The phrase “cash on the sidelines” is starting to pop up all over the place, as it has several times in the recent past.  We are told that, because of all these dollars piled up, stocks are cheap and M&A activity will begin to heat up very soon.  Depending on how you decide to look at the sidelined cash, the picture can look very different.  In our attempts to come up with a good measure, we took M2 money supply (which includes all manner of currency, checking and savings deposits and retail money funds) and added to it a component of M3 that has not been discontinued, institutional money funds.  This is the first chart you see below. 

An interesting thing to note about this chart:  cash never really comes off the sideline, not in any meaningful way. 

The next chart looks at cash as a percentage of the market capitalization of the S&P 500.  Versions of this chart have been floating around for a while, although we aren’t sure this is a very good way to couch the question of stock market valuation. 

What does this picture tell us?  As we saw above, cash doesn’t really ever decline, so what you’re witnessing here is the fluctuation of the stock market cap.  At the nadir of the market in March 2009, this ratio went to 183%.  Unfortunately we only have data going back to the 1960s, so we only have a few proven bear market bottoms to compare the March low with, which are circled in the graph above.  We’ve included trailing PE multiples for the S&P 500 for reference sake.   The effects of inflation in the 1970s probably skews the cash as a percentage of market cap metric a bit, so we’d be hesitant to directly compare the two time periods on this basis alone.  Recent massive write-downs in the financial sector skew the current PE multiple, also making comparisons tough.  However, it seems fair to say that the market was not ultra-cheap in March, but it was reasonably cheap.

The last iteration of cash mountain is one we haven’t seen anywhere else:  cash as a percentage of total debt outstanding. 

This one speaks for itself.

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