In December 2008, shortly after the failure of AIG and Lehman Brothers, the Federal Reserve Bank first cut its overnight lending rate to 0%. It left rates at that level until December 2015. As the markets started to experience volatility when the Fed began raising interest rates very slowly, the Fed backed off its rate hike campaign. Subsequently, as the economy was shut down in the spring of 2020 due to the COVID-19 coronavirus outbreak, the Fed once again took interest rates back to 0%, where they left them until March ‘22.
Over this 14-year period, many clients came to us with excess cash in their bank accounts wanting to know if they could invest them in low-risk, liquid alternatives with a higher rate of return. Unfortunately, for those who practiced good savings habits, which include many of our clients, the answer was TINA…There Is NO Alternative. As you can see in our first chart below, three years ago interest rates across the spectrum were being held artificially low by central bank policy. This led to no real options for investing excess liquidity. In essence, we were penalizing or taxing savers, people who were doing the responsible thing financially, in order to incentivize or entice borrowers with these artificially low-interest rates.
Source: Bespoke Investment Group
Since then, the Fed has raised interest rates 5 ½%, so far, in just the last year and a half, TINA is being replaced with TIAA…There Is An Alternative. As you can see in our second chart, also from our friends at Bespoke Investment Group, the interest rate environment has been turned on its head. We are now seeing interest rates in short-term, high-quality, and highly liquid assets at rates we have not seen in nearly 20 years.
Source: Bespoke Investment Group
Predictably, this has led to a flood of assets leaving banks and moving into investment instruments such as money market funds, treasury bills, and short-term bond funds. This has been exacerbated by uncertainty in the banking system, as evidenced by the failure of three regional banks in March and April of this year. People concerned about bank solvency and the limits of FDIC insurance have moved money, en masse, to these investments, as you can see below.
Sources: Capital Group, Investment Company Institute (ICI), Standard & Poor’s. As of June 30, 2023. Past results are not predictive of results in future periods.
I keep a copy of an article from early 2009 when the stock market was down more than 50% in the wake of the Great Financial Crisis. It coincides with money market funds peaking at $3.9 trillion, as you can see above. In the margin next to the article, I wrote “CASH = FEAR”. It meant that people were afraid to invest their money in stocks or bonds. Instead, they were willing to park their cash in money market funds that were paying 0%.
We saw a similar phenomenon play out in the spring of 2020, in the early days of the coronavirus outbreak. At that time, with interest rates once again near 0%, cash parked in money market funds hit a new peak of $4.8 trillion. You can see in the chart above that each time this happened previously, the market moved up dramatically over the next three months and six months.
We have no idea whether the same phenomenon will play out in the coming months. Unlike the previous two peaks in money market funds, this time the money being parked there is actually earning higher interest rates than we have seen in many years. This, along with economic and geopolitical fears, may keep this money parked in these vehicles longer than we would have expected previously, as TIAA is real.
Yes, TINA has been replaced by TIAA. The CFPs of Impel Wealth Management and our partners in the Horizon Advisor Network Investylitics committee will be watching this closely and stand ready to make adjustments to our model portfolios if and when necessary for the benefit of you, our trusted friends, and clients.
In the meantime, if you are sitting on excess liquidity or cash reserves at a bank that is still earning artificially low rates of return, TIAA is real and could benefit you. Feel free to reach out to your advisor about how we could help you and your family earn a higher rate of return on these funds.
© 2023 Jesse Hurst
The views stated are not necessarily the opinion of Cetera and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
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