Where Will You Put All That Extra Cash?

Supply-demand dynamics are still “very favorable” for stocks.

That’s according to Deutsche Bank, whose Parag Thatte noted that although equities “have seen large inflows from households” this year, a sizable sum still “seems to be parked in cash.”

Last week, global equity funds enjoyed their largest weekly inflow since September, raking in nearly $32 billion. That brought the YTD haul to almost $950 billion (figure below).

Plainly, that’s not sustainable. Any encore will be less spectacular even if stocks continue to attract money amid a lack of viable alternatives for idle cash.

Still-elevated money market fund balances are notable for the juxtaposition with the post-GFC recovery, Deutsche Bank suggested.

“Unlike after the 2009 market bottom when assets in money market funds declined sharply as the market rallied, they have barely budged after surging in Q1 of last year, while bank deposits have also kept rising, well beyond the cash held by corporates,” the bank said.

The latest ICI data showed money market fund assets stood at $4.64 trillion as of December 16 (figure below).

Most bull cases for equities include some reference to elevated cash levels and the assumption that one way or another, a sizable portion of that “dry powder” will find its way into stocks.

One key takeaway from Deutsche’s assessment involved the observation that the savings rate is still high in the face of “soaring” household wealth. Traditionally, the two are inversely correlated (figure on the left, below).

“Households are sitting on large excess savings,” the bank said, in the course of suggesting “a key upside risk in 2022 is if these savings are deployed either to support spending and therefore corporate earnings, or into equities and other asset classes directly.”

I’d note two things. First, the increase in household wealth (some $34 trillion in the six quarters since the original pandemic lockdowns) is in no small part attributable to gains in stocks. Specifically, the value of corporate equities has risen by more than $20 trillion since Q2 2020 (figure below).

So, to the extent Americans are inclined to view the increase in household wealth as a green light to deploy excess savings in stocks, they’re effectively doubling down — implicitly citing paper gains in equities as an excuse to buy more equities.

Of course, the value of real estate has ballooned too. For Americans lucky enough to own a home, the increase in property values may well serve as a convenient excuse to let go of superfluous cash buffers.

Second, as far as consumption goes, I’m still a bit reluctant to extrapolate from the rise in “household” wealth.

Participation in the $34 trillion collective wealth gain since Q1 2020 assumes ownership of stocks, a home or both. For many Americans, that simply isn’t reality.

Indeed, one of the key lessons from the post-GFC experiment in extreme monetary accommodation is that the vaunted “wealth effect” isn’t very efficient. Financial assets and real estate are concentrated in the hands of the wealthy. When you inflate the value of those assets, you’re inflating the net worth of people with the lowest marginal propensity to consume.

Because they don’t need to buy staple items and because they’ve usually maxed out discretionary spending on “normal” things (like clothes), the rich tend to run out of stuff to buy. So, as they get richer, they amass more assets. To the extent they do consume, that consumption tends to manifest in purchases of things that don’t matter very much in the context of economy-wide growth.