The Wall Street Journal Perpetuates The Ridiculous ‘Cash On The Sidelines’ Myth

Authored by Mike Shedlock via MishTalk.com,

The sideline cash theory has been debunked countless times but here we go again. And ironically, money supply is falling.

Investors Are Hungry for Risk—and Holding Record Cash Sums

Please consider Investors Are Hungry for Risk—and Holding Record Cash Sums

Investors are plowing cash into stocks and bond funds. Invesco’s QQQ exchange-traded fund, which tracks the tech-heavy Nasdaq-100 Index, reported its largest weekly inflow in history the week of Nov. 13. Funds that track high-yield bond indexes—the higher risk portion of the corporate bond market—reported their two highest weekly inflows on record in the middle of November. 

Meanwhile, institutions and investors together have a record $5.7 trillion parked in cash-like money-market funds, many of which are yielding above 5%, according to the Investment Company Institute. 

“For the first time in a long time, cash is a competitor,” said Ali Dibadj, chief executive of Janus Henderson Investors. “But I think as soon as short-term rates start to tick down, you’re going to see large flows to other assets.”

At retail brokerage Webull, Chief Executive Anthony Denier has seen firsthand the newfound appeal of cash to everyday investors. Webull began offering a 5% yield on cash held at the brokerage earlier this year to remain competitive with money-market funds. 

“All that cash that customers have been piling into their brokerage account the last six months to earn yield, they’re finally starting to use it this month and we’re seeing it put into action,” Denier said.

David Littleton, chief executive of asset manager F/m Investments, said he thinks the record sum in money-market funds is contributing to the velocity of the rally in beaten-down assets like small-caps.

“With the new inflation outlook, people either got greedy or they got fearful they were going to miss out on a rally, and you saw a 5% up move in the index,” said Littleton. “There’s definitely some cash waiting for these moments, but I don’t think you’ll see it all move overnight.”

Impossible for Money to Flow Anywhere

The CEOs of Janus Henderson Investors, Webull, and F/m have no idea how markets function.

It is impossible for money to flow from cash into stocks or bonds because for every buyer of an asset there is a seller of that asset so the amount of cash on the sidelines never changes due to such transactions.

Individuals can differentiate where they hold cash moving it from a checking account to a money market fund that yields more interest, but that is the full extent of it.

Buying stocks, bonds, or even houses with cash does not impact the amount of sideline cash. It simply transfers the cash from one holder to another holder.

Based on sideline cash theory, there could never be a bear market. But we have them.

Sideline Cash is a Function of the Fed and Banks Lending

The Fed can increase or decrease M2 Money Supply via repos, QE, and QT. And banks can lend money into existence at will.

The irony in all of this sideline cash nonsense is that as a result of the Fed’s QT, money supply is actually shrinking.

No Such Thing as Sideline Cash

There is not a record amount of sideline cash.

More accurately, there is no such thing as sideline cash because in aggregate, it is impossible for cash to move from the sidelines to any place else.

Mind the Gaps

Cash aside, please mind the gaps. A Powerful Stock Market Rally Leaves Four Stacked Gaps But They Will Close

As an individual, you can decide to buy stocks, but your cash will them become someone else’s cash.

Technically speaking, this is one of the worst setups in history to buy stocks. See the above link for discussion, noting the partially filled gap I mentioned is now filled.