Bloomberg writer Natasha Doff says Rich Europeans Have $14.7 Trillion and Are Ready to Pile Into Credit Markets.
Thought that inflows into European corporate bonds had peaked? Think again. Analysts at Bank of America Merrill Lynch have just identified a whole new potential buyer base.
European high-net worth individuals with a total wealth of more than $14.7 trillion are holding close to 24 percent of their portfolios in cash, the most since 2013, according to analysts at the bank.
“For now, we think there remains plenty of pent-up demand to buy credit,” analysts at BofAML including Barnaby Martin said in a research note.
How Markets Function
The Bloomberg article provides more evidence that economic writers and analysts do not understand basic points about how markets function.
It is mathematically impossible for $14.7 trillion of sideline cash to come into the market for the simple reason that for every buyer there is a seller. All that can happen is a transfer of “sideline cash” from one set of individuals to another set of individuals.
Someone, somewhere, mathematically has to hold the cash..
Yet, the sideline cash story goes on and on.
On April 3, 2017 CNBC wrote Put me in, coach: Money is pouring into the market from the sidelines
On November 5, 2017, Business Insider writer Olivier Garret, Garret/Galland Research, made this claim, citing Blackrock: $50 trillion of cash on the sidelines could be good news for stocks and gold
$50 trillion dollars is sitting on the sidelines as cash right now. BlackRock argues this cash has piled up because many investors are too risk averse to put money into the markets. The current economic and political climate scares them.
What Will It Take to Move Cash Off the Sidelines?
The key question of course is what it will take to get this $50 trillion back in the game again. That much money would boost the financial markets a lot if it were invested. But what will it take to tempt conservative investors to deploy their cash?
If the $50 trillion that is sitting on the sidelines in cash were to jump into the financial markets, there would be a huge rise in the prices of equities, bonds, and tangible assets such as gold.
Sideline Cash Nonsense
One can find hundreds of similar articles, all preaching the same nonsense.
The fact of the matter is sideline cash is a function of central bank printing, asset purchases, and fractional reserve banking that allows banks to create money simply by lending.
All the while, someone must hold every cent printed or lent into existence. That cash cannot feed the markets. Nor will the amount of sideline cash change no matter how much gold is purchased because the seller of the gold will then have the cash and the buyer will hold the gold. Yet, the sideline cash story gets perpetuated over and over.
It’s amazing how little fundamental knowledge many of the people writing about markets actually have about markets, even in high profile places like Bloomberg, Blackrock, Merrill Lynch, and Business Insider.
.Mike “Mish” Shedlock
The real definition of this money is not sidelined money but a centralised hoard. It is really not that important what its origins are, what is important is its disposition. It can be used to inflate asset bubbles or it can be used to expand production. Whatever the case, if this hoard exceeds the needs of capital, which it does, then it acts as a drag on the economy.
Sorry, long term user, but this site has been ruined…ads and articles unstructured and all over the place on my iPad…unusable!
the central banks have trillions waiting on the sidelines too.. depending on whther inflation gets below zero or not (data “depends”)
But it is important to the bankers, who are trying to figure out how to unlock the next wave of buying.
That means that yes, the cash is in the hands of those who are risk-adverse; but it tells us nothing of the demographic. Maybe they are risk-averse because they are using the money for retirement; or because they are saving to pay off the mortgage.
Hmm… I’d say that by definition they are right. The cash will migrate from those who wish to spend it, to those who do not wish to spend it (including being risk averse).
Anyway, if you assume they are measuring sideline cash in units of total market capitalization, at least what they talk about is not complete nonsense. Instead, “sideline cash” becomes some sort of measure of how much of the freshly lent into existence out of nowhere money, is flowing into nominal “assets”, as opposed to simply being held in cash; probably as a cushion against possible future cashflow problems. Viewed in that light, high percentage of cash “on the sidelines” could well be interpreted as bullish for asset markets, as it indicates the printers are temporarily ahead of the yield searchers; on their common road to ultimate absurdity and decimation of all but print and pump rackets.
Dude, this new posting scheme is nuts…..
If you want to be generous to the “sideline cash” ‘ers, assume they are talking about the size of the cash pile compared to the size of the total market.$20 trillion of cash when the total size of the stock market is $20 trillion, indicates
As I told Mish (apart from the fact that the whole “sidelines cash” idea makes no sense), there is a reason why these people are “high net worth individuals”. And the reason is not that they somehow feel suddenly compelled to throw money at the most overvalued corporate bond market in history. The analysts at Bloomberg and Merrill seem to assume that all investors are complete morons. I submit that this is not the case – it seems more likely to me that the cash reserves of HNW individuals will continue to rise.
Well that interesting to get sign in to comment. I think have to take nap now;-)
Well, apparently pressing “return” posts rather than creating a new paragraph. To continue: Most of what MMFs hold are short-term securities that would have to be sold to obtain cash if all these folks really wanted to “move all that cash” into the market. It is not possible for them all to do so as someone must buy the securities the MMF holds. There is not enough “transactional money” (M1 in the US) to do that. It would lead to the breaking of the buck in the MMFs. Similar nonsensical arguments are made about the health of the US balance sheet where the assets are claimed to easily cover the liabilities, yet those asset values are supported by an M1 level a fraction of what the aggregate asset vales supposedly are.
If the person who currently holds the cash wants the assets in question more than the person who currently holds the assets wants to sell, then the “sideline cash” moving into assets will serve to raise the price. For example, if Paul has 100 shares of Apple at $100/share and Peter uses $10,000 of his sideline cash to pay Paul for 50 shares of Apple, then it’s true the amount of sideline cash has not changed but the price of Apple stock is now $200/share.
The mistakes go beyond not recognizing that “cash” must be held by someone at all times. Much of what is counted as “cash” is not cash. For example, money market funds. They do not hold cash, except for a very small sliver of their assets maintained in a demand deposit account to meet check-writing and other forms of redemptions.
Shared.