In the investment business, it is sometimes easy to get caught up in daily deal headlines, economic announcements, or on a particular stock that might be soaring or swooning on a given day. We live in a world of unlimited data, delivered instantly and the financial media collectively draws conclusions on such all too quickly. Sometimes it’s helpful to take a step back and follow perhaps the most important thing of all: money…where is it and how much is there of it?
The chart below captures the total amount of money market mutual funds held by both retail and institutional investors in the US. The top blue line is the one to focus on. In the post Great Financial Crisis world, total money market assets were about $2.5-$2.75 trillion for nearly a decade. Throughout this period the Fed steadily performed financial repression via quantitative easing (money printing, bond buying, drive yields lower) and total money market assets hung around that level through thick and thin. Then two things happened: (1) COVID and consumers had a great financial COVID. Savings soared and money market assets spiked despite carrying a zero rate. People over saved and overpaid for financial safety. And then (2) post COVID inflation arrived and money market assets grew even more as the Fed hiked rates. At nearly $6 trillion, money market assets today are nearly double what they were for more then a decade.
Why is this important? It’s tough if not impossible to have a deep and dark recession when so much liquidity is still available. Major financial crisis only occur when liquidity evaporates completely and it’s hard to see $6 trillion in money market assets evaporating. This liquidity will likely act as a floor for the economy even as the economy slows in the coming months. This $6 trillion in liquidity will also likely act as a backstop to both bond and stock prices as rates fall. The days of 5% money market rates are likely coming to an end very soon and this $6 trillion will be in search of a new home for return. I don’t believe these depositors will sell money markets and buy stocks. They will likely buy bonds first and overpay for stocks later.
In the end it’s important to follow capital flows and money. The level of liquidity out there is at record levels, which should greatly improve odds of a mild economic recession and a pretty deep underlying bid for risk assets. Prepare yourself for the phrase “melt up”: if the Fed cuts rates very aggressively, $6 trillion in cash/money markets will run towards risk assets.
Source: LSEG Datastream and ©Yardeni Research, and Investment Company Institute as of January 26, 2024
Richard Barrett
Chief Investment Officer
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