Cash Rethink Energises Asset Markets

0:06Pushkin. All through last year, the question in markets was, yeah, okay, that's a pretty good investment opportunity, but is it better than cash? And if it wasn't, it wasn't a good opportunity. We've been talking about interest rate cuts on the show recently, and with that being the dominant market expectation, cash is potentially looking less attractive. Today on the show, the diminishing allure of cash. This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I'm reporter Ethan Wu here in New York, joined once again from London by markets columnist and queen of cash, Katie Martin.

0:45I'm happy to be queen of cash. It could have been worse, right? I could have been a cash cow and I'm not. So I'll be queen of cash. Katie, I don't think my employment would last particularly long if I called you a cash cow on the show. But yeah, cash rules everything around me, right? Everyone's talking about it right now. Absolutely. It's the logical question to ask when we talk about interest rate cuts. But Katie, this is a broader markets discussion, but this is also for me kind of a personal conversation. I have a non-insignificant portion of my personal wealth in a money market fund. And it's nice to get those returns.

1:18They've been pretty good recently. I think I get four and a half percent, but on some level, I'm a little nervous about it. Like, what do I do with all that money? You know what I mean? And I know you're not an investment advisor, but I can show you some advice. I really don't want to get the blame if I make you lose all of your money on some hideous crypto scheme. You're not going to tell me to put in dogecoin i'm not but um look it's useful to define our terms a little bit here right we're not i'm assuming ethan that you have more sense than to have your money in like literally paper money cash like put in a cupboard in your house somewhere we're talking like accounts we're talking like money market funds in the states which are like wildly popular and we don't have quite the same setup in europe but you know we're talking about money that's put on deposit that pays you some sort of rate that's tied to the benchmark interest rate.

2:08And cash goes through these various phases. So like in 2020, like Ray Dalio, Mr. Hedge Fund Supremo from Bridgewater Associates said, cash is trash. Get your money out of cash. It didn't pay you anything at the time. This is like four years ago. Interest rates were basically zero. You were just sitting with a pot of money that never grew. Fast forward to 2023 and suddenly cash was king. Like these sort of short-term savings accounts were paying you like, I don't know, 5%. That's like a chunk of change. You had to put money in really risky investments a few years ago to get that kind of rate of return.

2:46All of a sudden, you were being paid 5 % for something that's safe, really easy access, no drama, typically kind of boring. So I don't blame you for having a lot of your, no doubt, substantial wealth, Ethan, stashed away in money market funds. Very substantial. And like you said, Katie, last year, money market funds were kind of like, in some ways, the big traded markets. So we saw over a trillion dollars move into those funds as interest rates moved above 5%. The yields were attractive. They were competitive with the bond market. And I think as of the latest Federal Reserve data, there's over$6.1 trillion in money market funds.

3:24Part of that, I think, is cash, like you said, it has been so bad for so long that you would check your money market fund yield and it would be something depressing like 0.01 % or whatever. I have an acute childhood memory of looking at my bank statement. I had my hundred bucks of allowance in the bank and wondering, I'm getting one tenth of a penny of interest? That's preposterous. That's not true anymore. You get a - That's like your origin story as a writer of a financial newsletter. That's where it all began. That's where it all began. So teenage Ethan Wu there with your$100 in a checking account somewhere was horrified at the rate you were getting.

3:59You must have been feeling pretty clever last year, right? Yes and no. On the one hand, yes, money market yields are the best they've been in a decade plus. On the other hand, did you guys see what stocks did last year? It wasn't 5%, it wasn't 10%, it was 20 % on US stocks. So even though money market funds are competitive, that doesn't mean they outperformed. stocks are just, they feel unbeatable in the US over a long enough time horizon. And certainly last year, they were pretty much unbeatable. Yeah, yeah. So yes, cash was like this huge success story in 2023. Like the inflows, like you say, one point something trillion dollars into US money market funds last year, trillion with a T, that's a lot of money.

4:43Absolutely trounced the amount of money that went into similar like US equity funds or into bonds. But you do look at what happened in the stock market and you think, huh, like if I'd been like less of a scaredy cat and less cautious and if I got out of cash, then there could have been like much more, much bigger returns for me there. So this is the kind of dilemma now that investors are facing, whether they are, I'm going to say, modest individual investors like you, Ethan, or whether they are like massive institutional asset managers. It's time to get out of cash because those rates are falling.

5:18But where does it go instead? And, you know, the two obvious areas are stocks and bonds. Look, it makes sense to have some money swelled away in some sort of cash deposit money market type thing because you never know when you might need to pay a bill or fix your roof or fix your car or you might need some money to like really easy access money to spend on some sort of opportunity somewhere else in global markets. I don't know. And that applies equally whether you are Ethan Wu or another massive hedge fund slash institutional asset manager. So no one is saying get out of this stuff completely.

5:57But all of the kind of year ahead outlook research that I've read and regular listeners will know I'm a bit of a nerd about these things. A consistent theme that runs through all of the Wall Street Bank outlook stuff for 2024 is cut back on cash. Yeah. And part of the investment case for cash is not only that it gives you a strong nominal yield, that it avoids losses if the stock or bond markets are challenged, but also that you have optionality, right? That at any given point, if you see opportunities, you have funds ready to go. You can withdraw them from the money market fund that day. You could deploy them into stocks and bonds immediately.

6:35But obviously, that requires pulling the trigger at some point. And then there's a question of, okay, when do I pull the trigger? And there's something about cash that has like an irrational flavor to it, I think. And you mentioned this in your column, Katie, you say that cash has a quote unquote emotional appeal. And I mean, I certainly feel that it's a lot less scary. You get your kind of nice, steady four or 5 % yields rolling in. With stocks, it's a lot of up and down and I'm down today, I'm up today. And should I sell? It's drama. Yeah, it's drama. And so I think that kind of experience is really common, actually.

7:07So what I'm picking up from the different sorts of investors that I speak to, you know, the large institutions are like, yeah, OK, we're cutting back on cash allocations. But the investors that I speak to that kind of are advisors to wealthy individuals say they're actually having quite a difficult time convincing those people that it is time to get out of cash. They say, well, it worked out for me pretty well last year. And so why should I get out of it now? And so I think, you know, different types of investors are going to move at different speeds here. But I do think we're not going to see the sorts of inflows from 2023 repeated over the course of this year.

7:42I think there will be, at the very minimum, much smaller allocations into cash and probably some withdrawals. And if those withdrawals from cash into other asset classes are substantial, it could be a serious tailwind for asset prices. Bank of America had a recent note where they're predicting a great rotation from cash into stocks. And this is - Made that sound very grand there. Great rotation. It's not just a rotation, Katie. It's a great rotation. And given the amount of money that's flowed into cash, and given the fact that flows are sort of the marginal setter of asset prices, this has been part of the bull case for equities this year is there's all this cash on the quote unquote sidelines waiting to go into something.

8:27and if those cash yields start to fall and maybe equities dip a little bit and there's a nice buying point for investors, you could see a lot of money rush in and push stocks back up, even though they're at rather stretched valuations already. Yeah. This is what people in markets like to refer to as dry powder. All that cash that you've got squirreled away, Ethan, your massive personal wealth that you've got in cash, that's the way to think about it. It's dry powder. But at the end of this conversation, Are you more convinced to put it into something more economically useful? Oh, man. Just my general terror of the world, I think, suggests keeping it in cash.

9:05But rational investment process analyzing risk versus reward says put it in the bond market. It can lock in some good yields, get some capital gains as rates go down. I'm kind of feeling a bond fund. I might have to move it after this. If it goes wrong, please don't blame me. Listeners, this is definitely not investment advice. Cannot stress this enough. I may take it that way, but it is not for legal reasons. We'll be back in a moment with Long Short.

9:37Welcome back. This is Long Short, that part of the show where we go, Long a thing we love, short a thing we hate. Katie, I'm Long the guy who shaved Koh-Wan-J's face on the back of his head. Nice. As you might have heard... I'm really intrigued where this is going. Carry on. As you might have heard, there was an election in Taiwan recently. And normally, Taiwan's a two-party democracy, but there's been this insurgent third party called the Taiwan People's Party, led by this charismatic guy, Ko Wan-Jie, who's the former mayor of New Taipei City. His supporters are very passionate about his candidacy.

10:10And one guy told his barber to shave Ko's face on the back of his head, which invited a reprimand from election officials in the local Taiwanese media saying, hey, that's a violation of election law, buddy. You're not going into the booth with that. Put a hat on. But either way, I appreciate the dedication and I am long that guy. I appreciate the dedication. I think everyone should have political figures shaved into the back of their head or tattooed on their arm or something, apart from me. It should be compulsory. I couldn't agree more. Katie, are you short something? I think I'm going to be short the Magnificent Seven, you know.

10:43Oh, wow. Like, not short, short, like not like kind of actively betting against Magnificent Seven. But, you know, these are these like high flying, massive tech stocks in the US that have completely been bossing global markets around for the past year or so. Certainly, I don't think they're going to like necessarily tank, but I do see a decent chance that they're going to underperform the rest of the market. Nobody knows, but I'm going to take a punt on short. Katie, I'll have you know that one Robert Armstrong took this exact same bet on a previous recent episode of Unhedged. Does that influence your opinion?

11:20Yes, I'm now long.

11:25He's a counter indicator. I've completely changed my view. All right, Katie, thanks for being here on another Tuesday episode. We'll have you back soon. And listeners, we'll be back in your feed on Thursday with another episode of Unhedged. Catch you then.

11:41by Brian Erstat. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhez. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn, and Natalie Sandler. FT premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Ethan Wu. Thanks for listening.

12:21We'll be right back.