Lingering discomfort with the stock market is causing Canadians to “sit on a mountain of cash,” according to a new economics report issued by CIBC World Markets.

The report shows that liquid assets of Canadian households has grown by $45 billion over the last 30 months. Measured in both nominal and real terms, the current value of personal liquid assets is at record high. The last time Canada witnessed a liquidity bubble of a significant size was following the 1987 stock market crash, says Senior Economist Benjamin Tal.

“Given the current environment, it is difficult to see a quick bursting of the liquidity bubble,” says Tal. “The most likely scenario is that this cash will remain on the sideline for the remainder of the year, with 2004 seeing a gradual and hesitant move from cash into equities.”

The movement to safety is reflected in the recent redemption of equity mutual funds, with March being the seventh consecutive month that saw equity mutual fund redemption out-pacing gross sales — the longest period of negative activity on record. The value of equity mutual funds is now 27% below the level for the same period year earlier.

The weakness in equity mutual funds reflects a shift towards the safety of bonds, which over the past year have seen net inflows of close to $2 billion. “This is a clear defensive action — pointing to a still relatively high level of risk aversion among investors,” says Tal.

The report also notes that Canadians sold more than $6 billion in their money market mutual funds over the past year. “Investors are swapping safety for safety, by buying more GICs and taking advantage of the recent increase in short-term interest rates.”