Instead of sitting on the sidelines, look for value in the stock market. There's always SOMETHING on sale. I've had a lot of success doing this. Go to the Google Finance stock screener and turn on these filters:
-price to book
-ROA 5 years
-ROA TTM
-current ratio
Put the ROA 5 years and ROA TTM to a minimum of 1% then sort the list by price to book in ascending order. Look for stocks that have an ROA 10x greater than the price to book.

I noticed that gold miners stood out as great buys. I went all in on a 2x leveraged gold mining ETF and I'm making a killing.

Thu, 02/13/2014 - 22:43 | Link to Comment Uber Vandal
Uber Vandal's picture

I guess I am pleased with the gains I have made.

I have been to enough rodeos to know when to get out of Dodge.

I am also pleased you are making a killing. Make sure you take something off the table.

Fri, 02/14/2014 - 01:07 | Link to Comment TeddyBear
TeddyBear's picture

!

 

 

JNUG +77.99% Direxion Daily Jr Gld Mnrs Bull 3X Shrs

from x-mas buy :)

 

Fri, 02/14/2014 - 12:02 | Link to Comment SAT 800
SAT 800's picture

A rising tide floats all boats; now even the leaky canoe of the mining stocks which has absolutely refused to attract any attention and money love from anyone but hosers for years has floated up off the bottom. What happens after the tide comes in? It goes out. If you have a profit take it and don't fool around.

Thu, 02/13/2014 - 22:37 | Link to Comment Atomizer
Atomizer's picture

Have a story to share. Had to use USPS today. The branch was closed at 4:30 PM, even though the sun was out and they advertise closing hours at 5:00 PM This forces me to use their machine. Of course, no proper envelopes have been lined up before they left work. So I’m navigating thru the screen to ship a couple of documents. Payment screen arrives. Credit or EBT card?

 

Mind you , people are behind me. I shouted, EBT card? No wonder this fucking cesspool is going under. Next thing I heard was a applause & laughter behind me.  Heads need to be placed on the chopping block. Using taxpayers money via EBT to ship mail is fraudulent. It’s called double dipping. Better yet... Next time you hear Congress wanting to bail out the post office. Tell them to Fuck off!

 

Double taxation without representation!

Thu, 02/13/2014 - 22:40 | Link to Comment Oldwood
Oldwood's picture

Cash on the sidelines simply means that there is cash that the bankers don't have yet. If you wanted all of the money in the world and could convince people to give it to you for simple scraps of paper, all that you would lack is that money which those doubters in the value of your paper scraps, kept in their own pockets, or on the sidelines, as it were. The best way to get those remaining holdouts to give you their money is not to create more worthless paper scraps, but do everything in your power to make those existing scraps as expensive as possible, through the illusion of demand. The apparent demand for your paper is what gets those last holdouts to buy in, not oversupply.

The bankers and big financial entities have been able to trade amongst themselves to elevate the prices of these "stocks" of worthless paper by using the nearly free fed money, specifically to entice the doubters or sideline money, into the game. The game is, and always has been to get people to trade their lives and labors as cheaply as possible,and once fully indebted, ultimately for free.

Thu, 02/13/2014 - 23:30 | Link to Comment sgorem
sgorem's picture

+1000 to you Mr. Oldwood. It's always heart warming to see that someone not only has the insight to this never ending swindle, parlayed on us by our own malfeasant government and the fraudulent financial cabal, but to espouse it  in terms that hopefully even a moron could understand. Thanks.

Thu, 02/13/2014 - 22:56 | Link to Comment skwid vacuous
skwid vacuous's picture

the day some CNBS agitprop tool says "ya know - there's really not much cash left on the sidelines" then it's time to get really bearish, I guess?

Thu, 02/13/2014 - 23:23 | Link to Comment disabledvet
disabledvet's picture

this is no ordinary "inventory build" inside the USA.

this is a production boom unparalleled in US history.
put outside outright energy production (which will be getting massively exported soon...we already are exporting very large quantities of coal to "green Europe") there is a reason the Fed's policies have really completely and utterly failed to create anything in the way of inflation this go around.

i do agree "it's not because bankruptcy has been declared illegal" ala Europe. (Detroit..now Puerto Rico.)

I would argue strongly that we have yet another "industrial revolution" well underway in the form of Open Source computing...which is driving down the cost of making pretty much everything vis a vis consumer discretionary.

this can spill over into price (indeed it has relative to commodities last year)...price wars are starting to pop up all over the place.

if real estate has another meltdown "look out."
might explain why the dollar is getting a little "wobbly" here.

Thu, 02/13/2014 - 23:39 | Link to Comment sgorem
sgorem's picture

The Federal Reserve System is considered an independent central bank because its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government, it does not receive funding appropriated by the Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms. Happy Saint Valentines Day Massacre......

Fri, 02/14/2014 - 00:21 | Link to Comment devo
devo's picture

There's savings if that's what he means by "cash on the sidelines"?

I have some cash, but this asshat is assuming I want to put it into stocks and at these prices. No fucking way. Revenues are collapsing.

Fri, 02/14/2014 - 02:00 | Link to Comment Cashcollateral
Cashcollateral's picture

Please stop posting these retards. 

I am an investor. I have funds for investment. I'm only about 50% allocated because I feel the market is overbought. I still have 50% of my net portfolio in cash, waiting for attractive valuations so I can get in. When I see numbers I like, I and others like me will buy and most likely support the market.

I know cash on the sidelines exists, because I literally have cash on the sidelines. 

What the fuck is wrong with you people.

Fri, 02/14/2014 - 03:53 | Link to Comment devo
devo's picture

Exactly.

If there is cash on the sideline it's not going to buy here.

Fri, 02/14/2014 - 10:02 | Link to Comment Harry Dong
Harry Dong's picture

You missed the point. If you take 10k of your cash and buy C, then some very fortunate person has what used to be your $10k.  Capeche? No net change to cash in toto

The driving factor as pointed out is Money Supply...all the extra trillions the fed flooded in.

Fri, 02/14/2014 - 11:57 | Link to Comment SAT 800
SAT 800's picture

You're not an investor; you're a speculator. This mis-labeling and the wrong headed idea it fosters was taught to you by the opinion creating machinery over many years. There's never any rationale for having fifty percent of anything in anything; it's just stupid. Either a given market deserves your attention as a speculator; or it doesn't. The Stock Market does not.

Fri, 02/14/2014 - 07:56 | Link to Comment DavrosoftheDaleks
DavrosoftheDaleks's picture

I respect the article, but using RYDEX MMKT data is a tad weak.  Seriously, what market timer uses Rydex funds anymore?  I'd like to see Fidelity or Federate MMKT data as those are the top 2 MMKT firms in US and a year ago had over $400 billion in MMKT.

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