Don’t Worry, It’s Only a “Pre-Bubble”

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Mish, nominally, perhaps sideline cash can’t flow into or out of the market. however the amount at risk changes and the value of the sideline cash can indeed change. if i own a company that I bought for $1b and you buy it from me for $2b, you can claim that technically no money came into that market, but the amount at risk on that company would have doubled and the value of the $2b in sideline cash in relation to that market would have been cut in half.

I meant to say the cash goes for Main to Wall. IOW, Dalio is trying really hard to unload his stocks without crashing their value in the process.

https://s3-us-west-2.amazonaws.com/maven-user-photos/mishtalk/economics/pY98QOHeFE2eAof6gA5bwQ/Nl7bP2nWNUCrhaiyb-S4CQ

Okay with cash it’s all very simple, follow with me (it may help to pronounce “debit” as “debt” here):

The bank, as creditor, has credited the debtor, the spender, with credits through his credit card.
The splendor, as debtor, has debited the creditor, the apparently infinitely-creditable bank, some nevertheless-finite-amount of the banks credit, in return for his own credit that he will pay-off his credit card balance (assuming he was a very creditable character judged credit-worthy enough for the bank to act on his credit and credit his credit-account with credits – to his credit he did later pay off his debts).

The bank, as debtor, has debited the creditor, the saver, of central-bank-paper-credits, in return for its “debits” that can then be debited from his account in order to credit others with bank-debits through his debit card.
The saver, as creditor, has credited the debtor, the bank, with the central banks bearer-note credit that it will redeem gold (though I have heard that this might have recently been suspended).

The bank, as mortgagee, has credited the mortgagor with credits through the mortgage broker.
The mortgagor, as payor, paid these credits to the bank account of the payee, the property-seller.

These credits paid to bank account of the property-seller are to him considered “freed credits,” because he’s not a debtor, and yet he has been credited with credits.
These “free credits” are nevertheless also to be considered as regular bank-debits debited from the credited account of the mortgagor-debtor to the account of our now indirectly-credited-yet-creditor of the bank, the debit-card holder, our property-seller.

Our property seller uses these “freed credits,” the credited bank-debits of the current account which his debit card is linked to, to credit the margin account he has with his stockbroker.
The stockbroker, therefore debits his current account of the “bank-debits/free-credit” in order to credit his margin account with “bank-debit/free credit.”

Not content with the “free credit” in his margin account that was debited from his current account, our property-seller-turned-trader, though the bank is indebted to him by the free credit he credited to them, becomes nevertheless also debted to the bank by taking out a margin loan through the stockbroker to purchase shares. So the bank credits his margin account with margin credit alongside the already existing bank-debit/free-credit to raise the sum of – what actually functions as cash-money in the stock market arena – in his account even higher.

Now you know where this is going don’t you (my god are you still reading this?): our trader credits all his margin-credit & free-credit to another trader’s cash account in exchange for shares in Amazon (which he believes he will be able to sell them to another margin buyer later on at a higher price). Only, because he’s not in debt, it’s all free-credit to him. So he debits that out of his cash account, and into his current account, and then “calls in” that number from the banks (because free-credit is bank-debits) by withdrawing central-bank-paper-credit out of the ATM, and then blows that all in turn on booze and whores. Meanwhile interest accrues on the outstanding “debit-balance” of our purveyor of Amazon.

And now I realize I made a mistake on that document I put on my website because not only can all of the cash in the stock market be treated as margin debt (not, as I said 2/3rds), there actually needs to be twice the amount of free credit in the system to pay off the existing debit-balance in the event of a complete-margin-recall. So yeah let’s be glad there is a certain kind of “cash on the side” within the credit balances of the average hedge-fund/pension fund, or every trader in stock in the USA is bankrupt. Of course that money will have to come out of residual balances, what is allocated to purchase bonds, what is allocated to purchase mortgage-backed-securities, futures and every other security, and also foreign currency accounts.

The question is, what is $600bn dollars to this great “stockpiles” of side-credit that lies elsewhere? Under present circumstances, how enthusiastically would $15 trillion (or should that just be M1’s $3.5 trillion? I don’t want to confuse account balances with money-markets) sums of cash that’s out there pour into the stock market to meet deflationary margin calls? If apathetically then the market will go to zero. If enthusiastically, then the market won’t be affected whatsoever (but it certainly won’t help the other markets). Ray says the “side cash” exists, but he hasn’t said anything about the propensity of this cash to come off the sidelines. The last ten years in fact show that stockbrokers have had a strong propensity to withdraw cash from stockbroker accounts and put it elsewhere.

It’s not a myth. When you value stocks via a discount of future earnings (or cash flow), you need an interest rate to discount the future cash. The lower the interest rate, the higher the present value is of that future cash.

The phenomenon Dalio probably had in mind was, ‘Capitulation of the Sceptics’…like me. That’s where the sell side keeps yammering about how wonderful it is to finally cave in very late in the business cycle and start buying vastly over-priced stocks into the teeth of Fed tightening. It assumes Billionaire village idiots sitting on cash suddenly going stupid in large numbers.

The amount of cash should remain relatively stable in investment brokerage accounts since someone will always hold every investments. The underlining price of the assets doesn’t impact cash either. The amount of cash in investment accounts can fluctuate and maybe this what they are referencing when they say “there’s excess cash”. If you compare historical cash in brokerage accounts, I would guess the % on the sidelines could be higher than average currently which “supports” the sidelined cash claim.

The argument that “sideline cash” remains the same when stock is sold is based on the premise that “sideline cash” and “cash” are one an the same. When stock is sold, the buyer gives up cash, and the seller gets cash, so the sum of all cash remains the same. Is there a difference between “sideline cash” and “cash”. I believe that not all cash is the same. Some cash sits in brokerage accounts, awaiting reinvenstment. Other cash is moved out of the market, to other things, including being spent.
The reason that it matters is that what makes the market move one way or the other is the eagerness of buyers versus the eagerness of sellers. If buyers are eager to get in, and sellers are in no hurry to get out, the market moves higher. If Sellers are eager to get out, and buyers are in no hurry to get in, the market moves lower. If all cash is the same, that implies that buyers and sellers are equally eager to trade at all times, which further implies that the market should never move in either direction, which obviously is not true.
Therefore, when I hear the argument that “there is a lot of sideline cash”, I don’t hear “more cash has suddenly appeared in the economy”, which would clearly not be true, but rather, I interpret it as that the speaker believes buyers will become more eager in the future. Similarly, if i were to hear that sideline cash is declining, I would interpret as that the speaker believed that potential buyers were becoming less eager to buy.

Seems to me with the FED contracting and government deficits going up, there will be less cash for equities going forward. Not more.

If I own the “market” that i bought for $1b, and Mish pays me $2b for it, sure as $2b came in, $2b went out. But now there is $2b at risk, whereas before there was only $1b. And more importantly, that $2b is now worth 1/2 as much as is was before, at least in terms of stocks.

An important prerequisite for the survival of any totalitarian state, is to arrange things such, that as large a share of total resources as possible, is transferred to those who unquestioningly parrot the Party Line. That way, opposition has less resources with which to oppose.

Another, equally important prerequisite, is to manufacture some form of legitimacy. For the regime itself, and for its institutions,, which the regime depend on to enrich and empower themselves.

Dalio, whatever (positive or negative) else he may be doing, represents the apex of both above regime survival strategies. He’ll reliably, and unquestioningly, parrot the silly party line that finance, even in the current fiat backstopped and empowered degenerate incarnation, is some sort of important and enabling institution for the wellbeing of anyone not directly in on the virtually unlimited graft-for-the-connected it enables. As well as the fantasy that current day “Wall Street” is somehow closer related to “free markets,” than a Soviet five-year plan was. No better way to ensure the continued survival of that nonsensical world view, than to publicly enrich those most vocally professing it, beyond the wildest dreams of onlookers.

And, since the indoctrinati can be reliably counted on to fall for the sham that those receiving their welfare check from the Fed are somehow “smarter” and “knows more about business” and “the economy,” than those receiving them from Social Services; and that picking the winning one from a box of randomly moving stocks, is somehow meaningfully different than ditto from a box of lottery numbers; he also serves as a convenient regime legitimizer. After all, he won the lottery, and collected a lot of welfare checks; so if he cheerleads for whatever financialization nonsense is currently propping up the regime and its closest supporters, financialization nonsense must be the “smart” thing to cheer for. And if I want to appear like I am “smart” too, I should also mindlessly parrot whatever drivel he is regurgitating, and uncritically cheer for the regime and its institutions. Just like he is doing.

“The major networks fawn all over Dalio hoping for quotes,” That is because they do not see Dalio, they see dollars. You can talk sense only if you make billions…