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Pastimes : The Big Picture - Economics and Investing
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To: Arik T.G. who wrote (599)1/31/1999 5:02:00 AM
From: Arik T.G.  Read Replies (6) of 686
 
Re: Money on the sidelines

This mantra is one of the most silly "new era" justifications of equity valuations. I've heard it on CNBS so many times I want to puke.
The underlying assumption of this saying is that ALL money wants to enter the stock market, that the inflows to equities and equity funds are a simple derivative of the total money available (M3?) and nothing more.
Well, in a bear market (granted we haven't seen one in a long time) the money on the sidelines is reluctant to find its resting place in equities.
Furthermore, since the American public is spending all of its net income (savings rate = 0) the money on the sidelines can come from only three sources-
1. Shifting savings from other markets (bonds, foreign markets) to US equities.
2. Credit.
3. Companies cash flow.

It cannot be money that left equities a while ago, unless one of the three choices above replaced it when it left.

Since the total market cap for US equities is at all time high, and "sidelines money" can come only from the sources above, a logical conclusion is that unless one of the sources above is suddenly generating a lot of money, the amount of money on the sidelines has not grown recently, but rather took the opposite course.


A bubble is a bubble is a bubble

It will end in tears
ATG
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