A quick look a chart on Money Market Mutual Funds belies the common belief that “cash on the sidelines” is what powers markets higher.

As the chart below reveals, the Market goes up, and as we saw in the 1990s and from 2005-08, so too MMF goes up.

This is evidence against the standard sideline cash argument.

Indeed, rather than investigating these common aphorisms, if you trade on them at face value, you will be disappointed.  Unless you thoroughly data verify and prove/disprove ANY AND ALL Wall Street myths, rules of thumb, or standard trading phrases, you are going to a) develop a false belief system and 2) that will eventually lose you lots of money.

>

MMF and SPX
chart courtesy of Fusion IQ

>

See also:
Cash on the Sidelines Chart Book
Annaly Capital

http://www.annaly.com/blog/?p=520

There’s No Such Thing as Idle Cash on the Sidelines
Hussman Funds

http://www.hussman.net/wmc/wmc060710.htm

Category: Markets, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

31 Responses to “The Myth of Sideline Cash”

  1. SINGER says:

    Charles Biderman was on Bloomberg with Pimm Fox recently and was discussing the “money on the sidelines” issue. His point was that most of this money is “institutional money market accounts” which will not just flip to buying equities, but are substitutes for commercial paper. Can’t find source for that interview, but I’m sure Pimm Fox can!

  2. CTB says:

    I was under the impression that most of that money will continue to sit on balance sheets as a write-off against future losses.

  3. tradeking13 says:

    There’s No Such Thing as Idle Cash on the Sidelines
    http://www.hussman.net/wmc/wmc060710.htm

  4. soulmatic09 says:

    Total margin debt is what really drives markets. Cash isn’t all that important, so yeah I agree.

  5. Winston Munn says:

    I have all my money tied up in collateral.

  6. Onlooker from Troy says:

    Oh my God, will it ever end?! No, of course not. These con artists, peddlers and outright thieves have been using these lines forever. Of course the real outrage here (and maybe your biggest beef BR) is that the media and others swallow this B.S. hook, line and sinker without giving it the critical thought that would topple it. They’re willing accomplices in the hustlers game to reel in the general public for a fleecing.

    If there are any real money managing “professionals” out there that believe this crap, that just shows you the state of things. If they don’t believe it and use it anyway; well that just makes them lying thieves. Either way, stay away from them.

    In the end it’s a narrow minded, shallow, data mining, incomplete analysis that leads to an inaccurate conclusion.

  7. Onlooker from Troy says:

    And by the way, they’re not getting my cash on the sidelines. :)

  8. Onlooker from Troy says:

    What do I see next after reading this?

    Minyanville: Two Ways: Unused Cash Fuels Rally

    Oh for the love of God! I’m very disappointed Todd.

    ~~~

    BR: That author is Matt Theal — it takes all opinions to make a market

  9. VennData says:

    Seconding “There is no such thing as money on the sidelines.”

    “Money” is the Fed’s decision. If you do not understand that, you do not know the most fundamental features of our economy (See ‘gold bugs’ for a collection of people who do not understand this, or Fox news, etc…)

    But this excellent post goes further. Imagine operating under another “belief” “Sell in May and go away?” and you’re now realizing it should have been “Sell in May and get blown Away.”

    More “believers”

    Pessimism Exacts a Price on the Skeptics

    http://online.wsj.com/article/SB125409165677744755.html

  10. sb101 says:

    the better question is why is so much cash sitting in MMF funds earning 0%?

  11. Dan Duncan says:

    “Indeed, rather than investigating these common aphorisms, if you trade on them at face value, you will be disappointed. Unless you thoroughly data verify and prove/disprove ANY AND ALL Wall Street myths, rules of thumb, or standard trading phrases, you are going to a) develop a false belief system and 2) that will eventually lose you lots of money.”

    Barry, you’re just as guilty when you throw out the standard technical analysis B.S. with no underpinnings. Hell, just last week you were noting the significance of the dreaded “outside down day”…Oh no!

    Taking the Dreaded Outside Down day as an example (one of many—like Head shoulders, MA crossovers and on and on.)–and your time-tested advice to “data verify”…

    Just what exactly is the significance of the Outside Down Day? [And please, no garbage narratives...just the facts.]

    1. How often are outside days (up or down) followed up by a move in the same direction? Could you give us a little feedback on this…you are a part of Fusion IQ, after all, so it couldn’t be too difficult.

    2. Would the results of #1 be affected by the enactment of a reasonable stop-loss plan? [It is so damn annoying when people make market calls and then take credit for a particular call even the trade would have been stopped out by a normal enforcement of a stop loss protocol.]

    3. Any ideas as to how long the affects of the Outside day will last on a particular market movement..ie should the trader stay in trade for 1 day or should the occurrence of an outside day mark the beginning of a long term trade?

    4. If you don’t know the answer to #1 (let alone 2-4), why on earth are you mentioning the occurrence of an outside day as if it has any significance whatsoever? If you do know the answer, wouldn’t your readers find it interesting?

    5. Finally, and most importantly: Are you impressed by my willingness and desire to “thoroughly data verify and prove/disprove ANY AND ALL Wall Street myths, rules of thumb, or standard trading phrases”?

    ~~~

    BR: Last week, we put on a hedge to our long positions — but stayed long.

    I think what I wrote at the time was pretty clear:

    The technicians amongst you who pay attention to Japanese candlestick charts will note that yesterday was an “Outside Down Day.”

    While no one knows whether this will be a collapse or a mere shallow consolidation, I suspect the latter — but we have had a huge run since March, and our managed accounts have profits that require protecting . .

    Hardly a forecast, nor an endorsement of any branch of TA. We’ve made it pretty clear here (over the course of 10,000 posts) that we are not pure technicians.

    And I thought that post made it clear the basis for our motivation was to hedge our gains, not make a technical call.

  12. tradeking13 says:

    “the better question is why is so much cash sitting in MMF funds earning 0%?”

    Because factoring in deflation, the real rate is much higher.

  13. Brendan says:

    sb101,

    Simple, because 0% is better than, say, -10%. Not everyone is a savvy high net worth investor with liquid capital to play with. If you’re a middle class smuck, which there are many of us out there, and you think stocks will go down, then 0% beats a negative percentage. And if you have money in a retirement account and Uncle Sam says you can’t move it to even a CD without paying a tax penalty many times higher than what a CD will earn you, 0% beats that. And if you have a 401K that gets 25%, 50% or even 100% matching, then that beats all but the most bubblicious markets. So x dollars times 1.5 into your 401K and then 0% moving forward for, say, 5 years is still 1.5x which beats x dollars at 2%/year (which is excellent for a CD these days) for those same 5 years equals barely more than 1.1x (and that’s before taxes). These are your alternatives if you think the market is going to move back down for the short to medium term. Thus, “cash on the sidelines.”

  14. icesalmon says:

    I am a subscriber of Fusion IQ, it has been saying that “cash on the sidelines” is what powers markets higher. BR, who should I listen to? You or Fusion IQ?

    ~~~

    BR: The piece we put out was on median equity exposure amongst individual investors relative to their 21 year mean.

    That is a different measure, one that we have found a lot more meaningful than Money Market Mutual Fund total assets . . .

  15. gloeschi says:

    “Cash on the sidelines” -> I tried to argue with my colleagues (investment bankers) that everytime someone wants to “get rid off” his excess cash (hence buys shares), the cash just transfers to the guy who is selling him those shares. The cash does not go away (same for the shares). Just changes hands. It is so simple, yet so hard to understand for seemingly intelligent people. Why is that?

  16. DL says:

    The RATIO of money market assets to total NYSE market capitalization would be a much more meaningful chart than the one above. And as noted by soulmatic09, margin debt is another important consideration.

  17. advsys says:

    Just another of the many illustrations that facts don’t really count for much. My point being that one of the key things being overlooked in our current crisis is that part of the cause is a cultural one. No one cares about facts. We have created belief systems and we are wedded to torturing the facts to fit our particular belief system. Another example and one that Barry has alluded to in a recent posting is that we have no interest in long term consequences. For some reason we really don’t care what kind of mess we will leave the next generation. In reality it is even shorter than that. I don’t think most people care about even 2 years from now.

    There are many others, including hero worship of wall street icons no matter how badly they perform, a fix it now and quickly reaction based problem solving instead of thoughtful action, and possibly most importantly, we have lost interest in accountability and integrity.

  18. farmera1 says:

    advsys says:
    “For some reason we really don’t care what kind of mess we will leave the next generation. In reality it is even shorter than that. I don’t think most people care about even 2 years from now.”

    I think we as a country have been sucked into a belief that all that matters is profits. To me that means short term thinking, what happens this quarter is what matters “reported profits” and thus the stock prices is all that matters and oh by the way that is how the upper management makes the big bucks, through the use of copious stock options.

    I would maintain that short term quarter to quarter profits can easily be manipulated and they are. By using creative accounting, laying off workers or many other equally destructive and short sighted tactics. As upper management told me many times their job is to manage the stock price (no real surprise there since they get paid based on stock prices). The short term basis for their pay leads to all kinds of dumb decisions.
    re; GM, Chrysler, Bear Sterns, Lehman, Enron etc etc etc.

    There is a very clear reason the Japanese build better cars than the US. I would maintain that a driver is the US pay structure for upper management vs the Japanese and the rest of the world.

    For many US companies you won’t get far in management if you think beyond this quarter IMHO. Certainly that was my experience.

  19. dasht says:

    I have a question about this which might be a quite naive question. I think that this chart – correlation of MMF and markets – doesn’t disprove the “cash on the sidelines” theory. I think I would want to see a couple of different charts. I see I’m repeating some questions raised above so maybe I’m not *that* naive:

    Aren’t we really looking at two different measures of money supply? In that case, isn’t the ratio of markets to MMF more interesting?

    Isn’t the transaction rate of MMFs of significant interest here? That is, if the rate of withdrawals and deposits to MMFs is going up, wouldn’t that suggest that “money on the side” is driving up equity prices and what we’re seeing here is money coming off the sidelines, driving up stock, followed by people pulling (more) money out? (This assumes that not all sideline money is to be found in MMFS).

    Hardest, perhaps, to measure: what is the trend in how heavily MMF assets are leveraged as collateral, one way or another, for stock purchases?

    Finally, given the scarcity of credit, I would expect people to be still hording cash. That being the case, wouldn’t the hypothesis that it is *not* sidelined money driving stocks be better verified by MMFs rising much faster than stocks? I suppose this is another way to re-ask the “ratio” question.

    -t

  20. dasht says:

    (My amateur understanding of the current rally is that it’s a kind of musical chairs phenomenon. As the rapid phase of the crash set in, everyone scrambled to secure what they could. That included becoming as liquid as possible while exiting various sectors as rapidly as possible. Now everybody is trying to get a read on the political, business, and technological/infrastructure status and prospects. Probably most are secretly assuming something like an “L-shaped recovery”. And people are eager to “rationalize” their positions for that “L-shaped recovery” quickly. That would excite demand for indexed stocks and for some of the other popular sectors that everyone assumes are going *somewhere* as a result of technological/infrastructure challenges. Eventually (there’s no timing it), the hot money is all traded and everyone has done their best to get a seat and the music stops…. and the rally ends. The net effect would be a “squiggly L-shaped recovery” that looks like 3/4ths of a W-shape followed by flat-line (or long, slowly downward line).)

    -t

  21. rootless_cosmopolitan says:

    VennData,

    “Money” is the Fed’s decision. If you do not understand that, you do not know the most fundamental features of our economy”

    Then I must be one of those who do not know the most fundamental features of our economy, because I don’t think the Fed has such a big influence on how much money is in the economy. The Fed only controls how much government money is in the system. It already has less control over the velocity with which this money is circulating. It barely has any control over the amount of credit money that is created by the banks. Government money is only a small fraction of the total money. Thus, I don’t think “money” is really the Fed’s decision.

    Where am I going wrong here?

    rc

  22. leftback says:

    A lot of cash will stay “on the sidelines” – not in equilibrium with stocks. Especially after the next Red October™.
    http://www.calculatedriskblog.com/2009/09/pimco-personal-saving-rate-to-exceed-8.html

  23. rootless_cosmopolitan says:

    VennData,

    “But this excellent post goes further. Imagine operating under another “belief” “Sell in May and go away?” and you’re now realizing it should have been “Sell in May and get blown Away.””

    Why? Because of the great times that lie ahead? Or from the point of view of someone who believes he is one step ahead of the crowd, knows how to time the market and will be among the first ones at the exit?

    rc

  24. DeDude says:

    This seems to suggest that when stock markets are rising a lot of people are quick to rebalance their portfolios and “lock in” the gains in stocks by moving money from stocks into the money marked part of their retirement accounts. However, when the stock marked fall, they are much more reluctant to rebalance the other way – instead they just sit tight and try to ride it out. However, after a real big fall (as in January 03 and February 09) they do seem ready to do some rebalancing out of money marked, presumably into stocks. But they quickly get nervous about stock gains and move money and rebalance into money marked funds to early (July 97 and July 05).

  25. mdod says:

    Money on the sidelines is NOT a myth, and money is not only created by the Fed.

    Using yr/yr pct changes for both MZM and the S&P500 to make them trend stationary, MZM growth leads changes in the S&P 500 with a negative 34% correlation.

    Money is not only created by the Fed. Monetary aggregates can grow for three reasons: the Fed, bank lending, and shorter term changes in money demand (the amount of dollars that we choose to hold…or money on the sidelines). Because the changes in demand cannot change the money in circulation, the yield has to change. Sharp increases in money demand (money on the sidelines) usually can be identified by sharp drops in t-bill yields or a change to a steep sloping yield curves. Holding a money market fund is an alternative to holding stocks. If you can isolate the part of money growth that is coming from money demand, what you are measuring is “money on the sidelines.”

  26. [...] Barry Ritholtz jumps on one of my pet peeves, the whole gobs of money on the sidelines scam (silliness, nonsense or delusion work also) which constantly crops up in financial commentary. [...]

  27. limaur says:

    Cash on the sidelines means that less entrepreneurs are willing to borrow to invest , which is why we have deflation and a very low cost of money. In other words, you have misunderstood what is meant by the expression “cash on the sidelines”.

  28. pflynn says:

    This is Wall Street and the pundits being disingenuous, for there know that it the net cash, not gross, is a better measure. It is analogous to a researching a company financials and on their balance sheet they have four billion in cash; however, it has short-term debt of three billion and long-term debt of ten billion. Does this company really have excess cash to spend? No, the total money market assets are approximately, 3.48 trillion of which, 1.15 trillion is retail money markets, and the remainder is comprised of institutional money markets. The professionals fail to mention that the non-mortgage debt obligation is 2.42 trillion. Does the consumer really have the cash needed to support the economy, NO! We need to normalize the personal consumption expenditures by three to five percent. In doing so, the saving rate would improve, but the economy would suffer.

  29. [...] oberen Link (sehr lesenswert) habe ich von hier; dort kann man die vermeintlichen “Sidelines” [...]

  30. [...] time when you hear again ”still a lot of cash waiting sidelines”, think twice (hat tip the Big Picture and Annaly [...]