That’s the size of the wall of money held in cash by U.S. households. According to an article on Morningstar:
Data released by the Federal Reserve show that private cash holdings by households and companies as a percentage of nominal US GDP is just shy of 72 per cent, or about $10,120bn, as of the second quarter of 2009. The US household sector currently holds about $7,760bn in liquid assets. These cash balances are higher than the previous peak in the 1980s.
With returns on money market funds still low – the interest paid has barely turned positive – there are plenty of market watchers who expect the money to keep moving out of cash and prop up buying of stocks, corporate bonds and other assets with higher returns.
“The last time we had a big money mountain was in the 1980s,” says James Paulsen, chief investment strategist at Wells Capital Management. “For the next 20 years, a little bit more went into economic activity and some went into stocks and bonds. This same pattern will be repeated next year and for a number of years to come.”
There are a couple of interesting features in the current situation. 1) there is a ton of cash on the sidelines, and 2) the return on the cash is virtually nonexistent. Clearly, some of the cash will be looking for a home. Where will that new home be? It’s impossible to predict—but money will generally go where the returns have been. Relative strength is just a systematic way to measure where the best returns have been. Often it turns out that those trends continue for some time. The wall of money has created some potential investment opportunities and a systematic application of relative strength is one useful way to hone in on them.
