An interesting statistic stood out in the NinetyOne newsletter: US money market fund assets hit a new record of $5.58trn compared to the $4trn of the 2008 Global Financial Crisis. This trend is not just seen in the US. In South Africa, nearly R400 billion is kept in money market funds, mostly by the average Jo. This is over and above the R1.6trn in retail household bank deposits.
Although the returns on money market funds have recently been better, after-tax returns rarely keep up with inflation. If these funds had instead been invested in equity markets in South Africa or global equity markets, they would have yielded returns of more than 15% over the past year. It begs the question of why do people hold so much cash these days?
People hoard cash when they’re uncertain. When people fear for their jobs, or feel unsure about their economic future, they want a safety net around them. The extent of the current cash build-up indicates that the general population feels unsafe. And it is not for purely economic reasons: despite interest rates rising and the price of a normal basket of household goods climbing steadily, economic times have been tighter. We have yet to see deep recessionary conditions.
It may be that the world is just feeling more unsafe. There is more uncertainty around global economic policy and socio-political developments. Technological advances are starting to disrupt industries. Job losses are becoming real. It also may be that more people’s lives are in flux. Since the pandemic, people have been more inclined to make serious life changes like moving or changing jobs.
This uncertainty is not just cyclical. We’re not just seeing a normal economic cycle play out. Economic uncertainty has become a permanent feature of our world. And we need to make peace with this uncertainty.
By implication, we need to become more astute at investing in uncertainty. One of the best things may be to hold a larger cash moat much like a castle had a moat in the Middle Ages.
The purpose of a moat was to protect a castle from enemy attack. It was not to keep the inhabitants of a castle locked in. Inhabitants could still come and go about their business outside the castle. Similarly, a cash moat should be just big enough to protect us from financial enemies, but also still enable us to continue investing for our future, and our livelihood.
A cash moat is not the only means of protection against uncertainty. Our ability to be self-sustaining inside the castle and tighten our belts when the draw bridge is up is also important. We must adapt, learn and change when we need to.
Learning to live with uncertainty is a crucial skill for the world we live in, especially for our financial well-being. Holding the right-sized cash moat makes sense, but we cannot rely solely on cash to make us feel safe. We must also adapt to uncertainty in other ways.
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Kind regards,
Sunél