Spooked by market volatility, risk-averse Canadians are hoarding $75 billion in extra cash, according to a report from CIBC Economics.
Personal cash positions are at record levels according to CIBC deputy chief economist Benjamin Tal, and that's short-changing the Canadian economy, he said.
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"From a broader perspective, the Canadian economy is losing out because capital is not being allocated efficiently," he said.
Canadians started building up their cash assets in savings and chequing accounts during the 2008 crash caused by failing banks and they're building on that hoard, he said. Cash holdings are up 11 per cent in the past year.
There was an increase in holding cash in all age groups. Young people are especially risk-averse, Tal said, If you measure cash as a share of assets, young people under age 35 are holding twice as much cash as older age groups.
"Many older people, 60, 65, 70 – they need to be in the stock market to get a reasonable return. Just GICs will not do because interest rates are so low," he told CBC News.
Fear in the markets
He admits the stock market is a "scary place" right now. The TSX has fallen 6.7 per cent since the beginning of the year and is at a two-year low.
"Fear is dominating everything – if you analyse what happened over time you see when you panic and sold everything, that was exactly the wrong thing to do at the wrong time," he said.
Tal pointed to the October 1987 stock market correction which lasted two months, while investors added to their cash position for 18 months following the crash, during which time the stock market rallied more than 20 per cent. People did the same thing in 2001 and 2008, he said, hanging onto their cash too long and missing the rebound.
But Tal says a "short Canada" mentality, meaning expecting low prices on Canadian assets, is affecting both stock and bond markets.
The Canadian stock market has been affected by the drop in commodity prices and has fallen as if it were an emerging market, he said. But that's overshooting the fundamentals, he added.
""Today when markets are down we are seeing the same thing – $75 billion on the sidelines doing nothing."