No More "Cash On The Sidelines": Private Client Cash Levels Drop To Record Low

One can finally put all references to "cash on the sidelines" in the trash can, not only for purely logistical reasons (when someone buys a stock, the seller ends up with the cash), but also from a purely cash allocation basis. According to the latest BofA flow show report, Michael Hartnett writes that as of the latest week, private client cash - i.e., high net worth individuals, or those who still allocate capital to single-stocks and ETFs on a discretionary basis (unlike the broader US public which has long ago given up on the stock market), is now at a record low, taking out the cash levels observed in the period just prior to the last market peak in 2007: "GWIM cash allocation % AUM falls to all-time low of 10.4%."

Furthermore, for all the talk about climbing a wall of worry, the same investor group has now allocated 60.3% of its AUM to equities, just why of the recent peak in March 2015 (63%) and far above the pre-crisis peak of 56% in April 2007. At the same time, private clients have reduced their allocation to debt to the lowest on record, or just above 23%.

Against this backdrop of euphoria among investors, it is hardly a surprise that in the last week EPFR reported that there was a whopping $9.9bn inflow into equities and $10.7bn into bonds (nearly all corporate bonds), as global stock markets and credit indexes hit all-time highs. And while the bulk of the equity allocation was, as usual, into passive vehicles, last week saw an unexpected comeback for active equity funds which saw the largest weekly inflow of $3.5 billion, in two and a half years.

Where is all this new money going? For those following EM and Europe moves in recent weeks, it will come as no surprise, that of the $24BN in outflows from US stocks in the past 3 months, $19BN have gone into European stocks & $20BN into EM stocks, driven by more attractive rates & EPS outlook.


For now, all those rushing into the "hottest" new thing have been rewarded: annualized YTD returns for some of the biggest uses of cash include tech stocks at 55%, EM stocks 50%, biotech 36%, EAFE stocks 33%, European HY 27%, banks 27%, US stocks 18%, and US CCC HY 16%.

All this is taking place amid a backdrop of what Hartnett calls "lovey-dovey central banks" - Fed/ECB/BoJ all turned dovish in recent weeks, and the only bond sectors with outflows this week were Treasuries and floating-rate bank loans (latter previously big YTD inflow winner in anticipation higher rates). This was offset by the biggest inflows into Junk Bonds in 3 months as investors aggressively buy "yield" theme.

So where are we now? Going back to Hartnett favorite theme, the "Icarus rally", he summarizes the summer euphoria - and subsequent fall crash - as follows:

Strong inflows, "active" inflows, big returns, record low private client cash...Icarus won't soar forever; but big Humpty-Dumpty fall in risk assets awaits hawkish central banks + EPS/GDP reversals; in absence of immediate negative impact on small business employment following Obamacare repeal/replace failure and/or lurch toward tech-negative Occupy Silicon Valley policies, we think big fall in markets an autumn not summer event; meantime 2660 SPX & 510 ACWI = global market cap as % of GDP reaches record highs (Chart 4)...both remain reasonable Icarus targets.

Finally, here is a table of returns by asset class (2017 is annualized).


Too-Big-to-Bail (not verified) Fri, 07/21/2017 - 10:43 Permalink

The reason the FED can't let the markets crash just yet is there's not enough dumb money in yet to allow the smart money to get out. The 2008 crisis is still too fresh in people's minds so dumb money is not so dumb after all, and the dumbest money was already confiscated a long time ago. 

aqualech saveUSsavers (not verified) Fri, 07/21/2017 - 11:00 Permalink

"wrong, the dumbass retail money IS in, prob ALL IN  even refis to take money out for market, look at inflows last 3 months" Yep, that's what the article says.  My boss was lamenting to me yesterday that he couldn't find good times to stick more money in - he's been adding a lot lateley. I hear a bell ringing in the distance, getting closer.  They one that they ring at the top.

In reply to by saveUSsavers (not verified)

The Real Tony Too-Big-to-Bail (not verified) Fri, 07/21/2017 - 11:33 Permalink

The smart money exited the stock market eons ago, now the central bankers find themsleves with a dilemma. That is no one to sell all their overpriced garbage to. The central bankers just keep on trying to keep the market afloat with dreams (delusions) the economy will get better and they can reap a fortune for their shares when everyone piles into stocks. Unfortunately for them the opposite has happened every year as the world economy and especially the U.S. economy gets worse and wosre.

In reply to by Too-Big-to-Bail (not verified)

hola dos cola Fri, 07/21/2017 - 10:57 Permalink

Well, no need to take them to the cleaners. They are all at the cleaners now.And they'll do anything to protect their interest and the ones that 'watch' over it.Good thing average Joe controls and runs the banks. P.S. The stupids move to the sidelines in situations like these.And the idiots invest in their local community so they may actually enjoy some return reallife.   

rbianco3 Fri, 07/21/2017 - 11:05 Permalink

I'm tired of qetting squeezed out of a low volume fake market.Some of us are refreshed by the somewhat predictable and increasingly liquid crypto currency markets. I get the fact they are risky, not physical and all that good stuff which is why I've committed only a small portion of my investments. My 10% allocation of cryptos has balooned to 30% and I've made several sizable physical metals purchases using Bitcoin to reinvest some of the profits. Litecoin is my favorite right now- trading around $45 - am looking to see $60 in the next month.

Hikikomori Fri, 07/21/2017 - 11:48 Permalink

Quilt chart shows in the past 10 years, S&P 500 has been in the top 50% for yield 9/10 years, commodities have been in the bottom 50% 7/10 years, and are at the bottom now.  To me, this suggests commodities are cheap, and the S&P 500 is expensive.