[quote=“IsThereAny”]
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[quote=“IsThereAny”]
[quote=“IsThereAny”]
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^No. These clowns actually believe money “enters” a market. Money is swapped from one sideline to another. The market being the field if we must use the analogy. Absolutely zero “flow” is needed for a market to re-price, dude. I wonder what causes a gap. As I said, bumbling idiots.
Let’s say Trump’s theory happens; fed raises rates after Obama gets out, the stock bubble pops. How does the flow / repricing work? You would say rates rise, money moves out of stocks into fixed income, but few actually go to cash?
This is a nice way of putting it.
Although the central bank (or other banks) can change the money supply by changing the cost of borrowing (and therfore the amount of exchangeable funds available for a given level of aggregate risk-taking), money does not get created or destroyed when people buy or sell financial assets… all that happens is that money that was in one person’s account is now in another person’s account, and an asset that was in one person’s account gets shifted to another. So yes, it moves from one person’s sideline to another person’s (because it has been exchanged).
So when a stock crash happens, it’s mostly a statement of the value of a risky asset that may or may not produce future value VS having spendable funds today. If people (on average) find that the risky assets are suddenly too risky (or that immediate needs for cash suddenly go up), then the value of those assets vs the amount of money in circulation change… it’s just that the assets generally get repriced faster than money comes into and out of circulation.
The only way that money comes into or out of existence is 1) it gets literally printed or burned/burried, or 2) it gets borrowed (and becomes money) or repaid (and goes out of existence, quark-like). Rather, what happens is that non-money assets get valued relative to the existing money available to exchange for it.
^ This is one of the slipperiest concepts in finance. I’d like someone to build an excel model illustrating rapid repricing (as well as other scenarios), to trace where the money “goes”.
True but fails to take into account the amount of transaction that are on margin and/or where the seller does not actually own the asset.
The sideline theory is dumb, agreed.
People being individuals right? Of course they can’t, they’re not banks
The sideline theory is dumb, agreed.
Right, when the Chinese levered themselves up on A-shares last year (margin, futures), there was “less money on the sidelines”, they truly couldn’t push the market up any further.
But in the rapid downward repricing , wasn’t money truly destroyed (BChad says no), but I don’t see how it simply changed hands. Country market cap decreased, it was not all just shifted to real estate and bonds, yes a lot was, but a lot of losses…true evaporation of wealth. I need Bchad to evaluate this statement for accuracy, or for someone to build me an excel model, because I’m not getting it.
On Bloomberg TV some guest just said “the US investors are holding $12.2T in cash”, that seems like a lot.
Galli has a good point. I hadn’t thought through the effect of margin. However, it should fit into the framework, because margin is just borrowed money so it comes into existence when margin is extended and disappears when it is repaid. The fact that it can be created so quickly may create some effects that I haven’t fully thought through.
I also forgot that when defaults happen and debts are extinguished by haircuts or even plain non-payment, that has an effect on the net cash supply too.
As for what happens in market crashes, when trillions of market value poofs into the air. That has wealth effects because asset owners don’t have assets that are valued as much as they used to, but the actual amount of cash in the economy is unchanged (excepting defaults, including margin accoutns that can’t be paid).
Example: Before the crash, I had $10,000 in cash and $90,000 in stocks, making me feel swell with $100,000. After the crash, I had $10,000 in cash and $45,000 in stocks, making me feel poorer, with $55,000. It’s true that $45,000 of my paper wealth was extinguished, but I had just as much cash beforehand as I did afterwards. It’s just that cash used to be 10% of my wealth, and now it’s a little more than 18% of my wealth. My stocks used to be 9x my cash, and now they are only 4.5x.
At the macro level, what happens is that the amount of cash in the economy (ignoring defaults and net borrowing changes, which are likely to be small compared to the total money supply) stays the same, but the financial assets in the economy are less valuable relative to it. Stocks used to be worth the amount of cash in the economy times X, and now they are worth the amount of cash in the economy times Y, where Y < X and Y and X can be interpreted approximately as measures of willingness to hold those assets vs something immediately transformable into consumption, like cash.
There can be follow on effects… so if my total weath tanks during a crash, I may decide that I can’t afford to be so levered and so I repay borrowed funds. That effectively reduces the cash in the economy, so it’s not that big crashes can’t have an effect on cash, but it’s follow-on effect, and not a direct effect.
As for cash on the sidelines figures. My understanding is that this is not measured as number of dollars of cash lying around, since that is going to be more or less the same everywhere, it’s presumably measured as cash as a percentage of total assets, though perhaps reported (badly) as $ figures in order to sound really big.
everyone has that same mentality of “I’ll bet the farm if the market crashes”… this is one reason market keeps going up with every dip do the past 7 years bought hand over fist… problem is that next time recovery may not resemble 2009-2012 V shape recovery in equities.
the financial crisis is still fresh in peoples mind ( more so the impressive recovery in stocks) but another scenario playa out that interest rates and inflation balloons to double digits and stocks can be suck 20℅ or more lower and never really recover.
Think about the first time S&P crossed 2000 level " everything was priced correctly and everyone was happy" … how would you feel if it tested that level again… might as well be the end of the world… will you really be getting the farm if S&P trades below 2000? What are the implications of that to interest rates and global outlook to see that scenario?
This is an important point, and I think about this all the time.
People are always stuck in “what just happened”, projecting that on the future…that is how this bubble persists. But going long SPX when it eventually crashes, well…things might suck for decades for the US, or forever. The country has peaked, and this stuff is massively overvalued, the USG is bankrupt, the rate situation is f@#%$d. Potentially a serious trap.
Well I for one don’t. My mentality is I’ll bet the farm if the market crashes ALOT
2k? We almost saw 1800 earlier this year and the market hasn’t shown anything resembling a bear market. 1500 would be a nice number to get in at. Who knows, maybe we’ll get lucky and we sideways market until the economy recovers enough to warrant another rally. I don’t think so though.
Here’s a nice chart, Exibit2 global cash balance, hitting 5.8% of fun manager’s portfolios. Under this definition, it seems we are talking real cash. On Friday when my options unwind I’ll be around 30%. Lots of crappiness on the horizon.
There were a bevy of reasons for fund managers to push their cash balances to 5.8 percent of their portfolios in October, up from 5.5 percent last month, matching levels not seen since the aftermath of the Brexit vote. The share of cash hasn’t been higher than that since November 2001, shortly after the terrorist attacks in the U.S.
85% now
This thread was started late 2016 and you said you were 70% cash as of that point? You missed some serious gains in 2017…
fb and amzn made up for it.
still 100% in equities in 401k tho
im 15% cash. lol since 2017.
but i kinda need it. cuz if i lose my job. i need to pay a 50k 401k loan. lol
this market needs to crash more
Can’t buy food and shelter with stocks and bonds 