By James Saft
Jan 31 It looks like the central bankers are
winning: cash is being put back to work.
Equities are having, by some measures, their best January in
more than a decade. Signs point to cash coming off of the
sidelines as an important supporting factor. Global stocks are
up almost 5 percent for the month and the Standard & Poor's 500
Index is on track for its best January since 1997.
Meanwhile, flows of money into equity funds and ETFs have
been strong, while cash has drained out of major banks and money
Central banks have worked hard for the past four years to
entice worried investors and businesses to put their cash back
to work, but with only limited success. Central banks have cut
rates while at the same time buying up assets, especially
government debt. The net result is very low deposit or
Therefore, if you are an investor and have a bond mature, or
are sitting on cash, you are paying a pretty hefty premium in
lost purchasing power. The cost of that premium can be measured
by looking at what you would earn in a Treasury bill minus the
purchasing power you lose to inflation. The three-year rolling
return on that is a loss of more than 5 percent, according to
Andrew Lapthorne, quantitative analyst at Societe Generale in
To put it in perspective, returns from cash are worse than
in the last similar period when cash was punished - the 1970s -
when high inflation meant cash almost literally rotted in your
Ray Dalio, founder and chief investment officer at $142
billion hedge fund Bridgewater Associates, thinks a move out of
cash into a range of assets, including equities, is going to be
a force in 2013.
"We're in a situation where risks are reduced. So the fear,
the desire to hold that cash is reduced. You can go out on the
risk spectrum," Dalio told CNBC in Davos, Switzerland last week.
Investors may simply have thrown up their hands, and
concluded that the risks of losing slowly and surely in cash are
greater than that of another downturn.
FLOW OF FUNDS
Investors in U.S.-based equity mutual funds and ETFs have
plowed more than $29 billion into the sector in the first three
weeks of January, according to Lipper data, including a massive
week ending Jan. 9 which qualifies as the fourth-best on record.
Money has also been flowing into bond funds, indicating that
people discounting the "great rotation" out of bonds and into
stocks may be getting ahead of themselves.
Money market funds, however, are seeing money leaving,
according to both Lipper and Investment Company Institute data.
What's more, there is intriguing evidence that deposit money is
flowing out of the largest banks, some of which may well be
finding its way into stocks.
Deposits at the 25 largest U.S. lenders fell by $114
billion, or almost 5 percent, to $5.37 trillion in the week
ending Jan. 9, according to Federal Reserve data, in what
Barclays Capital says is the biggest such outflow since just
after the Sept. 11, 2001 attacks. This could have been driven by
the Dec. 31 end of an FDIC program to insure deposits over
One other interesting possibility is that money is finding
its way into stocks because investors are putting to work money
paid out prematurely in dividends and bonuses at the end of
2012. Many companies brought forward disbursements to beat an
anticipated 2013 tax hike, helping to drive personal income up
2.6 percent in the month. If so, that argues for the rally and
the flows to be short-lived.
Cash flowing into stocks, if that is what is happening, is
an important and powerful force, especially if it is part of a
broader willingness by investors and companies to take on risk.
These things can become self-fulfilling - and not simply because
stock prices going up make people feel wealthier and spend more.
But the rally doesn't tell you anything about the value of
the market. Stocks are not terribly expensive when you look at
earnings, but risky if you worry about growth. This might simply
be a momentum market, one which goes up because it is going up.
One of the clear risks of very loose interest rate policy is
that it can feed financial bubbles. That happened in 2000 and
again several years later. Bubble or not, a cash-fueled rally
could be the theme of 2013.