Transcript: Cash rethink energises asset markets

This is an audio transcript of the Unhedged podcast episode: ‘Cash rethink energises asset markets’

Ethan Wu
All through last year the question in markets was, yeah, OK, that’s a pretty good investment opportunity. But is it better than cash?

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And if it wasn’t, it wasn’t a good opportunity. We’ve been talking about interest rate cuts on the show recently and with that being the dominant market expectation, cash is potentially looking less attractive. Today on the show, the diminishing allure of cash. This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I’m reporter Ethan Wu here in New York, joined once again from London by markets columnist and queen of cash, Katie Martin.

Katie Martin
I’m happy to be queen of cash. It could have been worse, right? I could have been a cash cow, and I’m not. So I’ll be queen of cash.

Ethan Wu
Katie, I don’t think my employment would last particularly long if I called you a cash cow on the show. (Laughter)

Katie Martin
But, yeah, it’s, cash rules everything around me, right? Everyone’s talking about it right now.

Ethan Wu
Absolutely. It’s the logical question to ask when we talk about interest rate cuts. But, Katie, this is, you know, this is a broader markets discussion, but this is also, for me, kind of a personal conversation. I have a non-insignificant portion of my personal wealth in a money market fund, and it’s nice to get those returns have been pretty good recently. I think I get 4.5 per cent, but on some level I’m a little nervous about it. Like, what do I do with all that money, you know what I mean? And I know you’re not an investment advisor, but, you know, I’m sure you have some advice.

Katie Martin
I really don’t want to get the blame if I make you lose all of your money on some hideous crypto scheme. (Ethan laughs)

Ethan Wu
You’re not going to tell me to put it in dogecoin?

Katie Martin
I’m not. But look, it’s useful to define our terms a little bit here, right? We’re not, I’m assuming, Ethan, that you have more sense than to have your money in, like, literally paper money cash, like, put in a cupboard in your house somewhere. We’re talking like accounts. We’re talking like money market funds in the States, which are like, wildly popular. And we don’t have quite the same set-up in Europe. But, you know, we’re talking about money that’s put on deposit, that pays you some sort of rate that’s tied to the benchmark interest rate. And cash goes through these various phases. So like in 2020, like Ray Dalio, Mr hedge fund supremo from Bridgewater Associates, said cash is trash. Get your money out of cash. It didn’t pay you anything at the time. This is like four years ago. Interest rates were basically zero. You’re just sitting with a pot of money that never grew.

Fast forward to 2023 and suddenly cash was king. Like these sort of short-term savings accounts were paying you like, I don’t know, 5 per cent. That’s like a chunk of change. Like you have to put money in really risky investments a few years ago to kind of get that kind of rate of return. All of a sudden, you’re being paid 5 per cent for something that’s safe, really easy access, no drama, typically kind of boring. So, you know, I don’t blame you for having a lot of your no doubt substantial wealth, Ethan, stashed away in money market funds.

Ethan Wu
Very substantial. I know, and like you said, Katie last year, you know, money market funds, we’re kind of like, in some ways the big trade in markets. So we saw over $1tn move into those funds as interest rates moved above 5 per cent. The yields were attractive. They were competitive with the bond market. And, you know, I think as of the latest Federal Reserve data, there’s over $6.1tn in money market funds. Part of that, I think, is cash, like you said, has been so bad for so long that you would, you know, check your money market fund yield and it would be something depressing, like 0.01 per cent or whatever. I have like an acute childhood memory of looking at my bank statement. You know, I had my $100 of allowance in the bank and wondering, you know, I’m getting one-tenth of a penny of interest? That’s preposterous. That’s not true anymore.

Katie Martin
That’s like your origin story as a writer of a financial newsletter.

Ethan Wu
(Laughter) That’s where it all began. That’s where it all began.

Katie Martin
So teenage Ethan Wu there with your $100 in a checking account somewhere was horrified at the rate you were getting. You must have been feeling pretty clever last year, right?

Ethan Wu
Yes and no. On the one hand, yes, money market yields are the best they’ve been in a decade-plus. On the other hand, did you guys see what stocks did last year, right? It wasn’t 5 per cent. It wasn’t 10 per cent. It was 20 per cent on US stocks. So even though money market funds are competitive, that doesn’t mean they outperformed. Stocks are just, they feel unbeatable in the US over a long enough time horizon. And certainly last year, they were pretty much unbeatable.

Katie Martin
Yeah. Yeah. So yes, cash was like this huge success story in 2023. Like the inflows like you say, one point something trillion dollars into US money market funds last year. Trillion with a T — that’s a lot of money. Absolutely trounced the amount of money that went into similar like US equity funds or into bonds. But you do look at what happened in the stock market and you think, huh? Like, if I’d been like less of a scaredy cat and less cautious, and if I’d got out of cash, then there could have been like much more, much bigger returns for me there.

So this is the kind of dilemma now that investors are facing, whether they are, I’m going to say modest individual investors like you, Ethan, or whether they are like massive institutional asset managers. It’s time to get out of cash because those rates are falling. But where does it go instead? And, you know, the two obvious areas are stocks and bonds. It look, it makes sense to have some money squirrelled away in some sort of cash deposit money market type thing. Because you never know when you might need to pay a bill, or fix your roof, or fix your car. Or you might need some money to, like really easy-access money to spend on some sort of opportunity somewhere else in global markets, I don’t know. And that applies equally, whether you are Ethan Wu or another massive hedge fund/institutional asset manager. So no one is saying get out of this stuff completely. But all of the kind of year-ahead outlook research that I’ve read — and regular listeners will know I’m a bit of a nerd about these things — a consistent theme that runs through all of the Wall Street bank outlook stuff for 2024 is cut back on cash.

Ethan Wu
Yeah. And part of the investment case for cash is not only that it gives you a strong nominal yield, that it, you know, avoids losses if the stock or bond markets are challenged but also move optionality, right? That at any given point, if you see opportunities, you have like funds ready to go. You can withdraw them for the money market fund that day. You could deploy them into stocks and bonds immediately. But obviously that requires, like, pulling the trigger at some point. And then there’s a question of, OK, when do I pull the trigger? And there’s something about cash that has like an irrational flavour to it, I think. And you mentioned this in your column, Katie. You say that cash has a quote unquote, emotional appeal. And, I mean, I certainly feel that. It’s a lot less scary. You get your kind of nice, steady 4, 5 per cent yields rolling in. With stocks, it’s a lot of up and down. And I’m down today, I’m up today, and should I sell or should I buy?

Katie Martin
It’s drama. Yeah, it’s drama. And so I think that kind of experience is really common, actually. So what I’m picking up from the different sorts of investors that I speak to, you know, the large institutions are like, yeah, OK, we’re cutting back on cash allocations. But the investors that I speak to that kind of are advisers to wealthy individuals say they’re actually having quite a difficult time convincing those people that it is time to get out of cash. They say, well, it worked out for me pretty well last year, and so why should I get out of it now? And so I think, you know, different types of investors are going to move at different speeds here. But I do think we’re not gonna see the sorts of inflows from 2023 repeated over the course of this year. I think there will be, at the very minimum, much small allocations into cash and probably some withdrawals.

Ethan Wu
And if those withdrawals from cash into other asset classes are substantial, you know, it could be a serious tailwind for asset prices. Bank of America had a recent note where they’re predicting a great rotation from cash into stocks. And this is . . . 

Katie Martin
You make that sound very grand there, (changes accent) “great rotation”.

Ethan Wu
It’s not just a rotation, Katie. It’s a great rotation. And, you know, given the amount of money that’s flowed into cash and given the fact that flows are sort of the, you know, marginal setter of asset prices, this has been part of the bull case for equities this year, is there’s all this cash on the quote unquote, sidelines, waiting to go into something. And if those cash yields start to fall and maybe equities dip a little bit and there’s a, you know, a nice buying point for investors, you could see a lot of money rush in and push stocks back up, even though they’re at rather stretched valuations already.

Katie Martin
Yeah. This is what people in markets like to refer to as dry powder. All that cash that you’ve got squirrelled away, Ethan, your massive personal wealth that you’ve got in cash, that’s the way to think about it. It’s dry powder. But at the end of this conversation, are you more convinced to put it into something more economically useful?

Ethan Wu
Oh, man. I just, my general terror of the world I think suggests keeping it in cash. But, you know, rational investment process, analysing risk versus reward says put it in the bond market. Can lock in some good yields, get some capital gains as rates go down. I’m kind of feeling a bond fund. I might have to move it after this.

Katie Martin
Uh-oh. If it goes wrong, please don’t blame me. (Ethan laughs)

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Ethan Wu
Listeners, this is definitely not investment advice.

Katie Martin
(Laughter) I cannot stress this enough.

Ethan Wu
I may take it that way, but it is not, for legal reasons. We’ll be back in a moment with Long/Short.

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Welcome back. This is Long/Short, that part of the show where we go long a thing we love, short a thing we hate. Katie, I’m long the guy who shaved Ko Wen-je’s face on the back of his head.

Katie Martin
Nice.

Ethan Wu
As you might have heard . . . (Laughter)

Katie Martin
I’m really intrigued where this is going. Carry on.

Ethan Wu
As you might have heard, there was an election in Taiwan recently. And, you know, normally Taiwan’s a two-party democracy, but there’s been this insurgent third party called the Taiwan People’s party, led by this charismatic guy, Ko Wen-je, who’s the former mayor of New Taipei City. His supporters are very passionate about his candidacy. And one guy told his barber to shave Ko’s face on the back of his head, which invited a reprimand from election officials in the local Taiwanese media saying, hey, that’s a violation of election law, buddy. You’re not going into the booth with that. Put a hat on. But either way, I appreciate the dedication and I am long that guy.

Katie Martin
I appreciate the dedication. I think everyone should have political figures shaved into the back of their head or tattooed on their arm or something, apart from me.

Ethan Wu
It should be compulsory. I couldn’t agree more. Katie, are you short something?

Katie Martin
I think I’m gonna be short the Magnificent Seven, you know. Like, not short short, like not like kind of actively betting against Magnificent Seven but, you know, these are like, high-flying, massive tech stocks in the US that have completely been bossing global markets around for the past year or so, certainly. I don’t think they’re gonna, like, necessarily tank, but I do see a decent chance that they’re going to underperform the rest of the market. Nobody knows, but I’m gonna take a punt on short. 

Ethan Wu
Katie, I’ll have you know that a one Robert Armstrong took this exact same bet on a previous recent episode of Unhedged. Does that influence your opinion?

Katie Martin
Yes, I’m now long. (Ethan laughs)

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If his accounts are indicator, I’ve completely changed my view.

Ethan Wu
All right, Katie, thanks for being here on another Tuesday episode. We’ll have you back soon. And listeners, we’ll be back in your feed on Thursday with another episode of Unhedged. Catch you then.

Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com/unhedgedoffer. I’m Ethan Wu. Thanks for listening.

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