The Fallacy of 'Money on the Sidelines' 27 comments
an article to
-
Font Size:
-
Print
- TweetThis
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 (click to enlarge) 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: (click to enlarge)
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 (click to enlarge).
From the end of 2007 through Q1 of 2009, household equity has declined by 94%. Is it surprising that Friday'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 the House 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 (click to enlarge) 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 whose 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.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
Would certainly agree with the comments on government provided liquidity being the main driving force in pumping the market higher. Not only the US as you point out, but worldwide as well. It has been pointed out by many that significant amounts of the China stimulus has found it's way into Asian markets as well. As you have also pointed out with GS and 2% of traders (HFT, algo, program, etc) controlling as much as 50-70% of the entire volume on US markets and given the hugh government liquidity provided to them, it is little wonder that they have been able to move the market relentlessly up. And book massive trading profits at virtually every major trader.
Buying for longer term purposes at these current levels seems to be much too risky a propositon to us. If one can trade the market and make some ST profits great, but that is easier said than done and carries a very high degree of risk.
One of life's mysteries, I suppose.
Jeremy Grantham stated that in December 2008, the world had $50 trillion in assets at the peak which was supported by $42 trillion of leverage (80%). He believes the max leverage ratio should be roughly 50%. With asset values at roughly $35-40 trillion, leverage still needs to come down by roughly half. This does not bode well for the global economy, equity markets, etc.
Regarding gains in the stock market, actually the $2.7 trillion in equity doesn not need to come from the Fed etc. It is percieved. If no one traded but 2 people with $100 million up all stocks by 11% you boost the theoretical value of socks without actually having to fund it with $2.7 trillion. Trust me Goldman Sacs knows this. It's not a zero sum game. Tyler is correct that the the Fed is funding the commodities and equity expansion with depreciated dollars and a flight away from long term fixed rate investments. Unfortunate for him this is coming from a growing adversion to it's #1 business, selling US Treasury bonds.
Most of the money "on the sidelines" is money in the banks. Yet even with that much money there is no guarantee that they are either safe or solvent. Thus it is understandable that they keep the case save Goldman Sacs who likes to gamble and will distribute as much of the wealth they can to make sure they keep getting a government subsidized free roll without risking their own capital. I suppose if all the other banks did the same we would be better off until the next crash. Then we would be could join Africa in a competition of which continent could be the most impoverished.
On Aug 02 12:34 PM mineralt wrote:
> If 85% to 90% of households have no real net worth, then I would
> think socialism is around the corner, as a vast majority will have
> nothing to lose. If we're honest about this, Wall Street pimped out
> the future of this country for its own bonuses. How much money will
> you Wall Street guys make when you live in the People's Republic
> of the United States?
As in French Revolution or Weimar-leading to Hitler.
Both parties live in real big houses and work in real big buildings. If food riots start the people would know just where to go to find more.
On Aug 02 12:34 PM mineralt wrote:
> If 85% to 90% of households have no real net worth, then I would
> think socialism is around the corner, as a vast majority will have
> nothing to lose. If we're honest about this, Wall Street pimped out
> the future of this country for its own bonuses. How much money will
> you Wall Street guys make when you live in the People's Republic
> of the United States?
1. The government is ramping up "Be Prepared for Disaster" ads. They were doing this prior to the crash last year, and then they were on hiatus-until recently. Now they are using Grover from Sesame Street to frighten the children into forcing complacent parents into action.
The government is TELLING us that disaster WILL happen and that they will be incapable of helping us all. For once, we should follow their advice and not only get a "go pack" but stockpile a little food and water, learn to cook, start canning. Hopefully we will never need the info, but I feel that we will and won't be prepared.
2. Banks are still cutting credit from PAYING customers. I got hit by notices from Chase that my two zero balance, rarely used and decades old credit cards are being canceled because my credit report changed - which it didn't. I have not added debt, no one has hijacked my identity and have no late payments.
3. Inflation in core necessities is occurring completely under the radar for any goods made in China. From the nuts and bolts my business buys, to aspirin, cough syrup and allergy medicine, to bras (up 25%), to childrens' socks and pajamas (up 30%), food - frozen, juices, pastas, rice, cereal, snacks (all up at least 30% yoy), to utilities minus gasoline, everything is up in price. Except the stuff you can live without, that is cheap and helping to mis-define our inflation rates.
4. Eroding workweek, full time employment, insured and wages. Please. How could this be anything but a nightmare as it becomes more apparent everyday that we are shedding family-supporting jobs at never before seen levels.
5. Washington. From increased legal immigration, to amnesty, to Cap & Trade, to Health Care, to the Food Safety Bill, EVERY damn policy coming from Washington is going to decimate ANOTHER industry/section of our economy. The "winning" businesses will NEVER be profitable, nor big enough, to hire us all. Much of the legislation SPELL OUT the loss of jobs they will cause. Yet, they pass it anyway.
6. State spending. Like drunken sailors on leave in Vegas. Many states are completely insolvent yet they are currently cutting weeds, building courthouses and paving roads at record pace. Not to mention hiring temp workers and using them to give us the government treatment when we apply for extended unemployment, foreclosure help, bankruptcy or food stamps.
Nearly everyone of these realities would explode IF (when) the bond market implodes. With record spending, no base and growing debt, I just do not see how our growing public debt is not going to wipe out everything.
Thanks for another great article Tyler.
They have also the need to average down on their equity losses in their own portfolios as well as for all the managed accounts they handle. Everything isn't a conspiracy out there.
On Aug 02 09:55 AM yellowhoard wrote:
> Indeed Tyler.
>
> The question is, how long and how high can the money printers move
> this market before the house of cards collapses?
>
> Logic says get out. But where?
>
> What if we are on our way to DOW 30,000?
>
> As for me, I'm enjoying the ride but I'm standing in the doorway.
>
>
> That said, I'm sure others are too. So, just about any external event
> could start a stampede to cash.
I do wish I could figure out how to trade with this information. I can see from your analysis that it is highly unlikely that the market is in anything but a bear rally, and that for a number of years the economy is cooked, but what I do next isn't clear at all.
I feel the interest rate pain too!
I am forced to take significant risks with my money because I don't see any other way to achieve my goals of putting my kids through college (in 15 years) and then retiring (in 20 years).
Personally, I have never seen a more dangerous situation.
Let me add to the chorus of compliments above on another excellent, informative article.
Having said that, Alex Filinov brings up an interesting and valid point (his comment is about halfway down from the top) about money on the sidelines. At noon, I listened to a short interview on the radio of Terry Savage, a consumer finance/investing commentor. One of the anchors doing the interview brought up the difference between "retail money" and "institutional money". She responded that many people have 401ks, etc., and the funds these people hold are a big chunk of the "instituational money".
This makes some sense to me. While the average retail customer is hoarding cash, to the extent possible, many still have "money on the sidelines", via theiir fund holdings. Just something to consider.
One issue -
I do think there is a problem concluding that there is a dollar for dollar relationship b/w the SPX mcap and MMFA. After all, $1 of buying can push up the SPX by multiples of that if trading volume is low. What matters is the impact of the incremental additional cash entering the stockmarket, and that depends on the level of traded free float.
I think a better chart to look at on Bloomberg is the ratio of MFFA Index to WCAUUS Index. This highlights to me there is still some way to go in this equity rally, which will benefit household net worth at a faster rate than a $ for $ logic suggests.
Second, what does volume tell us? To move a company's stock price, it matters not whether one share a day trades, or one million shares a day trade. Assuming for the sake of argument that individual investors do pile into stocks, once the moment after they have bought shares, they are irrelevant to the stock price until they sell. All that matters to stock prices is that there is one person willing to sell low, or buy high. Whether American households participate en masse is sort of beside the point.
What low volumes do is simply to exacerbate volatility since there are fewer dollars and minds at work. Which could make it more likely a market has gotten ahead of where it ought to be. Or maybe not - perhaps those investing today are really a microcosm of a broader population of investors who may, or may not, invest in the future.
Either way, tough to draw any hard conclusions from what, if anything, "cash on the sidelines" and low volume indicates, and more importantly what, if anything, it suggests about future market performance.
My point is simply that if aggregate cash (US household or otherwise) is moving into the stockmarket this will tend to push up prices. And especially so if traded free float and the willingness of holders to sell are both low. It is like the marginal impact of $1m of buying of illiquid small caps vs highly liquid bigcaps.
If $1 moves from cash into stocks, and traded volumes remains unchanged, logically stocks will go up. In theory, the whole market could be sold for almost nothing without moving cash balances but that is not the real world, and it would also involve rising volume. However, it would be difficult to move $4 trillion from cash into the stockmarket and to avoid paying well more than $4 trillion.
Comparing the market cap of the market to the potential buying power in the form of cash which is typically in the market makes sense.
High cash balances also impact interest rates, driving them down at the short end of the yield curve making stocks relatively more attractive given their higher yields. Warren Buffett has made similar arguments in the past if you prefer to listen to him.
I expect cash balances to decline, but even if I'm wrong and they don't, my point is simply that it is reasonable to expect that $1 of extra cash moving into the market will tend to be inflationary for stocks, and by more than $1, as sources of new selling volume will not exactly offset the incremental demand.
This is not a trivial point because it can lead to the "wealth effect" (of rising market cap of the stockmarket based on only a few months of trading) being magnified on the way up, just as has been magnified on the way down.
On Aug 05 06:50 PM Alex Trias wrote:
> Two points. First, what drives stock prices is the relative eagerness
> of buyers and sellers. "Cash on the sidelines" doesn't mean much
> more than maybe, those who have sold might want to buy again maybe.
> And it really doesn't indicate the relative eagerness of buyers verses
> sellers.
> Second, what does volume tell us? To move a company's stock price,
> it matters not whether one share a day trades, or one million shares
> a day trade. Assuming for the sake of argument that individual investors
> do pile into stocks, once the moment after they have bought shares,
> they are irrelevant to the stock price until they sell. All that
> matters to stock prices is that there is one person willing to sell
> low, or buy high. Whether American households participate en masse
> is sort of beside the point.
>
> What low volumes do is simply to exacerbate volatility since there
> are fewer dollars and minds at work. Which could make it more likely
> a market has gotten ahead of where it ought to be. Or maybe not -
> perhaps those investing today are really a microcosm of a broader
> population of investors who may, or may not, invest in the future.
>
> Either way, tough to draw any hard conclusions from what, if anything,
> "cash on the sidelines" and low volume indicates, and more importantly
> what, if anything, it suggests about future market performance.