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The Blind Leading the Blind

Dec 12, 2016


Can you fathom $50 trillion in cash?

Bill Gates is worth US$70 billion...which in itself is hard to comprehend.

Therefore, $50,000 billion (that's another way of saying $50 trillion) is a mind-blowing amount of money.

What could you do with that sort of money?

According to a Business Insider article, '$50 trillion of cash on the sidelines could be good news for stocks and gold', published on 5 November 2016:

  • '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?'

Imagine that amount of cash - or even half of it - unleashed on the markets? What impact on asset values would that have?

Bet you're thinking that it would have a 'huge impact'.

Not so fast. Let's peel back a layer or two.

What constitutes cash?

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Money in your wallet or purse? In the bank? Term deposits?

It's not quite that simple.

There are four official measures of 'cash'.

M3 is the broadest measure (definition) of 'cash'.

Gathering data from around the world on where all the 'cash is stashed' is not an easy exercise.

There's a degree of guesswork involved.

According to the CIA World Factbook, the global stock of broad money is US$81 trillion.

Apparently, $50 trillion (nearly two-thirds) of the world's cash is sitting, watching and waiting for an opportunity to leave the sidelines and join the main game.

Apparently, this could be good news for markets.

There's one small problem with this theory.

Let's assume the $50 trillion in cash is launched into the've got a picture in your head? Good.

The cash leaves the bank - $50 trillion of the $81 trillion - and goes on a buying spree.

There is one major problem with this theory.

If, as the article predicts, that did happen, the world's money supply would shrink to $31 trillion.

Global GDP (economic activity) is US$80 trillion. To create that activity requires money to circulate within the economy - the speed with which money changes hands is called 'the velocity of money'.

With US$81 trillion in cash, and a global economy worth US$80 trillion, the velocity of money is 1.

If you believe the cash on the sidelines theory, we would be left with US$31 trillion to create economic activity of US$80 trillion.

Which, if true, would require the velocity of money to more than double.

The reality is that the cash level stays the same.

Let me explain.

Person A has $100,000 worth of shares and Person B has $100,000 in cash.

Person B buys the shares from Person A.

Person A now has $100,000 in cash, and Person B has $100,000 in shares.

The cash ends up back in the bank...just in a different person's account. However, for the sake of calculating 'cash in society', the $100,000 is still hasn't gone anywhere.

Think of it like a sports team. There are 11 players on the field and five reserves. A player comes off, and a reserve goes on. At the end of the game, the team finishes with 11 players (provided no one has been sent off). Under the 'cash waiting on the sideline' theory, they'd have you believe at the end of the game that the team has 16 players on the field.

The 'cash on the sidelines' story makes for a great headline for the investing public to get all excited about. However, it ignores one small, but very vital, detail - for every buyer, there's a seller. It's a cash-for-asset swap.

What's even more disturbing about the Business Insider article is that it was written by a US research house that states on its website:

  • '[The research firm] provides private investors and financial service professionals with original research on compelling investments uncovered by our team.

    'Using a disciplined process, finely tuned over long careers, our analysts uncover overlooked or underappreciated investments.'

You'd expect the boys down the pub to buy into the 'weight of money on the sidelines' story, but, seriously, you'd think a professional research firm would not peddle this old furphy.

This is just one example of the fiction the investing public needs to filter in an attempt to make calculated investment decisions.

My latest book, 'How Much Bull Can Investors Bear?' looks at a host of myths the investment industry uses to persuade you - consciously and subconsciously - to buy their products.

The investment industry is a marketing machine with one sell you on performance, a comfortable retirement, peace of mind, and professional management. They know the emotional 'buy' buttons to press.

The fact that the myths - like the weight of money argument - do not stand up to even basic scrutiny is of no consequence. Why?

Because the vast majority of people have been dumbed down by decades of marketing propaganda to believe, without question, what they are told.

In the coming months and years, people are unfortunately going to learn what the price of ignorance really is.

The global financial system has upwards of US$70 trillion more debt than it did in 2008. Debt is out of control.

The investment industry has no intention of shooting itself in the foot and warning you of this...that's assuming they actually recognise the severity of the instability within the system.

Those that are supposed to have at least an understanding of what the near-term holds have an appalling record (emphasis mine):

  • 'For a number of years, professors at Duke University conducted a survey in which the chief financial officers of large corporations estimated the returns of the Standard & Poor's index over the following year. The Duke scholars collected 11,600 such forecast and examined their accuracy. The conclusion was straightforward: financial officers of large corporations had no clue about the short-term future of the stock market; the correlation between their estimates and the true value was slightly less than zero.' - Thinking, Fast and Slow, Daniel Kahneman

The financial officers - the ones responsible for knowing the numbers - had no clue.

Yet these are the very same people that occupy airtime and print space as the media's go-to 'professional talking heads'.

The industry is blinded by self-interest.

Investors are blind because they've had the wool pulled over their eyes by the so-called professionals.

The blind are leading the blind towards an event that's shaping up to be every bit as devastating as 1929.

Remove the blinkers and see through the industry's smoke and mirrors before it's too late.

Please note: This article was first published in The Daily Reckoning Australia on December 08, 2016.

Vern Gowdie is a contributing editor to Money Morning - Australia's biggest circulation daily financial email. Vern has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia's Top 50 financial planners. His previous firm, Gowdie Financial Planning, was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top 5 financial planning firms in Australia. Vern has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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1 Responses to "The Blind Leading the Blind"

Rama Rao

Dec 12, 2016

The emotional "buy" is something which most of us are prisoners of. It takes a lot of self discipline and rigor to control our senses and emotions.Thanks for the nice article. By the way where can i get your book "How much Bulls can investors bear" ?

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