The sideline cash theory has been debunked countless times but here we go again. And ironically, money supply is falling. 
Investors Are Hungry for Risk—and Holding Record Cash Sums
Please consider Investors Are Hungry for Risk—and Holding Record Cash Sums
Investors are plowing cash into stocks and bond funds. Invesco’s QQQ exchange-traded fund, which tracks the tech-heavy Nasdaq-100 Index, reported its largest weekly inflow in history the week of Nov. 13. Funds that track high-yield bond indexes—the higher risk portion of the corporate bond market—reported their two highest weekly inflows on record in the middle of November.
Meanwhile, institutions and investors together have a record $5.7 trillion parked in cash-like money-market funds, many of which are yielding above 5%, according to the Investment Company Institute.
“For the first time in a long time, cash is a competitor,” said Ali Dibadj, chief executive of Janus Henderson Investors. “But I think as soon as short-term rates start to tick down, you’re going to see large flows to other assets.”
At retail brokerage Webull, Chief Executive Anthony Denier has seen firsthand the newfound appeal of cash to everyday investors. Webull began offering a 5% yield on cash held at the brokerage earlier this year to remain competitive with money-market funds.
“All that cash that customers have been piling into their brokerage account the last six months to earn yield, they’re finally starting to use it this month and we’re seeing it put into action,” Denier said.
David Littleton, chief executive of asset manager F/m Investments, said he thinks the record sum in money-market funds is contributing to the velocity of the rally in beaten-down assets like small-caps.
“With the new inflation outlook, people either got greedy or they got fearful they were going to miss out on a rally, and you saw a 5% up move in the index,” said Littleton. “There’s definitely some cash waiting for these moments, but I don’t think you’ll see it all move overnight.”
Impossible for Money to Flow Anywhere
The CEOs of Janus Henderson Investors, Webull, and F/m have no idea how markets function.
It is impossible for money to flow from cash into stocks or bonds because for every buyer of an asset there is a seller of that asset so the amount of cash on the sidelines never changes due to such transactions.
Individuals can differentiate where they hold cash moving it from a checking account to a money market fund that yields more interest, but that is the full extent of it.
Buying stocks, bonds, or even houses with cash does not impact the amount of sideline cash. It simply transfers the cash from one holder to another holder.
Based on sideline cash theory, there could never be a bear market. But we have them.
Sideline Cash is a Function of the Fed and Banks Lending
The Fed can increase or decrease M2 Money Supply via repos, QE, and QT. And banks can lend money into existence at will.
The irony in all of this sideline cash nonsense is that as a result of the Fed’s QT, money supply is actually shrinking.
No Such Thing as Sideline Cash
There is not a record amount of sideline cash.
More accurately, there is no such thing as sideline cash because in aggregate, it is impossible for cash to move from the sidelines to any place else.
Mind the Gaps
Cash aside, please mind the gaps. A Powerful Stock Market Rally Leaves Four Stacked Gaps But They Will Close
As an individual, you can decide to buy stocks, but your cash will them become someone else’s cash.
Technically speaking, this is one of the worst setups in history to buy stocks. See the above link for discussion, noting the partially filled gap I mentioned is now filled.
That is not true at all. There is less cash on the sideline once people start bidding up the prices of assets. If people with cash start to compete for the same asset, prices go up. The only way the author of this article would be accurate is if the prices of assets never change.
You are totally clueless to the point of hopelessness.
Not hopelessness. I ran some scenarios through Excel and proved myself wrong. See, there is hope. I got net-worth confused with money supply.
“For every buyer of an asset there is a seller of that asset so the amount of cash on the sidelines never changes”
– This is true in a free market economy. Except when the Fed steps in to buy bonds (government and corporate) and equities with trillions in fiat. The free market balance is eliminated. Equity index prices increased at the same time bond yields fell throughout 2010 decade. The reason a third of all outstanding US government debt ($7.6 trillion) is set to mature in the next 12 months, according to an analysis from asset management firm Apollo. A majority of this debt is owned by the Fed during its QE from the mortgage crisis.
=because for every buyer of an asset there is a seller of that asset so the amount of cash
exactly!
In other words, Boomers have sold their stocks to the Millennials to reduce their risk. Millennials in turn gave their cash to the Boomers who are invested in guaranteed returns. The Boomers have seen this show before. This will be the Millennial’s first time.
Large, successful trading entities aren’t going to instruct you how to beat them, nor are secondary entities that historically serve them, the WSJ isn’t a trading entity, but they are affiliated with them, their best customers are investment banks.
The fact that they’re owned by FOX removes credibility, for me.
I treat publicly offered trading tips & info with skepticism, factoring their motive, especially when it comes from a Wall St establishment.
2008 should have taught us all that lesson, knowing Moody’s and the S&P were promoting CDO’s as “AAA” all the way up to Autumn 2008, while banks themselves were promoting these assets, fully knowing what they were.
Analysts, banks, even the media have turned trading/investing into a non-stop game of liars poker, and the liars have plausible deniability when you take their advice.
I agree with Mish’s observation of M supply, we haven’t seen a downturn in M2 since the great depression, that doesn’t mean we’re going to see a repeat of that era, but it definitely fuels the idea of questioning the WSJ’s article.
My solution, short garbage stocks, buy good stocks, keep an eye on the FED – NOT interpretations of the FED, NOT predictions of the FED, use your own judgement.
Plato’s allegory of the cave, great concept in his wisdom.
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There’s a sucker born every minute.With the dramatic increases in global population over the past 100 years the timing is now probably more like every 10 seconds.
“Buying stocks, bonds, or even houses with cash does not impact the amount of sideline cash.”
Not in absolute terms.
But in relative terms it does. “Sideline” cash as a percentage of total stock market valuation, can, and does, change, depending on how many shares of stock one is willing to accept in return for a dollar. And measuring size of cash balances relative to size of market, like size of debt relative to size of economy, is arguably more meaningful than an absolute dollar measure which does not take market/economy size into consideration.
Not exactly all that interesting economically, since with cash constant all you’re really measuring is size of market. But then again, the “investor” classes in financialized dystopias; where every penny owned is a penny redistributed one’s way by a central bank and nothing else; don’t exactly consist of the sharpest tools in the shed. Blind faith in “sideline cash” rah-rah and hype; is surely no more idiotic than similarly blind faith in whatever “reasons” clueless, blowhard mediocrities have for picking amongst random numbers.
thanks Mish, I guess there still is some gray area here. seems pretty cut and dry to me. keep up the good work.
USA has a corrupt government and a corrupt Federal Reserve that debased the currency by expanding the money supply. The result is hyper inflation. Commodities and stocks price themselves in the debased currency. All the money created is able to pay the higher prices. The cost of commodities and stocks will rise. The losers are those who did not invest in stocks, real estate, commodities, Those who depend upon government transfer payments, alimony, over valued minimum wage labor, over valued prevailing wages, and bonds lose the most. Over leveraged borrowers who do not have the revenue/income to refinance at higher rates forfeit collateral to the lender. Bank lenders on commercial real estate are the new owners of downtown San Francisco, Portland, Seattle, New York City, Baltimore, etc. Watch those savvy bankers bundle the property into a hot new investment vehicle, tiered commercial mortgage backed securities.
There is a gap in your logic. If I buy or sell a stock, the amount of cash is not changed. However, the amount of cash in the pool of ‘money someone might use to buy stock’ can change, because the new holder of the cash may have no interest in ever buying stock.
“All that cash that customers have been piling into their brokerage account the last six months to earn yield, they’re finally starting to use it this month and we’re seeing it put into action,” Denier said.
The past 6 months, how did those people know the market was going to go down? How do they know now, the market is going to go up? Greenspan dropped the rate in January 2001 and the market kept going down until October 2002, a year after the 2001 recession ended.
Retirement advice has consistently been to have a bucket of cash on hand so you do not get forced to sell in a down market. Given the number of boomers retiring I would expect cash to be at high levels compared to historical trends.
According to the Federal Reserve Bank of Chicago’s “Modern Money Mechanics”.
Modern Money Mechanics : Federal Reserve Bank of Chicago : Free Download, Borrow, and Streaming : Internet Archive
“If the buyer of a reverse repo or a security sold by the Fed is a nonbank (which 90% of RRPs are), and pays for the purchase using its bank account, the money supply is directly affected”.
Contrary to the FED, MMMFs are not banks. They are intermediary financial institutions, NBFIs. Their deposits should not be double counted in the money stock. I.e., the transfer of funds from O/N RRPs to the MMMFs is an increase in liquidity.
Case in point, the O/N RRP facility. Aug, 9 WSJ:
“In their Aug 6. letter in response to our op-ed “How the Fed Is Hedging Its Inflation Bet” (Aug. 2), John Greenwood and Steve Hanke argue that the Fed’s sale of a trillion dollars of reverse repos does not in and of itself reduce the deposit liabilities of banks and money-market mutual funds, and that the money supply is unaffected. By that logic, none of the monetary tools of the Federal Reserve Bank would affect the money supply.”
As far as I know the main way the money supply shrinks is when the Treasury repays the principle on bonds they sold to the Fed. When the bond that the Fed holds matures, the Treasury repays the Fed its par value, and the Fed destroys that money by erasing it from its books / money supply. Everything else is just money changing form in terms of where it’s invested.
RRP is a classic example. The balances of these MMFs have been cut in half since May of this year. The vast majority of this money is chasing higher treasury yields. When rates fall and new treasuries move below a yield, the holders of these bonds won’t re-invest in t-bills and will move the money somewhere else, possibly back to MMFs. At that point, this money will start to be re-invested in RRPs and we’ll see that amount dramatically rise.
Velocity measures the speed which is a much harder concept to understand and analyze.
Some of the O/N RRP money was mopped up by the TGA. But rates still rose. Something smells funny.
The principle was to reduce the volume of bank deposits is for the saver-holder to use his funds for the payment of a bank loan, interest on a bank loan for the payment of a banks service, or for the purchase from their banks of any type of commercial bank security obligation, e.g., bank stocks, debentures, etc.
Of course, we shouldn’t leave out bad debt.
If QT Is Doing This, No Wonder Stocks Are Rallying (zerohedge.com)
The economy is awash with cash. That’s what the balance in O/N RRPs demonstrates.
Open market operations should be divided into 2 separate classes:
(#1) purchases from, and sales to: member commercial banks;
(#2) purchases from, and sales to: “other non-bank entities”:
(#1) OMO transactions of the buying type between the FRB-NY’s “trading desk” (the Central bank) and the member commercial banks directly affect the interbank demand deposit volumes in one of the 12 District Reserve banks without bringing about any change in the money stock.
The “trading desk” credits the master account of the clearing bank used by the primary dealer from whom the security is purchased. This alteration in the assets of the commercial banks (the banks’ IBDDs), increases – by exactly the amount the PD’s portfolios (or acting as dealer agents, NB’s portfolios), of Treasury and coupon securities was decreased.
(#2) Purchases and sales between the Reserve banks and non-bank investors directly affect both bank reserves (outside money) and the money stock (inside money).
It will be a black swan when O/N RRP volumes are eliminated.
See: Reserve Demand, Interest Rate Control and Quantitative Tightening (europa.eu)
NONCONFIDENTIAL // EXTERNAL
I agree with Mish that when someone buys stocks, they transfer cash into stock, and an equal amount of cash is then transferred to the seller of the stock for a net 0 effect on “sideline cash”. That said, sideline cash that wishes to be deployed into stocks can and does change over time for various reasons. Fiscal policy is an obvious reason in that fiscal policy can have a large effect on consumer free cash flow, and the increase or decrease of consumer cash flow can effect the amount of sideline cash that wishes to be deployed into equities. There are many other things that can effect, positively or negatively, the amount of sideline cash that wishes to be deployed into equities, this was just the most obvious.
Sideline cash is much closer to the action (and the players) than cash parked on its butt up in the seats.
Mish, your point is a good one! I think the meme of money flow is a metaphor for a greater propensity to buy ( money flowing in) or sell (money flowing out).
Here’s a thought experiment. What if a company issues new stock? Does that constitute money flow into stocks? The company now has the cash so one could use the same argument and say on aggregate there is no money flow. The money now sits on the companies balance sheet. However, if that’s the case, then there has never been any money flow into the stock market. It’s as if, the trillion dollar stock market just “poofed” into existence!
Wow! Here I thought I put out an excellent bit of sophistry and no one took the bait! ;)~
Don’t forget the element of LEVERAGE and the Buy-Back program
Stock are no longer really meant for issuing.
At one time they were meant to raise capital for productive businesses.
Stocks are now meant to be traded between folks (that have no real interest in the companies) in the expectation of jacking up prices.
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Not necessarily so if sellers turn around and buy something else.
I truly wish people could read and think before posting idiotic comments.
If the sellers turn around and buy something else, them the cash gets transferred to the seller of something else.
Looks like you got me. But your insult was totally uncalled for.
I am crazy.
I sell stuff for Federal Reserve Notes.
Then I burn them.
I don’t have them and the FRB doesn’t have them.
Where did the money go?
And don’t tell me about implied rationality.
In a good market it would be more accurate to say that the people buying stocks are willing to pay up to get them. In a bad market people are willing to accept a lower price to get rid of the stocks they own. Cash has nothing to do with it but mood does.
Yup.
I am more likely to buy investments if I have large heaps of cash lying around.
But not guaranteed.
I am less likely to buy if I don’t feel that I have enough cash to get through hard times.
Guaranteed I will hoard some cash.
So Mish, if you know that banks create money into existence, and if you know that money supply is falling, why is it that you don’t understand what inflation is?
Inflation is the expansion of money supply, not the increase of prices. Bank Reserves via QE/QT don’t do anything, they are not money, they are irrelevant.
If don’t agree, then make an article with evidence to support your position.
Perhaps through doing so, you might realise that your apparent position is garbage.
Inflation can ALSO be supply shortages, costs due to natural disasters or global crop failures…or Wars. Inflation happens when OIL is constrained and production reduced by OPEC+ a “friendly little Cartel” that can drive prices up massively on BOTH energy and any goods shipped using OIL / Gas / Diesel. Lots of ways for inflation to happen, without necessarily expanding the money supply.
Now is the worst time in history to hold dollars, commercial real estate, US Treasury bonds, stock of over leveraged corporations, used EV car inventory, or tickets to the Biden inaugural ball.
On an individual basis, I continue to buy the dips and sell the rips. Though overall, I have also been selling into strength and raising my cash levels. Always good to lock in profits from time to time.
How do you “lock in” profits with all the fiat currencies losing value?
Asking for a friend.
Checkable Depoits has gone from $1 Trillion as of Jan 2020 to $4 Trillion today:
https://fred.stlouisfed.org/series/BOGZ1FL193020005Q
This is available money that can be deployed instantaneously, and could account for people emphasizing the enormous amount of cash that is now “on the sidelines”.
QE
But that money cannot flow into stocks. the seller of stocks will have cash.
MR. MISH,
What you say makes no sense. Do you even understand how many dollars have been printed. Where else is the money going to go? I can understand your reasoning if they stopped printing dollars,, but this is not the reality. Market will go higher as long as the print continues. Scale it out ratio it over time vs supply. If you were to stop printing, yes. But even then it would be like trying to stop a train. There is no other option than for big money to plow stocks. We have enough now to run over high on DOW to 41,200. All about the confidence game. , Con game etc. < PE , formulas etc don’t matter, ,,,where else are they going to go, Pump it and dump it. Cause I assure you they will be printing another 50 trillion over the next 20 years. You making me lose faith in you.
A lot of the printed dollars you mention were never released into the general economy. They were used in the background to shore up key funds with bad investments. There is helicopter (inflation) money and there is money neither you nor I will ever see .. or touch.
Scott is correct in my view.
Mish has explained this more times than I can count on his blog. The Fed can print as much as it wants, but it can’t control where it goes or if it goes anywhere at all. As Scott mentioned, most of the printed money never made it outside of reserves held at the banks.
The COVID helicopter money from 3 rounds of stimulus, $757 billion (out of $790 billion) in PPP loans that were forgiven, rent moratoriums, and student loan payment deferments all contributed to the current inflation we are all dealing with. It is true that the Fed played a role in the above, but the Fed wasn’t the signer of checks…..the U.S. Treasury was.
Yes, but Mish is incorrect about QE and incorrect about inflation.
Yes because they are not money, they are bank reserves.
“Stimmies” are money, but they are created by commercial banks extending credit to the government in exchange for treasuries (that aren’t being snapped up as much as they are being created).
Dollars have not been printed. “Bank Reserves” have been created, and swapped for debt, but Bank Reserves are not money, and are not dollars.You can’t use them for anything. They are more like the coin-shaped metal token that you put in a shopping trolley to release the lock.
Bank Reserves are like gift cards that can only be redeemed within the Banking system’s store. They are not spent at John Q. Public’s store.
I think of those reserves akin to a ship’s ballast.
It just sits there, but without it the entire system is unstable.
He didn’t say the market can’t go higher (or lower).
He simply said before and after a stock trade there is exactly the same amount of sideline cash. In other words, if you buy a share from me at $100, you get the share and I get the $100. So now I have $100 of sideline cash which is exactly the same amount you had before you bought the stock.