On Friday the Federal Reserve released its quarterly Flow of Funds data, current through June 2011. One of the more popular headlines from this data concerns the record amount of “cash on the sidelines“. Through Q2 2011, nonfarm nonfinancial corporate businesses held $2.05 trillion in liquid assets on their balance sheets. As the argument goes, this must be a sign of pent-up demand just waiting to be unleashed on the market. The second chart below illustrates why this may not necessarily be the case.

Liquid assets held on companies’ balance sheets is a nominal number, much like the nominal level of GDP, that rarely decreases. Of course cash on the sidelines is at a record nominal level, it usually is. This series must be compared to other balance sheet items for relevance. The chart below shows liquid assets as a percentage of total nonfarm nonfinancial corporate business assets since 1952. By this measure, the “cash on the sidelines” argument is far less compelling.

Even when examined over a shorter time frame, as shown below, the percentage of cash on the sidelines is still within its range of the past 30 years. While liquid assets have certainly increased relative to the rest of corporations’ assets since the end of 2008, the idea of record levels of cash just waiting to invest in the markets is not evident when viewed in this manner.

Bianco Research, LLC.
September 20, 2011

Category: Analysts, Data Analysis

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.

22 Responses to “The Myth Of Cash On The Sidelines”

  1. Woof says:

    Wonder what it would look like as % of total market capitalization of US stocks.

  2. Centurion9.41 says:

    Good piece, but it’s still amazing to me how often long term data (1st chart) related to economic growth is not shown in log scale. If the 1st chart was shown on a log scale, it would show a much much smoother growth line that would match nicely with a long term log scale chart of the market…

    Re chart 3 & it’s “Even when examined over a shorter time frame, as shown below, the percentage of cash on the sidelines is still within its range of the past 30 years”
    - some will point to the 1984 peak and following market years as evidence of the “cash is on the sidelines” cheer.

    The fact is, relative to market tops there is a lot of capital in assets other than equities. Hence TheBernank’s attempts to push it elsewhere.

    The real effect of TheBernank’s Twist will be financial institutions being forced from their spread trades & QE front running into speculating in ponds with liquidity sufficient to allow them to switch back to QE front running when that press is turned back on.

    The fact is the political ideology battles, the box of the Keynseian debt end game, and the natural economic “rest/natural reaction” phase China/BRICs/EM are entering means the next leg on the revision to the mean is under way.

  3. rd says:

    In our modern era of inflation, just about anything with a dollar sign in front of it looks parabolic when plotted on an arithmetic plot that has several decades of data.

    We should make it a resolution to use semi-log plots for any time frames greater than a decade so that real deviations from trends can be seen, instead of just the impact of inflation.

  4. [...] The myth of cash on the sidelines.  (Big Picture) [...]

  5. Lee Gibson says:

    And so another media meme turns out to be totally bogus.

  6. gman says:

    $100 of stock $10 of cash= “10% cash on sidlines”
    stock crashed to $50
    still w/ $10 in cash = “20% cash on sidelines”

    Crashes cause ” cash on sideline” to go up!

  7. DrungoHazewood says:

    Money flows through, not into, the market.

  8. DrungoHazewood says:

    Gold and silver? Wow, lots of small fry and big fish getting fried. Silver was 41 two days ago. Margin calls all over.

  9. ToNYC says:

    The great Bondini Bernanke has transmuted saver’s interest income into medicine to cure the member bank monopoly toxic ingestion with his magic ZIRP-wand. The old witch would have prescribed ipecac, but Federal Reserve’s Alchemy always sells better than blowing chunks until it doesn’t.

  10. 4whatitsworth says:

    Hmm.. the question here is do you believe the total asset number on the balance sheet. We are in the modern area of bookkeeping fabrication and companies made up of acquisitions (balance sheet myth). If carefully scrutinized I think that one would see that the real asset number is much lower and the liquid asset number is fairly accurate. Let’s see liquid assets vs cash flow.

  11. Carl C says:

    I haven’t done liquid assets vs. cash flow, but I have done liquid assets vs. profits. Like cash flow, profits tends to be a “noisy” indicator and tends to jump around a lot. So, the chart is choppy like the 4th chart above. But, the median and current values are enough to give you the big picture…

    Liquid Assets vs. Profits:
    median (since 1998): 1.04
    this quarter: 1.06

  12. Frilton Miedman says:

    $2 trillion is still $2 trillion, even dollar devalued it’s an incredible sum.

    What I wonder, on the second chart that shows “as a percent of”, wouldn’t that chart more illuminate the massive growth in non-liquid assets?

  13. KenK says:

    Does anyone know how FASB treats “cash” versus “cash plus commercial paper” as liquid assets? Since the liquidity scare over commercial paper in 2008, perhaps corporations have moved out of commercial paper into even shorter term cash. Anyone know?

  14. TrickStyle says:

    “While liquid assets have certainly increased relative to the rest of corporations’ assets since the end of 2008, the idea of record levels of cash just waiting to invest in the markets is not evident when viewed in this manner.”

    Right. That’s that the main point. –> Don’t overthink it. Nice charts though.

  15. pa1 says:

    Your second and third charts are incorrectly labelled as having total assets as the denominator when it is actually just financial assets. If you’d used total assets (i.e. included tangible assets) then the chart would show the ratio at a 50 year high.

  16. Marc P says:

    Does “Total Liquid Assets” mean net of total debt? If it doesn’t then the charts are meaningless. If Acme Corp. borrows $100M, the cash shows up in the ratio used above, and the debt doesn’t.

    As I understand it, corporate non-financial cash has increased because corporations have taken the opportunity to issue all the cheap debt they can. Even though many companies outside the Fortune 1000 cannot borrow from banks, there are plenty of Fortune 100 and 500 companies who are able to sell lots of low-coupon bonds. I’d like to see the latest numbers on that.

  17. VennData says:

    When someone buys something they spend their cash.. ans someone else gets cash.

    That happens every time. There is NEVER “cash on the sidelines” unless you buy things with something other than cash.

  18. spragus says:

    The other question is where is the cash? Is this cash in the US or is it trapped in some low tax country like Ireland?

  19. Jim67545 says:

    Spend $750M building a plant in USA or let a Chinese company upfront the $$ and make the product for half the cost. Keep cash to offset “uncertainty”, for M&A, stock buybacks or, most importantly, ginormous executive salaries. To the decision makers (nka “job creators”) is there any other choice? Why are we surprised?

  20. kaleberg says:

    Corporate cash is supply side cash. What we are lacking right now is demand side cash. The only mechanism for generating demand side cash is government spending, but the theory is that we can’t raise the deficit during a recession, so we’re stuck like the old USSR, strangling on our own ideology. It’s rather ironic after all our bragging about capitalism outcompeting communism by a full 0.001% and so on.

  21. victor says:

    @Marc P: good point, Wall Street Journal’s Sat/Sun Sep 17/18 on pageA2 has the graphs (2003 t0 2011) for US non-financial corp. 2010: liquid assets $1.5t and credit market debt outstanding $7t; projected 2011 figures are higher: $2t and $8t resp.