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Don't Worry, It's Only a "Pre-Bubble"

Ray Dalio, who embarrassed himself saying "You’re Going to Feel Pretty Stupid Holding Cash" offers more silliness.

Ray Galio, the head of the world's largest hedge fund says U.S. in a ‘Pre-Bubble Phase’ with a 70% Chance of Recession.

I think we are in a pre-bubble stage that could go into a bubble stage,” the hedge-fund manager said during a Harvard Kennedy School’s Institute of Politics on Wednesday.

Dalio’s recession comments echo remarks he has made over in a LinkedIn post, where he wrote that “the risks of a recession in the next 18-24 months are rising.”

"Stupid to Hold Cash"

Despite his recession call, Dalio is the same person who told the crowd at Davos, ‘If You’re Holding Cash, You’re Going to Feel Pretty Stupid’.

Dalio is also a believer in the sideline cash theory and that we may see a "Minor Correction".

In a LinkedIn article following the VIX-related plunge, Dalio said We’ve Just Had a Taste of What the Tightening Will Be Like.

The headline sounds bearish, but the message sure isn't, as the key paragraph explains.

"Still, these big declines are just minor corrections in the scope of things, there is a lot of cash on the side to buy on the break, and what comes next will be most important."

Inundated With Cash

In the CNBC interview, Dalio also spoke of sideline cash.

"There is a lot of cash on the sidelines. I don't mean just investor cash. I think banks have a lot of cash. Corporations have a lot of cash. So we are going to be inundated with cash."

Sideline Cash Rebuttal

Question of the Day

Previously, I asked the question: Do hedge fund managers really believe this sideline cash nonsense, or are they purposely feeding their clients BS?

Here are the final results.

Pre-Bubble?

The major networks fawn all over Dalio hoping for quotes, and not a one them takes him to task for spouting pure nonsense or even his "stupid to hold cash" call.

Mike "Mish" Shedlock

So to say that there is still the same amount of sideline cash might be correct, but it is no longer of the same value.

Seems to me with the FED contracting and government deficits going up, there will be less cash for equities going forward. Not more.

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big difference between a p.m. who can go from cash to fully invested and back to cash than an individual who has to worry about the tax consequences and commissions of frequent buying and selling. Plus Dahlio could always shut down and start a new fund. If we lost our life savings we'd have to declare bankruptyc

It's amazing how foolish all these billionaires are, while the perma-pessimists can at least take solace in the fact that they are smarter than everyone else. Right after Trumps election, someone I know with an MBA - who's spent the last 40 years working one dead-end job after the other and struggles to pay for basic necessities, in spite of never having children - told me what 'an idiot Trump was' and that he had 'homeless friends' who knew how the economy works better than Trump.

The argument that "sideline cash" remains the same when stock is sold is based on the premise that "sideline cash" and "cash" are one an the same. When stock is sold, the buyer gives up cash, and the seller gets cash, so the sum of all cash remains the same. Is there a difference between "sideline cash" and "cash". I believe that not all cash is the same. Some cash sits in brokerage accounts, awaiting reinvenstment. Other cash is moved out of the market, to other things, including being spent.
The reason that it matters is that what makes the market move one way or the other is the eagerness of buyers versus the eagerness of sellers. If buyers are eager to get in, and sellers are in no hurry to get out, the market moves higher. If Sellers are eager to get out, and buyers are in no hurry to get in, the market moves lower. If all cash is the same, that implies that buyers and sellers are equally eager to trade at all times, which further implies that the market should never move in either direction, which obviously is not true.
Therefore, when I hear the argument that "there is a lot of sideline cash", I don't hear "more cash has suddenly appeared in the economy", which would clearly not be true, but rather, I interpret it as that the speaker believes buyers will become more eager in the future. Similarly, if i were to hear that sideline cash is declining, I would interpret as that the speaker believed that potential buyers were becoming less eager to buy.

"Mish, your treatment of the sideline cash idea is a bit misguided for a couple reasons. First, while the nominal amount of sideline cash doesn't change when money comes "into the market," it's value in relation to the market does. Second, with fractional reserve banking and central bank fiat money, the supply of cash is constantly changing."

For starters, I never said the nominal amount changes on stock transactions. Indeed it doesn't.

Second, I also agree the supply of cash constantly changes and I never said otherwise.

Third, I agree that an overall increase in cash is one way of measuring inflation. When did I ever say otherwise? Now, I do not think that is the best definition, but it has nothing to do with the topic at hand.

Fourth, you are dead wrong about the value coming into the market. A stock purchase does not change the value of sideline cash. The notion is nonsensical since the amount of cash does not change.

Fifth, it is mathematically impossible for money to come into the market except at IPO or offering, but even then, the amount of sideline cash does not change.

Before and after a stock or bond transaction the amount of sideline cash does not change. If you disagree - you are nuts. If the amount sideline cash does not change, then neither does the value of the cash except possibly for reasons totally unrelated to the transaction.

You are adding a bunch of statements that have nothing to do with what I said, some of which are correct, others not. And one is mathematically impossible.

Mish

(edited)

The amount of cash should remain relatively stable in investment brokerage accounts since someone will always hold every investments. The underlining price of the assets doesn't impact cash either. The amount of cash in investment accounts can fluctuate and maybe this what they are referencing when they say "there's excess cash". If you compare historical cash in brokerage accounts, I would guess the % on the sidelines could be higher than average currently which "supports" the sidelined cash claim.

MtnMan, the amount of sideline cash varies with Fed monetary policy and bank lending. It tends to go up over time. Regardless, it cannot flow into or out of equities or bonds.

The phenomenon Dalio probably had in mind was, 'Capitulation of the Sceptics'...like me. That's where the sell side keeps yammering about how wonderful it is to finally cave in very late in the business cycle and start buying vastly over-priced stocks into the teeth of Fed tightening. It assumes Billionaire village idiots sitting on cash suddenly going stupid in large numbers.

Could sideline cash be interpreted as "cash available to participate in market X"? For example, if I have $1M in my checking or savings account that $$ cannot be considered as "in the sidelines, of an equity market" - since that cash cannot participate (under my control) in that market. Now, say that I open a new brokerage account and fund it with $500K from my savings account - I haven't bought any securities just yet, but now that $$ could be used to participate in the market and so more $$ just "came into" the market, thus "in the sidelines". The total available cash did not change - but which market that cash was in did. The only thing one can easily buy with cash in a brokerage account is securities, not beer.

Could you comment on the meme that i hear repeatedly ( Buffet, Siegel , Yellen ) that low interest rates support high stock valuations ? Thanks keep up the myth buster theme. https://www.youtube.com/watch?v=jvkCt1pDVlk

It's not a myth. When you value stocks via a discount of future earnings (or cash flow), you need an interest rate to discount the future cash. The lower the interest rate, the higher the present value is of that future cash.

The core point that Mish is making is simple. If I buy stock, i put my money into the market, but on the other side of the transaction, someone has to sell the stock to me, and they in turn remove their money from the market. At the end of the day, I have less cash in my account, and they have more cash in theirs, by the exact same amount. Thus, the total amount of cash must be the same after a stock purchase as it was before it.
My point is that if you define "sideline cash" as "cash which is being held for purposes of buying stock in the future", that is something different from "cash". Thus, the money in my account before I bought the stock was "sideline cash". After my purchase, if the stock seller holds the cash in his account for reinvesting in the market, then "sideline cash" indeed remains unchanged. On the other hand, if the seller has no intention of reinvesting it in the the market, then, while he has cash, he does not have "sideline cash", so there was a net change in total "sideline cash" when I bought the stock.

Okay with cash it's all very simple, follow with me (it may help to pronounce "debit" as "debt" here):

The bank, as creditor, has credited the debtor, the spender, with credits through his credit card.
The splendor, as debtor, has debited the creditor, the apparently infinitely-creditable bank, some nevertheless-finite-amount of the banks credit, in return for his own credit that he will pay-off his credit card balance (assuming he was a very creditable character judged credit-worthy enough for the bank to act on his credit and credit his credit-account with credits - to his credit he did later pay off his debts).

The bank, as debtor, has debited the creditor, the saver, of central-bank-paper-credits, in return for its "debits" that can then be debited from his account in order to credit others with bank-debits through his debit card.
The saver, as creditor, has credited the debtor, the bank, with the central banks bearer-note credit that it will redeem gold (though I have heard that this might have recently been suspended).

The bank, as mortgagee, has credited the mortgagor with credits through the mortgage broker.
The mortgagor, as payor, paid these credits to the bank account of the payee, the property-seller.

These credits paid to bank account of the property-seller are to him considered "freed credits," because he's not a debtor, and yet he has been credited with credits.
These "free credits" are nevertheless also to be considered as regular bank-debits debited from the credited account of the mortgagor-debtor to the account of our now indirectly-credited-yet-creditor of the bank, the debit-card holder, our property-seller.

Our property seller uses these "freed credits," the credited bank-debits of the current account which his debit card is linked to, to credit the margin account he has with his stockbroker.
The stockbroker, therefore debits his current account of the "bank-debits/free-credit" in order to credit his margin account with "bank-debit/free credit."

Not content with the "free credit" in his margin account that was debited from his current account, our property-seller-turned-trader, though the bank is indebted to him by the free credit he credited to them, becomes nevertheless also debted to the bank by taking out a margin loan through the stockbroker to purchase shares. So the bank credits his margin account with margin credit alongside the already existing bank-debit/free-credit to raise the sum of - what actually functions as cash-money in the stock market arena - in his account even higher.

Now you know where this is going don't you (my god are you still reading this?): our trader credits all his margin-credit & free-credit to another trader's cash account in exchange for shares in Amazon (which he believes he will be able to sell them to another margin buyer later on at a higher price). Only, because he's not in debt, it's all free-credit to him. So he debits that out of his cash account, and into his current account, and then "calls in" that number from the banks (because free-credit is bank-debits) by withdrawing central-bank-paper-credit out of the ATM, and then blows that all in turn on booze and whores. Meanwhile interest accrues on the outstanding "debit-balance" of our purveyor of Amazon.

And now I realize I made a mistake on that document I put on my website because not only can all of the cash in the stock market be treated as margin debt (not, as I said 2/3rds), there actually needs to be twice the amount of free credit in the system to pay off the existing debit-balance in the event of a complete-margin-recall. So yeah let's be glad there is a certain kind of "cash on the side" within the credit balances of the average hedge-fund/pension fund, or every trader in stock in the USA is bankrupt. Of course that money will have to come out of residual balances, what is allocated to purchase bonds, what is allocated to purchase mortgage-backed-securities, futures and every other security, and also foreign currency accounts.

The question is, what is $600bn dollars to this great "stockpiles" of side-credit that lies elsewhere? Under present circumstances, how enthusiastically would $15 trillion (or should that just be M1's $3.5 trillion? I don't want to confuse account balances with money-markets) sums of cash that's out there pour into the stock market to meet deflationary margin calls? If apathetically then the market will go to zero. If enthusiastically, then the market won't be affected whatsoever (but it certainly won't help the other markets). Ray says the "side cash" exists, but he hasn't said anything about the propensity of this cash to come off the sidelines. The last ten years in fact show that stockbrokers have had a strong propensity to withdraw cash from stockbroker accounts and put it elsewhere.

(edited)

Here is what he really means: there are a lot of potential retail stock buyers on the sideline and the psyops being deployed by current holders of stocks (dis-proportionally institutional?) may still induce the retail chumps to bid stocks even higher as the institutions try to take their profits. You are right, the cash on the sidelines remains the same, it just gets transferred from Wall to Main and stock prices can go either way over the course of cash transfers.

I meant to say the cash goes for Main to Wall. IOW, Dalio is trying really hard to unload his stocks without crashing their value in the process.

While the dollar will rise as the sovereign debt crisis spreads (India and other periphery countries cannot sell their debt now to extend old debt), blue chip stocks and other safe havens will increase purchasing power much more than cash. Also, if your cash is held in TBTF banks, then bail-ins will convert your cash (banks liability) to equity in bank, which you may or may not see again. A forced haircut will be the best case. Bail-in is the next bail-out in the west. Here is Canada's description of tyranny - http://www.gazette.gc.ca/rp-pr/p1/2017/2017-06-17/html/reg4-eng.html.

Mish, nominally, perhaps sideline cash can't flow into or out of the market. however the amount at risk changes and the value of the sideline cash can indeed change. if i own a company that I bought for $1b and you buy it from me for $2b, you can claim that technically no money came into that market, but the amount at risk on that company would have doubled and the value of the $2b in sideline cash in relation to that market would have been cut in half.

Mish, how can you say the value doesn't change when it equates to a different amount of stock or bonds? the purchasing power changes. in my example, before the purchase, $2b is worthe 2x the stock, after it's worth 1x. that is the change to which i'm referring.

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