$50 Trillion Sideline Cash Conundrum?
As most Mish readers understand, there is no conundrum. Let’s go over why, one more time.
There’s been a lot of discussion about how much cash investors are holding these days.
BlackRock puts the figure at more than $50 trillion, a figure that includes a host of different metrics, from central-bank assets to financial-firm reserves and consumer savings accounts.
Other measures show a similar trend. Private-equity firms are amassing great piles of liquid securities, with Blackstone saying that nearly one-third of its assets are in cash. Fund managers in general have boosted reserves as a share of their portfolios to levels that match the highest since 2001.
So what is the meaning of this trend toward bigger cash cushions? Several weeks ago, my response was to say that all this money will support asset values going forward. That may have been too simplistic.
Just because there’s more cash in the financial system doesn’t necessarily mean that it’s available to buy securities, nor that it’ll prevent a repricing of debt and equities that have been propped up by years of unconventional monetary policies. In fact, it could even indicate more risk out there, as one reader astutely noted. Fund managers may be holding more cash to offset a bigger pool of leveraged derivative bets, which may or may not be sufficient to compensate for the risk.
Sideline Cash Silliness
Barring trivial exceptions, sideline cash can never support asset prices for the simple reason for every buyer of equities there is a seller.
Money cannot flow into stocks or bonds. If $50 trillion in sideline cash purchased equities and bonds, there would still be $50 trillion in sideline cash.
The minor exception to the rule there is a seller for every buyer are new or secondary offerings, trivial in comparison to the alleged sideline cash theory.
Sideline cash is a function of Fed printing and the ability of banks to borrow money into existence.
Statement 1: Several weeks ago, my response was to say that all this money will support asset values going forward. That may have been too simplistic.
Statement 2: Just because there’s more cash in the financial system doesn’t necessarily mean that it’s available to buy securities, nor that it’ll prevent a repricing of debt and equities that have been propped up by years of unconventional monetary policies.
Better, but still wrong, and missing a key point: In aggregate it cannot be used to buy securities.
Sideline cash will keep rising as long as debt expansion and Fed printing continues, but not a penny of it can come into the markets, except for new or secondary offerings.
There is no conundrum. Nor is there any such thing as “sideline cash”. Someone has to hold every penny printed into existence, at every point in time until reverse repos drain the cash.
Mike “Mish” Shedlock