What About 'All That Cash on the Sidelines'?

Whenever the generic term “all that cash on the sidelines” is stated, they are really talking about the balance in Money Market Mutual Funds [MMMF].

There is no guarantee that throwing a lot of cash at something makes it more appealing to everyone else who has cash on their sideline and no guarantee stocks will go up because of it.  There is no guarantee that cash leaving MMMF will go to stocks and not some other investment with a preferable risk/return profile. 

I know the bulls and the media keep hyping this concept as a reason for you to either not sell stocks or to start buying.  However, there is no evidence that the amount of cash on the sidelines ever signals a top or a bottom or anything in between.    There is no timing technique relating to changes in the amounts of cash held in money market accounts or the corresponding stock market performance.

I’ll make it easy for you by listing the values (from ICI - the authority on measuring/reporting mutual fund balances) at year end for the “amount of cash on the sidelines” (aka money market balances) and the S&P 500 balance for the past few bull and bear markets.  Try to find a correlation.  Try to find what percentage decrease in the cash on the sidelines equates to what percentage increase in the stock market (or vice versa).  Good luck.

• 1994     $ 0.565 trillion     S&P   459.27
• 1995     $ 0.753 trillion     S&P   615.93
• 1996     $ 0.902 trillion     S&P   740.74
• 1997     $ 1.059 trillion     S&P   970.43
• 1998     $ 1.352 trillion     S&P 1229.23
• 1999     $ 1.613 trillion     S&P 1469.25
• 2000     $ 1.845 trillion     S&P 1320.28
• 2001     $ 2.285 trillion     S&P 1148.08
• 2002     $ 2.272 trillion     S&P   879.82
• 2003     $ 2.052 trillion     S&P 1111.92
• 2004     $ 1.913 trillion     S&P 1211.92
• 2005     $ 2.040 trillion     S&P 1248.29
• 2006     $ 2.354 trillion     S&P 1418.30
• 2007     $ 3.107 trillion     S&P 1468.36
• 2008     $ 3.582 trillion     S&P 1156.39 

MMMF data through 09/10/2008 S&P through 09/17/2008

If you want to look at shorter timeframes from the recent past, click here and see how much of the week-to-week moves in the market were related to a change in the MMMF balance.

Bulls love to spout anything that promotes their case whether they are myths or facts.  I am presenting facts and you can decide for yourself.  So the next time you hear some smartie tell you that you should invest because there is a record amount of cash on the sidelines and when it comes into stocks there will be some huge increase in the index, please remember the facts.

Comments

[Steven Hansen:]

sideline money can also be in other instruments such as short term treasury, bond/cash type etf's etc.

none the less, i am surprised at the lack of sensitivity of the money market mutual funds to sideline money.

2008 Sep 18 02:26 AM

[mikebrah:]

When bulls refer to this, its usually in percentage terms. Cash in money markets as a percent of total funds, not in absolute dollar terms, can have meaning.

2008 Sep 18 02:31 AM

[nickr:]

And what if the money on the sidelines - especially non US - decides that the best bet is against the banks...?

2008 Sep 18 03:05 AM

[fatcat:]

I have a feeling most of that cash will stay on the sidelines for awhile...

2008 Sep 18 03:09 AM

[DaveW:]

agree with fatcat, cash is still king, a concept that adds nothing positive to the marketplace until it capitulates into equities. In the meantime it is simply 'potential energy' wating to be unleashed.

2008 Sep 18 12:21 PM

[alajac:]

Actually it looks pretty clear that the relationship is inverse, and that the more money in the accounts, the closer we are to a top. And that the bottom will be confirmed by an increase in the money in the accounts. Piece of cake. But not a very good reason to `buy and/or hold`.


HOW TO FIX THE ECONOMY (change the system, not the faces)

a plan to stimulate the economy, lower taxes, start paying off the National Debt, alleviate poverty and decrease crime

by replacing our OLD economic system with a NEW system based on

a new and debt-free U.S. currency to replace Federal Reserve Debt-Money,

a 0.5% tax on electronic transfers to replace the Federal Income Tax and the IRS,

and $1000 per month privatization compensation (non-Fed $) for all legal U.S. residents

There is NO BENEFIT AT ALL in having a Central Bank (well, none for us) compared to having the U.S. Treasury print and distribute our own debt-free money to ourselves. THE ONLY DIFFERENCE between having a central bank or not, is that ``One system costs us 95% of our wealth every hundred years and puts us and our posterity into mind-boggling debt until the end of time``... and the other doesn`t.

So the first thing we need for our NEW SYSTEM is our own, debt-free U.S. Government fiat currency, backed by all the property within the nation`s borders. Obviously I disagree with those who insist that `only gold is real money`. The hoarding of gold-backed money has led to and prolonged many U.S. economic depressions which explains why the U.S. has tried and abandoned `the gold standard` many times over the years. ``Bad money drives out good`` means people will always wind up using as money whatever has the least actual value that will still be accepted by others to facilitate trade. Debt-Free fiat money will work just as well as Federal Reserve fiat Debt-money, but without all the nasty side-effects.

Another problem with the OLD SYSTEM is that income-based taxation creates wasteful tax avoidance behavior, requires an expensive tax reporting industry and an intrusive collection bureaucracy, and is, arguably, a form of `involuntary servitude`. Under our NEW SYSTEM, we should replace all income-related taxes with a one-half percent, automatically-collecte... electronic transfer tax (also known as a `debit tax`) which will be avoidable by transacting business using cash or barter. This will not only rid us of the IRS (saving the billions currently spent on `tax reporting`), it will also end the current penalization of work and entrepreneurism, as well as freeing up untold billions currently spent on `tax avoidance`. A debit tax is `more just`, corresponding closely with ``benefits previously-obtained`` rather than penalizing labor and industriousness, and (as it can be legally avoided, even if only inconveniently so) this debit tax can be considered ``voluntarily-paid``. A small electronic transfer tax will also act to discourage excessive short-term market speculation and should be able to raise enough revenue to begin paying off the National Debt. The tax should be either paid with the new debt-free money or exchanged for it by the Treasury with tax revenue on Federal Reserve money being used to start retiring the National Debt.

As argued by Tom Paine in his 1797 essay ``Agrarian Justice``, the third problem with the OLD SYSTEM is that, because governments privatize all of their claimed property (allocating it however they like), everyone winds up being denied free access to all property (other than that which has been specifically allocated to them) without being compensated for that loss. That`s not a problem for those with access to capital and property ownership, but for the rest of us, it is totally unfair and creates a slanted playing field upon which wealth gravitates to the already wealthy and the well-connected. However governments allocate their property, every method has the same result of `denial to everyone of free access to all land`. It has taken 200 years for this injustice to be acknowledged in a place and time where something can be done about it and when events have conspired to make rectification not only just, but vital to our economic survival. Just as compensation for eminent domain takings are provided for in the 5th Amendment of the U.S. Constitution, governments should provide compensation for denying everyone `right of free access to all property`.

Thus, in order to remedy this, we must elect a Congress that will PAY EVERY LEGAL U.S. RESIDENT `Adequate and Equal Compensation for Denial of Free Access to U.S. Property`, compensation which can FUNCTIONALLY REPLACE ALL FORMS OF PERSONAL AND CORPORATE WELFARE AND SUBSIDIES, including rescinding Federal Minimum Wage laws and phasing-out the Social Security system. (Once everyone is getting `Denial of Free Access` compensation their whole lives, most people will be able to save enough to be able to comfortably cease working at some point in their lives.)

Our NEW SYSTEM should pay $1000 per month (of our new, non-Fed, non-Debt-Money) to every legal adult resident. Compensation for minors should be held in a trust fund to avoid incentivizing `baby factories`. Since everyone gets the same amount of compensation, this plan is not wealth redistributive, but will give the least wealthy the biggest relative monthly percentage increase of wealth. Because when people HAVE something, they have something to lose, we can expect a reduction in all sorts of crime under our NEW SYSTEM as well as better childcare, less poverty, more rural homesteading, better maintained urban areas, less intrusive and cheaper government with lower military-related expenses and a safer world in general. Once this NEW SYSTEM gets going, I expect residents of other countries will insist their governments either copy our NEW SYSTEM or else apply for U.S. statehood as Texas did in 1845.

HEALTH CARE...The AMA and FDA work to constrain competition in order to maximize the medical and pharmaceutical industries` ability to extort unconscionable prices for services and substances that should be affordable out-of-pocket. We need to train up thousands more doctors and other healthcare professionals and to decriminalize and unbridle access for adults to WHATEVER drugs adults want, obtained from WHATEVER source adults decide thay want to obtain them, for WHATEVER purpose those adults wish to use them, and let the market work to make prices of normal medical help and pharmacology affordable.

SEND A MESSAGE to candidates running for Congress in 2010 and 2012 that they need to support the three changes (new currency, new taxation, and privatization compensation) required to implement this proposed NEW SYSTEM with a MASS WRITE-IN CAMPAIGN that `blows socks off` from DC to LA. I will be registered as a Write-In Candidate for US President in Michigan, and in other states as I get help with other states` registering processes. Pass this message along to several people every day (or, even better, to everyone you know today, and to everyone you meet from now on). IF EACH OF US EVERY DAY CONVINCE EVEN ONE OTHER PERSON TO JOIN US, OVER ONE BILLION PEOPLE WILL BE `ON BOARD` IN 30 DAYS. (Seriously. Grab a calculator and start doubling from 1.) For an e-copy, or to ask questions or volunteer, write me at alan_jacquemotte@yahoo... or P.O. Box 183393, Shelby Twp, MI 48318.

2008 Sep 18 07:27 PM

[Velshan:]

Very good idea. I fully support. But don't think that most are ready for such a big change. That revolution will one day come to America but not today

2008 Sep 19 02:40 PM