A total of $50 trillion is sitting on the sidelines as cash right now. BlackRock argues this cash has piled up because many investors are too risk averse to put money into the markets. The current economic and political climate scares them. What options do people have?
Negative interest rates rule all over the globe. This means that the old saw, “Put your cash to work,” no longer holds true. Nearly three-fourths of that $50 trillion of cash is receiving less than ½% annual interest. The remaining fourth ($13 trillion) is paying negative interest rates.
The only way to get a decent return in the bond market today is to take risk with longer maturities and lower grade investments (junk bonds). This is why major equity markets have kept moving up for many years now, despite anemic economic growth.
On the other hand, many risk-averse investors have started to reduce their equity positions over recent months. That accounts for a chunk of this cash sitting on the sidelines today.
The US Federal Reserve reported that US investors had $10.8 trillion in cash or cash-like investments as of 2015. The 2016 BlackRock Investor Pulse Survey noted, “Americans are most likely to have increased their cash [in] deposits or savings accounts (23%), and more than half (53%) of investors have only increased their cash allocations and not other investment products.” It appears that a new saying has replaced the saying, “Put your cash to work.”
In this low-growth, high-risk environment, people are now thinking, “Hold on to your cash and wait for opportunities.”
Tracking Down the $50 Trillion in Cash
As mentioned, a good bit of this $50 trillion war chest has been raised from the sale of stocks. Another portion of that $50 trillion has come from sales of bonds. Bank of America Merrill Lynch ran a survey in mid-October. They asked 213 fund managers with some $563 billion under management what their cash levels were. The results showed that cash levels had moved up to 5.8% from the previous 5.5% post-Brexit high. The bond allocation compared to cash among funds is currently at the lowest level since July 2006.
What Will It Take to Move Cash Off the Sidelines?
The key question of course is what it will take to get this $50 trillion back in the game again. That much money would boost the financial markets a lot if it were invested. But what will it take to tempt conservative investors to deploy their cash? Many near-term catalysts could make investors want to put their capital back to work again.
The return of inflation would certainly encourage people to invest some of their war chest. There is pressure to get a real return on your assets when the cost of your groceries, utilities, clothes, and rent all start moving up. By the same token, if the US fed kicked off a series of interest rate hikes, investors would likely invest. Especially if bond yields started to move up too. Another trigger would be a significant correction in the financial markets. A market crash could lead to a quick inflow from investors seeing equity prices dropping so low. Better to buy there than get almost nothing from one’s money. That much cash could stop a serious downturn if it were put into the market at the right time.
Getting a Grip on Gold
On the other hand, there are the concerns about a shaky financial system and the future of fiat currencies. This could quickly drive the price of gold and other tangible assets to unheard-of levels. Early investors in tangible assets would certainly benefit from this trend. Imagine if only a small portion of this cash was invested in a tangible asset class such as gold. That could drive prices into the stratosphere.
Assuming a price of $1,300 an ounce, the amount of gold mined globally since the beginning of time is worth just $7.5 trillion. Most of this gold of course is either locked up in a central banker’s vault or been made into jewelry. That gold will not be sold on the market any time soon. Let’s consider for a moment what would happen if a mere 1% of the cash piled up today was invested in gold. One percent of $50+ trillion is $500 billion.
That’s 2½ times the $200 billion annual market for gold. You don’t have to be a math genius to see how much $50 trillion in cash could affect the financial markets. If the $50 trillion that is sitting on the sidelines in cash were to jump into the financial markets, there would be a huge rise in the prices of equities, bonds, and tangible assets such as gold.
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