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Scribbler's Macroeconomic View

The Imaginary Sideline Cash

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Scribbler
, 01-13-2009 at 08:19 PM (2465 Views)
I keep hearing people on TV talking about how there is so much cash on the sidelines, and once that cash come back into the market, stock prices will zoom upward.

This is nonsense. The amount of cash on the sidelines is the same amount of cash that has always been on the sidelines.

For every stock trade, there is a buyer and a seller. The buyer takes his cash and gives it to the owner of the stock (seller). The owner of the stock (seller) gives his stock to the buyer in return for cash. The same amount of cash (and shares) exist as originally did before; there is no cash that has been "taken out of the market."

And since there is nothing taken out of the market, there is nothing new to come back in. Yes, value has been destroyed. But the idea that because there was so much selling, and stocks have fallen so much, there is a ton of money on "the sideline" waiting to come back in is nonsense.

How many companies have sacrificed their Balance Sheet to buyback stock, only to see the stock price continue to collapse? With a buyback, there is cash specifically marked for the purchase of stock. Yet many of the companies with the most aggressive buybacks now have stock prices much lower from when the buyback began.

At best this line of thought is wishful thinking, at worst it is a technique to keep people in the market, hoping for a turn.

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  1. Bullitt's Avatar
    I think companies have learned the hard way that stock buybacks don't work. Most of these buybacks were pressured by activist type investors so the activists had some strength to sell into. Buying company stock was a fad. After it became factored into the market, it was destined to fail.

    For every buyer there's a seller, yet the experts use terms like 'the smart money is buying today'. I don't know, looking at the results for the past 10 years from the 'smart money' crowd, they haven't looked too smart to me. It's a mystery to me what role market makers and specialists have in maintaining liquidity in the markets after the tailspin of 2008.

    Cash on the sidelines- I've seen charts showing that it's been rising since March, but too often we look to charts and 'averages' to make sense of the unknown. I just think that instead of people piling money into stocks and 401K's they are using it to pay down credit card debt. What are we going to do in 15 years when people don't have enough to retire on because they liquidated their 401K to pay down their house and car? It's sad to think that Americans have been so insecure with themselves over all these years that they dug deeper and deeper into debt just to keep up with the Joneses. Pathetic when you take a step back isn't it?
  2. coolhand's Avatar
    Cash on the sidelines also includes liquid vehicles such as money markets and treasuries. I consider bonds to be cash on the sidelines too. Each are at historic levels. As the stock market begins to recover and risk is perceived to decrease, folks will begin to chase higher returns again. Guess where the money will come from.

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