Tuesday, September 8, 2009

Cash on the Sidelines

As in all of the debate about investing and economics, conventional wisdom is the most intriguing to me. Repeat something often enough and it can become self fulfilling. Frankly I see nothing wrong with self fulfillment and if I thought it worked I would be repeating all sorts of things until they became true.

This week Liz Ann Sonders, Schwab's Chief Market strategist, who has been quietly one of the better economists in recent years, noted in her commentary that there is plenty of "money on the sidelines." Last week a friend off mine said the same thing. And CNBC seems to ALWAYS think there is a lot of money on the sidelines.

Last month Merrill Lynch did a survey of 204 fund managers in 80 countries who manage more than half a trillion dollars in assets. The average cash balance is 3.5%, the lowest since July 2007. Equity allocations are the highest since October 2007 and bond allocations the lowest since April 2007.

What will the source of funding be to push the stock market still higher? The big money seems all in already. There seems only one source lately, federal debt with the Fed lending to banks at 0 - 0.25% who then in turn buy treasuries at higher returns. A much safer bet than actually lending to debt ridden citizens without the power of the printing press.

So maybe there IS cash on the sidelines. But it isn't from the usual investment sources.

John Barnyak