This Time is NOT Different
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A staggering $6.5 trillion now sits in money market funds as of November 2024.
Even Warren Buffett is keeping a record $325 billion in cash, primarily in these instruments to earn steady yields.
3 key moments have seen similar rapid increases in money market assets:
The pattern is clear - when the financial world hoards cash at this scale, rough times often follow.
Understanding Today's Cash Appeal
If markets are booming, why is $6.5 trillion parked in money market funds?
Well, current money market yields hover around 5% - in the higher range of the last 20 years.
While not spectacular, this 5% return becomes compelling when compared to the S&P 500's earnings yield of just 3%.
This inverted relationship is particularly noteworthy because throughout most of history, the S&P 500's return on investment has exceeded cash yields.
Today's reversal of this pattern helps explain why some investors are questioning stocks as long-term investments.
Moreover, when compared to inflation rates, current cash yields offer positive real returns, making cash more appealing.
Positive real interest rates occur when cash yields outpace inflation, preserving purchasing power.
Negative real interest rates were very common over the last 30 years, which encouraged spending and investing.
Today’s positive rates mark a fundamental shift, changing how both businesses and individuals allocate capital.
At Bravos Research, we're capitalizing on market opportunities despite these conditions.
We recently closed our Ethereum position for a 36.7% profit.
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Real Interest Rates and Economic Impact
Today's positive real interest rates of about 2% carry significant implications.
Historically, such levels have preceded recessions as they fundamentally change economic behavior.
When real rates turn positive, both individuals and businesses tend to save rather than spend or invest.
This reduces demand, raises unemployment, and slows economic growth.
As economist John Maynard Keynes said “The propensity to save will defeat its own purpose.”
When corporations build cash reserves instead of investing in new projects or hiring, economic growth typically suffers.
We're seeing this pattern today through surging large time deposits, similar to the pre-financial crisis.
However, Milton Friedman offered a contrasting view, arguing that higher savings provide the foundation for future growth and productivity.
This aligns with business cycle theory - economic downturns create conditions for future upswings when accumulated cash gets deployed into new investments.
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This "pent-up demand" is a critical part of the business cycle.
The question is: when will today’s $6.5 trillion in cash reserves start flowing back into the economy?
Historically, cash in money market funds is only deployed during or after economic downturns.
The trigger?
Negative real interest rates, which makes holding cash unattractive.
Negative real rates occur when cash yields fall below inflation, eroding purchasing power.
This pushes investors to redeploy funds into higher-yielding assets, kickstarting economic growth.
But historically, the Fed has never pushed rates into negative territory without a recession occurring first.
2 Potential Market Scenarios
Now there are 2 potential paths that lie ahead:
Scenario 1:
A recession materializes, ending the current cycle but setting up conditions for a new boom through:
If a recession happens though, it would very likely end this bull market.
The stock market does not usually thrive in an economy undergoing an economic downturn.
Scenario 2:
The economy maintains stability with elevated rates, similar to periods in:
During these periods, the US stock market has typically thrived.
Our View
Our view was that a recession may happen by early 2025, but until key indicators start flashing red, we don’t expect an immediate downturn.
One of them, for example, is US initial jobless claims that gives us a good idea of the state of the US job market.
Currently, claims remain below the critical 260,000 level and have actually been declining recently.
This pattern mirrors the late 1990s, when falling claims supported continued market strength until the job market eventually cracked.
Elevated money market assets suggest that we're in the latter stages of this economic cycle.
However, history shows that these periods can last longer than expected before a downturn occurs.
Our strategy focuses on current opportunities rather than waiting for recession signals.
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