$50 Trillion Cash Safety Net Aches for a Market Fall

(Bloomberg Gadfly) -- If you want to get a sense of just how insecure investors are feeling, consider this: Investors worldwide are holding more than $50 trillion in cash.

That's according to BlackRock President Rob Kapito, who mentioned the startling statistic in an earnings call on Tuesday. He noted that up to 60 percent of clients' holdings are now sitting in cash, according to BlackRock research. "Depending upon changes in interest rates and changes in equity volatility, a lot of that money can come into motion," he added.

BlackRock knows a lot about big sums of money. The New York firm now manages more than $5 trillion, an amount that's bigger than the Japanese economy. But it's hard to comprehend a concept like $50 trillion, even for the world's biggest asset manager.

That's almost three times the annual economic output of the U.S., the world's biggest economy. It's more than twice as much as the balance sheets of all the biggest central banks combined. If even a fraction of this cash starts to move into stocks, bonds or other assets, it could have a significant effect.

The existence of this huge buffer is already making a big mark. It explains why the market hasn't dropped meaningfully, despite some considerable jitters, and why asset prices may continue to rise well beyond levels that seem rational. 

Billions of dollars are just waiting for a chance to pounce on anything that looks remotely like an opportunity. U.S. distressed debt managers have a record $56 billion to invest, according to research firm Preqin. But there just aren’t enough bad loans and bonds for them to buy, as Bloomberg's Jodi Xu Klein wrote in an article on Tuesday. Fund managers surveyed by Bank of America Merrill Lynch have been building their cash cushions to levels that haven't been higher since November 2001, Bloomberg's Sid Verma and Luke Kawa wrote Tuesday.

Why are investors hoarding so much money? BlackRock's CEO Larry Fink weighed in on the question Tuesday: "I don't believe the people are sitting there because they're just worried about the next event. A lot of people just don't feel like investing has been that fair to them."

Unlike complicated securities or balance sheets, cash is perceived as safe. It gives investors the ability to move quickly to take advantage of opportunities that come up. But it provides absolutely no extra income, nor the delight of purchasing property that owners enjoy living in or investing in a business that supplies desired or needed goods and services. And if inflation ever kicks in, this money will essentially lose value.

Perhaps no extra income is better than the less-than-nothing promised by government bonds in Europe and Japan. But cash is an unsustainable proposition for pensions, retirees, insurance companies and many others who expect to earn some sort of return on their assets. This money is poised to rush in at the mere hint of a prolonged selloff, which means it will act as a buffer against just such a thing.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story: Lisa Abramowicz in New York at labramowicz@bloomberg.net.

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net.