The Fallacy of Cash on the Sidelines 48 comments
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The second fact is that as a result of more than a trillion dollars of new issuance of Treasury securities with relatively short durations, it is a tautology that there is a mountain of what is mistakenly viewed as “cash on the sidelines” invested in these securities. This mountain of “sideline cash” exists and must continue to exist as long as these additional government securities remain outstanding. It is an error to view outstanding debt securities as if they are “liquidity” poised to “flow back into the stock market.” The faith in that myth may very well spur some speculation in stocks, but it is a belief that is utterly detached from reality. The mountain of outstanding money market securities is the result of government debt issuance that must be held by somebody until those securities are retired. It is not spendable “liquidity” – it is a pile of IOUs printed up as evidence of money that has already been squandered. The analysts and financial news reporters who observe this enormous swamp of short-term money market securities, and talk about “cash on the sidelines” as if it is spendable in aggregate immediately reveal themselves to be unaware of the concept of equilibrium and of the nature of secondary markets (where there must be a buyer for every security sold, and a seller for every security bought).
If you sell your stocks or bonds or money market securities, they don't cease to exist. Somebody else has to purchase them. Somebody else has to hold them. As I've said numerous times, if Ricky wants to sell his money market funds and buy stocks, then his money market fund has to sell money market securities to Nicky, whose cash goes to Ricky, who uses the cash to buy stocks from Mickey. In the end, the cash that was held by Nicky is now held by Mickey. The money market securities that were previously held by Ricky are now held by Nicky. And the stocks that were once held by Mickey are now held by Ricky. There is exactly as much “money on the sidelines” after these transactions as there was before. Money doesn't go into or out of the stock market – it goes through it. Prices don't move because supply exceeds demand or demand exceeds supply. In equilibrium, the two are identical because that's exactly what a trade is. Prices move because the buyer is more eager than the seller, or vice versa.
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As far as stock creating cash - your own post proves this is rediculous. Companies TRADE stock for cash. There is never any more or less CASH in the system (UNLESS THE FED CREATES IT OUT OF THIN AIR) regardless of how much stock trades hands. The stock, as I said before, IS A TRANSFER VEHICLE, that moves cash from one person to another. Stock doesn't create ANYTHING.
Productive capacity of a profitable business creates wealth. NOT STOCK!
This is really basic stuff.
On May 19 05:45 PM Westcoaster wrote:
> Also the stock market is not zero sum. It is very possible to invest
> 1 dollar and watch a business grow it to 3 dollars. Also when companies
> issue stock they do create money. They trade paper for cash.
If the market is oversubscribing to every issue of T-Bills lately at around 0-4% there is a time preference for safety right now today. People don't want to take a bet on 10% AAA CMBS paper. If businesses are hording cash, instead of investing in new markets and machines, then their time preference is to sit on their cash.
1.5
I think we agree with each other but companies through their deposits do create more cash in our system. And yes of course it’s the productivity where this new cash is being accumulated from. The stock, and its price, should be a reflection of this. Hopefully we are all discussing the same coin just different sides of it.
baboon has money in his account. cash. say $10mm.
he decides he wants to buy stock. Kid Dynamite sells him stock. Now baboon's cash is zero, and Kid Dynamite's cash is $10mm. there is still the SAME AMOUNT of cash on the sidelines.
that's the point. it's simple. the cash doesn't get "Spent" - it just gets transferred.
now, the next step is that "cash" isn't really cash - cause your money market fund owns actual (short term debt) securities... so you need to repeat the step - no big deal - you sell your money market fund assets (this step is invisible to you) - someone else buys them - it's probably me, Kid Dynamite, who now has "cash" cause you bought my stocks from me!
On May 20 11:31 AM Baboon wrote:
> I am still missing your point. What in you view do people use to
> buy stocks if not the "money on the sidelines"?
Cash on the sidelines has many sources of the inflows.
As I said before, sometimes cash on the sidelines will lead to the increasing stock prices. Sometimes it won't.
It all depends on how the cash on the sidelines grows. You narrowly focus on the stock transactions that indeed do not change the cash reserve. But the media's talk is about the increase of the "cash on the sidelines" in general.
The misconception is that buying and selling on the secondary market will lead to the rising "cash on the sideline".
But the media might well be referring to the FED's pumping up liquidity into the capital markets through buying the assets. This money increase might lead as well to the rising stock prices. And as a result we'll get ourselves a new stock bubble, that's all.
On May 20 01:06 PM Kid Dynamite wrote:
> ok Baboon - let's go through it one more time:
>
> baboon has money in his account. cash. say $10mm.
>
> he decides he wants to buy stock. Kid Dynamite sells him stock.
> Now baboon's cash is zero, and Kid Dynamite's cash is $10mm. there
> is still the SAME AMOUNT of cash on the sidelines.
>
> that's the point. it's simple. the cash doesn't get "Spent" - it
> just gets transferred.
>
> now, the next step is that "cash" isn't really cash - cause your
> money market fund owns actual (short term debt) securities... so
> you need to repeat the step - no big deal - you sell your money market
> fund assets (this step is invisible to you) - someone else buys them
> - it's probably me, Kid Dynamite, who now has "cash" cause you bought
> my stocks from me!
>
Trading means TRANSFER - to buy stock you have to have cash -BUT YOU PAY THE OTHER GUY in...(wait for it) CASH!
NO CASH IS CREATED OR DESTROYED!
NOTHING is SIDELINNED!
THE proceeds from a stock TRANSACTION is (wait for it)... CASH!
That cash doesn't necessarily go BACK into the STOCK MARKET. It might. But it might go into real estate or into bonds.
Those having trouble with Kid’s and Hussman’s articles are ASSUMING that the SALE PROCEEDS from a STOCK transaction have to purchase stocks again or that other so-called liquid assets HAVE TO EVENTUALLY BUY stocks. THIS is a ridiculous assumption! Saying there is cash on the sidelines waiting to go into stocks is like saying that same cash is on the sidelines waiting to buy GM SUV’s! Maybe the cash is waiting on the sidelines to buy Butterfinger candy bars! Homer Simpson's cash is!
The fallacy here is that the cash isn’t on the sidelines waiting to buy ANYTHING. It is simply sitting where it is sitting and you can’t create or destroy the amount of “cash”. Unless someone barters a stock for stock or a house for stock, the NET cash is virtually always the same.
One of the reasons VOLUME is so low right now is people do not have “cash” to spend on stocks and stocks are not in demand as an asset class. When stocks become more attractive, people will sell their BONDS, Real estate, Money Market, or whatever and raise…(wait for it) CASH so they can then buy stocks.
Traders often say that “cash” is a position. THIS IS WHY!
THIS IS SIMPLE STUFF.
AHHHHHHHHHHHHHHHHHHHHH...
Trading means TRANSFER - to buy stock you have to have cash -BUT YOU PAY THE OTHER GUY in...(wait for it) CASH!
NO CASH IS CREATED OR DESTROYED!
NOTHING is SIDELINNED!
THE proceeds from a stock TRANSACTION is (wait for it)... CASH!
That cash doesn't necessarily go BACK into the STOCK MARKET. It might. But it might go into real estate or into bonds.
Those having trouble with Kid’s and Hussman’s articles are ASSUMING that the SALE PROCEEDS from a STOCK transaction have to purchase stocks again or that other so-called liquid assets HAVE TO EVENTUALLY BUY stocks. THIS is a ridiculous assumption! Saying there is cash on the sidelines waiting to go into stocks is like saying that same cash is on the sidelines waiting to buy GM SUV’s! Maybe the cash is waiting on the sidelines to buy Butterfinger candy bars! Homer Simpson's cash is!
The fallacy here is that the cash isn’t on the sidelines waiting to buy ANYTHING. It is simply sitting where it is sitting and you can’t create or destroy the amount of “cash”. Unless someone barters a stock for stock or a house for stock, the NET cash is virtually always the same.
One of the reasons VOLUME is so low right now is people do not have “cash” to spend on stocks and stocks are not in demand as an asset class. When stocks become more attractive, people will sell their BONDS, Real estate, Money Market, or whatever and raise…(wait for it) CASH so they can then buy stocks.
Traders often say that “cash” is a position. THIS IS WHY!
THIS IS SIMPLE STUFF.
AHHHHHHHHHHHHHHHHHHHHH...
> can’t create or destroy the amount of “cash”. Unless someone barters
> a stock for stock or a house for stock, the NET cash is virtually
> always the same.
FED can.
Or can it.
Why do you think the TARP money is being repaid after being used by GS and others to spike the markets.
BECAUSE THERE WAS NO CASH AVAILABLE FOR STOCK PURCHASES. IT WAS ALL SITTING SOMEWHERE ELSE WAITING TO BUY BUTTERFINGER canday bars!
Again, this isn't rocket science.
ALL THINGS BEING EQUAL (or as economists like me say, Cēterīs Paribus) THERE IS NO NEW CASH.
IF THE FED CREATES FUNNY MONEY it can push stock prices up but NOT THE REAL VALUE of the stock!!!!!!!
That is why the BUBBLES are all illusion and don't create real wealth. The bubbles create a zero sum game where SOME people get rich at the exspense of others.
REALLY SIMPLE STUFF - We need to get past this economic illiteracy if we are going to save the nation from the FED and Goldman Sachs!
Get those monkey fleas off of me! AHHHHHHHHHHHHHHH!
On May 20 02:09 PM Baboon wrote:
> >you
The stock price might go up because of the fed's printing money and that's good enough for the purpose of this discussion.
By the way monkeys are way smarter than people. People have a lot to learn from them.
> IF THE FED CREATES FUNNY MONEY it can push stock prices up but NOT
> THE REAL VALUE of the stock!!!!!!!
>
Like a mokey, you keep jumping around. Logic dictates, as Spock would say, that you can't mix apples and oranges.
Inflationary pressures on stock prices is NOT GOOD ENOUGH for the purpose of this discussion, as you say. If stock prices rise due to inflation so does every other DAMN PRICE and so, for the purposes of our discussion, ONLY NONIMAL ADDITIONAL CASH is created, not REAL CASH. THERE IS NO CHANGE in the amount of cash in terms of VALUATIONS.
You should get a job with Tiny Tim, Ben and Larry...their thinking is twisted as yours!
en.wikipedia.org/wiki/...)
WAKE THE HELL UP MONKEY BOY.
On May 20 02:32 PM Baboon wrote:
> Who said that the real value of the company will go up?
> The stock price might go up because of the fed's printing money and
> that's good enough for the purpose of this discussion.
>
> By the way monkeys are way smarter than people. People have a lot
> to learn from them.
>
Even the new funny money could go to just buy Butterfinger candy bars and NEVER FIND THEIR WAY INTO STOCKS!
In fact, in a hyper-inflationary enviornment, nonminal stock prices might fall over time as more and more "cash" is needed by people just to buy the necessities of life.
God kill me now! IT's planet of the apes! Get your hands off me you damn filthy APE!
No means NO!
A simply Google query on "cash on the sidelines" will unleash a torrent of mainstream media outlets and blogs who think they've found the holy grail of equity upside proclaiming that the stock market is bound to rise rapidly, because there is so much "cash on the sidelines" right now.
No mentioning of the real value of the companies. Just their stock prices. Then the article goes into discussing the fact that buying and selling stocks on the secondary markets does not change the money on the sidelines.
Post here the quotes from the article that specifically talk about the fact that the cash on the sidelines is not going to change the real value of the companies if used to buy stocks.
Are you even a human?
On May 20 02:50 PM 1.5 quadrillion wrote:
> The issue has on this thread has always been NET CASH, not inflationary
> FED actions.
>
> Like a mokey, you keep jumping around. Logic dictates, as Spock would
> say, that you can't mix apples and oranges.
>
> Inflationary pressures on stock prices is NOT GOOD ENOUGH for the
> purpose of this discussion, as you say. If stock prices rise due
> to inflation so does every other DAMN PRICE and so, for the purposes
> of our discussion, ONLY NONIMAL ADDITIONAL CASH is created, not REAL
> CASH. THERE IS NO CHANGE in the amount of cash in terms of VALUATIONS.
>
>
> You should get a job with Tiny Tim, Ben and Larry...their thinking
> is twisted as yours!
> en.wikipedia.org/wiki/...)
>
>
> WAKE THE HELL UP MONKEY BOY.
You are getting it wrong on purpose so you don't have to see the point. People who live for drama love to change it up and shake and bake it.
I didn't bring up the FED, You did.
TOO MANY BANANAS!@ Potasium level too high. AH! Call the VET.
On May 20 03:10 PM Baboon wrote:
> Read the original article:
>
> A simply Google query on "cash on the sidelines" will unleash a torrent
> of mainstream media outlets and blogs who think they've found the
> holy grail of equity upside proclaiming that the stock market is
> bound to rise rapidly, because there is so much "cash on the sidelines"
> right now.
>
>
> No mentioning of the real value of the companies. Just their stock
> prices. Then the article goes into discussing the fact that buying
> and selling stocks on the secondary markets does not change the money
> on the sidelines.
>
> Post here the quotes from the article that specifically talk about
> the fact that the cash on the sidelines is not going to change the
> real value of the companies if used to buy stocks.
>
> Are you even a human?
>
>
You are getting it wrong on purpose so you don't have to see the point. People who live for drama love to change it up and shake and bake it.
I didn't bring up the FED, You did.
TOO MANY BANANAS!@ Potasium level too high. AH! Call the VET.
On May 20 03:10 PM Baboon wrote:
> Read the original article:
>
> A simply Google query on "cash on the sidelines" will unleash a torrent
> of mainstream media outlets and blogs who think they've found the
> holy grail of equity upside proclaiming that the stock market is
> bound to rise rapidly, because there is so much "cash on the sidelines"
> right now.
>
>
> No mentioning of the real value of the companies. Just their stock
> prices. Then the article goes into discussing the fact that buying
> and selling stocks on the secondary markets does not change the money
> on the sidelines.
>
> Post here the quotes from the article that specifically talk about
> the fact that the cash on the sidelines is not going to change the
> real value of the companies if used to buy stocks.
>
> Are you even a human?
>
>
It can grow for different reasons, the financial transactions do not change the "money on the sidelines" unless the FED is involved ( as it was during the last financial crisis as emergency act ) and the money on the sidelines may lead to the rising stock prices.
On May 20 03:51 PM 1.5 quadrillion wrote:
> Baboon - Again you change the subject -
>
> You are getting it wrong on purpose so you don't have to see the
> point.
I hope you find some of that loose sideline cash soon!@
and besides...all cash in existence represents a debt....if there were no debt then there would be no cash...problem solved.
If enough of these people become convinced that it is safe to "get back into the water" of the stock market, then a large amount of buying will ensue. That feeds a rally and stock values go up.
Calling it "cash on the sidelines" is not quite correct, but the effect of a lot of cash positions moving into equities at one time is huge every time it happens.
I'll call it "buyers on the sidelines", and there are a lot of them out there....waiting.
The debt/money "reality" is part of why we can't spend our way out of this mess. More money (cash) = more debt = more interest payments = liquidity crunch.
Remember, many of us are calling to end the money as debt insanity and start issuing Constitutional HARD MONEY.
DEBT RATIOS ARE IMPORTANT especially in terms of the money supply. We have reached the limit of productivity being able to finance continued credit money creation.
If the "cash on the sidelines" is needed to pay higher taxes and higher credit costs and inflationary prices on necessities, do you think it will find it's way back into stocks?
Again, this isn't rocket science.
And apparently some Baboons are monkeys.
On May 21 08:47 AM cyclops wrote:
> A baboon is not a monkey, dammit!
>
> and besides...all cash in existence represents a debt....if there
> were no debt then there would be no cash...problem solved.