Money market net inflows

Posted By Darren Winters on Oct 9, 2019

Money market net inflows

Capital flows are the holy grail of forecasting future asset prices, and the money market net inflows are telling us that there is a dash for cash in anticipation of the next market crash.

Money market net inflows have accelerated due to deteriorating economic indicators

The latest being ISM US manufacturing purchasing managers’ index which came in at 47.8% in September, the lowest since June 2009.

The ultra-strong US dollar has become the world’s largest economy’s Achilles’ heel with new export orders index tanking to 41%, the lowest level since March 2009. A strong US dollar has made US exports un-competitive in foreign markets. Moreover, a climate of protectionism is also a headwind for US manufacturing. 

Money market net inflows suggest that investors are positioning their portfolio for a manufacturing recession

“We have now tariffed our way into a manufacturing recession in the U.S. and globally,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group.

This chart which indicates a relentless decline in US manufacturing since the start of 2019.

“There is no end in sight to this slowdown, the recession risk is real” Torsten Slok, chief economist at Deutsche Bank said in a note Tuesday after the report.

Money market net inflows could also mean the realignment of fundamentals and price discovery in determining the trajectory of asset prices

Put simply, the central bank’s funny money to keep asset prices propped up will not cut it anymore. Think about it. Money market net inflows suggest that a lack of investor liquidity is not the problem. So the central bank can do quantitative easing QE to infinity but it will not solve investors’ lack of appetite for risk assets.

A state of disequilibrium is increasing demand for safe-haven liquid assets which could also explain money market net inflows

Money market net inflows

The central bank’s QE has failed as a long term monetary policy tool.

What has a decade of QE achieved? 

We see disequilibrium everywhere you look. The disequilibrium in productive and speculative investments. Captains of industry are less inclined to take a risk and invest in plant and machinery when easy profits can be made with stock buyback. So Capex spending is at an all-time low compared with speculative investing. We see the disequilibrium of risk in financial markets, even junk bonds have negative yields.

Social disequilibrium is also visible with wealth inequality at an all-time high. This spurs on the rise of popularism, protectionism, nationalism and that could, as many have noted, eventually lead us to war.

“Money market net inflows are at levels not seen since 2009” said senior research analyst at Lipper Pat Keon CFA.

The group’s [money markets] net inflow for Q3 is its fourth-highest ever (Lipper began tracking this data in 1992), trailing only the three consecutive quarters at the start of the crisis—Q3 2007 (+$319.4 billion), Q4 2007 (+$272.4 billion), and Q1 2008 (+$347.7 billion),” Keon said.

With recession fears looming already in June, as I reported, then it comes as no surprise that Money market net inflows are accelerating.

Four months ago nearly every single asset, except equities had priced in something of a sharp global slowdown. But I am less optimistic now that more central bank liquidity can save the markets from a downturn, bearing in mind that the geopolitical situation has deteriorated further since June.

Deflation, record debt levels and aging demographics (known as the Killer Ds) could also be fueling a doom loop and money market net inflows

We could be in the final phase of a forty-year cycle. It first started with the stagflation of the 70s, then the debt binge of the 90s and now the deflationary stage.

Many of the G7 countries, this is a group of seven countries that have the largest and most advanced economies, are experiencing lackluster consumption, low inflation, and aging populations. 

It is the latter point of aging populations that suggest that consumption is unlikely to pick up for the foreseeable future. Older people spend less money and produce far less than younger, more active generations do. Until not too long ago an aging population wasn’t seen as much of a problem since there were far more young people in the world than there were old. But the balance has been shifting for the last few decades, especially in Japan and Europe.

Demographics could be cementing a macro trend for haven assets which could also be contributing to money market net inflows and maybe even low sovereign yields

An aging population will have an impact on the demand for investment products. Older people have low or zero propensity to earn income from wages so their desire to save more will be greater than to make risky investments. 

So as the population ages and spends less we see deflation. Older people tend to hoard cash. 

A rise in the productivity of the workforce could offset an aging population. If the existing smaller workforce is more productive it could raise GDP and offset the impact of an aging population. But productivity levels are not rising in the G7 and we see deflation.

Equally deflationary conditions make the debt worse. If you borrow money at a fixed rate, a little inflation – or even a lot of inflation – helps a great deal. 

Money market net inflows suggest that the longest secular bull market in living memory could be laying down to rest

On average, bull markets last 4.5 years. The current bull market has been going on for almost 10 years. The case for the bull market lasting as markets enter the most polarized presidential election year ever in 2020 is waning.  So at some point, this bull market super-cycle is going to end, and it could be with a bang.

“Get out while you can, the outlook is darkening and the thunder is growing louder by the day” said Chris Rupkey, a chief financial economist at MUFG Union Bank in a note.

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