A lack of cash sitting around
As asset prices have escalated, so has the appetite to chase risk. The herding into equities suggests that investors have thrown caution to the wind. Such also means they have deployed most of their investible cash.
Once you run out of cash to invest, the next step is to borrow cash to increase equity allocations. With professional investors leveraging their bets, there isn’t much excess cash sitting around.
Mutual fund managers are also holding record low levels of cash.
With net exposure to equity risk by individuals at historically high levels, it suggests two things:
- There is little buying left from individuals to push markets marginally higher.
- The stock-to-cash ratio, shown below, is at levels ordinarily coincident with market peaks.
The reality is that investors are holding very little cash as they have gone all in to chase the market higher.
So where is all this cash?
Money market cash levels have indeed been climbing. A chart from the
Office Of Financial Research shows this:
There are a few things we need to consider concerning money market funds.
- Just because I have money in a money market account doesn’t mean I am saving it for investing purposes. It could be an emergency savings account, a down payment for a house, or a vacation fund on which I want to earn a higher rate of interest.
- Corporations use money marketsto store cash for payroll, capital expenditures, operations and other uses not related to investing in the stock market.
- Foreign entities store cash in the U.S. for transactions processed in the United States, which they may not want to repatriate into their country of origin.
The list goes on, but you get the idea.
If you look at the chart above, you will notice that the bulk of the money is in government money market funds. Those particular types of money market funds generally have much higher account minimums (from $100,000 to $1 million), suggesting the funds are not retail investors. (Those would be the smaller balances of prime retail funds.)
As noted, much of the “cash on the sidelines” is held by corporations. As we said in
“A major support for assets has reversed,” that isn’t a surprise:
“CEOs make decisions on how they use their cash. If concerns of a recession persist, companies will become more conservative on the use of their cash, rather than continuing to repurchase shares.” — September 2019
As we also said in that article:
“When stock prices do eventually fall, companies that performed un-economic buybacks would find themselves with financial losses on their hands, more debt on their balance sheets, and fewer opportunities to grow in the future. Equally disturbing, the many CEOs who sanctioned buybacks are much wealthier and unaccountable for their actions.”
As we saw, the companies that spent billions on share buybacks over the past decade were first in line for a government bailout last year. Now companies are hoarding cash to ensure their survival against a weaker economic environment in 2021.
