Consider this interesting divergence: Despite a plethora of bubble talk, chatter about high CAPE valuations, and market tops, investors have been carrying an awful lot of cash. This is not a new phenomenon, but rather, has been a persistent condition since this most hated rally in Wall St history began.

Before we proceed with the details, let me forewarn you what this column is not: It is not a “Cash on the Sidelines” argument. As we have discussed previously, there is ALWAYS cash on the sidelines. It is a lagging, not leading, indicator. When an investor buys an asset, it means the other side of the trade sells that asset. The cash merely transfers from one account to another. I don’t pay garner much insight from sideline cash until it reaches extreme deviations from historical means in individual investor allocations.

Regardless, it has not escaped my notice that a variety of surveys from major firms has revealed a lot of investment dollars is sitting in cash. Us Trust, Black Rock, UBS and American Express have all made similar discoveries, especially amongst high net worth/high income investors. What makes this so significant is the psychological component to this.


Continues here

Category: Investing, Psychology, Sentiment

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.

28 Responses to “What Does It Mean When Investors Sit in Lots of Cash?”

  1. [...] What’s the deal with investors sitting on so much cash?  (TBP) [...]

  2. A says:

    While it may be a tad irrational to think this way, the fact of the matter is, confidence cannot be high when retail investors remember how wall street fraud helped to bring the financial system down – and not one of WS’s executives will be going to jail for it.

    Which basically says, it can happen again.

    • VennData says:

      Please elaborate on the exact laws and the exact people who violated them. Bush’s Ownership Society made leveraging at 50/1 legal.

      Let’s end this stupid meme about no one has confidence because no one went to jail, the market’s at record highs.

      There are a fixed number of shares out there, the money to buy them exchanges as BR states, so at record highs how can people give a damn if Mozillo and his ilk paid big fines and copped pleas. The Fed buys Treasury bonds pumping lots of cash into the system. That is why people have so much cash. They have to.

  3. Casual_Observer says:

    I can only answer for me as an individual investor. I got nervous at S&P 500 at 1800 and assumed it had more downside than upside potential at that level. Accordingly, I rotated a decent chunk to cash. In hindsight, I suspect I made a mistake but, at S&P 1808, I worry that I’d re-buy near the top. So, I’m trapped within a problem of my own making. I suspect that my story plays out across many individual investors who feel burned by 2001/2002 and 2008/2009.

  4. Moopheus says:

    If you already have more money than you know what to do with, then why do you need to make more? And if you don’t, why would you trust Wall Street more than an FDIC-backed bank account? I was just having this conversation with my wife the other day. She was once again cheesed off by the lack of interest on our savings. But the alternatives are a) spend money and leave us with less of a buffer in case of emergency or b) “invest” it, and let some Wall Street shark feed off of us for a while until the next crash. (Right now, we’re also paying an extra $500 a month on our mortgage. We figure that’s the best safe “investment” we can make right now. We want to be completely debt-free before retirement.) Obviously, policy-makers want us to feel inclined to spend more, but on what? I’ve got a house full of stuff already.

    • My experience has been that the wealthy puts their money SOMEWHERE. Stocks, bonds, real estate, something.

      Not cash

      • Moopheus says:

        So if you’re very wealthy, there’s no getting off the gerbil wheel?

      • winstongator says:

        I don’t see checking your portfolio, essentially counting your money, as being on the gerbil wheel. Having your savings tied to productive assets can get you off the real gerbil wheel faster.

        Vanguard is far from a Wall St shark. There are lots of stock market investment options outside Wall St that can outperform because of their lower fees.

    • louiswi says:

      I tend to agree with Moopheus. I have something few other people seem to have. I have enough.

    • catclub says:

      When people say “cheesed off by the lack of interest on our savings”
      I respond: Kasasa Checking at (some) Credit Unions. Up to 3% interest on accounts up to $25k, free checking and free ATM.

      It is little help if you have $250k in cash. But $750 (3% of $25k) > 0.

      Plus, your money is no longer at TBTF Moneycenter bank.

    • catclub says:

      Look up Kasasa Checking for that No interest on savings problem.

  5. jeff in indy says:

    so I guess we continue to build cash until ’18 or thereabouts?

  6. Alananke says:

    Ironically, this is not seen in ICI data. Seeing record LOW levels of cash there – and record allocations to risky assets (stocks and bonds incl ETF assets). Below average for stocks, and above average for bonds…

  7. WFTA says:

    Interesting dilemma. Every bit of wealth I carried in cash in 2013 missed out on a 25% increase in valuation. Every bit of cash I carried in 2008 missed a 50% decrease in valuation.

    If I knew who would win the next Superbowl, I’d be retiring in February 2014. Unfortunately, I don’t know.

    Own a couple of years’ worth of cash, keep buying XOM, WMT and JNJ and try to get eight hours of sleep each night. Try to remember that taxes are a high-class problem. This may be the basis for a philosophy.

    BR, I’m sure the Bloomberg gig is the right thing, but it doesn’t feel as edgy. Happy holidays.

  8. Moss says:

    I imagine many have dumped bonds, bond proxies, Emerging markets and commodities. Some folks I know are ‘waiting for a drop’. The fear of another liquidity crisis is still in people’s mind. Better to be safe than sorry, cash is king remember. I have advised a few family members to pay down mortgage with excess cash. Of course those that did nothing are worried about losing it again.

  9. dctodd27 says:

    Isn’t the “retail cash”, ie money markets, just a function of the amount of short-term debt issuance, ie T-Bills, commercial paper? And the more debt issued, the more cash that exists that needs to be held? It would be very interesting to graph the growth in “sideline cash” and the growth of short-term debt. I haven’t seen the numbers but I bet this would explain at least some of what you’re seeing here…

  10. rd says:

    I suspect that wealth inequality is playing a role here.

    The wealthy are sitting on much more wealth than they would have had a couple of decades ago. Ultimately, the failure of trickle-down economics is that a certain point they have enought that they don’t need to spend or invest so their money ceases to help move the economy along.

    Meanwhile, the lower end of the spectrum has low savings rates, not enough saved for retirement and is concerned about whether or not they will have a job next year. They don’t think they can afford to lose 50% of their small nest egg in anotehr market and housing crash.

    • WFTA says:

      Unfortunately I think you are exactly correct.

      I will add: I think it was yield chasing in CDOs that built the ’08 bubble (more correctly the bubble that led to the ’08 crash.)

  11. stonedwino says:

    rd said:

    “The wealthy are sitting on much more wealth than they would have had a couple of decades ago. Ultimately, the failure of trickle-down economics is that a certain point they have enought that they don’t need to spend or invest so their money ceases to help move the economy along.”

    Dude, you nailed it. That’s probably closer to any other reasonable explanation of our inequality and how so much money & wealth has simply been REMOVED from the economy. The only way to fix that is via taxation and new uber tax brackets.

  12. [...] is always cash on the sidelines.  (Big Picture, [...]

  13. neddyj says:

    IMO – That cash is a combo of people selling their bond funds because they believe there to be a bubble or at least a top in on bonds, and scar tissue from the financial meltdown of a few years ago. Maybe some of that bond money will sniff around for stocks, but that’s not necessarily the risk those investment dollars are seeking. The scar tissue money won’t find it’s way back, at least not for many more years. That was a painful shitstorm that investors went through in 08. Their home values got crushed and their stock portfolios got crushed. They may feel that the govt saved the financial system and screwed them at the same time…so they have no confidence in the POMO drip fed market run that we’re on.

    Bulls obviously will see both the large number in cash as bullish as well as that fear of the market – both as bullish interpretations. I’m not so sure I agree. I don’t think we’re in a bubble in the pure sense of the word – but if the Fed tapers, the stock market will drop and it will certainly look like similar to a bubble has been pricked.

  14. Petey Wheatstraw says:

    They apparently trust the markets less than they fear the gradual devaluation of their currency.

    The canary has gone silent.

  15. rd says:

    Maybe the reason is that household net wrth is closing in on the all-time 2007 high:

    Funding retirement isn’t a problem anymore as we are all very wealthy and assets have been guaranteed by congress and the Fed not to lose value.

  16. ephone1 says:

    I remember a few years back when I was sitting on lots of cash (still am) and the major headlines were dominated by the pending Euro crisis that would start with Greece. Every pundit expected Europe to implode, and we would see the next leg down. It obviously never happened, but in light of 2008, it seemed likely that crisis wasn’t through.

  17. constantnormal says:

    I think it’s gotta be chalked up to “uncertainty” — about the economy, about politics, about the crazy state of our government (which is clearly no longer responsible to the people), but mostly about the hard-to-see “future”.

    In the past, people could be easily fooled into silly straight-line projections about what the future would be like. Not-so-much these days. I think most people accept (at some level) the Tofflerian “future shock” scenario, where the rate of change in all aspects of our society is more than people or systems can accommodate. They are desperately seeking stability and safety, and of course, there is none to be found.

    A certain measure of stability can be found in the dynamism of walking or riding a bike, but no real “safety”. Back when the world did not change very rapidly, one could seek out islands of stability, and anchor one’s life there. No longer.

    The natural response is to hunker down, feather the nest with cash, and await stability and safety. But that is like waiting for Godot. Ain’t gonna happen. Eventually, those that are stationary will get mowed down by the scythe of “progress” (a.k.a “change”), and those that are in motion will survive (some of them, anyway).

    My two cents on the topic.

  18. Dave says:

    Good insight above ; I am carrying more cash ( 40%) than before the 2008-09 melt down when I was comfortable carrying as little as 10% cash. I suspect most active investors are more risk averse now and I know that as a 49 year old, I will never be as aggressive as I was in my younger years. Another double edged sword, is I live in Toronto Canada which is in the middle of a massive housing bubble so while I’m happy to see my home value soar, I also suspect that home prices could collapse here and that is another reason for my cautious stance in my portfolio.