[quote author="awgee" date=1235187026]I have a real question. This is not an argument or in any way meant to be antagonistic. It is a real question that I have when I hear financial folks speaking thusly.
[quote author="CapitalismWorks" date=1234872996] Since the average investor is currently 33% cash on average (according to UBS research), there is more cash than usual sitting idle (just not as much as there used to be).
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During selloffs, the folks on financial tv speak of people or institutions going to cash and having more cash than usual on the sidelines. They talk about all the cash waiting on the sidelines.
Well, if a person or mutual fund or whatever sells $10,000 worth of equities and converts it to cash, doesn't someone else have to convert cash to equities in order to buy the $10,000 worth of equities that the other party sold? How can there be more cash than usual? For every seller there is a buyer. And in the same amounts.
Am I making sense? Do you know what I mean?</blockquote>
You're making sense. In my opinion when they say there is all this cash on the sidelines, is true to an extent. However, cash has been destroyed as well in the process.
In order for something to go up in value, you need more cash around.
Let's just say that there are two individuals in the stock market. Price of CSCO share is at 100 dollars. A owns one share of CSCO and B doesn't but has 100 dollars in cash. Real value is 200 dollars.
Now A has something that is worth 100 dollars, but that price is only determined by the last person that bought. B comes along and says hey I don't want your share for 100, I'll give you 50 dollars for it. A isn't pressured to sell so he says no. Something happens in life that A now has to sell, so he is reconsidering the offer. Eventually they negotiate a deal for 75.
New real value? 175 dollars. The cash is still there, 75 received for A and B has 25 left. But the share is now only worth 75, so the purchasing power has decreased. It's the same theory as equity in your home, value drops, and equity evaporates.
So it's true that there is sideline cash, but it takes another to make the transaction work.
Now take another example of what is happening today. Same people A and B. However, B only has 10 dollars because he got laid off from his high paying job and the new one doesn't pay as much. Let's just say that C, D, E and F also only have 10 dollars. Their purchasing power drops so A has to decide if he wants to sell for 100 or give in to the pressure and sell for 10.
90 dollars of value just evaporated. I'm not sure if explaining it right or in a way that makes sense. However, as long as purchasing power is decreaseing so is the demand. Demand drops, supply increases, stocks go down.
