ContraryInvestor: Of Mountains And Molehills
This is a very good take on the "cash on the sidelines" argument that is often stated to support a continued equity rally. (i.e. it dispels the myth). The rally since March was not caused by retail investors or their managers and the retail investor does not have the means to sustain it. It is a macroeconmic "splash-back" as the real (or fake as the case may be) money moves through the system. And I doubt it finds the broad US economy a compelling long term investment at these prices.
ContraryInvestor - Jan 2010
Of Mountains And Molehills…As we move into the new year and 2010 forecast after forecast hits the Street, invariably the “mountain of money on the sidelines” argument is being put forth by more than a good number of Street seers and pundits as a rationale for bullishness on financial assets, and equities specifically. We’ve heard this same argument again and again for decades now. Invariably these seers and pundits are referring to money market fund balances in their so-called analysis. Don’t get us wrong, over the last few decades we have seen record money market fund balances be created. But the fact is that if you go back to the early 1980’s and move forward, there has virtually never been a down year for money fund balances straight through to 2002. Point-to-point from 2002 through 2006, money fund balances experienced no growth. But you also know that during this exact period, we experienced both a cyclical bull market in equities and a coincident multi-generational residential real estate bubble of incredible proportion. It’s no wonder money fund balances did not grow as it‘s simply not often that we get a double barreled asset class movement as was the case from ‘02 through ‘06. But off to the races with growth in 2007 and beyond has once again been seen in money funds until just recently, punctuated by the safety trade movement of last year and early this. Of course once Bernanke and friends moved the Fed Funds rate to academic zero, dragging money fund rates with it, mom and pop investors have dutifully moved into bond funds in record amounts. Just as the Fed wanted, but ultimately to investor’s detriment when generational low interest rates are no more. The point is that the theoretical “mountain” of money has been on a path of growth for three decades now. The mountain simply grows ever higher and analysts again and again point to it in each cycle as a rationale for yet ever higher financial asset prices (of course completely disregarding the issue of valuation in the investment decision making process using this logic). As we see it, if the mountain of money argument held significant water, we would never have experienced two instances in the same decade where the equity market was cut in half. The so-called mountain of money in money funds should have cushioned such an extreme historical outcome…but they did not.
The fact is that money funds have grown in popularity with a broad constituency of “players” as the decades have evolved. Conservative folks that two or three decades ago would only put their money in banks “found” the sometimes higher yielding money fund complex and shifted investment exposure. But for many former CD buyers who moved to funds, it’s a good bet that money is never destined for equities. The corporate crowd found the fund complex long ago in terms of parking short term cash/working capital assets, etc. as money funds fit the bill - yield, liquid and often safety (govt. funds). You get the picture. The growth in multiple constituencies in money fund owners means there is a ton of money in the fund complex that is never destined for equities. But the analytical community treats money funds as if their owners were homogenous. They are not and that says to us generically pointing to money fund balances and suggesting it is fodder for equities is very poor analysis at best, and disingenuous at worst.
Anyway, we promise the remainder of this discussion will be long on graphics and short on commentary as the pictures tell the story. As opposed to looking at the money fund complex generically and drawing conclusions about fuel for potential equity investment, we’d rather take an analysis of “cash” by investor constituency. Just who are buyers of equities? Households, institutional investors, corporations (buy backs), etc. We want to look at them. Where are levels of cash by constituency relative to current market values? Relative to historical context?
One last quick comment before pushing off from shore. In terms of institutional cash levels, this week the Investment Company Institute reported equity and bond fund cash levels. Near 3.8% at present, equity fund complex cash rests at a level last seen in October of 2007. Relative to total historical context (data going back to the 1970’s) it’s a low number both in relative and absolute terms. The low in October of 2007 was 3.48%. Not quite a mountain at the moment, no?
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