Cash On The Sidelines

Posted on by Finster Posted in Markets

Reuters reported yesterday that investors expect stocks to continue to rally because there is “a nearly $6 trillion pile of cash on the sidelines” waiting to be put to work.

So what happens if investors pull out this pile of cash and start buying stocks. To the moon!

The implication is that somehow this pile could be drawn down and “put into” stocks instead. Just how would that work?

Suppose you are one of those investors. You pull your considerable share of those trillions out of your money market fund. You buy stocks with it. Then the seller of those stocks has the cash. It wasn’t drawn down and converted into stocks …. it just changed hands. Stocks went from the sellers hands to yours and the cash went from your hands to the sellers. You converted your cash into stocks, but only at the expense of someone else converting their stocks into cash.

The amount of cash and stocks in the system was unchanged. An individual may trade cash for stock. But investors as a whole have no way of disposing of their cash or increasing their holdings of stock. The “cash on the sidelines” meme is based on an invalid extrapolation of the specific to the general.

This is known in the field of logic as a fallacy of composition.

Those six trillion bucks are in the financial system because the Fed put them there. And there they will remain until the Fed takes them out.

8 thoughts on “Cash On The Sidelines”

  1. jk says:

    it makes a difference, who is holding the cash and who the stock, and where the stocks are in the price cycle. people may have come across the term “distribution” in describing some action in stocks. this means the smallish group of people who have made major gains then cashing out their positions, and the stocks being distributed to the masses who will be the bag holders when the market goes down. then the bag holders sell at a loss and the stock moves from “weak hands” back to “strong hands.”
    .
    william bernstein said:
    “How do stocks redistribute during a bear market? J.P. Morgan very famously said ‘In bear markets, stocks return to their rightful owners.’ Which unfortunately is wealthy people. If the average 401(k) holder sells out of their stocks right now and the market goes down even further and they completely sell out or they sell out like they did in 2009, who is on the other side of that transaction? Well it was the one-tenth of one percent.”
    .
    so i must ask: exactly whose cash is on the sidelines? it makes a difference.

    1. Finster says:

      No question it makes a difference who is holding the stock. Usually stories like this are trotted out when that smallish group who are holding want to sell to the masses. Which is most of the time. The point is stories like this are rubbish. There is less cash in the system now than there was at the beginning of 2022 when a bear market was under way. The Fed has been shrinking its balance sheet and M2 has been declining.

      The Wall Street media always have a sales pitch. They just rotate from one to another whenever the last one is getting old and losing its potency. If the mainstream financial media weren’t so bad I wouldn’t need to do posts like this.

    1. Finster says:

      Might be a good time to buy Chinese stocks. They’ve been badly out of favor this year. Not for nothing, but change is a reliable constant…

    1. Finster says:

      There are only two possibilities. Either these stocks are grossly overvalued or they have become oligopolies exceeding Standard Oil and Ma Bell when they were broken up. Maybe both.

      Far too much wealth and power is concentrated in too few hands. This is an unsurprising result of years of ultralow rate policy, exacerbated by corporate tax cuts extending to the very richest corporations.