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The Cash Hoard Of 2023 (And The Sideline Money Myth)
The vast "cash hoard of 2023" has the bullish media salivating about what it means for the future of equities. That cash hoard in money market funds now…
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The vast “cash hoard of 2023” has the bullish media salivating about what it means for the future of equities. That cash hoard in money market funds now exceeds $5.2 trillion.
Such has brought forth the age-old narrative that the “money on the sidelines” is set to come into the markets. However, they don’t tell you those funds have accumulated since 1974. Correctly, in the aftermath of crisis events, some of these assets rotate from “safety” to “risk,” but not the degree commentators suggest. Interestingly, such did not occur following the pandemic-related crisis.
This is the “myth of money on the sidelines.”
“There are no sidelines. Those saying this seem to envision a seller of stocks moving her money to cash and awaiting a chance to return. But they always ignore that this seller sold to somebody, who presumably moved a precisely equal amount of cash off the sidelines.” – Clifford Asness:
Every transaction in the market requires both a buyer and a seller, with the only differentiating factor being at what PRICE the transaction occurs. Since this is required for market equilibrium, there can be no “sidelines.”
Think of this dynamic as you would a football game. Each team must field 11 players despite having over 50 players. If a player comes off the sidelines to replace a player on the field, the substituted player will join the other sidelined players’ ranks. Notably, at all times, there will only be 11 players per team on the field. Such holds equally true if teams expand to 100 or even 1,000 players.
So, while the “cash hoard” has swollen in recent years, there are two important points to consider in the current environment.
- The disincentive of taking risk versus “risk-free” returns; and,
- Who holds the majority of that “cash hoard?”
Why Take the Risk?
Following the financial crisis, Ben Bernanke dropped the Fed funds rate to zero and flooded the system with liquidity through “quantitative easing.” As he noted in 2010, those actions would boost asset prices, lifting consumer confidence and creating economic growth. By dropping rates to zero, “risk-free” rates also dropped toward zero, leaving investors little choice to obtain a return on their cash.
Today, that narrative has changed with current “risk-free” yields above 4%. Historically, there were periods when one could stick money in a “savings” account and earn enough return without taking risks. In other words, it was possible to “save” your way to retirement.
The chart below shows the savings rate on short-term deposits versus the equity-risk premium of the market.
One of the problems with the “cash hoard” in 2023 is there is currently no incentive to reverse those savings into “risk assets” unless the Fed is dropping rates and reintroducing “quantitative easing.” However, as discussed in “Banking Crisis Is How It Starts,” if the Fed reverses to a more accommodative policy, it is because they have “broken something.” Such will not be the time to take on more risk, but less.
Furthermore, despite the high money market account balances, investors have very low cash balances relative to the current equity exposure. As asset prices escalated since the Financial Crisis, supported by successive rounds of monetary policy, investors were trained to chase risk. While equity-to-cash ratios peaked in 2022, they remain at historically high levels.
Furthermore, retail investors have very little cash in money markets to invest.
Professional mutual fund managers are also holding near record-low levels of cash.
In fact, what is interesting is that historically, although higher rates attracted savings, the subsequent rate decline did not create massive outflows.
There is a reason for that.
Corporate Coffers
So, if it isn’t retail or professional investors, who is holding this $5 trillion cash hoard? The following Office of Financial Research chart breaks down money market funds by type.
Looking at the chart above, you will notice that the bulk of the money is in government money market funds. Those particular money market funds generally have much higher account minimums (from $100,000 to $1 million), suggesting the funds are not retail investors. (Those would be the smaller balances of prime institutional and retail funds.)
As noted, much of the “cash on the sidelines” is held by corporations. As we said in “A major support for assets has reversed,” that isn’t a surprise:
“CEOs make decisions on how they use their cash. If concerns of a recession persist, companies will become more conservative on the use of their cash, rather than continuing to repurchase shares.” — September 2019
Not surprisingly, as of the end of 2022, with CEO confidence near record lows, the money spent on buybacks slowed, and the cash hoard swelled as mergers and acquisitions declined.
Until the economic environment improves, those cash hoards will unlikely revert anytime soon.
Future Returns May Be Lower
As discussed in “Long-Term Returns Are Unsustainable.”
“The chart below shows the average annual inflation-adjusted total returns (dividends included) since 1928. I used the total return data from Aswath Damodaran, a Stern School of Business professor at New York University. The chart shows that from 1928 to 2021, the market returned 8.48% after inflation. However, notice that after the financial crisis in 2008, returns jumped by an average of four percentage points for the various periods.
After more than a decade, many investors have become complacent in expecting elevated rates of return from the financial markets. However, can those expectations continue to get met in the future?”
Of course, those excess returns were driven by the massive floods of liquidity from the Government and the Federal Reserve, including trillions in corporate share buybacks and zero interest rates. Since 2009, there was more than $43 Trillion in various liquidity supports. To put that into perspective, the inputs exceed underlying economic growth by more than 10-fold.
However, given an equal choice between “risk” and “risk-free” returns, such extracts buyers from the market and lowers potential price appreciation. In other words, as long as savings rates remain elevated, future stock market returns will likely be lower than over the past decade.
With net exposure to equities by professional and retail investors still near historically high levels, it suggests there is not an exceeding amount of buying power to push markets substantially higher.
It is a foregone conclusion that the Fed will eventually cut rates drastically due to a financial crisis or a recession. However, as noted above, that does not mean the $5 trillion “cash hoard” will come flooding back into the equity markets. back into the markets. That will ultimately be an issue of confidence.
So, the next time you hear someone talk about “money on the sidelines,” just remember that it really isn’t on the sidelines.
More importantly, if you expect a return to the “bull market of yesteryear,” you may be disappointed.
The post The Cash Hoard Of 2023 (And The Sideline Money Myth) appeared first on RIA.
recession pandemic economic growth equities stocks monetary policy fed federal reserve recession interest rates
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Shipping company files surprise Chapter 7 bankruptcy, liquidation
While demand for trucking has increased, so have costs and competition, which have forced a number of players to close.
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The U.S. economy is built on trucks.
As a nation we have relatively limited train assets, and while in recent years planes have played an expanded role in moving goods, trucks still represent the backbone of how everything — food, gasoline, commodities, and pretty much anything else — moves around the country.
Related: Fast-food chain closes more stores after Chapter 11 bankruptcy
"Trucks moved 61.1% of the tonnage and 64.9% of the value of these shipments. The average shipment by truck was 63 miles compared to an average of 640 miles by rail," according to the U.S. Bureau of Transportation Statistics 2023 numbers.
But running a trucking company has been tricky because the largest players have economies of scale that smaller operators don't. That puts any trucking company that's not a massive player very sensitive to increases in gas prices or drops in freight rates.
And that in turn has led a number of trucking companies, including Yellow Freight, the third-largest less-than-truckload operator; J.J. & Sons Logistics, Meadow Lark, and Boateng Logistics, to close while freight brokerage Convoy shut down in October.
Aside from Convoy, none of these brands are household names. but with the demand for trucking increasing, every company that goes out of business puts more pressure on those that remain, which contributes to increased prices.
Image source: Shutterstock
Another freight company closes and plans to liquidate
Not every bankruptcy filing explains why a company has gone out of business. In the trucking industry, multiple recent Chapter 7 bankruptcies have been tied to lawsuits that pushed otherwise successful companies into insolvency.
In the case of TBL Logistics, a Virginia-based national freight company, its Feb. 29 bankruptcy filing in U.S. Bankruptcy Court for the Western District of Virginia appears to be death by too much debt.
"In its filing, TBL Logistics listed its assets and liabilities as between $1 million and $10 million. The company stated that it has up to 49 creditors and maintains that no funds will be available for unsecured creditors once it pays administrative fees," Freightwaves reported.
The company's owners, Christopher and Melinda Bradner, did not respond to the website's request for comment.
Before it closed, TBL Logistics specialized in refrigerated and oversized loads. The company described its business on its website.
"TBL Logistics is a non-asset-based third-party logistics freight broker company providing reliable and efficient transportation solutions, management, and storage for businesses of all sizes. With our extensive network of carriers and industry expertise, we streamline the shipping process, ensuring your goods reach their destination safely and on time."
The world has a truck-driver shortage
The covid pandemic forced companies to consider their supply chain in ways they never had to before. Increased demand showed the weakness in the trucking industry and drew attention to how difficult life for truck drivers can be.
That was an issue HBO's John Oliver highlighted on his "Last Week Tonight" show in October 2022. In the episode, the host suggested that the U.S. would basically start to starve if the trucking industry shut down for three days.
"Sorry, three days, every produce department in America would go from a fully stocked market to an all-you-can-eat raccoon buffet," he said. "So it’s no wonder trucking’s a huge industry, with more than 3.5 million people in America working as drivers, from port truckers who bring goods off ships to railyards and warehouses, to long-haul truckers who move them across the country, to 'last-mile' drivers, who take care of local delivery."
The show highlighted how many truck drivers face low pay, difficult working conditions and, in many cases, crushing debt.
"Hundreds of thousands of people become truck drivers every year. But hundreds of thousands also quit. Job turnover for truckers averages over 100%, and at some companies it’s as high as 300%, meaning they’re hiring three people for a single job over the course of a year. And when a field this important has a level of job satisfaction that low, it sure seems like there’s a huge problem," Oliver shared.
The truck-driver shortage is not just a U.S. problem; it's a global issue, according to IRU.org.
"IRU’s 2023 driver shortage report has found that over three million truck driver jobs are unfilled, or 7% of total positions, in 36 countries studied," the global transportation trade association reported.
"With the huge gap between young and old drivers growing, it will get much worse over the next five years without significant action."
Related: Veteran fund manager picks favorite stocks for 2024
bankruptcy bankruptcies pandemic stocks commoditiesUncategorized
Wendy’s has a new deal for daylight savings time haters
The Daylight Savings Time promotion slashes prices on breakfast.
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Daylight Savings Time, or the practice of advancing clocks an hour in the spring to maximize natural daylight, is a controversial practice because of the way it leaves many feeling off-sync and tired on the second Sunday in March when the change is made and one has one less hour to sleep in.
Despite annual "Abolish Daylight Savings Time" think pieces and online arguments that crop up with unwavering regularity, Daylight Savings in North America begins on March 10 this year.
Related: Coca-Cola has a new soda for Diet Coke fans
Tapping into some people's very vocal dislike of Daylight Savings Time, fast-food chain Wendy's (WEN) is launching a daylight savings promotion that is jokingly designed to make losing an hour of sleep less painful and encourage fans to order breakfast anyway.
Image source: Wendy's.
Promotion wants you to compensate for lost sleep with cheaper breakfast
As it is also meant to drive traffic to the Wendy's app, the promotion allows anyone who makes a purchase of $3 or more through the platform to get a free hot coffee, cold coffee or Frosty Cream Cold Brew.
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Available during the Wendy's breakfast hours of 6 a.m. and 10:30 a.m. (which, naturally, will feel even earlier due to Daylight Savings), the deal also allows customers to buy any of its breakfast sandwiches for $3. Items like the Sausage, Egg and Cheese Biscuit, Breakfast Baconator and Maple Bacon Chicken Croissant normally range in price between $4.50 and $7.
The choice of the latter is quite wide since, in the years following the pandemic, Wendy's has made a concerted effort to expand its breakfast menu with a range of new sandwiches with egg in them and sweet items such as the French Toast Sticks. The goal was both to stand out from competitors with a wider breakfast menu and increase traffic to its stores during early-morning hours.
Wendy's deal comes after controversy over 'dynamic pricing'
But last month, the chain known for the square shape of its burger patties ignited controversy after saying that it wanted to introduce "dynamic pricing" in which the cost of many of the items on its menu will vary depending on the time of day. In an earnings call, chief executive Kirk Tanner said that electronic billboards would allow restaurants to display various deals and promotions during slower times in the early morning and late at night.
Outcry was swift and Wendy's ended up walking back its plans with words that they were "misconstrued" as an intent to surge prices during its most popular periods.
While the company issued a statement saying that any changes were meant as "discounts and value offers" during quiet periods rather than raised prices during busy ones, the reputational damage was already done since many saw the clarification as another way to obfuscate its pricing model.
"We said these menuboards would give us more flexibility to change the display of featured items," Wendy's said in its statement. "This was misconstrued in some media reports as an intent to raise prices when demand is highest at our restaurants."
The Daylight Savings Time promotion, in turn, is also a way to demonstrate the kinds of deals Wendy's wants to promote in its stores without putting up full-sized advertising or posters for what is only relevant for a few days.
Related: Veteran fund manager picks favorite stocks for 2024
stocks pandemicUncategorized
Comments on February Employment Report
The headline jobs number in the February employment report was above expectations; however, December and January payrolls were revised down by 167,000 combined. The participation rate was unchanged, the employment population ratio decreased, and the …
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Prime (25 to 54 Years Old) Participation
Since the overall participation rate is impacted by both cyclical (recession) and demographic (aging population, younger people staying in school) reasons, here is the employment-population ratio for the key working age group: 25 to 54 years old.
The 25 to 54 years old participation rate increased in February to 83.5% from 83.3% in January, and the 25 to 54 employment population ratio increased to 80.7% from 80.6% the previous month.
Average Hourly Wages
The graph shows the nominal year-over-year change in "Average Hourly Earnings" for all private employees from the Current Employment Statistics (CES). Wage growth has trended down after peaking at 5.9% YoY in March 2022 and was at 4.3% YoY in February.
Part Time for Economic Reasons
From the BLS report:"The number of people employed part time for economic reasons, at 4.4 million, changed little in February. These individuals, who would have preferred full-time employment, were working part time because their hours had been reduced or they were unable to find full-time jobs."The number of persons working part time for economic reasons decreased in February to 4.36 million from 4.42 million in February. This is slightly above pre-pandemic levels.
These workers are included in the alternate measure of labor underutilization (U-6) that increased to 7.3% from 7.2% in the previous month. This is down from the record high in April 2020 of 23.0% and up from the lowest level on record (seasonally adjusted) in December 2022 (6.5%). (This series started in 1994). This measure is above the 7.0% level in February 2020 (pre-pandemic).
Unemployed over 26 Weeks
This graph shows the number of workers unemployed for 27 weeks or more. According to the BLS, there are 1.203 million workers who have been unemployed for more than 26 weeks and still want a job, down from 1.277 million the previous month.
This is close to pre-pandemic levels.
Job Streak
| Headline Jobs, Top 10 Streaks | ||
|---|---|---|
| Year Ended | Streak, Months | |
| 1 | 2019 | 100 |
| 2 | 1990 | 48 |
| 3 | 2007 | 46 |
| 4 | 1979 | 45 |
| 5 | 20241 | 38 |
| 6 tie | 1943 | 33 |
| 6 tie | 1986 | 33 |
| 6 tie | 2000 | 33 |
| 9 | 1967 | 29 |
| 10 | 1995 | 25 |
| 1Currrent Streak | ||
Summary:
The headline monthly jobs number was above consensus expectations; however, December and January payrolls were revised down by 167,000 combined. The participation rate was unchanged, the employment population ratio decreased, and the unemployment rate was increased to 3.9%. Another solid report.
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