There is NO cash on the sidelines

[8 min read]

Dear Reader,

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

From Fortune magazine on 25 February 2021:

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.’

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:

‘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…

‘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…’

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…

‘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,
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.

Las Vegas without the Free Drinks
Bill Bonner

‘A system…contrived (in the Treasury Department) for deluging the states with paper-money instead of gold and silver, for withdrawing our citizens from the pursuits of commerce, manufactures, buildings, and other branches of useful industry to occupy themselves and their capitals in a species of gambling…’

– Thomas Jefferson’s letter to George Washington,
March 1, 1792, during the Panic of 1792, after
the formation of the First Bank of the United States

Jefferson was right. But it took more than 200 years for the dagger he saw coming to reach the heart.

And now, it is here.

Commerce, manufactures, and other useful industries are in decline. The US economy grew more than 5% per year during the Kennedy-Johnson years.

In Trump’s term, the growth rate was only 1.25% — the lowest since the Great Depression.

New era

But gambling is more popular than ever.

And now, the stock market — previously a place to discover the real values of the US’ useful industries — is now a huge casino, like Las Vegas without the free drinks, where companies that might be worth zero are valued at billions of dollars.

How come?

Because the country has been deluged with paper money. Easy money. Fast money. Fake money. Stimmy money.

There, too, Donald Trump is a record setter.

While he was president, the Federal Reserve’s balance sheet — which rises as the Fed ‘prints’ more ‘paper’ money — rose more than three times as fast as under George W Bush and more than twice as fast as during the reign of Barack Obama.

Not surprisingly, US debt increased faster, too.

During the Clinton years, the national debt rose at an annual average of about $200 billion. It rose three times faster under George W Bush…five times faster under Obama…and 10 times faster under Trump.

All of which makes us wonder…what kind of hallucinations were the folks at CPAC, the Conservative Political Action Conference, suffering when they bowed down before the graven image of Donald Trump?

He is the least conservative of any president — Democrat or Republican — in history (setting aside, perhaps, FDR).

Oh yes…we forgot…it’s TPAC now. Conservatives are history. It’s a new era.

And it doesn’t matter what you think…what you say…or who you vote for — this sucker is going down.

Going down

But wait…maybe if we all pull together…

From a dear reader comes a practical question. What if we really did try to pay off the federal debt?

‘As for the debt of our country,’ asks Annette A, ‘What if everyone in this country gave $1 to $5 dollars on the principal of our debt every year? I really don’t know how many people live in the US, but it is a lot. How many years would it take? If this is done, I know that many rich people would give more than $5.’

Well, let’s see. If each American adult pitched in $5…every year…how long would it take to pay off $28 trillion in debt?

Hmmm…we have the answer: 21,937 years! Or, approximately, until hell freezes over.

And that’s only if the feds stop adding more debt…which ain’t going to happen.

Which is why we need the full George W Bush insight. ‘If the money supply doesn’t loosen up,’ said he, ‘this sucker will go down.’

Loosen up

That’s what happens. At first, as Hemingway noted, inflating the money supply produces a little ‘temporary prosperity’.

But then, if you stop inflating, the pseudo prosperity disappears…and the sucker goes down.

This is the same trap that faced Rudolf Havenstein in Germany…Gideon Gono in Zimbabwe…Celestino Rodrigo in Argentina…Delcy Rodríguez in Venezuela…and now, Jerome Powell in the US.

It’s inflate or die.

Each administration, naturally, wants more prosperity…even if it is temporary. So it needs to ‘loosen up’ the money supply a little more.

That’s why the Fed’s real interest rate (charged to member banks) was below zero for all but a couple of quarters over the last 10 years.

And this leads to an even greater dependence on the deluge of paper money…and sets the nation up for an eventual catastrophe.

Here’s Yahoo! Finance last month:

‘Nearly 7 in 10 Americans in a Quinnipiac University poll said they support President Biden's $1.9 trillion coronavirus relief plan.’

And here’s the Bank of America, warning that unless the Fed loosens up more…now…the sucker is going down again. From Business Insider:

‘Last week’s spike in interest rates has Bank of America analysts on edge about a potential stock market crash.

‘In a note on Friday, the bank highlighted the historic yield spike in mortgage-backed securities [MBS] and compared the current environment to 1987, when a continued jump in MBS yields preceded a stock market crash of more than 20%.

‘In 1987, an interest rate shock in April was followed by further rate increases that ultimately led to the October stock market crash, BofA said.

‘[…]

‘“Unless Fed fights back very soon with more treasury/MBS purchases, a similar fate likely lies ahead,” BofA warned.’

Wrong choices

Once a heavy object begins rolling down a steep hill, it doesn’t stop until it smashes into something.

It doesn’t matter what you say or what you think. As it rolls downhill, it gathers momentum, making it more and more dangerous to try to stop it.

And then you get dunderheads like George W Bush, Ben Bernanke, Janet Yellen, Barack Obama, Donald Trump, and Jerome Powell shoving it along even faster.

We’re used to thinking that things are under our control…that if only ‘they’ would do the right thing…make the right choices…we could avert disaster.

Maybe.

But once you’ve made the wrong choices for a long time, it’s almost impossible to make the right ones. The momentum is against you.

Regards,

Bill Bonner,
For The Rum Rebellion