Minyan Mailbag: Sideline Cash Theory Revisited
Stocks rise and fall on sentiment, not cash flow.
Dear Prof. Shedlock,
It appears the Treasury isn't going to guarantee money markets after December 18th, and will only guarantee funds already in money markets on September 19th.
I think it's pretty clear that they're trying to drive money back into the markets. It's a dangerous and desperate move.
Take a look at this notice from Schwab:
The US Treasury Temporary Guarantee Program provides a guarantee to participating money market mutual fund shareholders based on the number of shares invested in the fund at the close of business on September 19, 2008. Any increase in shares in the account after the close of business on September 19, 2008, will not be guaranteed. If the number of these shares fluctuates over the period, investors will be covered for either the number of shares held as of the close of business on September 19, 2008, or the current amount, whichever is less.
If a shareholder closes his/her account with a fund or broker-dealer, any future investment in the fund will not be guaranteed.
The Guarantee Program expires on December 18, 2008, unless extended by the US Treasury.
Dear Minyan PB,
Thanks for your question - and I suspect you're correct about the Fed's intent. But can the Fed drive stock prices higher?
I'd have to say no; It won't work, for 2 reasons: The first is that it may cause another run on money-market mutual funds. The second is that the idea is just another version of the discredited sideline cash theory.
On the latter, I am stunned by the number of emails about sideline cash I've been receiving in response to unrelenting bullishness. Many people are telling me that money moves into stocks, and that sideline cash is bullish. Here's one such email.
If I sold $50 million of equity, and I now have $50 million in sideline cash, putting it back in the market (along with a million other people doing the same thing) would force the market up. Don't try to make it any more complicated. Also, don't think of each transaction as a buyer and seller. If it was as simple as one buyer and one seller, the market would NEVER MOVE EVEN ONE POINT."
Sadly, this kind of thinking is running rampant. Jon, if you sold $50 million in equities, you would indeed have $50 million in sideline cash (minus transaction fees).
However, Jim (who bought those shares from you), had $50 million in sideline cash before, and doesn't have it now. All that transpired is the transfer of $50 million in sideline cash from Jon to Jim.
Yes, it's as simple as that.
Money doesn't flow into the stock market, except during IPOs and secondary offerings. Otherwise, the same amount of sideline cash (minus transaction fees) existed before and after someone buys stocks.
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