The Great Financial Migration

The Great Migration was one of the largest movements of people in United States History. Approximately six million people moved from the American South to Northern, Midwestern, and Western states roughly from the 1910s until the 1970s. But nope, I am not referring to this.

The Inflation Story of this decade

Due to rising inflation since COVID-19, the Feds have been aggressively increasing interest rates. At one point in Jun’22, it hit a high of 9.1% in the United States and 7.483% in Sep’22 in Singapore. This has caused the Feds to increase interest rates 11 times in 1 year to the current federal funds rate of 5.25-5.5 percent.

By increasing interest rates, the average person pays more for mortgages, auto loans, and everything else that comes with taking on credit. Corporations pay more on their business loans, forcing them to freeze pay bumps, cut wages, or streamline their headcount. This leads to lesser wages being paid out and flowing into the economy. The outcome is that people spend less, thus destroying demand, increasing the supply of goods and services, and lowering the cost of selling.

Increasing interest rates can be seen as a terrible thing to us. However, without doing this, out-of-control inflation will lead to a much worse outcome.

Because of this, I coin inflation the silent killer. When I was dating back in my teens with my seventh girlfriend (I’m kidding), a movie ticket cost me about $9 on a weekend. Today, it’s about $14.50, and it can go up to $15.50 for the weekends. What about food, groceries, petrol prices, COE, and housing in Singapore, which have increased much higher in percentages than movie tickets? No doubt, Singapore is one of the most expensive cities to live in, tied with New York, Zurich, and Geneva according to a recent article by Forbes.

Nonetheless, the inevitable interest rate hike has brought inflation down as seen in the charts below. But do not be happy prematurely! One thing that people often misunderstand about inflation is that when inflation falls. It does not mean that goods and services are becoming MORE AFFORDABLE. It just means that goods and services are becoming MORE EXPENSIVE AT A SLOWER PACE. We would need deflation for our goods and services to become more affordable and for that to happen, it might spell greater trouble for us from an economic standpoint.

The rise of Money Market Funds (MMF)

With all that being said, most people did save more money during the pandemic. As interest rates were raised, so did yield from money market funds. Simply put, your money market funds consist of low-risk, short-term debt instruments such as treasuries, timed deposits, and commercial paper. It is probably the most go-to asset class in the last 3 years. This has caused MMF measured by fund houses to have doubled to more than 6.5 trillion USD in the last 3 years. What a staggering figure!

For the record, there are 12 zeroes in a trillion!

What happens when interest rates drops?

Do you think that MMF returns will still stay attractive?

Will investors start to pull money out from MMF?

Where will this money go to?

Should I stay in MMF or front-run the market before the rate cuts begin by entering the markets earlier to ride the stock market recovery when rates drop?

If I do so? Am I still considered early? Or have the market priced in the rate cuts?

Understanding the past

Back in 2008, rates were cut aggressively. The same happened during the Dot-com bubble. In both cases, the Fed cut interest rates as a tool to combat economic downturns resulting from financial market disruptions. Lower interest rates can help stimulate the economy by making borrowing cheaper, encouraging spending and investment, and ultimately supporting economic recovery.

Based on the example above, the Feds had to cut rates because they had no choice, they were forced into rate cuts because the economy started to break. So in this scenario, a rate cut did not send stocks flying!

What about now? If the Feds were to cut rates now, would this be the magic pill that sends the stock market up?

Prediction

If today, the Federal Reserve cut rates when they wanted to, and if it plays out to be a prerogative approach and not because they were forced to as the economy started breaking, that could lead to an explosive reaction from the stock market and the economy based on history.

However, if unemployment data goes up (BAD), consumer spending goes down (BAD) and consumer debt is going up (BAD), this might become a genuine concern that these rate cuts might be the former situation that I described. So, the fear here is that the rate cuts are the precursor to an economic meltdown!

Regardless, when rates start to cut, we will have an exorbitant amount of money moving out from the money market fund and this gargantuan sum of 12 zeroes will start to flow into risk assets!

I will confess. I do not have a crystal ball, but I have to make a stand for where I lean towards. That would mean that the market will continue to do well and rate cuts will be based on the Fed’s prerogative approach.

This is the time to invest and stay invested!

Nonetheless, we ought to continue to monitor the 3 key economic data I mentioned above, but at the moment, no bells are being rang and we are seeing a pro-business US president likely to be elected which is all good for the market!

Once again, as we deploy our money, always remember to:

1. Never sell house all in

2. Never go all in at once

3. Always keep your rainy day fund intact

This is not financial advice and should not be suitable for everyone. Invest safe!

Looking forward to the great financial migration happening and let’s ride up this bull market together!