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.
Source: Bianco Research, LLC. September 20, 2011
Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data, ability to repeat discredited memes, and lack of respect for scientific knowledge. Also, be sure to create straw men and argue against things I have neither said nor even implied. Any irrelevancies you can mention will also be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.
Wonder what it would look like as % of total market capitalization of US stocks.
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.
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.
[...] The myth of cash on the sidelines. (Big Picture) [...]
And so another media meme turns out to be totally bogus.
MS IS LEHMAN OF 2011?
http://discussions.ft.com/longroom/tables/equity-strategy/ms-is-the-lehman-of-2011
$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!
Money flows through, not into, the market.
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