There Is NO Cash on the Sidelines — Cash Just Moved Around

Can the mainstream press please STOP writing this nonsense…please!

From Fortune magazine on 25 February 2021:


Fortune Magazine

Source: Fortune magazine

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The rationale for this illogical headline is this (emphasis added):

U.S. stimulus checks could unleash a $170 billion wave of fresh retail inflows to the stock market, according to Deutsche Bank AG strategists.

A survey of retail investors showed respondents planned to put 37% of their stimulus cash directly into equities, a team including Parag Thatte wrote in a note Wednesday. With potentially $465 billion of direct stimulus being planned, that adds up to $170 billion, they said.

Three ‘Deep Value’ Stocks to Watch as the Market Recovers. Discover More.

Granted, those who think shares are preferable to cash will invest some or all of their stimulus money into the market.

With cash yielding next to nothing, who can blame investors for wanting more from their capital?

And if they do, they’d be wise to seek expert advice to help identify the wheat from the chaff in this market.

My fellow editor and good friend Greg Canavan is a 20-year investment veteran. His new service, Greg Canavan’s Investment Advisory, is tailored for investors seeking more from their capital than what a bank account is offering. On Thursday, Greg is hosting an event to provide investors a unique insight into the opportunities that exist in a zero-rate world. If you are interested in learning from one of the best in the business, please register here for your free place.

The Fortune magazine headline is far from original.

In a recent issue of The Gowdie Letter, I included numerous examples of similar headlines.

Here’s an edited sample:

…from Barron’s on 7 December 2020 (emphasis added):

“There is record amounts of cash sitting in checking accounts of American households—and for optimistic investors, it’s just one more reason the stock market should keep pushing higher.”

Then, in Yahoo! Finance on 12 December 2020, we are told a tsunami of cash is going wash into the market and float it higher…much higher:


Tidal Wave Of Cash

Source: Yahoo

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According to the article (emphasis added):

“It should also come as no surprise that there’s never been so much cash sitting on the sidelines — nearly $5 trillion, as a matter of fact. This is significantly above the record $3.8 trillion in cash set back in January 2009 during the financial crisis!

“Consumers also kept their wallets closed. Typically, Americans keep 7%-8% of their income in savings. This year, though, that rate surged over 33%. According to the FDIC, more than $2 trillion has been stockpiled into individual bank accounts.

“That money came from selling stocks and the massive government stimulus that was pumped into the economy.”

from Forbes on 10 December 2020…


Stocks Could Mount Another Rally

Source: Forbes

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According to the article (emphasis added):

A growth bomb”: 3.5$ trillion of excess cash on the sidelines.

Some Wall Street strategists call it a “growth bomb”—a $3.5 trillion pile of money people and businesses are holding as a safety net.

Take a look at this chart which shows a record stash of cash that Americans are keeping in their bank accounts:

And here’s the irrefutable evidence of the cash on the sidelines…just waiting to be called off the bench and into the game of ever-rising share prices…


Stash of Cash in the Bank

Source: Forbes

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As you can see, the old cash on the sidelines BS is a very popular theme of late.

But it’s an ABSOLUTE NONSENSE.

Why?

The answer to that question is hiding in plain sight in the Fortune magazine headline…get ready for a $170 billion inflow into stocks.

Every share purchase requires a buyer AND a seller. The buyer’s inflow is the seller’s outflow.

This edited extract is from The Gowdie Letter:

The old cash on the sidelines furphy.

It all sounds so plausible…this “tsunami” of cash is ready to flood into the market.

I recall being at a financial planning conference in late 2006 and an advisor confidently spoke about how “all the cash on the sidelines” will continue driving up the share market.

Against my better judgement I interrupted him and said that’s not correct.

There is no cash on the sidelines.

He pointed to the chart and said he begged to differ, the numbers state otherwise.

I removed a $20 note from my wallet and said “this is part of the cash on the sidelines. Let’s say your laser pointer is a parcel of CBA shares. We enter into a trade…my $20 for your CBA shares.” We did the physical exchange…“I’ve now got your shares and you have the cash…back on the sidelines.”

It was embarrassing, but something inside of me felt compelled to not let that myth sprout roots.

The fact the Yahoo! Finance article even stated…That money came from selling stocks…astounds me. How could they not see the obvious error in this statement?

Yes, that cash did come from selling stocks. But if we go back to the basics of how a market functions, the transaction requires both…willing seller and willing buyer.

Let me demonstrate…


Mary’s account to Bob’s account.

No cash came off the sidelines…it simply transferred from Mary’s account to Bob’s account.

The same amount of cash is still sitting in the system.

The cash just moved around…it was NOT and can NEVER be a one-sided transaction…all buying and NO selling. How dumb is that notion?

Yet, people fall for this furphy time and time again.

The sudden influx of free money acts as an enabler to participate in a market that has done well…especially compared to cash.

The free money provides people with the means to bid more for a stock (possibly much more than it is really worth, think GameStop and Tesla) which then provides an opportunity for a seller to exit with (hopefully) a tidy profit.

The end result is the buyer has the seller’s shares AND the seller has the buyer’s free money. Cash goes back to the sidelines.

This is why Greg’s service is invaluable for those seeking expert guidance in how to identify true value in this market.

Plenty of companies will be bid up by momentum buying from buyers with too much money and too little investing intelligence. Smart sellers will see this lot coming and be more than happy to exchange their shares for the newbie buyer’s cash.

Identifying real value is a skill few possess…and Greg is one of them. Register here for an opportunity to listen in tomorrow to one of the best in the business.

Regards,

Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion

Vern is also the Editor of The Gowdie Letter and The Gowdie Advisory — investment services designed to help everyday Australians avoid the financial pitfalls of a volatile economy and make informed decisions to grow their wealth for generations to come.


Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Fat Tail Investment Research as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.


The Rum Rebellion