Fundyi_20061213190104
The WSJ noted that, according to the Money Fund Report
newsletter, "Investors to money-market funds added $21.26 billion in
the week ended
Tuesday, bringing total net assets to a record $2.333 trillion. The
previous record had stood since Dec. 10, 2002."

About 86% of the money came from Institutional investors — $18.32 billion; individual investors contributed $2.94 billion.

This sort of data is always tough to draw conclusions from: We know there is a record amount of cash in Money Markets, but the tough question is why?

I can think of many reasons — none of which have any quantitative support:

• Hugely profitable, cash rich corporate earnings gotta sit somewhere;

• Skittish investors don’t believe the rally, leaving money "safe;"

• Big bonus pools/high earners cash not put to work yet;

• The ongoing option backdating scandal  continues to plague investor confidence;

• There’s always been huge cash on the sidelines, even thru the 1990′s bull market;

iMoneynet, the source of this data, expects to see this cash hoard continue to rise into 2007.

Is this pile of cash significant? That is an interesting question, and one I simply do not know the answer to . . .

>


Sources:
$200 BILLION GROWTH IN INSTITUTIONAL MMFs POSSIBLE IN 2007
iMoneynet, December 1, 2006
http://www.imoneynet.com/articles/articlesFolder/Retail1616/Retail1616.pdf

Money-Fund Assets Hit Record
WSJ, December 14, 2006; Page B8
http://online.wsj.com/article/SB116605609381249620.html

Category: Data Analysis, Economy, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

54 Responses to “Record Cash in Money Funds”

  1. Sue says:

    Well, I don’t really advocate polls for this site, but, in the way of a poll, let me say that I pulled out most of my money in my stock fund 401(k) and put it into a 491(k) money market shortly before the election. I believed that there had been a lot of artificial inflation of the economy’s statistics. So I missed out on the November rally. I’m still sceptical, but what can I say? Most people I know are extremely worried about their incomes. But the statistics and measurements are not reflecting this.

  2. Chet V says:

    Perhaps you could add to your bullet points the fact excess pile of cash that may be sitting around due to cancelled housing contracts and/or cash which had been previously earmarked for real estate…

    In any case, I’m sure it’s not ONE thing but MANY little things and that might just be one of them.

  3. theroxylandr says:

    Yeah, bonus is a big problem. Bonuses were already announced, and, frankly, I have no clue what to do with all that money. Treasuries? Money market? Definitely not mutual funds.

  4. Tom says:

    Hussman says, There is no such thing as cash on the sidelines

    http://hussmanfunds.com/wmc/wmc060710.htm

  5. erik says:

    question:

    now that it looks like a republican led coup over the senate, do you step in and buy big pharma here.

    mrk just broke through technical levels to the downside and a republican lead senate would quickly place it back on track.

    morbid, but considering the circumstances, appealing here.

  6. An accountant friend on mine explained that the Pension Bill was forcing companies to pour money into the stock market to correct the unfunded pension liabilities.

    Pension reform: Boon for 401(k)s

  7. dave says:

    I think we’re seeing record balances in other places too. Corporate balance sheets, DOW stocks, real estate, yaaaaawn.

  8. trip says:

    My bonus has been sitting in cash since September.

  9. Fred says:

    Am the only one here who sees this as market friendly?

  10. My1 says:

    I wouldn’t say markets are ever particularly “friendly”. The only time the market is friendly is when it’s weak.

  11. fred hooper says:

    Demand deposits at commercial banks total $300 Billion, and 64% of bank assets are exposed in real estate loans. I believe these represent record lows and record highs, respectively. Nothing to worry about here. Yawwwwn.

    http://wallstreetexaminer.com/blogs/winter/?p=119#more-119

  12. MarkTX says:

    Looks like “Investors” are putting all that “Cash” into the market Right Now….

  13. That’s why I raised the question

  14. Michael C. says:

    I view cash on the sidelines as supportive of the market.

    One indicator I look at is the percentage of Rydex money market, though they are only a fraction of the overall market, compared to Rydex funds invested. This indicator was at the lows of its range in Dec 2004 and Nov 2005 and at its highs in March 2005 and July 2006. Right now it is about middle of the range.

  15. Michael C. says:

    Vix also down into single digit territory if anyone cares.

  16. HerbieS says:

    The rally continues! the mkt is rippin today.

  17. james says:

    One simple explanation is the explosion in derivatives contracts. With Merrill reporting that notional outstanding is now $370 TRILLION plus, there is plenty of room for cash to be used as the place holding for all that leverage. This “fits” with the fact that mutual funds have record low cash but institutions make up the largest growth in cash.

  18. alexd says:

    Change in the Senate is not a big deal yet. The only way to replace a senator is death or resignation. There is an article on Bloomberg on that.

    That Rydex % is very interesting. Where can I catch it and is there a graphical display of this relationship available.

    Hey Hey Hey

    I would like to suggest that we start talking about commodities, their relationship to the economy and the stock markets both locally and worldwide, and the best ways to invest with them for the long term. I am aware that in Europe there are now commodity etfs. I actually saw an article where someone felt that they were without use due to the idea that demand was not there. that was a dumb call. That is like the person from Digital who proposed the rhetorical question of “who would want a personal computer?” People invest (usually too late) using the Willie Sutton method of investing. Sooner or later tey will catch on to what is moving.

    I think we need to broaden our horizons.

  19. scorpio says:

    i dont think this cash comes off the sidelines. lots of folks v concerned about the future of this country and the planet. risk-reward completely out of whack. ability to make back losses over some reasonable time frame in serious jeopardy.

  20. GerryL says:

    With money markets paying 5% it is not a bad place to be.

  21. Turbo says:

    Inverted yield curve + extremely low credit spreads may be diverting money from bond funds into money market funds?

  22. MarkTX says:

    yes and yes to GerryL and Turbo,

    Money market funds have replaced short term cd’s, bonds, maybe even banking/checking accounts over the past 5-10 years-just look at the yields on the chart to see why.

    Futhermore, if people have a diversified portfolio with 60 30 10 %, then AT LEAST 10% of their money is in cash or equivalent (maybe 20%), and given the yield on cash the last couple of years (P Poor), Money Market Funds gained enormously….

    Thus, Does their 10-20% “cash” really go into the market anytime soon given their portfolio compositon???

  23. BDG123 says:

    Everyone looks at cash as a precursor to market movements. That is erroneous. Looking at Rydex or something similar is of value because so many traders hop in and out of Rydex funds as traders. ie, It’s “trading” money sentimet. But, that is much different than cash on the sidelines per se.

    Additionally, it’s not a matter of cash on the sidelines. It’s a matter of too much cash period. In other words, it’s not a stock market or investing phenomenon. It’s a lack of demand for capital across the economic spectrum. Hence, money ends up sitting in cash equivalents which also exacerbates the money supply and credit creation issue.

  24. My1 says:

    alexd,
    any chances of those commodity ETFs coming to the US anytime soon? I’m waiting.

  25. Incognitus says:

    Peeeeooople, open the frakking eyes.

    That cash is the other side of debt. When someone borrows money, money gets created. Someone’s debt is someone else’s cash, damnit !!!

    Also, there’s no such thing as “cash on the sidelines”. It is IMPOSSIBLE to make the cash disappear. Someone “buys stock” and no longer has the cash? Why the seller now has the cash, and it sits in bank accounts or money market funds !!!

    CASH and DEBT are TWO sides of the SAME coin !!!

  26. Incognitus says:

    The only thing CLOSE to “cash in the sidelines”, is cash that people have already used to subscribe stock funds, but whose managers have not deployed.

    Guess what, by that measure you have preciously little “cash on the sidelines”.

    However, the constant debt creation keeps making up MORE cash, some of which keeps finding its way into those same stock funds, empowering the Ponzi market along. Until it doesn’t. Then it will all turn to Pumpkins.

  27. Michael C. says:

    …cash that people have already used to subscribe stock funds, but whose managers have not deployed.

    I would agree.

    By that measure, as reported by the Investment Company Institute each month, mutual fund cash has been around 4% or so for the last 1 1/2 years. 4% happened to coincide with the market tops in early 1998 and early 2000. However, we’ve been at 4% since mid 2005.

  28. anon says:

    You can’t just look at this $2.3 billion figure out of context. To gauge how much potential buying pressure this cash provides, you have to look at the value of money market funds / the value of stock funds.. this is how Jason Goepfert and other sentiment analysts look at it.

    FWIW, that ratio is basically at a record low right now.

  29. scorpio says:

    i have cash. it’s on the sidelines. i’m getting 5% at Schwab, and i think they’re ripping me off. it’s not an offset to anyone’s debt, least of all mine. it’s not going into stocks or bonds or real estate at these levels. i can wait.

  30. Turbo says:

    Yep, too much unproductive cash, too few productive investment opportunities and too much debt. Screams that we are closing in on a period of inflation or financial asset destruction or both. An increase in preference for holding cash historically points to deflation, but I’m not so sure this time.

  31. Incognitus says:

    Michael C, the problem is that due to the ongoing crazy credit creation, even though the cash is low, it keeps getting replenished. Even if a small fraction of the credit creation ends up in those funds, it’s very significant, because we’re talking about stupidly large numbers (trillions …).

    I thought the end of the housing bubble would by itself be enough to slow down credit creation (after all, you don’t need prices to fall, you just need transactions to come off so that people borrow less).

    Little did I know that Private Equity and their leveraged buyouts would more than take up the slack.

    Anyway, the longer this goes on, the uglier it will be when it ends. If it goes on long enough, even having the money in the bank won’t be safe. “Bank runs” won’t be just a thing of the past.

  32. Incognitus says:

    scorpio, your cash IS an offset to someone else’s cash.

    How do you think money is created? Do you think the FED “prints it”?

    It doesn’t.

    Money gets created EVERY time someone borrows from a bank.

    Imagine an island where there were only 3 people. A, B and C. A got 1 million USD in the bank, B got nothing, C got a home. Now, B goes to the bank and borrows 900 thousand USD, buys the home from C.

    What have you got not?

    You got A with 1 million USD in the bank, B with a home (and 900 thousand in debt), and C with 900 thousand in the bank.

    So now there’s 1.9 million in the bank / money market funds / CDs, whatever.

    SEE? That’s how money gets created.

    That’s also why there’s the famous “Savings glut”.

  33. Incognitus says:

    Geeez, so many typos …

    “scorpio, your cash IS an offset to someone else’s DEBT.”

    “What have you got NOW?”

  34. MarkTX says:

    all this talk of cash and especially all that Goldman Sach bonus money (SIC) says it is time for me to go spend what little cash i have….

    it is 5 o’clock somewheres :) CHeers…

  35. calmo says:

    The ABC banking typos with Incognito.
    This is marketable people.

  36. DavidB says:

    I’m wondering if it is not tax related due to this last run? Make a whack of cash in the market, sell the securities and keep it in MMs until tax time. That way you are guaranteed the cash to pay Uncle Sam and the market pays you to hold it for him.

    I’ve also noticed in the past that cash tends to rise going first into tax season and then into summer holidays. Are people now using these easy-to-access money market accounts as short term savings accounts?

    And one final morbid question…

    How do they figure out when a senator is sick in the head? Do they act different than what they usually do?

    Pardon the shot, couldn’t resist. The world is free to make fun of me on my death bed now….just nothing with lipstick and wigs please

  37. Michael C. says:

    Michael C, the problem is that due to the ongoing crazy credit creation, even though the cash is low, it keeps getting replenished. Even if a small fraction of the credit creation ends up in those funds, it’s very significant, because we’re talking about stupidly large numbers (trillions …).

    I agree there too.

    Liquidity and money supply have been increasing beyond any rate ever seen. So much that it is skewing these types of measurements and making them almost meaningless.

    Perhaps there’s a way to normalize it but maybe that is making it too complicated. Maybe the simple version is liquidity up massively equals unreasonable asset appreciation.

  38. Michael C. says:

    I’m wondering if it is not tax related due to this last run? Make a whack of cash in the market, sell the securities and keep it in MMs until tax time. That way you are guaranteed the cash to pay Uncle Sam and the market pays you to hold it for him.

    These are market myths. Tax selling, window dressing. They have very little effect or correlation to the market. They simply make for nice headlines to explain away market movements.

  39. Teddy says:

    I read that there is a fairly new instrument of debt,”the pay option mortgage”, which is becoming increasingly popular, whereby the borrower with home equity initiates a new mortgage with the option to never pay any principle nor interest as long as there is equity, with the monthly interest debited from the equity and added to the principle owed. Is this like a reverse mortgage with a potential fuse?

  40. DavidB says:

    These are market myths.

    OK, but what about senators being sick in the head?

    I notice you didn’t comment on that.

    I am provoking providence here I think

  41. jkw says:

    I just moved most of my cash from a bank account to a money market fund for the 20bp (and growing) difference in rates. I’ve been reconsidering that over the past week because I like the guarantee of FDIC insurance more than a claim that “nobody has ever lost money in a money market fund.” If the derivatives mess explodes, all kinds of things will suddenly be worthless. I’m not sure what the FDIC would do in a wide-spread bank failure scenario, but I figure that if the FDIC fails, the US dollar (and all other currencies) will be worthless anyway.

    There is a large amount of cash out there right now from people taking advantage of 0% loans. I personally have about $60k in loans with total interest charges of about $30/month. All that money is sitting in cash, and I certainly won’t move it anywhere riskier than a money market fund. I would guess that there are thousands of people doing this, with possibly several billion in cash just from people playing consumer credit spreads. With so much easy credit available, why wouldn’t people have hordes of cash sitting somewhere? Not everyone is stupid enough to spend every penny they can get their hands on.

  42. Michael C. says:

    OK, but what about senators being sick in the head?

    I notice you didn’t comment on that.

    Yikes…I’ll stick with what I know, or think I know.

  43. my1 says:

    Incognitus,
    I guess your scenraio fits although its a bit different. The reason that banks “create” money is because of fractional-reserve banking.

    In olden times the Bankers/Money-lenders ran a gold reserve. Coins would be traded for notes. The bankers would then lend out more notes than gold. Bam! Money created. (Even with a gold-standard).

    I think people are beginning to catch on, like they tend to do every few years. Usually they run to hard assets (like real estate, but that’s been squeezed already). They may be waiting for a break-out in commodities (or maybe higher rates for better returns?).

  44. Patrick (G) says:

    Incognitus,
    your scenario is off-kilter:
    On your 3 person island:
    A is effectively the middleman/banker.
    B wishes to acquire C’s house.
    C has a house he wishes to trade for something of equivalent value from A.

    It is what B is willing to do for A to acquire C’s house that grows the island’s GDP.

    Money is just a convenient way for all parties to quantify the value of what is being traded.

    Banks can lend out all they want, but when you come down to it, they need sufficient people willing and capable of trading labor or assets for whatever the loans bought.

    The U.S. economy, in particular the consumer finance sectors, have been operating perilously close to the limit of what people are willing and capable of supplying for a good number of years now.

    Forget that at your own peril.

  45. Patrick (G) says:

    Back to the Money Markets discussion; the presumption is that the build-up in those funds will go to the stock market.

    Maybe, or it could be that banks are too stingy with the rates they pay on savings accounts, and people (like me) are using MM accounts instead with no intention of using one red cent of it for Stock Market purchases.

    Let’s see the size of that pile of money come February after the Christmas credit card billing cycle.

  46. Jdamon says:

    Patrick,

    I personally have 20% of my holdings in a money market account and I have been waiting for some downtrend/correction in the market to put a good $125K to work in equities. While my 80% weighting is fairly aggressive, I was 90% until August of this year when I feared the market would sell off into the election.

    I do think a lot of people are worried they are missing a great bull run here with a Goldilocks economy – not to hot, not to cold, but just right…..

  47. scorpio says:

    jdamon: but they’ve already missed it, unless u think next year continues at something like these rates. i admit that i missed it. doesnt mean i’m going to chase it. admittedly 5% not the happiest return, but it aint bupkes either

  48. My1 says:

    Scorpio, we missed a few rallies,

    Y/Y:

    Dow is up 15%
    Real Estate still up Y/Y in many places
    Bonds up 5%
    Gold 25%
    Silver 100%
    Many commodities higher

    But no Inflation, I guess.

  49. Incognitus says:

    My scenario was right. “Fractional Banking” comes from you only having to keep in reserve part of what you lend. That’s why I used a 900 thousand loan instead of 1mn.

  50. Mike_in_FL says:

    I would just call this a symptom of excess money growth everywhere … all over the world. While our Fed conveniently no longer reports M3, most other countries do still have broad money statistics available. Just look at some of these YOY growth rates in the most recent reported month …

    Eurozone: +8.5% (well above the 4.5% “speed limit” discussed by European central bankers)
    India: +19.4% (just off the August peak, which was itself close to the multi-year high of 20.6% in 1998)
    Canada: +8.6% (fastest in a year)
    Australia: +13.1% (fastest since 2/04)
    U.K.: +14.1% (2nd fastest since 1990 behind the month prior)

    The list of countries where money growth is vaulting ahead of the growth rate in the underlying economy goes on and on, too. I think the surge in money market balances simply reflects the fact the global economy is awash in cash. Lots of it is making its way into asset markets, driving stocks, commercial real estate, junk bonds and virtually every other asset under the sun up in price. But some of it is also piling up in MM funds. My two cents anyway.

  51. stan says:

    Well, given that it’s the first time in a few years that money funds generate a decent return, it should be no surprise. Alternative yield instruments offer no competition, i.e. the saver segment of the economy is doing just that and the population is aging meaning there is more risk averse money around.

  52. Rick45 says:

    theroxylandr John’s statement from last Sunday’s report was “idle” cash; the street just couldnt hold their “wad” any longer by trying to compete with free “5+%” Money Market funds. 30% of my n.w. is in the market, thats all the beancounters get to play with (note I manage all of my own investments) but since John is a fellow Hoover/S.U. alum. I do follow his work.

  53. Rick45 says:

    “It’s a lack of demand for capital across the economic spectrum. Hence, money ends up sitting in cash equivalents which also exacerbates the money supply and credit creation issue.”

    Mark TX only in America can saving be inflationary for the economy. I see Lord Bernanke this morning imploring the chinese to reduce their savings glut so they can by their own gee-gaws and plastic crappola.

  54. Rick45 says:

    From John Hussman’s Week in Review 12/11

    “Though CNBC briefly seemed professional in the wake of the 2000-2002 market plunge, airing short conversational spots where the anchors emphasized journalistic responsibility, that tenor has now been replaced by carnival-barking shows like “Mad Money,” complete with its lightning round, featuring a shrill whine of irresponsible speculative “plays” backed by death-metal guitar music, and “Fast Money” promoted by spots that promise, for example, “Tonight, the boys get down and dirty with a hot commodity…” I wish I was making this up.”

    John please add my chief gripe; they need to stop pretending to be celebrities and just do their jobs by reporting the news.
    Goodness ever since that stunt M.B. pulled with Ben that ignited the May sell-off now when she opens her mouth I hold my breath…