Earlier this week, USA Today attempted to analyze the reasons behind the mountains of cash and reluctance to take risks in recent years. The article, "Financial crisis ushers in 'The Age of Safety' for investors," says, "Americans' risk-taking DNA code has been short-circuited. Investing used to be about taking risk to make money. Then came the financial crisis four years ago and the Great Recession. Now it's more about playing it safe -- and not losing the money you already have. The "risk-off" trade, or dialing down risk in a major way, is the new "in thing.""
USA Today explains, "Risk aversion is at unprecedented levels. Cash, which guarantees a return of 0%, is one of the new must-have investments. In contrast, investing in stocks -- despite the fact that the market has doubled in value since March 2009, is trading at four-year highs and is up 11.7% this year -- has fallen out of favor. Welcome to The Age of Safety. A psychological shift has taken place in the minds of investors. Fear has replaced greed as the overriding emotion driving investment decisions."
The paper quotes Peter Crane, president of Crane Data, "a firm that tracks money market cash flows," "You can go all the way back to the early 2000s, when the Nasdaq technology stock bubble burst. Then came 9/11. Since then, you have had the creeping realization that it is a more dangerous world. Then the 2008 financial crisis drove home the point that it is a much more dangerous financial world. Both businesses and individuals realize they need larger cash war chests."
The piece adds, "As a result, he says, cash is viewed as the only true safe harbor. There's no shortage of statistics that scream "safety": Cash hoarding. A record $9.43 trillion -- enough cash to buy 120 of the biggest companies in the Standard & Poor's 500-stock index -- is now sitting in money market mutual funds, bank savings accounts and CDs, according to Crane Data. But all that cash isn't making anyone rich."
It quotes Crane on the money fund and bank money market deposit account total, "The rate of return is effectively zero. How much of the $9 trillion is scared money is arguable. But the overall numbers are gigantic."
Finally, the paper comments, "Main Street investors have been lightening up on stocks since the financial crisis. In the four years ending 2011, individual investors yanked more than $395 billion out of stock mutual funds, according to the Investment Company Institute. In contrast, more than $775 billion has been funneled into the perceived safety of mutual funds that invest in bonds. (Mutual funds that invest solely in U.S. stocks have seen outflows six straight years.) That trend of selling stock funds and buying bond funds has continued in 2012. Cautious companies in the S&P 500 reluctant to hire or invest are also sitting on a near record $1 trillion in cash."
In other news, ICI released its weekly "Money Market Mutual Fund Assets." It says, "Total money market mutual fund assets decreased by $870 million to $2.570 trillion for the week ended Wednesday, September 5, the Investment Company Institute reported today. Taxable government funds decreased by $3.01 billion, taxable non-government funds increased by $340 million, and tax-exempt funds increased by $1.80 billion." Year-to-date in 2012, money fund assets have declined by $124 billion, or 4.6%, but they have risen by $32.5 billion, or 1.3%, since mid-year (June 27).