John Hussman is writing There’s No Such Thing as Idle Cash on the Sidelines.
I am a big fan of Hussman.
That said, it seems to me he took multiple paragraphs to state the obvious.
The simple reason there is no such thing as “sideline cash” is as follows:
For every buyer there is a seller so the net result will almost always be cash on the sidelines.
Think about it. If there is $1B in sideline cash and that buyer buys, the seller will be sitting on exactly $1B in sideline cash.
There are exceptions to this of course, otherwise sideline cash would be a constant.
Those exceptions are IPOs (it takes real cash to buy an IPO), and corporate profits (profits sit as sideline cash until they are invested for expansions or mergers).
Let’s go one further and look at why corporations are sitting on accumulated cash. The obvious answer it is because they recognize that expansion is NOT worth the risk.
Why expand into a slowdown? The fact that corporations are sitting on record amounts of cash is a BEARISH outlook not a positive outlook.
No doubt the permabulls would suggest that LOW cash positions were bullish for the very reasons I just stated. Now they are suggesting the exact opposite.
Given that there is a buyer for every seller (except for IPOs which would require real cash), buying and selling of stocks is net neutral. The amount sold will be equal to the amount bought.
The fact that corporations are willing to use cash to buy back shares rather than expand is a net negative. There is nothing positive about it at all. Take the homebuilders for example. They have been recklessly repurchasing shares rather than attempting to expand. They are supporting Earnings Per Share but to the detriment of their balance sheet. By recklessly, I am referring to share repurchases rather than the unwillingness to expand. Quite simply it is a waste of shareholder money to either expand or to repurchase shares at this point in time. In the meantime homebuilder insiders are (and have been) bailing out left and right.
In that light tell me how “sideline cash” is of any use (except for the insiders bailing out all the way down).
More to the point, if someone can tell me why corporations would want to expand into an obvious recession, I want to hear it.
Please consider MMM.
If you want one company that is best in class and perhaps best in the world that might be it. They just warned leaving an “island reversal” in its wake.
Is that a good sign?
Forget about “sideline cash” except as a corporate “time preference” that says cash is worth more than expansion. To the extent that cash is accumulating, that is a net negative. To the extent that corporations are buying back shares while insiders are bailing, that is a net negative.
Simply put, this sideline cash story is a total bunch of nonsense no matter how one looks at it.
Mike Shedlock / Mish/