Why Fear Hoards Cash

“Do more of what works, and less of what doesn't.”
- Steve Clark

This four-year, vitriol-driven political marathon in America is exhausting.

The slings and arrows from each side hurl poison-tipped jibes back and forth, intending to reduce and destroy their opposite numbers amongst the donkey or elephant party faithful, while ultimately terrifying the product (the voters and their collage of representative colleges). 

Every vision of the future is deemed dire by those facing the other’s fence. And the rhetoric is emotive, patriotic, and leveraged wherever possible with the faces and narratives of injustice and inequality. 

And always the other side is wholly to blame.

Some rosy outlook, eh?

But it’s helpful to frame this framing. Because from that perspective we might be able to step back, even just a bit, and see more clearly the facts, figures, and undercurrents beneath all the painted figurines of politics and propaganda frothing up the surface waves.

That’s where the positive stuff is, the brighter future, and the history of stock market and economic performance that endorses our ingenuity and, perhaps most importantly, disassociates it from the politics of fear and the media’s commercial agenda. 

I’ve yet to encounter a successful investor who has met their wealth goals over time based on negativity about the future long-term prospects of America.

Off Track...

I have two suggestions about the social media you’re using: 

1. Try not using it for a week. I’m certain that when you do your stress levels will fall, and 
2. Thereafter it may well hit home that social media has become a drug; one that leads some to believe in things that technically do not exist. 

And if you’re not ready for that then take 90 minutes to watch the Netflix documentary "The Social Dilemma."  

Like it or not it will change your perspective about what and how things are unfolding.

And here’s a small reveal; while I am struck by the rather frightening first 80 minutes, the ending will shock you. That’s why the engineers and internal bigwigs at most of the social media platforms "aggressively limit" the time they permit any of their family members to use the very platforms that made them rich.  

Maybe it’s not so much about giving up the complete use of these tools. Just don’t confuse them for reality. Sounds trite, I know. Emojis do not a relationship make. You need people and direct contact for that.

Good News

Things are getting better.  

We’re all trying to tip-toe through the current stage of the media monster world. That stage where darn near any suggestion of positive news is not only bad but is met immediately with a suggestion that it likely means we either don’t care or are intent on causing some offence or other.

Just stop it.

Let's just focus on the good.

Earnings season starts this week (good Lord, I swear the last one just ended). 

This one is going to give us a stronger sense of the widespread business model shifts we are likely to see accelerate into 2021 and beyond. Folks, we will never go back to the old normal way of doing things. Embrace the new normal(s), even when it all feels a little scary.

Ands expect beats to be even more significant than last quarter as change speeds up margin improvements in every crack and crevice.

The forward four-quarter estimate for the S&P 500 returned to its familiar pattern of sequentially moving higher this week, printing $156.08 versus $155.98 last week.

This is set to bump about $10 as we roll the last 4th quarter into the 2021 forward look.

What remains the strong point is that since July 1, only two of the last 16 weeks have seen sequential declines in the forward estimate.

This weekly overview on the S&P 500 numbers - both expected EPS and revenue growth - shows that the positive trends remain in place, but analysts are still nervous about raising numbers in advance of seeing prints.  

It took them a decade to "catch-up" with the recovery momentum from the GFC in 2009 - and they were still underestimating.

This week there are a flood of banks, brokers, and money managers ready for the kick-off.  The two busiest weeks for this season will bracket election week.

More Detail?

• With the forward estimates improving sequentially to $156.08 from last week's $155.98, the forward PE is 22x (but see last bullet point).
• The S&P 500 forward earnings yield fell a little bit this week to 4.49% from 4.64% last week.
• The "average" expected calendar 2020 and 2021 S&P 500 EPS growth fell to 3.5% this week, from a long string of 4% prints.  This is the normal "hook" pattern before a season begins as analysts get nervous - let's see what it looks like after a few weeks of beats to the upside.  

As noted above, the "expected" 2021 EPS of $166.22 (once we get the Q4 rollover) is still above the 2019 actual EPS of $162.93.  

This number puts current values at a little under a 21 P/E - against the 10-year Bond P/E of 129.

Cash is Still the TOP Fear Trade

This first chart below tells you how well money markets are working.  

Think of it as a way of seeing whether the US Federal Reserve is behaving correctly, as Scott Grannis of the Calafia Beach Pundit blog helps put into perspective. 

The blue line is the inflation-adjusted Fed funds rate (i.e., the Fed's target rate minus the year over year change in the Core Personal Consumption Deflator), and the red line is the real yield on 5-year TIPS, which in turn is essentially the market's expectation of what the real funds rate will average over the next 5 years.

When the blue line is below the red line, the Fed is behaving well and the economy is healthy, because the market is expecting the real funds rate to rise in the future. 

But when the blue line is above the red line this means the Fed is so "tight" that the economy is likely to weaken and the Fed will eventually need to lower the real funds rate in response.

Today it looks like the Fed is just about right:

These next few charts are going to show you what panic looks like outside of sentiment surveys.  

Like I have always said when you look for important foundations: Watch what people do with their money, not how they answer surveys. 

To be blunt, the demand for cold hard cash has never been higher, and yet another record is set in the latest Fed data.

So, how much cash is on hand in various types of deposits? A cool $18.7 Trillion (nearly $11 Trillion in savings deposits alone):

The next chart below can be seen "as being a proxy for the amount of cash and cash equivalents the public wants to hold, expressed as a percentage of average annual income."

Now, prior to the Covid crisis, as a country we were comfortable holding a cash and cash-equivalent reserve equal to about 70% of our annual income; now it's almost 90%.

Money demand was relatively stable for many decades, but it has increased dramatically in the wake of the Great Recession and now during the Covid panic.

Think of this as a scale.

Fear hoards cash. And it’s hopeful to think we will very likely see this cash demand fall a good bit in the months and years to come as confidence returns, the phoenix once again rises from the ashes, and the economy does what it does; expands:

The economy is coiling.  

Just as you might think it’s ready to collapse it continues to surprise to the upside.  

After almost four decades in this business I’ve learned that the tougher and uglier the setback, the bigger and more robust the recovery. 

Now think about all those terrible times and horrible events of the past, and how unimaginable a recover seemed at the time.

Now think about right now. 

What do you think is going to happen next?