Cash On The Sidelines Is A Myth

From Bruce Krasting:

I have an account with one of the well know WS names. The guy I work with calls this morning. He says:

“Across the entire ‘Wealth Management’ side of our firm we have clients who are sitting on cash earning zero return. For that reason we think stocks have to move higher.”

Bruce goes on to say why he will keep his money on the sidelines a bit longer despite what his guy says. Bruce may be right that it would be wise to stay there, but I have another problem with his brokers advice. The guy doesn’t know what he is talking about. The whole cash on the sidelines argument is a bunch of hooey, a myth, a sign you may need someone new.

Let us assume that his clients have 100 million sitting in cash. All at once every one of them uses all of their cash to buy stocks. They now have no cash sitting on the sidelines. Where did it go? To the people who they bought the stocks from. They now have 100 million sitting in cash. There is always cash on the sidelines and there always will be. That same argument was made in the fall of 2007 and it was just as true, or really just as false, then. You would think the 60% losses from there would have taught us that lesson, but no, it is still trotted out time and again despite no evidence that “cash on the sidelines” works or even makes any sense.

Don’t listen Bruce.

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