More Sideline Cash Nonsense From Bloomberg and Merrill Lynch

Bank of America analysts claim to have discovered a new source of corporate bond buying: High net worth individuals holding piles of cash. The analysts say there is "plenty of pent-up demand". In reality, neither the Bloomberg writer nor the BoA analysts understand how markets function.

Thought that inflows into European corporate bonds had peaked? Think again. Analysts at Bank of America Merrill Lynch have just identified a whole new potential buyer base.

European high-net worth individuals with a total wealth of more than $14.7 trillion are holding close to 24 percent of their portfolios in cash, the most since 2013, according to analysts at the bank.

“For now, we think there remains plenty of pent-up demand to buy credit,” analysts at BofAML including Barnaby Martin said in a research note.

How Markets Function

The Bloomberg article provides more evidence that economic writers and analysts do not understand basic points about how markets function.

It is mathematically impossible for $14.7 trillion of sideline cash to come into the market for the simple reason that for every buyer there is a seller. All that can happen is a transfer of "sideline cash" from one set of individuals to another set of individuals.

Someone, somewhere, mathematically has to hold the cash..

Yet, the sideline cash story goes on and on.

On November 5, 2017, Business Insider writer Olivier Garret, Garret/Galland Research, made this claim, citing Blackrock: $50 trillion of cash on the sidelines could be good news for stocks and gold

$50 trillion dollars is sitting on the sidelines as cash right now. BlackRock argues this cash has piled up because many investors are too risk averse to put money into the markets. The current economic and political climate scares them.

What Will It Take to Move Cash Off the Sidelines?

The key question of course is what it will take to get this $50 trillion back in the game again. That much money would boost the financial markets a lot if it were invested. But what will it take to tempt conservative investors to deploy their cash?

If the $50 trillion that is sitting on the sidelines in cash were to jump into the financial markets, there would be a huge rise in the prices of equities, bonds, and tangible assets such as gold.

Sideline Cash Nonsense

One can find hundreds of similar articles, all preaching the same nonsense.

The fact of the matter is sideline cash is a function of central bank printing, asset purchases, and fractional reserve banking that allows banks to create money simply by lending.

All the while, someone must hold every cent printed or lent into existence. That cash cannot feed the markets. Nor will the amount of sideline cash change no matter how much gold is purchased because the seller of the gold will then have the cash and the buyer will hold the gold. Yet, the sideline cash story gets perpetuated over and over.

It's amazing how little fundamental knowledge many of the people writing about markets actually have about markets, even in high profile places like Bloomberg, Blackrock, Merrill Lynch, and Business Insider.

.Mike "Mish" Shedlock

If you want to be generous to the "sideline cash" 'ers, assume they are talking about the size of the cash pile compared to the size of the total market.$20 trillion of cash when the total size of the stock market is $20 trillion, indicates

Dude, this new posting scheme is nuts.....

Anyway, if you assume they are measuring sideline cash in units of total market capitalization, at least what they talk about is not complete nonsense. Instead, "sideline cash" becomes some sort of measure of how much of the freshly lent into existence out of nowhere money, is flowing into nominal "assets", as opposed to simply being held in cash; probably as a cushion against possible future cashflow problems. Viewed in that light, high percentage of cash "on the sidelines" could well be interpreted as bullish for asset markets, as it indicates the printers are temporarily ahead of the yield searchers; on their common road to ultimate absurdity and decimation of all but print and pump rackets.

Hmm... I'd say that by definition they are right. The cash will migrate from those who wish to spend it, to those who do not wish to spend it (including being risk averse).

That means that yes, the cash is in the hands of those who are risk-adverse; but it tells us nothing of the demographic. Maybe they are risk-averse because they are using the money for retirement; or because they are saving to pay off the mortgage.

But it is important to the bankers, who are trying to figure out how to unlock the next wave of buying.

For more cash to come into the corporate bond market. New issuance would have to spike and leveraging of the balance sheets increase. Agree with Mish that new buyer in the secondary, can't mean more bonds, just higher prices and lower yields, but corporations may be able to sell more new issuance although i find that unlikely. Also private investors are the least credit savvy, so g-d help us if they become a significant funding source of corporate debt.

the central banks have trillions waiting on the sidelines too.. depending on whther inflation gets below zero or not (data "depends")

Sorry, long term user, but this site has been and articles unstructured and all over the place on my iPad...unusable!

The real definition of this money is not sidelined money but a centralised hoard. It is really not that important what its origins are, what is important is its disposition. It can be used to inflate asset bubbles or it can be used to expand production. Whatever the case, if this hoard exceeds the needs of capital, which it does, then it acts as a drag on the economy.