Today's Financial Times writes "Wall of US cash still looking to find a home", which discusses the recently oft-discussed concept of "trillions" of liquidity poised and ready to support stocks and other asset prices. We've argued against the "wall of cash" theory in the past, mainly due to its poor performance historically and to the dominance of transactional assets in money funds. But we have noticed the heavy correlation since March between outflows from money funds and increases in stock prices. However, most market commentators fail to appreciate the money market's, the broader economy and seasonal factor's influences on money fund balances.
The FT says, "The financial market panic of 2008 was characterised by a huge stampede into cash.... Using US money market mutual funds as a proxy for demand for cash, this trend continued until March this year, when money fund balances peaked at $3,760bn. This peak, of course, coincided with the start of the rally in risky assets, which has lifted everything from equities to corporate bonds. Since then, $560bn has flowed out of these money market funds, according to analysis by JPMorgan. The balances are still quite high. Indeed, despite the outflows, there is still $1,000bn more in money market funds than in early 2007."
But the article quotes a JPMorgan report, "Before the crisis began in 2007, many liquidity focused investors were heavily engaged in enhanced cash or ultra-short total return strategies that were supposed to provide better returns without compromising liquidity. The poor performance of these strategies in the crisis lingers with many of these investors, suggesting they're unlikely to try it again." FT says, "Some money is likely to switch out, however. The JPMorgan report says that institutional money fund balances -- which represent the bulk of such funds -- could drop by 10 per cent and retail balances could fall 20 per cent over the next year. This would add up to $400bn moving out of cash."
Crane Data's most recent Money Fund Intelligence notes that money fund asset outflows have slowed of late. Our December issue, which was released Monday, said, "[M]oney market mutual funds have declined by an eye-popping $510 billion in 2009. Assets peaked at a record $3.922 trillion in January, and they have been sliding steadily since mid-March.... Money fund assets are currently at $3.319 trillion according the Investment Company Institute's weekly totals. They have declined by 13.3% year-to-date, likely making 2009 funds' second worst year in history after 1983's 18.4% decline. But the most recent weekly and monthly statistics show that the outflows have slowed."
Assuming this week will show asset inflows for money funds (Crane Data's Money Fund Intelligence Daily shows a $7.3 billion increase through Tuesday), money funds will have risen in two out of the past four weeks. Assets declined by $49 billion in November, according to our Money Fund Intelligence XLS, the smallest decline since May. October saw assets decrease by $65 billion and September by $115 billion. Frankly, it looks like much of the "hot" money is already gone. If zero interest rates haven't driven off the $3.3 trillion yet, it must have an awfully good reason to be in "cash".
MFI also said, "Judging from the 2003-2004 rate cycle and overall historical asset trends, we estimate that money fund assets will decline by about 5% in 2010, bottoming out around the $3.1 trillion level. We also expect assets to resume their climb in 2011 and follow rising rates higher."
