More Money in Cash Right Now Than Equity in U.S. Companies

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It didn’t take long for the market to figure it out, did it? The Dow powered up by 2% overnight. Traders now realise it’s okay to borrow money and buy higher-yielding assets. Besides, with short-term interest rates so low, the Fed is all but demanding that investors move out of cash and into something that moves, like stocks, houses, or commodities.

So we’re moving. And we’re moving people. We’re moving.

But where are we moving to? It looks like another mini-bubble. The market seemed prime for a fall in conjunction with a U.S. dollar rally. That could still happen if the U.S. employment report tomorrow is a shocker.

A negative employment will remind everyone that this recovery (if it can properly be called) that is still largely a jobless one. The process of reducing household debt is going to take years and not months if households can’t grow their incomes. Real wage growth (adjusted for inflation) is pretty hard to come by in most of the Western world (unless you run a bank).

All this adds up to lower household spending ahead. How much further ahead can stock prices get of corporate profits that may never materialise? We’ll see. But valuations are already stretched. Investment advisor Jeremy Grantham reckons fair value on the S&P 500 is around 860 – or 24% lower than yesterday’s close at 1,066.

But whether the market breaks up or down here (something Murray has been looking out with his technicals) is up to investors. There is a huge cash position on the sidelines that’s still worried to jump back into markets. For the bear to really do his work, he’s got to convince these people to get into the market. The Fed is helping by making cash a wasting asset (when you figure in inflation).

Thinking out loud, then, you could make a case for new highs on the market as this cash mountain moves into equities. We saw a chart on Sunday at the opening of the conference hosted by the Gold Standard Institute which showed that the amount of cash on the sidelines exceeded the total market cap of the Wilshire 5,000 (a broad measure of the market value of all U.S. equities).

In layman’s terms, it means there is more money in cash right now than there is equity in U.S. companies. Now, there is a very good reason investors are reducing their allocation to stocks. As we’ve said before, we think the equity premium – what people are willing to pay for stocks – is regressing to the mean. It was so high for so long because corporate cash flows in the second half of the last century benefitted so much from low interest rates and globalisation.

But even if the equity premium is collapsing, it wouldn’t take a small change in that cash position to power equities much, much higher. In fact, if the investors holding that cash realise that inflation is a bigger risk than over-valued stocks, they may decide to get out of cash anyway, despite the risk of being in the market.

In any case, we are not suddenly becoming bullish. But we are suddenly thinking that the next phase of this GFC (other than the sovereign debt crisis) is to lure investors back into an equity rally. Whether they are prodded by negative real interest rates on short-term deposits, or lured by equity markets lurching ahead with the backing of the dollar carry trade, well that doesn’t really matter.

It could all be moving on up.

What’s really worth watching is how the commodities behave in this market. They are moving on up too. This means gold is shedding its image as a risk-aversion asset and becoming something that people want to own. Its allocation in household and institutional portfolios is going up too. And of course, trading cash for things is probably a good trade these days, no matter whose cash you have in your wallet.

We’ll have to cut it short today as other deadlines press. But beware. The bear is afoot and he is making mischief. He is doing is devilish best to convince investors that he’s hibernating. After all, the November to April period is usually when stocks do their best.

This year has been unusual because, thanks to the Fed, stocks had a great six months during a time when they generally don’t do much. It’s unnatural you might say. But so are current fiscal and monetary policy, we might say.

We might also say that there is something tawdry about insisting that modern living standards are not negotiable and must be preserved with high public sector debt. In effect, today’s policy makers are saying to the future, “Our current well-being and comfort is more important than any debt you may have to repay. We refuse to live within our means because it would inconvenience us to do so. We are too lazy and selfish to recognise our financial mistakes and pay for them. We’re going to leave that to you. Suckers!”

It’s not very nice. It’s not very moral. But it is what it is. And right now, it gives you the chance to prepare your portfolio for the consequences of bad policy (fiscal, monetary, climate…take your pick!) More on all of it next week. Until then!

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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15 Comments on "More Money in Cash Right Now Than Equity in U.S. Companies"

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Annie
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The share markets are like a mob of sheep. Oh that grass on the cliff edge looks nice let’s go eat it……meanwhile the ground underneath the grass is getting softer and softer and the cliff is in danger of collapsing. Never mind the farmer will put a big net under us and catch us if we fall and then all the other animals(who were careful about which grass they ate) can give us their grass to eat until we find some other tasty patch on some other edifice to gobble.

Coffee Addict
Guest
Roubini talks about a wall of liquidity pumping the markets up and we are told that this liquidity will continue. We also know if other thing were equal, the DOW is overvalued by 40%+ and is due for a massive correction. Are gold and energy overvalued on the same metrics? The answer is probably yes but so too is cash (except for the Yuan). Other things are not equal. With cash overvalued there is no real certainly the equity markets will double dip. The markets might or it might not. Indeed the adrenalin of the mob will decide where it… Read more »
watcher7
Guest

The opinion “Chuck Sees Stock Market, Gold Surging Higher” – link below – supports views expressed in my article – “1930s, 1970s and Today – Contraction, Expansion and Contraction?” – referred to in previous posts.

http://www.rickackerman.com/2009/11/chuck-sees-stock-market-gold-surging-higher/

Ross
Guest
Those UUCP calls came through in spades. http://www.zerohedge.com/article/uup-halted. But like banking capital the underlying fund gets all naked. Any thoughts Mr Prozak? I am as skittish as I was on carry trades with counterparty risk. Most of GS’s clip is from CDS right now. Looking for short ideas I am in awe of social media among that skittishness. The tip that suited my underground dollar bull sentiment was from Denninger and it seems to have gone viral. I think longs with liquid NTA and ROE are a chance but Cohen’s mother may have convinced him that his name makes him… Read more »
prozak
Guest

Why is it that Dan and Bill are the only two good writers working for the DR?

I don’t always agree with what they say… but at least they appear to have thought about it and then back it up with at least some analysis.

prozak
Guest
Ross, I’ve been sitting out of the market for the past week…By choice initially and then by force due to some issues with computers. got out on Friday 30 Oct… I was totally short at the time… no longs at all… wont be able to do anything until next week at the earliest. The reason I initially chose to exit all short term positions (i still have a short CABLE position which is long term-ish and more to just give me some USD cash…) is that although I am at present personally bearish Stocks, Commods and bullish USD I saw… Read more »
Pete
Guest

“These are just my rambling thoughts. No one should act on what I say here as although I might trade what I say I do so understanding completely the risk and my management of it.” A highly qualified position!

Lachlan Scanlan
Guest

The dollar reversal scenario dont seem over just yet.

Ross
Guest

Prozak, range-bound decoupling is as good as anything I had in the predictive event playbook. My myopia on the carrytrade is lessening. The Brazilian tax imposition takes out a corner and they haven’t got enough narrative going to push into others quickly. The US consumer and unemployment is my first thought now.

Lachlan Scanlan
Guest

Last few months I keep wondering whether the long awaited new low in stocks not to come any time soon rather more a sideways trading scenario in at least some stock markets ie high liquidity pushing from below and depressed economic conditions capping gains. Higher oil prices soon may also keep economies therefore stocks capped into a sideways channel.

Lachlan Scanlan
Guest

So too an upsurge in taxation.

Lachlan Scanlan
Guest

As you just stated Ross. Sorry mate. I just been reading about increased taxation due in US over in Doug Casey land. Not looking good at all.

Ross
Guest
Lachlan, have you got that link? I only read Casey when he syndicates. He isn’t signed on to the “it was all Hoover’s fault due his tax rise” cause is he? Two ways to deal with a collapse in tax receipts, especially like now when you have recently deliver the bubble in them from ticket clipping unreal levels of consumption or personal trainers, and from property taxes. You have 4 choices: 1. More debt supplied from the few capital surplus pools (don’t count as surplus bodgy USD paper reserves). This is the anti Hoover rant to support continuous Greenspan puts… Read more »
Lachlan Scanlan
Guest
Gidday Ross. Number 4 sounds best but not betting on it. Lucky the email was in my deleted items box for me to access. Here is the web version. http://www.caseyresearch.com/displayCdd.php.?id=269 By David Galland though not Doug Casey. A few excerpts…fed tax 35% up tp 39.6 plus additional 5.4% on gross for high incomes (health care bill). Long term capital gains to increase almost double in some cases (15% to 28%). On a side note..Doug purports to be an anarchist. Not sure how that works but. Surely anarchy just happens through the “invisible hand of God”(breadown of society through natural or… Read more »
Dan
Guest

“The poor object to being governed badly, while the rich object to being governed at all.” G. K. Chesterton

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