Here we go again.
Wall Street is once again pushing the feel-good theory that there is a giant wave of money just waiting to come into the stock market and drive stock prices higher.
MarketWatch’s Barbara Kollmeyer reports the latest sales patter from a big Wall Street honcho fest in Hong Kong. “There’s about $4 trillion of cash, sloshing around, waiting for action,” BlackRock’s head of global client business, Mark Wiedman, is quoted as saying.
Good luck with that, guys.
The theory of “money on the sidelines” is one of the old Wall Street standbys. It’s usually wheeled out by people in the market to keep investors hopeful when share prices are flat or down, as they have been lately.
There is a superficial, glib appeal to the idea. After all, lots of people hold money on deposit at the bank, and they could use that money to buy stocks, right?
The latest Federal Reserve Financial Accounts of the United States show these sums run into the trillions. At the latest count, households and nonprofits held $4.4 trillion in checking accounts and cash, $9.8 trillion in certificates of deposit and savings accounts and $3.5 trillion in money-market accounts.
So what’s to prevent some of that money “coming into the market?” Simple. The fallacy of composition.
To put it simply: Every time a stock is bought, one must be sold. If someone with $10,000 in the bank turns bullish on stocks and decides to invest that money in the stock market, they can only make an investment by finding existing shareholders who are willing to sell their shares in return for $10,000. The money and the stock change hands, sure. But that’s all.
So any individual can “put their cash to work” by investing in stocks. But individuals in total can’t do so. This is a basic logical fallacy, the fallacy of composition.
It’s akin to thinking that, because any individual player at a poker table can win, everyone can.
Even when a company uses its own cash to buy back and cancel stock, it can reduce its own share float but not the amount of cash in the overall financial system. The cash moves around, but it doesn’t vanish.
The role of stock buybacks is overstated anyway. According to the Bank for International Settlements, about $1 worth of new shares get issued for each $2 that’s bought back and canceled. And analysts at McKinsey & Co. recently demonstrated that buybacks cannot, of themselves, create value.
If Wall Street types really want to make the case for being bullish, they’ve got stronger arguments to hand. One is that we’ve just started the six-month season when stocks typically make all the money.
The other is that individual investors overall continue to cash out of the stock market, through mutual funds and exchange-traded funds, and history says you can usually make money simply by doing the opposite of whatever they’re doing.
On the other hand, they’ll have to explain why U.S. stocks are a compelling investment when they are more expensive — according to Yale professor Robert Shiller’s numbers — than they were in 2007 or even 1929.
Or why stock prices should remain so elevated despite skyrocketing bond yields over the past two years.
Meanwhile, one more thing regarding that “cash on the sidelines” nonsense. The same Fed data showed that households had even more in bank accounts, cash and money-market funds at the end of 2021 than they do now. Yet this did nothing to stop a long slide in stock and bond markets.