This Time is NOT Different.

$6.5 trillion that is the amount of cash that's currently on the sidelines and what's called money market funds as of November of 2024 you may have heard for example of Warren Buffett keeping a record $325 billion worth of cash well that money is stored in instruments like money market funds that allows him to earn a steady yield on his cash throughout recent Financial history we've had three key moments where money market fund assets have risen at the same rapid Pace as the are today in the few years before the 2011.com recession occurred in the year

leading up to the great financial crisis and in the year leading up to the pandemic one thing is clear when the financial world is hoarding cash like it is today something bad typically happens so the question now is whether this time is going to be different well for starters the current macro conditions are aligned for investors to see cash as an interesting investment this is the average yield that you currently see in Money Market funds today it's hovering it around down 5% which is in the higher range of what we've seen over the last 20

years a 5% return on investment isn't spectacular by any means but it's also not terrible and it's actually quite good when you compare that to the S&P 500's earnings yield which is hovering at 3% today the S&P 500 earnings yield is basically the return on investment of being invested in the S&P 500 throughout most of History the S&P 500's return on investment is higher than the yield that you get for holding cash which makes it more attractive for investors to buy the S&P 500 rather than stay invested in cash today that's not the case an

investors like Warren Buffett are likely seeing this and concluding that stocks aren't a particularly good long-term investment the yield on cash on the other hand looks quite good at the current yield because when you compare this yield to the rate of inflation the yield on cash is currently quite a bit higher than the rate of inflation in the United States this is also what's called having positive real interest rates real meaning that it's been adjusted for inflation sometimes the US economy has had positive real interest rates like today but in certain periods of History we've

seen negative real interest rates and that's something that became quite common over the last 20 to 30 years looking at interest rates but adjusted for inflation is essential to understand what is happening in the economy today this is what inflation adjusted interest rates or real interest rates look like going back to the 1980s and today real interest rates are at about 2% in positive territory and what's very interesting is that when interest rates have been positive to the extent to which they are today that's often been followed by an economic recession in the United States

as you can see marked here by these gray recession bars these are typically the moment where unemployment in the United States is rising the reason this happens is because when real interest rates are positive it leads people and businesses to save up rather than spend and invest as John Maynard came means one of the most influential economists put it the propensity to save will defeat its own purpose his theory suggested that higher Savings in the economy will lead to lower demand for goods and services and so a less prosperous economy so basically saying that when

people and businesses save up that hurts the economy indeed if corporations are ramping up their cash piles rather than investing in new projects and hiring new workers the economy is unlikely to prosper and that's exactly what is happening today for examp example large time deposits have absolutely surged over the last couple of years as a result of these attractive interest rate levels again this is something that we also saw in the leadup to the great financial crisis there is good news however not all economists agree with canes Milton Freeman for example said that the level

of savings in a country is a key determinant of its long-term economic growth and productivity savings provide the resources for investment indeed a company or individual that has saved up enough money will be able to take on larger new projects that require a certain starting Capital something that it wouldn't be able to do without saving and this can fuel economic Prosperity this is a core concept behind the theory of the business cycle downswings in the economy set the stage up for the upward swings that follow the upwards swing starts when all of the cash that

was saved up in the peaking process and during the downturn starts to get deployed back into large Investments projects that fuel an economic boom so when is the US going to reach this phase where all of that cash finally gets deployed back into the economy that's the million dooll question well when we look at historical data on money market funds these large cash reserves that were built up heading into and during the recessions only get deployed towards the end of the economic downturn or completely afterwards and there is a clear Catalyst for this while positive

real interest rates typically lead to these big surges in cash hoarding negative real interest rates are what eventually leads all of that saved up cash to be deployed back into the economy which can create a big economic boom because remember when real interest rates are negative it means that cash is yielding a lower return than the rate of inflation so it doesn't make sense to keep cash when you're just losing purchasing power if we come back to our chart of real interest rates we see that they only go into negative territory during or after economic

downturn that is because the federal Reser Reserve only lowers interest rates enough for them to be negative when the economy is struggling and they want to stimulate economic growth they have never brought interest rates down into negative territory without a recession occurring so that leaves us with two potential scenarios for the US economy looking forward scenario one a recession occurs in the near future ending the previous business cycle and kickstarting a new one causing real interest rates to go back into negative territory and creating an economic boom usually when this happens it's not such a

great sign for the US Stock Market the stock market definitely does not like when the economy is experiencing a recession scenario 2 we don't see a recession we see the economy hold up quite well keeping interest rates steady at these high levels there has been a handful of periods throughout history where real interest rates have been able to stay steady at these kinds of elevated levels in the mid 1980s in the late 1990s and even briefly in 2006 2007 when we look at the US Stock Market during these periods it was thriving in fact we've

already been in this situation since about June of 2023 and look at what the stock market has been doing during this period this is a very similar environment to the late 1990s now we've been of the view that a recession is likely to happen by January of 2025 if that does materialize it would put an end to this Raging Bull Market just like it did in 2000 however most of the indicators that we're looking at with our clients are not yet flashing an imminent recession signal one of them for example initial jobless claims in the

United States that gives us a good idea of where the US job market stands seeing initial jobless claims move above 260,000 would be incredibly concerning for us and suggest the economy is heading into a recession as you can see more recently that's not what's been happening initial jobless claims have been coming down when you look at the late 1990s initial jobless claims were also trending lower which allowed the stock market to Trend higher it's only when the job market began to crack that the stock stock market began to decline so we think that's where we're

at today the rise in money market fund assets is a great indication of where we are in the economic cycle we're definitely closer to the end of one rather than the beginning but as we can see from the late 1990s this type of environment can last a while before an actual downturn occurs we didn't get our insane 2024 trading performance by waiting around for a recession to happen opportunities are presenting themselves every day in markets and we share them with our clients as we see the