FT: Investors' Cash Pile Smaller
The Financial Times writes that "Investors' cash pile is smaller than it appears." They explain, "One of the most popular bull narratives for risk assets in 2024 is the huge amount of money sitting in cash right now. The idea is that while cash has a high yield -- 5 per cent or thereabouts -- as the Federal Reserve cuts interest rates those yields will fall, and cash holders will go in search of assets with higher returns, such as stocks and corporate bonds.... We hasten to note that we don't believe in the 'cash on the sidelines' fallacy. When cash is used to buy shares, the amount of cash in the system does not change. There is no such thing as financial transubstantiation. The argument, instead, is that when investors want to reduce the share of cash in their portfolio, they try to trade out of it. This effort to be rid of cash is, at the level of the whole system, futile. But the accompanying increase of the velocity of money in the financial system pushes prices of risk assets up." The piece continues, "That said, the 'cash will seek a new home in risk assets' bull story has another issue, which was pointed out to us by Absolute Strategy Research's Ian Harnett. The level of mutual fund cash is actually not that high, compared to the market capitalisation of the stock market. Here is ASR's chart, showing that the money market assets/market cap ratio is near its historical average." The FT adds, "What matters, for the purposes of moving markets, is the volume of money that is trying to rebalance away from cash, relative to the amount of non-cash assets that are available. So the great money-market fund exodus might not move markets as much as bulls hope. That being said, a lot of investors might want to rebalance from cash to fixed income, so the most relevant ratio might be cash holdings to the market capitalisation of stocks and corporate bonds, and one might want to consider longer-term Treasuries, too. That might change the picture somewhat."
