Canadian households are sitting on uninvested cash or near-cash holdings totalling $1 trillion or more as investors remain risk averse, a new research report from Scotia Capital Inc. reveals.

The report by economists Derek Holt and Karen Cordes finds that the total currency holdings, chequable and nonchequable deposits at all financial institutions, direct holdings of short-term paper, and indirect holdings of cash through money market mutual fund assets added up to $972 billion in the second quarter of 2009. The report suggests that the total has possibly surpassed $1 trillion since the second quarter.

“After having been largely flat through the 1990s, cash and near-cash holdings have taken off this decade,” says the report. “They are simply and astoundingly massive.”

The economists note that the rate of cash accumulation increased earlier this decade, after the dot-com bubble and the September 11, 2001 terrorist attacks, and then accelerated further 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,” the report says.

The Scotia Capital economists point out that the amount of uninvested cash has significant implication in terms of the potential for the stock market to continue to rally.

“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 report says.

The vast amount of liquid holdings could also have implications for inflation, in terms of gauging the scope for unleashing further asset price inflation. The measure could also serve as a credit quality metric, since insulating cash holdings could serve as a shock absorber to further potential downsides to the economy and markets, according to the Scotia Capital economists.

IE