Follow the money. A huge amount of it is sitting on the sidelines. Where it goes could determine how the current crisis in markets is resolved.
Money market funds have problems. Since the crisis hit the money markets last summer, it has been harder for them to beat returns on saving accounts. The returns they offer have seldom been so unattractive.
But that has not stopped investors from parking money there. According to the Investment Company Institute, the total assets of US money market funds topped $3,500bn (£1,780bn) at the end of last month. This is a record. At the end of 2005, they held less than $2,000bn. In the past 12 months, their cash has risen by 44 per cent.
Optimists hope that this money will soon move in to stocks. How will it be tempted ?
One hope is that valuations on stocks will become compellingly cheap. For this, US corporate earnings figures for the first quarter could be vital. If earnings can avoid a dip, as brokers predict, then current valuations might begin to look attractive. If not, not.
Another catalyst might come from companies’ own use of cash. While credit was booming, companies could save money by borrowing and using the funds to buy back their own stock – or to take over other companies. That raised share prices.
These manoeuvres no longer make sense. In the US, data from TrimTabs show cash takeovers in the past six months have been their lowest since the second half of 2003, while in the first quarter, stock buybacks dropped to their lowest in five quarters. New offerings of equity – which tend to depress share prices – have been rising.
The risk is that issuance will increase, as banks face an acute need to raise capital. But if that can be avoided, and companies do start buying their own stock, the cash sitting on the sidelines might follow.