Concerning All of that Money on the Sidelines


Mr. Market blew a great chance to scare the hell out of everyone on Friday, ending the session with a mild short-squeeze rather than the rout that stocks so desperately need. AAPL as always remains key to the global illusion of prosperity and the lofty aspirations of pension fund managers, and that is why, as last week’s commentary suggested, it is not about to go quietly into the night. The stock struggled nonetheless last week to make headway toward a 187.93 target after peaking on Wednesday at a record-high 170.20. It subsequently sold off hard for all of about ten hours, then muddled to the finish line in a way that could have satisfied neither bull nor bear.

The rally target, a very major one, remains viable, but we’ll need to monitor the stock closely in case omicron fears threaten to kayo the consumer economy yet again. When the week ended, Fauci and his lackeys in the news media seemed eager, if not to say desperate, for someone to die, or at least be hospitalized for a few days, lest an opportunity be missed to roll out the booster-shot-of-the-month. Alas, press releases from South Africa, omicron’s ground zero, only served to mitigate fears that the latest Covid variant, if it is one, could be the devastating killer that so many politicians and bureaucrats are hoping for.

For its part, the stock market continues to feel like it’s in a topping process. However, it takes a little imagination to concoct a scenario in which the practically unlimited quantities of ginned-up money that have powered the bull market could dry up. Consider that companies with tens of billions of real dollars of surplus cash go out and borrow funny money because, apparently, they want to save the good stuff for…exactly what? Certainly not to expand capacity, despite what you read about shortages. They know that shortages come and go, and that’s why they are reluctant to commit, say, $10 billion to build a microchip plant with a years-long lead time just when the global economy seems poised for the next lockdown.

One logical way the bull market could end involves all of that supposed money on the sidelines. Sideline money is a staple of Wall Street lore, always plentifully available in the form of bullish op-ed commentaries whenever a bull market appears to stall. Let the broad averages idle for just a few weeks and some Wall Street Journal columnist will invariably produce 1200 sunny words about how investors are sitting on limitless scads of money. In fact, precious little money gets sat on in a literal or even figurative way; every penny of it is working all of the time, regardless of where it is parked. But like the stock market itself, the money is more a creature of the mind than of economic actuality. Realize that when stocks move higher and higher, it is their earnings multiples that ultimately justifies the rise. At what level does the justification cease? Well, there really is no specific level, only a degree of optimism that tends to lead the stock market’s ups and downs. At extremes, the correlation is always inverse, and ebullience can turn to fear literally overnight.

Similarly, the quantity of money available for any and all purposes varies according to the eagerness of people to borrow. And borrow they must, since there are technically no savings in a macroeconomy that will never be able to make good on Social Security, Medicare or even a paltry $1.8 trillion of tuition-related debt. At present, investors, if not the working man, are still thinking expansively about our economic future. That is mainly because the stock market is trading near record highs and residential real estate is pumped to an extreme. But let the stock market turn down for no apparent reason, ending the bull market, and the gaseous ebullience that allows us to keep expanding investable money starts to congeal. More selling on Wall Street would turn the substance of our dreams even thicker, with the result that the downtrend would begin to accelerate. Very early in this shift, the desire to borrow money, especially to throw at stocks, will detumesce faster than an octagenarian’s erection.

That is how money velocity could collapse, causing all of those supposed dollars on the sidelines to vanish into the shadows of what we’ve fear for so long; a day of reckoning.

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