Another article from the wall street journal on all the cash that could flow into markets.
The article is here in an accessible way. (Thank you Gridbird for the Archive link).
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12/23/2024
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I’d note the data in the article’s chart is as of 3Q 2023 and you’re using current M2. The source of the chart is listed as the Federal Reserve. So it’s a question of Federal Reserve Data vs Federal Reserve Data. Are they using seasonally adjusted data or not? Trying to trace down the discrepancies is a rabbit hole I’m not going down. ..again.
Hi I hate math,
ICI has the number dropping just below 6 trillion. Based on everything else that I’ve seen, the number seems reasonable.
And very unlikely we see lowflation with near zero interest rates, ever again. More like 3% …
FGN has been a good play, and looks like it could pop, perhaps as high as 27. LNC D (not over 27!)and JXN A are also interesting, based on price . APOS, CFG D RF B SNV D and E. AHL C plus smattering of others. Athene apollo aspen all inter related!! Have about 25 the positions actively buying based on comparative pricing.
https://smarts.thestreet.com/all-smarts/doug-kasss-10-surprises-for-2024
“7. Wall Street’s most vicious vultures — private equity — are about to get torn to shreds.
With still elevated interest rates, especially in the second half of the year, and a slowing global economy, loan rate resets contribute to a leader in private credit failing. Blackstone’s (BX) shares drop by a third after BREIT (private real estate fund run by Blackstone) and (BXMT) come under new redemption pressures. Shares of other private equity stocks Apollo (APO) and (KKR) plunge as the SEC opens an investigation into the failure of the private equity industry to realistically mark-to-market their portfolios in a timely manner.”
So the theory in the article is that there is a) $8.8T is in money funds
b) that money will soon flow into equities when rates fall.
Both of these points are not accurate and this is easily demonstrated:
Let’s look at point a) first.
The chart in the article shows that currently 30% of M2 is in money funds.
They don’t show M2, but it’s easy to find at the St Louis Fed:
https://fred.stlouisfed.org/series/WM2NS
From this M2 chart we see M2 level is currently $20.872T. Using the chart in the article we see that the current MM balance is .3*$20.872T or $6.26T. So the article appears to be off by $2.54T in the very first paragraph.
Now let’s look at point b)
Money supply ramped from 2020 to 2024 going from from $15.49T to the current $20.872T. In 2020 25% of M2 was in money funds, and as we have seen in 2024 30% is in money funds. So that is a move from
2020: .25*$15.49T = $3.87T to 2024: .30*$20.87T = $6.26T
The difference here is $6.26T – $3.87T = $2.39T
During the period from 2020 to 2024 (which obviously includes the ramp from 0% to current 5% MM yields) $2.39T flowed into MM funds.
The absolute best case scenario is to assume that 100% of the money that flowed into MM funds during this period will flow back out. Furthermore one must assume that all of this cash can only flow into the stock market. If that happens this would amount to $2.39T flowing into the stock market.
Even this scenario is flawed for 3 reasons (at least). 1)Rates will not go back to 0% so all of this $2.39T wont go into the stock market. 2)M2 itself is declining due to QT (supposedly). 3) This $2.39T is just as likely to flow into bonds or real estate (for example). In fact, the kids in the article say they they plan to buy houses.
No there is not $8.8T in cash waiting to flood into the stock market as soon as the Fed cuts by a quarter point.
@August West
Great post! Another example of the benefits of “doing the math”
August
I agree that the article has a click bait feel to it. Moreover, it’s confusing. I also agree with your conclusion that a lot of the discussed liquidity won’t migrate to stocks. But I’m confused by your other analysis. The article claims that there is more than 8.8 trillion dollars of money market funds PLUS time deposits that could go into the market. You’re correct that 30% of the M2 is a little over 6 trillion in money market funds. But that’s actually what their chart shows.
Rainbows of Doom vs Reversion to the Mean – I’m booking as much solid 7-8% ETD into the late 2020s as I can afford. Thank you, Tim, thank you, Grid .
D, I never was concerned with short duration until the Fed warned me two years ago I need to, so I paid heed. But now I have drifted back to 50/50 with less than 1 to 5 years duration, and the rest virtually perpetual being that are plus 6% yield and way under par. Plan to hold this ratio for a while. My long range yield crystal worked pretty flawlessly for about 10 years, but Im afraid its about worn out and dont trust it to keep working as well going forward. So I will just kind of split the middle and trade around it some when opportunity presents itself.
A lot of small balling too. For example I really liked that FGN IPO issue out of gate and bought a little slug and ran it up a buck and sold. But it has retreated back into 25.80s past couple days from around 26.25 dump, so I bought them back. The initial interest rate plus stub goes ex next month.
Your welcome. It doesnt catch all articles but it seems to get a lot of the popular stuff. Been listening to this cash sideline debate. Some think a lot this money wont get in the market because it was never in the market to begin with. I know slim anecdotal observations a lot of “old schoolers” who resemble this. They suffered with puny rates in ZIRP and are now stacking it up in 5%. And not looking to invest it or spend it.
I had a CD mature today myself. Since I already prefunded IBond purchase with a stock sell, I am going to roll this right back into another CD and keep it deeper on the sideline. Of course if end of world SA marketer Avi Gilburt is right this CD will wind up worthless being the bank will go bankrupt and FDIC wont be able to cover the loss.
Dollar will be more worthless than it is but govt can always print enough money to cover everyone with FDIC.