How stupid or just plain ignorant can our TV economic experts be?
I heard so many supposed economic experts and market analysts say lately that massive amounts of money are sitting on the sidelines, and will rush in and rally the markets any day now.
How stupid and idiotic can they really be? Do they have any clue of what they are talking about? And why do we keep listening to these morons?
Well, to start off, let me tell you that the entire concept of this “loads of cash sitting on the sidelines” theory actually fails to reflect the reality of how markets really work:
First, we should be very clear that there is no such thing as money going into or out of a secondary market.
When stocks are issued in an IPO, or bonds are floated to investors, companies receive funds from investors and, in return, give investors pieces of paper called stocks and bonds, as evidence of the investors’ claim on some future stream of cash. This is a “primary market” transaction.
Once those pieces of paper are issued, they are traded between investors in the “secondary market.” When we talk about the stock market, we’re talking almost exclusively about the secondary market, because new issues make up a very small part of total activity.
So once again, and to set the record straight; when investors purchase a stock in the secondary market, the dollars that buyers bring “into” the market are immediately taken “out of” the market in the hands of the sellers. It is an exchange. This is why the place it happens is called a “stock exchange.”
The stock market is not an air balloon into which money goes in or out and expands or contracts that balloon. Nor is it a water balloon that is expanded by pouring in “liquidity.” Prices are not driven by the amount of money that buyers “put in” or sellers “take out” (as those dollar amounts are identical). Prices are determined by the relative eagerness of the buyer versus the seller…
Cash does not ever find a “home” in a secondary market. Every time you hear the phrase “investors are putting money into…” or “investors are taking money out of …” or “money is flowing out of … and into …,” it is a signal that the speaker is unable to distinguish a secondary market from a primary one and is a certified idiot.
So what really happens when all that money gets up out of cash accounts and comes “into” the market? It goes into someone else’s cash account. And maybe they put it back “into the market” (into someone else’s cash account). And so on.
Bottom Line: Looks like “the money on the sidelines” sound bite so often offered by some airhead on CNBC & other similarly motivated propaganda agencies is as hollow as most of the “news” offered today.
Besides, who on earth is sitting on the sidelines with tons of cash just waiting to pounce on the “incredible” opportunities out there?
Not the private investor segment for sure. They have lost trillions of dollars only a few years back just at the time when they, the Boomers, where about to retire.
Not the “professional” money managers either. Hedge Funds are still closing down in droves, pension funds are running back to bonds and anything tangible such as commodities.
Not the Sovereign Wealth Funds also for sure They had their fingers burned after listening to some guy in a silk tie on Wall Street one too many times. In 2007/08 they were led to believe that they where the hunter when in hindsight they realized that they where the prey – not a good feeling!
It appears the only market participants still playing are the likes of the “black boxes” of JP Morgan and Goldman Sachs battling it out in some titanic game of ‘two player Pacman’. The vision of two giant sharks in a kidney shaped swimming pool, just conserving energy and watching each other while waiting for some poor misguided European pension fund or some government controlled zombie entity such as CITI or AIG to jump in, springs to mind.
What a circus….
For the guys out there who still don’t get it…. Imagine you are a banker who have a hundred dollars bill in your Right Pocket. You take the hundred dollars bill from your right pocket put it in circulation (Economy) …comes back to your left pocket. At the end of the day how much money did you gain (Zero). How much money did you circulate/exchanged (put into the economy) $100.
Imagine you do that for a hundred times a day. It is still the same One Hundred Dollars Bill so your gain is still $0 but the economy/circulation/exchange of money is up $10,000. Now if you send your One Hundred Dollars Bill to India or the Middle East and it does not come back, then your gain is -$100 but our Economy is now down by a lot. So what we really need is to figure out a way to get this money sitting on the side back in circulation again because printing money is not going to solve anything. In fact printing money brings us closer to devaluing the $$$ which will hurt us all…. Got it?
Stock prices rise and fall on sentiment changes every single day, not because money flows into or out of the market.
Now you know…