Pragmatic Capitalism

Practical Views on Money & Finance


We’ve highlighted the financial punditry’s obsession with “cash on the sidelines” over the course of the last year in attempts to show that there is really no such thing.  The argument from an investment perspective is utterly absurd.  In general, investors like to think that their cash is some sort of fuel for the market that will drive prices higher.  This is easily debunked simply by looking at the transactions at work.  When you buy stocks you are effectively swapping cash with the seller.  It’s that simple.  There is no change in net financial assets.  You merely swapped cash for stock and the seller swapped stock for cash.  The price you arrive at is merely a function of psychology.  Who is the more eager buyer or seller? While there is technically “cash on the sidelines” this amount of cash on the sidelines is relatively stable in any given period. It’s not changing with every transaction as many would have you believe. Therefore, there is no fuel or pile of cash that is just waiting to be injected into the market and drive prices higher.

In terms of corporate balance sheets the argument is equally misleading.  You’ll often hear the financial punditry discuss the asset side of the balance sheet while ignoring the liability side.  There’s all this “cash on the sidelines” just waiting to hire people, merge with other companies, etc.  The only problem is, debt has been surging at the same time that cash levels rise.  We’ve discussed this thoroughly in the past (see here), but Mish at Global Economic Analysis (with the help of Tableau Software) provided a great visual tool today that puts this reality into perspective.  We can see from the following tool that corporate balance sheets aren’t nearly in the excellent condition that most people believe.

Cash on the sidelines? Don’t believe it.

Got a comment or question? Feel free to contact Cullen via email here or on Twitter here.
Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering asset management, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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