Cash is King

I noted back in March that even though the supply of money being pumped out by the Fed has been spiking for many months, inflation is being held at bay because banks aren't making loans very freely. As well, account holders are saving money at rates higher than for a generation or so, and that leaves money in banks also. Hence, despite an oversupply of money to the economy, we are in a period of deflation, not inflation.

When will the logjam break? That is, when will money start to flood into the broad economy? Probably not soon, since cash is still king.

In the past, investors would cling to cash until the market's prospects brightened and then money would pour back into stocks. That's just what the bulls today are hoping will drive a surge on Wall Street in the months ahead.

But the shock of the financial crisis - which have made leverage and risk-taking dirty words - may be changing all that. Even with today's minuscule returns, cash seems to have become a sought-after asset class among investors who intend to keep it as a part of their portfolios for the long term. ...

Even with the massive government stimulus program, Americans are choosing to bolster their nest eggs rather than spend. According to Rosenberg's calculations, the total stimulus from the Obama administration came to $163 billion at an annual rate in May, but consumer spending only increased at an annual rate of $25 billion.
So long as the cash just stays on the sidelines, there won't be much fuel to propel stocks and the economy forward.

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