State Street Global Advisors (SSGA) recently published a "Q1 2025 Cash Outlook," which is entitled, "Dawn of a New Future." Subtitled, "From the US policy rate path to Fed's tapering of quantitative tightening, and maybe even the dawn of a new future for cash investing in asset tokenization and stablecoins -- 2025 looks poised to be a very happening year for cash investors," the piece tells us, "Looking back, 2024 feels like a whirlwind -- another year that seemed to pass in the blink of an eye. It was marked by persistent questions early in the year about when cash would flow out of money market funds (MMFs) and be redeployed into the economy. My answer then was the same as it is now, as we begin 2025: it depends on the availability of compelling opportunities. Investors need assets of genuine value -- not ones at new highs (equities) or tight spreads (credit). Alternatively, economic pressures such as declining business revenues or personal cash flow constraints may necessitate the drawdown of these funds."
Author William Goldthwait writes, "MMF balances ended 2023 at $5.87 trillion and grew by approximately 15% over 2024, reaching $6.75 trillion as of 18 December 2024 (source: Investment Company Institute [ICI]). This remarkable growth underscores two significant factors: the wealth effect is massive, and people and entities are conservatively sitting on more cash in case of need or opportunity. Over the past five years, MMF balances have surged by an astonishing 87%."
He explains, "Government MMFs were the primary beneficiaries of these balance increases, with institutional and retail categories growing by 15%. Retail prime MMFs also saw healthy growth, rising by 12% to $1 trillion. Meanwhile, institutional prime MMFs faced substantial challenges, with AuM declining by 18%, though the drop was less severe than some had anticipated. Institutional prime MMFs currently hold ~$218 billion in assets, far above the $122 billion low seen after the 2016 MMF reforms, but below the 2020 peak of $320 billion. New Securities and Exchange Commission (SEC) regulations will likely limit institutional investors returning to this sector and may lead them to seek out similar returns in other offerings, like local government investment pools or ultra-short-term investment funds."
Discussing "Stablecoins and the Tipping Point," SSGA says, "[L]et's focus on one trend that is reshaping the financial system: the evolution of 'cash.' How do individuals and entities move cash efficiently across borders and through the banking system? Traditionally, this process has been expensive, slow and complex. But is that starting to change? Enter stablecoins, such as Tether and USDC, which are gaining traction as transformative tools in global finance. According to CoinMarketCap.com, Tether's market cap has surpassed $138 billion, underpinned by the increasingly robust infrastructure."
They comment, "Some asset management firms are exploring the potential of tokenizing MMFs, hinting at a future where digital assets blend seamlessly with traditional financial products. While this movement is gradual, it prompts the question: When will we reach the tipping point? The history of money market funds (MMFs) offers valuable perspective. Introduced in the early 1970s, MMFs were initially a niche retail product, offering higher interest rates than bank accounts and the convenience of check-writing from mutual fund accounts. Their rise was not without challenges; the SEC implemented Rule 2a-7 in 1983 to address regulatory issues. Growth remained modest through the 1980s, but by the 1990s, MMFs hit their tipping point."
The Outlook states, "At the start of the decade, MMF assets under management stood at just under $400 billion, according to the Investment Company Institute. By the decade's end, that figure had soared to over $1.6 trillion -- more than a fourfold increase. In contrast, commercial bank deposits grew at a slower pace, from ~$2.2 trillion to ~$3.4 trillion over the same period. This explosive growth marked MMFs as a transformative financial tool with widespread benefits."
Finally, it adds, "The stablecoin market is still in its early stages, with significant learning and development required before it integrates fully into the broader financial framework. However, if stablecoins can deliver on their promise of faster, safer and more cost-effective transactions, they may very well catalyze the next tipping point in global finance. The parallels between the rise of MMFs and the potential of stablecoins are striking. History suggests that change often starts slowly, gaining momentum until it reaches a critical mass. Are we on the cusp of a similar revolution? Only time will tell."
In other news, The Wall Street Journal's Jason Zweig tells us, "What You Don't Know Could Sting Your Portfolio." He writes, "Your financial adviser may have a conflict of interest that you would never even think to ask about. Advisers are required by law to act in your best interest. They can sometimes be pushed to do otherwise, though. The latest push comes from an unlit corner of the financial industry, and you need to know about it so you can guard against it."
He explains, "In an email, the Fidelity representative spelled out seven ways Armbruster could make up the shortfall. Several involved what the rep called 'asset shift,' or moves into investments run by Fidelity affiliates -- which would generate more revenue for the giant firm regardless of whether they were the best option for Armbruster's clients."
Zweig continues, "In one asset shift, Armbruster could move about $3 million out of high-yielding money-market funds into Fidelity's FCASH fund, lately yielding 2.19%. It could move roughly $35 million into other money-market funds run by Fidelity. Or it could move about $80 million out of fixed-income index funds run by other managers into a more expensive bond fund actively managed by Fidelity."
He adds, "Each of those moves would make Fidelity a little bit more money, thanks to lower payouts or higher fees. And they would likely make Armbruster's clients a little bit less money. After all my years of writing about investing, I had no idea this sort of thing was going on behind the scenes, and I doubt you did, either."
