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What's All the Buzz About?



David Miller - 11:01 AM

Brian Reynolds' recent columns claiming stocks are unloved are a bit of cold water in the face for most Minyanville readers, I expect. The conventional wisdom is that stocks are overloved. American households generate a lot of cash (and do a good job spending it, which is why the debt levels are so high), and I've wondered where it's going.

This article came across my desk this morning and shares a couple of interesting stats that may surprise you:

  • Bank assets in money market depository accounts (MMDAs) have risen 75% in the last five years
  • MMDAs stand at $3.5 trillion, the highest level ever.
  • $2 trillion has been added since the end of 2000, the year the bear market started.
  • Assets in money market mutual funds dropped $330B since 2001, showing only a part of this was a transfer in vehicles.

If you are an investor in banks, the rest of the article should interest you as it predicts either banks will need to raise rates on their MMDAs (currently under 1% on average) or customers will move their money to money market mutual funds (paying above 3%).

John Succo - 11:14 AM

This is a good point, David, and why bank stocks have risen recently from their lows.

A flattening yield curve, one which is now about 6 points from inverting, is not good for banks. This has been offset, and overcome, because investors see short term earnings rising because banks have been dragging their feet in raising rates paid.

That is short term as you point out. Perhaps this is why bank stocks are now a little "stuck".

But households do not generate as much cash as they used to. All through the sixties until the 90's, 95% of household gains came in the form of income. This has steadily been declining and is now at a low of 80%.

The income has been replaced by borrowing and capital gains. This is a long term de-stabilizing effect in our opinion.

David Miller - 11:24 AM

Thanks, John. I also think it bears (no pun intended) on the thesis that declines in home values would bust the economy due to consumers existing on the razor edge of insolvency. Whether the cash is coming from income, refinancing, or capital appreciation, Americans seem to be socking it away at a record pace. That's not something we often hear.

I don't mean to diminish the debt load (public and private) and the have/have-nots issues that are very real and important to keep an eye on. I was just surprised by the statistic and it filled in a piece of the puzzle for me.

Scott Reamer - 11:27 AM

Vis-à-vis David's observations about money market mutual fund asset changes, since 'money' can be (and is) printed at will, such rapid increases in MMDA levels are none too surprising at all. M3 - the broadest monetary aggregate - has risen from $6.6 trillion to $10.1 trillion in the same 5 year span: a $3.5 billion increase. MMDA accounts have risen from $2 trillion to $3.5 trillion in the last 5 years while MMMF (money market mutual fund) assets have decreased $320 billion from $2.3 trillion to $1.96 trillion.

Rate differentials (between MMMF' and MMDAs) certainly have had their intended effect: the Fed's historic decrease in Fed funds (hand in hand with foreign central bank's buying for internal political reasons) ballooned the amount of "money" (note we did not say wealth) in the economy.

That we saw a net $1.82 trillion swing from MMMFs to MMDAs over 5 years ($365 billion per year) rather speaks much more to the time preference changes we have seen in that time: from massive risk taking in 2000 to significant risk aversion in 2003/2003, and back again to risk seeking (increased time preferences) now. This is part and parcel of the same underlying force that is causing corporations to 'hoard' cash to the tune of ~$600 billion on their balance sheets.

It's just that individuals are not yet reflecting that trend as corporate CEOs and CFOs are. Our work suggests they will shortly. Time preferences are reaching a zenith.

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