Why are Americans hoarding $3.5 trillion in cash?

Posted Oct 1st 2009 12:30PM by Connie Madon
Filed under: Forecasts, Indices, Economic Data, S and P 500

Why are Americans hoarding $3.5 trillion in cash? An interesting question. Let's dig deeper and see if we can find out why.

Here are some interesting facts about the $3.5 trillion:

After reducing money market accounts by 11% this year, investors hold cash equal to 73% of S&P 500 Index. At its peak in 2007, the buying power was at 62%.
Estimates are for GDP to increase sixfold to 2.9% in the third quarter.
In 2007 and 2008, investors placed $1.45 trillion in money market accounts. As of the week ending January 14, that number reached a record $3.92 trillion.
Investors have added $15.8 billion to domestic equity funds since March.

Many investors have been on the sidelines and missed the current rally completely, which helps to explain the huge cash position. Yet, by some measures stocks are still cheap. Look at these numbers:

The S&P Index is selling at 2.14 times book value (assets minus liabilities), 34% below its 15 year average, according to data complied by Bloomberg.
The Index is at 1.13 times sales, 23% less than its average since 1993.
Yet, stocks are not cheap. They are selling at 19 times profit, above the 16.3 average for the past 128 years, this according to Yale University's Robert Shiller.

Much of this data is summed up by John Paulson, who said: "There's a huge amount of dry powder for both the economy and the stock market. As confidence grows in the sustainability of this recovery, more cash is going to find itself into economic or investment pursuits. Considerable buying power could be reallocated to stocks."

Will the current stock market rally continue for the rest of this year?
Yes	71 (41.8%)
No	99 (58.2%)

Tags: cash, hoarding, inthenews, John Paulson, money market, Robert Shiller

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Reader Comments (Page 1 of 1)

10-01-2009 @ 1:34PM

Deep Blue said...

You see there's this thing called the future and it's really blurry right now. Neighbors and friends getting layed off and the past 10 years of 'investing' amounting to ZIPPO. Welcome to the Grand Illusion