Risk-averse Canadian households are sitting on up to $1-trillion of cash and "near-cash" holdings, earning next to nothing, Scotia Capital Inc. says in a new research report.
This caution is justified, to a certain extent, given the financial shocks of recent years, economist Derek Holt said in releasing his analysis.
"Large cash holdings at a particular point in time may make sense if one is bearish, but sustained over a number of years it is difficult to justify," he said.
Scotia Capital mined Statistics Canada's national balance sheet accounts for people and unincorporated businesses to come up with its estimate that Canadian households are sitting on a "massive treasure chest of between $635-billion and $1-trillion, depending on the definition of cash that is used."
Since the beginning of the decade, Canadian savings patterns have become "disproportionately skewed towards chequing and savings accounts and money market mutual funds and all that liquid stuff," Mr. Holt said in an interview.
"The main thrust isn't that households are saving too much - I don't think they are - but that they're saving too conservatively through cash and near-cash," he said.
The amount of un-invested cash and near-cash holdings that Canadians are sitting on "is crucially important in a number of respects," Mr. Holt and his colleague Karen Cordes said in their report.
- "It's pertinent to the buy-and-sell sides of the street at the institutional and retail levels in terms of the scope for a rally in equity and spread products to continue, potential retail demand for new issues, and for overall marketing efforts," The Scotia Capital Report said.
- "It's …important to the inflation debate, in terms of gauging the scope for unleashing further asset price inflation, as well as the potential for that to translate into economy-wide price pressures should it be re-allocated too rapidly.
- "It is also useful for deposit-funded lenders to understand, in that the manna-from- heaven effect on relatively cheaper retail funding may not be as easy to come by in future, given the magnitude in the current excesses in liquidity.
- "Lastly, it's a credit quality metric by way of the insulating cash holdings that can serve as a shock absorber to further potential downsides to the economy and markets."
Mr. Holt said he is "of two minds" about Scotia Capital's findings that cash and near-cash holdings have ballooned this decade after remaining largely flat through the 1990s.
"I don't want to be too harsh on households in terms of the extent to which they have ramped up their cash and near-cash holdings, because it has occurred in a couple of ways," he said.
"Two particular slope shifts have occurred, one after Y2K, the dot-bomb bubble and 9/11," Mr. Holt and Ms. Cordes wrote. "The rate of cash accumulation then accelerated after mid-2007.…
"There are multiple drivers, but we think the dominant one is excessive complacency and risk aversion on behalf of households when managing their finances," they said in their report.
"Maybe a portion of that is risk-aversion that is not unjustified," Mr. Holt said.
"But when you get into that magnitude of very low yielding - after inflation and taxes - holdings of these assets over such a long period of time, I think it is very hard to justify on risk aversion or being conservative because you are only hurting yourself over the very long term."
The economists did not suggest what Canadians should be doing with their money, but hoped their report would kick off some debate about the allocation of these assets.
The estimate of $972-billion sitting in cash and near-cash holdings includes currency holdings, deposits of all types and short-term paper such as treasury-bills and commercial paper. The economists included unincorporated businesses in their analysis because "the lack of incorporated status means that households are on the hook for the liabilities of those businesses, and households are the claimants to their assets," they said.
Stripping out fixed-term deposits, which are not fully liquid, the total still comes to $635-billion.
"It is useful to put such holdings in perspective by comparing them to appropriate benchmarks," the economists wrote.
"The narrower measure of cash and near-cash holdings that excludes all fixed-term deposits equals 40 per cent of total Canadian equity market capitalization, 9 per cent of total household sector assets, 46 per cent of their total liabilities, two-thirds of their after-tax incomes and nearly 70 per cent of consumer spending."