More “Money on the Sidelines” Nonsense
Lance on Sep 28 2009 at 10:10 pm | Filed under: Uncategorized
Barry Ritholtz jumps on one of my pet peeves, the whole “gobs of money on the sidelines” scam (silliness, nonsense or delusion work also) which constantly crops up in financial commentary.
Folks, don’t fall for it. The stock market may rise or fall in coming months but “money on the sidelines” will not have anything to do with it. Barry resurrects an old John Hussman piece which is one of my favorite dissections of this myth:
I’ve said this before, but it’s important. If Ricky sells his money market shares and buys stocks, then his money market fund has to sell commercial paper to Nicky, whose currency goes to Ricky, who uses it to pay for the stock bought from Mickey. In the end, the currency that Nicky held is now held by Mickey, the commercial paper held by Ricky is now held by Nicky, and the stock held by Mickey is now held by Ricky, and there is exactly as much stock, commercial paper, and currency outstanding as there was before. All that happened is that the owner of each security has changed.
I suggest reading the whole thing, but if ordinary logic doesn’t prove it then maybe actual facts about the behavior of markets will help, also courtesy of Barry:
Notice, when the market was rising so was cash. It didn’t disappear into the stock market and explain the rising market. In fact, during the tech crash it declined along with the market. Before the most recent market crash this argument “cash on the sidelines” was used to argue why the stock market wouldn’t decline. How did that work out?
Amusingly (if somewhat darkly so) Hussman in the piece above wrote in 2006 how the fallacy might mislead us:
There is an important reason for these considerations here. As I’ve noted in recent months, it’s likely that China and Japan will at least stabilize in their willingness to absorb the flood of government liabilities that they’ve been snapping up in recent years. That means that more of these liabilities will be forced into the hands of U.S. investors. As that happens, we’re likely to observe an accumulation of “cash on the sidelines” that might look like a hopeful sign for stocks.
A hopeful sign that left investors holding the bag. Don’t believe it this time or next time.
