As cash market account balances soar, the mainstream media once more proclaims, “There’s $6 trillion of money on the sidelines simply ready to come back into the market.”

No? Properly, right here it’s straight from YahooFinance:

“The rising pile of money in cash market funds ought to function a powerful backstop for the inventory market in 2024, in response to a latest word from Fundstrat’s technical strategist Mark Newton. The attract of 5% rates of interest has led to a surge in cash market fund property this yr, with complete money on the sidelines not too long ago reaching a report $5.88 trillion. That’s up 24% from final yr, when cash market funds held $4.73 trillion in money.

‘Whereas a number of outstanding sentiment polls have turned extra optimistic in the previous couple of weeks, this gauge ought to be a supply of consolation to market bulls, that means that minor pullbacks within the weeks/months to come back probably ought to be buyable given the worldwide liquidity backdrop coupled with ample money on the sidelines,” Newton mentioned.

The surge in cash markets for the reason that “pandemic” has revived the age-old narrative that “cash on the sidelines” is about to come back into the markets. Nevertheless, they don’t inform you these funds have collected since 1974. Appropriately, within the aftermath of disaster occasions, a few of these property rotate from “security” to “threat,” however not the diploma commentators counsel.

Right here is the issue with the “money on the sidelines” reasoning: it’s a full fable.

The Fable Of Money On The Sidelines

We have now repeatedly mentioned this fable, however it’s value repeating, notably when the monetary media begins to push the narrative to garner headlines.

There’s a superficial, glib attraction to the thought. In spite of everything, a number of individuals maintain cash on deposit on the financial institution, and so they might use that cash to purchase shares, proper? In spite of everything, the most recent monetary information from the Workplace of Monetary Analysis exhibits greater than $6.3 Trillion sitting in cash market accounts.

So what’s to forestall a few of that cash “coming into the market?”

Easy. The fallacy of composition. This was the :

“Each transaction available in the market requires each a purchaser and a vendor, with the one differentiating issue being the transaction’s worth. Since that is required for there to be equilibrium within the markets, there might be no “sidelines.”

Consider this dynamic like a soccer recreation. Every crew should area 11 gamers regardless of having over 50 gamers. If a participant comes off the sidelines to exchange a participant on the sphere, the participant being changed will be a part of the ranks of the 40 or so different gamers on the sidelines. Always, there’ll solely be 11 gamers per crew on the sphere. That is true if groups develop to 100 and even 1000 gamers.”

Much less Money Than You Assume

Moreover, regardless of this very salient level, trying on the stock-to-cash ratios (money as a share of funding portfolios) additionally suggests little or no shopping for energy for traders. As proven within the chart from Sentimentrader.com, as asset costs have escalated, so have people’ urge for food to chase threat. The present fairness to cash market asset ratio, though down from its report, continues to be above all pre-financial disaster peaks.

If we glance particularly at retail traders, their money ranges have been on the lowest degree since 2014 and aren’t removed from report lows. On the similar time, fairness allocations aren’t removed from the degrees in 2007.

The identical is legitimate with cash market ranges relative to the market capitalization of the index. The ratio is presently close to its lowest since 1980, which means that even when the money did come into the market, it might not transfer the needle a lot.

With internet publicity to fairness threat by people at very excessive ranges it suggests two issues:

1. There’s little shopping for left from people to push markets marginally greater, and
2. The inventory/money ratio, proven beneath, is close to ranges that typically coincide with market peaks.

But it surely isn’t simply particular person traders which are “all in,” however professionals as properly.

So, if retail {and professional} traders are already primarily allotted to fairness publicity, with little or no “money on the sidelines,” who has all this money?

So, The place Is All This Money, Then?

To know who’s holding all of the money presently in cash market funds, we will break the Workplace Of Monetary Analysis information down by class.

There are some things we have to contemplate about cash market funds.

1. Simply because I’ve cash in a cash market account doesn’t imply I’m saving it for investing functions. It might be an emergency financial savings account, a down cost for a home, or a trip fund on which I wish to earn the next rate of interest.
2. Additionally, companies use cash markets to retailer money for payroll, capital expenditures, operations, and different makes use of unrelated to investing within the inventory market.
3. Overseas entities additionally retailer money within the U.S. for transactions processed in the USA, which they could not wish to repatriate again into their nation of origin instantly.

The record goes on, however you get the thought.

Moreover, you’ll discover the majority of the cash is in Authorities Cash Market funds. These explicit forms of cash market funds typically have a lot greater account minimums (from $100,000 to $1 million), suggesting these funds are not retail traders. (These can be the smaller balances of prime retail funds.)

In fact, for the reason that “Nice Monetary Disaster,” one of many main makes use of of company “money on the sidelines” has been for share repurchases to spice up earnings. As famous beforehand, as a lot as might be attributed to share buybacks alone.

What Modifications The Recreation

As famous above, the inventory market is at all times a operate of patrons and sellers, every negotiating to make a transaction. Whereas there’s a purchaser for each vendor, the query is at all times at “what worth?”

Within the present bull market, few individuals are prepared to promote, so patrons should preserve bidding up costs to draw a vendor to make a transaction. So long as this stays the case and enthusiasm exceeds logic, patrons will proceed to pay greater costs to get into the positions they wish to personal.

Such is the very definition of the “larger idiot” concept.

Nevertheless, sooner or later, for no matter purpose, this dynamic will change. Consumers will turn into extra scarce as they refuse to pay the next worth. When sellers understand the change, there will probably be a rush to promote to a diminishing pool of patrons. Ultimately, sellers start to “panic promote” as patrons evaporate and costs plunge.

Sellers reside greater. Consumers reside decrease.

What causes that change? Nobody is aware of.

However for now, we have to put the parable of “money on the sidelines” to relaxation.