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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

$50 Trillion in Cash Is Sitting on the Sidelines Today

Stock-Markets / Financial Markets 2016 Oct 28, 2016 - 05:00 PM GMT

By: David_Galland


Dear Parader,

I have just come off what can only be described as “Hell Week” in opening Bad Brothers Wine Experience.

To give you a sense of the enterprise, below are photos of Bad Brothers four days before we opened, and a photo on opening day.

The dramatic difference between before and after is attributable to the way many Argentines approach a job. Weeks, or even months, can go by with modest progress, but when the deadline is staring them in the face like the proverbial onrushing train in the tunnel, 30 or 40 people show up at the door like the company of dwarves in The Hobbit.

In the case of Bad Brothers, the human hive came alive about two weeks out when the building was barely more than a shell, with little more than some electricity and some water.

Many a naysayer walked through the unfinished doors over the course of last week, saw the dust-covered mayhem, and mumbled the equivalent of “Good luck!” before beating a retreat.

Having substantial experience in the way construction is done down here, my constant response was, “We’ll make it. It just takes patience and a bit of faith.”

And sure enough, this past Saturday we opened right on time. The wine and food flowed in abundance, the music worked, even the outdoor air-conditioning functioned just as planned. It was, all in all, a magical day. (Don’t ask me about the day after…)

Some, my family among them, have wondered why, instead of putting my feet up and enjoying the leisurely life here in Cafayate, I decided to do something as overtly difficult as starting a large wine bar/restaurant.

In response, I would list the following reasons:

  1. Brain Exercise. It’s a well-established fact that exercising one’s brain is very beneficial in the building of new synapses and otherwise fending off the inevitable deterioration of gray matter. If there is a better form of brain exercise than starting a business one has no familiarity with, in the Argentine outback, I can’t imagine what it is.
  2. Friends. One in particular, Agustin Lanus. In addition to being an excellent human being, Agustin is a master winemaker with a very bright future. That I can help him fulfill his passion for crafting exceptional, high-altitude wines gives me great pleasure.
  3. Sense of Community. I love this little town and feel honored to be able to be part of its evolution. I can’t tell you how many times people have asked me to recommend a fun place to hang out in Cafayate, and I didn’t have an answer. Now I do.
  4. Helping People. Over my long business career, one of my greatest pleasures has come from helping worthy individuals advance in their careers. “You’ll never find good workers in Cafayate,” I was told more times than I can recall. Yet, so far, that has turned out to be the exact opposite of true. In my opinion, in most cases the problem rests in how Argentine employers tend to treat their workers—like caudillos lording it over the campesinos. That may get the work done, but it’s doesn’t foster much in the way of loyalty.
  5. Wine. Over the years, I have come to appreciate the difference between ordinary and exceptional wine. That doesn’t make me a wine snob, as I would never drop more than $30 on a bottle of wine. Fortunately, here in the Argentine you can get world-class wines for great prices. And, as the co-owner of two different wine businesses and a wine bar, I get an even better price.
  6. Profit. Just kidding! As far as I can tell, it’s almost impossible to make any real money in this business.
  7. I Never Want to Be in a Rut. As some pundit put it, “A rut is a grave waiting to be filled in.” The idea of retiring and spending my days puttering around the house or playing golf (badly) is anathema to me. It’s also well documented that we humans are happiest when surmounting challenges just beyond our abilities. Creating a thriving wine bar/restaurant certainly fills that bill.

Regardless of how things turn out, it’s an unassailable truth that our lifetimes are finite and that the older we get, the more challenges—physically and mentally—each of us will face. Which is why every so often, I remind myself that the next 10 years will likely be the best 10 years remaining in my life, and so I better make the most of them.

I hope that you, too, are not currently resting in a rut. Life is way too short and way too interesting to spend your remaining days on your back, waiting for the first shovelful to hit you in the face.

And with that bit of philosophizing, I want to turn to an investment topic. Or, more correctly, pass the baton on to my long-term friend and business partner, Olivier Garret, writing on the wildcard of trillions of dollars of cash and cash equivalents that is ready to move if given the slightest encouragement.

In my view, that encouragement will come from a hopelessly deadlocked US government, a near-certainty if Hillary is elected.

Regardless of who ultimately prevails, there’s a pretty sure-fire way to make steady money with your investments. The full details are in a report we put together entitled Dimes for Dollars: The 3 Most Powerful Strategies to Buy Low and Sell High, and it’s yours for the asking.

$50 Trillion in Cash on Sidelines Today Could Support Major Move in Stocks and Gold

By Olivier Garret

$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. But what options do people have?

Negative interest rates rule all over the globe. This means 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 0.5% 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 Federal Reserve reported that as of 2015, US investors had $10.8 trillion in cash or cash-like investments.

The 2016 BlackRock Investor Pulse Survey noted, “Americans are most likely to have increased their cash 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

A good bit of this $50 trillion war chest has been raised from the sale of stocks.

Another portion 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 move 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.

One surprising catalyst could be if Hillary were to win the US presidential election. As it is unlikely that the Democrats will be able to take the Senate, and maybe not even the House, she would enter office with the government hopelessly in gridlock. That provides a level of predictability that investors love.

The return of inflation would also 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.

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 buying there than getting 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 were invested in a tangible asset class such as gold. That could drive prices into the stratosphere.

Assuming a price of $1,300 per 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 anytime soon.

Let’s consider for a moment what would happen if a mere 1% of the cash piled up today were invested in gold. 1% of $50+ trillion is $500 billion. That’s two and a half 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 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.


David again. With apologies for signing off this week without our usual “Here Come the Clowns” feature, thank you for reading and for being a subscriber!

See you next week!

David Galland
Managing Editor, The Passing Parade

Garret/Galland Research provides private investors and financial service professionals with original research on compelling investments uncovered by our team. Sign up for one or both of our free weekly e-letters. The Passing Parade offers fast-paced, entertaining, and always interesting observations on the global economy, markets, and more. Sign up now… it’s free!

© 2016 David Galland - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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