The Big Cash Glut

February 10, 2021 - John Osbon (4 mins to read)

The term “too big to fail” was coined following the collapse of Lehman Brothers bank in the heat of the 2008 financial crisis. The Fed chose this term to describe a company with so much complexity and interconnectedness that if they failed they would create an unacceptable amount of financial damage for the rest of the economy. This switch to too-big-to-fail policy ushered in the era of the QE standard for the dollar, or in other words, the persistent mass creation of new dollars to support our major institutions when they are under duress. 13 years later, we have increased our total money supply by nearly 250%. All of that new money is constantly searching for a home. Here are some considerations:

The Fed Is Still Trying To Get Ahead

Treasury rates, known as the risk free rate, are the most important financial benchmark in the global financial system. As most people are aware, rates have been at or near zero for most of the last 13 years. For four years starting in December 2015 the Fed raised rates in small increments, eventually getting to 2.5%. During this brief period, investors who held cash earned a guaranteed risk-free 2.5% yield on their cash. Not bad! In late summer of 2019, however, rates started dropping again until they were cut to zero when the pandemic arrived in March 2020. The Fed has stated they would like to raise rates, but not for at least a few years and not until they see some signs of at least 2% inflation. In the mean time, the downward pressure on rates has pushed the high yield (junk bond) rate to a modern era low of 4%.

Money market funds

Money market funds are one place to look for signs of high cash levels. $4.2T is held in money market funds and earning next to nothing. This is near the all-time high. Another place to look for cash is in deposits in all commercial banks, which are also up sharply. With short term rates at zero or negative and 10-year rates barely above 1%, there are not many favorable low-risk options to hold cash. It’s no wonder the stock market and real estate continue to rise as cash seeks out assets with attractive return potential. There is still plenty of cash looking for a productive home.

Some cash management tools are negative

Outside the United States the situation is even worse for cash holders. Many global rates are negative, especially in developed countries. This means savers must pay interest to the bank on their balance. Central banks in the major money centers of London, Brussels, Tokyo and Zurich have agreed to tolerate negative rates as a way of forcing cash into the real economy or into the stock market. 

Emergent Cryptocurrency

The crypto community loves to point out that Bitcoin has a fixed supply. Investors in gold also like the fixed supply feature. The dollar ended its fixed supply when it separated from the gold standard in 1971. The US is currently expanding the total supply of US dollars at the rate of about 2% per quarter on average, not including one-time stimulus plans.

In November 2020, we wrote an Update On The Role of Bitcoin which argued that the next big Cryptocurrency bull market was just getting started. This was due to two main reasons: Authority and Access. The price of bitcoin is up 183% since then. Institutional holders like Paul Tudor Jones, Stanley Druckenmiller, Tesla, MicroStrategy Incorporated are adding legitimacy to Bitcoin. On the day our article was published PayPal announced it was allowing its 286 million users to use its platform to purchase Bitcoin. As the total number of users rises, the price of Bitcoin should rise exponentially with it. You can track the total number of bitcoin addresses here.

The bitcoin emergent phenomenon is strange in that it has no simple historical comparison. Most still do not trust it. At best it’s difficult to understand and at worst it’s labeled a technical ponzi scheme. Others see it as the clear future and are going a step further by actively investing in Bitcoin, Etherium and DeFi coins, which stands for decentralized finance. For those who want an entirely new financial system, the blockchain and its elements present a chance to participate in an emergent financial trend. In many ways, blockchain today is like the internet in the 1990s.

How to invest for protection, cash flow and growth

This is an increasingly difficult question to answer. We approach this question by first defining a family’s set of current and future liabilities. This helps us understand how much we need to protect and how much we can safely invest for cash flow and growth. The details of where and how to invest today can change quickly. If you are worried about the current level of the stock market, consider that there is an enormous supply of cash that is still looking to be put to work that can no longer earn a return from the traditional use of bonds. If you are interested in learning more, please contact us.

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