Mish is the man to explain the “sideline cash” theory. Great article and easy to understand.
From Mish:
I am stunned by the number of emails about sideline cash I have been receiving in response to Unrelenting Bullishness. Many people are telling me that money moves into stocks and that sideline cash is bullish. Here is one such email.
Jon writes: “If I sold $50 million of equity, and I now have $50 million in sideline cash, putting it back in the market (along with a million other people) would force the market up. Don’t try to make it any more complicated Also, don’t think of each transaction as a buyer and seller. If it was as simple as one buyer and one seller, the market would NEVER MOVE EVEN ONE POINT.”
Sadly, this kind of thinking is running rampant. Jon, if you sold $50 million in equities you would indeed have $50 million in sideline cash (minus transaction fees).
However, Jim (who bought those shares from you), had $50 million in sideline cash before and does not have it now. All that transpired is the transfer of $50 million in sideline cash from Jon to Jim. Yes, it is as simple as that.
Money does not flow into the stock market except during IPO and secondary offerings. Otherwise the same amount of sideline cash (minus transaction fees) existed before and after someone buys stocks.
