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Central-Planners Fail To Herd Money Market Funds Into Overpriced Stocks

Tyler Durden's picture


After years of deliberations and relentless scheming on how to make the multi-trillion money market funds less attractive, two weeks ago the SEC finally passed, with much industry pushback in a close 3 to 2 vote, regulation that among other things implemented gates on various money market funds, a move which both we and SEC commissioner Kara Stein explained would accelerate the exodus of funds out of MMFs and increase the risk of financial instability in a rickety, house of cards, system. Of course, forcing money flows out of MMFs and into risky assets was the goal of "regulators" and the Fed all along - after all someone has to come in and pick up the baton from a Fed which is no longer in the business of injecting nearly $100 billion in the stock market every month: what better replacement than a forced reallocation out of the $2.6 trillion money market industry.

“We’re definitely worried about breaking the buck,” Verett Mims, assistant treasurer at Chicago-based Boeing, said in a telephone interview on July 30. “That’s our biggest problem, the notion of principal preservation.”


The state of Maryland may also refrain from investing in prime money-market funds as a result of the floating-price rule, according to its treasurer, Nancy Kopp.


The changes “make these money market funds less usable, if not usable at all as investment vehicles,” she said in a July 22 conference call organized by the Chamber of Conference.

Sadly for the central planners, while they succeeded in the first part of their plan, namely getting investors to flee from money market funds, they failed in getting the money to flow into the desired asset class: stocks. Instead, money market funds are rushing at an unprecedented pace into that other most hated by the Fed, after precious metals of course, asset: Treasurys. Most hated because declining yields disprove all the propaganda about an improving economy as they do, or at least did, imply deflation down the road: hardly the stuff robust 3%+ recoveries are made of.

As Bloomberg reports, "one of the biggest winners in the push to make money-market funds safer for investors is turning out to be none other than the U.S. government." Actually, no, because the fate of the US government is now far more closely linked to the stock market ponzi than it is to the bond market, which after all the Fed can monetize directly. Allowing Yellen to legally buy stocks in the open market (as opposed to through Citadel) however, would require changing the Fed's charter.

Rules adopted by regulators last month will require money funds that invest in riskier assets to abandon their traditional $1 share-price floor and disclose daily changes in value. For companies that use the funds like bank accounts, the prospect of prices falling below $1 may prompt them to shift their cash into the shortest-term Treasuries, creating as much as $500 billion of demand in two years, according to Bank of America Corp.

Some examples include  Boeing and the state of Maryland who are already looking to make the switch to avoid the possibility of any potential losses. Bloomberg notes that "with the $1.39 trillion U.S. bill market accounting for the smallest share of Treasuries in six decades, the extra demand may help the world’s largest debtor nation contain its own funding costs as the Federal Reserve moves to raise interest rates." Well, yes: but that's not what the Fed wants - it would much prefer modestly rising rates if that means soaring stocks to keep the equity bubble inflated. After all pundit after pundit keeps pounding the table on the "bond bubble", which of course means that the real bubble is in stocks.

“Whether investors move into government institutional money-market funds or just buy securities themselves, there will be a large demand” for short-dated debt, Jim Lee, head of U.S. derivatives strategy at Royal Bank of Scotland Group Plc’s capital markets unit in Stamford, Connecticut, said in a telephone interview on July 28. “That will lower yields.”


He predicts investors may shift as much as $350 billion to money-market funds that invest only in government debt.

Bank of America, which also has hated Treasurys as an asset class since mid-2013, also chimes in:

Investors using prime funds to manage their idle cash may find floating prices an unnecessary risk when differences in fund rates are so minimal, said Brian Smedley, an interest-rate strategist at Bank of America in New York. He estimates about half the $964 billion held in institutional prime funds will flow into those that only invest in government debt and yield about 0.013 percentage point less, before the new rules become fully effective in 2016.

With demand set to surge, supply of high quality collateral, aka Treasurys, continues to decline:

As more companies opt for the safety of government debt, the supply of Treasury bills stands to decrease further. With the Obama administration projecting the deficit will narrow to a six-year low of $583 billion, the Treasury Department has pared its issuance of the short-term debt.


U.S. government securities due in four weeks to one year account for just 11.5 percent of the $12.1 trillion market for Treasuries, the smallest proportion in data compiled by Barclays Plc going back to 1952. As recently as 2008, bills accounted for more than third of the total.


This lack of supply, coupled with the money-market fund shift, mean short-term rates will remain low, Deborah Cunningham, the head of money-market funds at Pittsburgh-based Federated Investors Inc., which oversees $245 billion in short-term securities, said in a July 31 telephone interview.

It also means that the latest self-fulfilling prophecy, namely that MMF cash will flow into bond funds, will be actualized, much to the chagrin of the Princeton economics department.

Those curious what recent MMF regulation change means for various asset classes are encouraged to skim the following table from JPM:

But before we declare victory over central planning, don't forget that the "regulators", the Fed and the SEC, are already contemplating the next step: recall that as we reported in June, "the Fed is preparing to impose "exit fee" gates on bond funds, in what, the official narrative goes, is an attempt to prevent a panicked rush for the exits. Of course, this is diametrically opposite of what the truth is."

Here one should clearly ignore here what the Fed itself said about the "logic" behind such an action, and how that too will ultimately backfire.

Our results have broader policy signi cance. Rules that provide intermediaries, such as MMFs, the ability to restrict redemptions when liquidity falls short may threaten financial stability by setting up the possibility of preemptive runs. Much of the wider policy signi cance of that risk is beyond the scope of this paper, since our model does not incorporate the large negative externalities associated with runs on financial institutions, including MMFs. But one notable concern, given the similarity of MMF portfolios, is that a preemptive run on one fund might cause investors in other funds to reassess whether risks in their funds are indeed vanishingly small.

And why worry about "backfiring" when the Fed already knows it is all in and any diversion from the herding path will merely result in the systemic reset arriving that much faster.

The bottom line is simple: the Fed will continue herding investors as long as it takes: first out of the money market funds, then out of bond funds, until the only possible investment product remains triple digit P/E stocks, and everyone is all the biggest market ponzi bubble of all time.


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Tue, 08/05/2014 - 09:40 | 5048388 IronShield
IronShield's picture

Market goes up, make money.

Market goes down, make money.

What's the problem?

Tue, 08/05/2014 - 09:42 | 5048399 Bill of Rights
Bill of Rights's picture

Its not really money ?

Tue, 08/05/2014 - 09:47 | 5048434 Thought Processor
Thought Processor's picture



Because if they devalue the USD when everyone is in Money Market funds there will be revolution over night.


In order for the slight of hand to work the masses must be in something that has 'no' legal gaurantee of a return.  That would be stocks and stocks alone.



Tue, 08/05/2014 - 09:59 | 5048497 NidStyles
NidStyles's picture


Tue, 08/05/2014 - 10:10 | 5048548 Pladizow
Pladizow's picture

These changes only apply to institutional investors, not retail - correct?

Tue, 08/05/2014 - 10:29 | 5048645 Leonardo Fibonacci2
Leonardo Fibonacci2's picture

The tribe just moving the herd in the right direction so that the sheeple could be sheered.  Wool=Shekels. Besides its just goyims and Lloyd is doing God's work.

Tue, 08/05/2014 - 10:44 | 5048732 Manthong
Manthong's picture

“our biggest problem, the notion of principal preservation”

That is about the most infuriating thing I have read in a long time.

I think that idiots biggest problem needs to turn to preserving his own ass - and soon.

Tue, 08/05/2014 - 09:49 | 5048437 IronShield
IronShield's picture

I'm pretty sure I can still get my overpriced cup of joe using that 'money'; until I can't.  ;-)

Tue, 08/05/2014 - 09:56 | 5048456 Dr. Engali
Dr. Engali's picture

You've just unwittingly shown in your statement why the currency that you are using to buy that over priced cup of coffee with is not money.

Tue, 08/05/2014 - 09:59 | 5048498 IronShield
IronShield's picture

Sea shells are so yesteryear; get with the times.  Perhaps bitcoins are more to your liking?  Gold?  Nah, that's for saving. Silver? Tulips?

Tue, 08/05/2014 - 09:54 | 5048465 LawsofPhysics
LawsofPhysics's picture

"Its not really money ?"  -  bingo.  Let the hyperinflation begin.  Items required for survival are already leading the way...

Tue, 08/05/2014 - 09:59 | 5048491 IronShield
IronShield's picture

Like silver?

Tue, 08/05/2014 - 10:04 | 5048516 LawsofPhysics
LawsofPhysics's picture

Silver is not required for your survival, but yes, I do love a sale.


Not a very critical thinker are you?

Tue, 08/05/2014 - 10:07 | 5048531 IronShield
IronShield's picture

So, silver will decline in price during a hyperinflation?  Not seeing the logic in your statements; likely because there is none.  And I'm not a very critical thinker???  Ho Lee Fuk.

Tue, 08/05/2014 - 10:17 | 5048584 LawsofPhysics
LawsofPhysics's picture

If the dollar is temporarily stonger (more purchasing power), why wouldn't you think it might temporarily buy more silver?

Again, I think my statement holds.

Tue, 08/05/2014 - 10:26 | 5048638 IronShield
IronShield's picture

What are you pricing silver in again?  Fiat, money, MOE; whatever you call it, you need it, until you don't. 

Silver is a funny thing; like to watch but made money on it long ago.  Now just a train wreck; and so are the purchasers.  Will it outpace (hyper)inflation?  Perhaps, but there are much better alternatives (as you should know).  ;-)

Tue, 08/05/2014 - 12:04 | 5049231 syntaxterror
syntaxterror's picture

Don't cry for me Argentina!

Tue, 08/05/2014 - 10:09 | 5048542 curbyourrisk
curbyourrisk's picture

No...not Silver..



Tue, 08/05/2014 - 10:10 | 5048549 IronShield
IronShield's picture


Tue, 08/05/2014 - 11:32 | 5049016 F0ster
F0ster's picture

Got Gold?

Tue, 08/05/2014 - 10:41 | 5048723 Bossman1967
Bossman1967's picture

what and who do these people think they are? precious metals suck but in the end I have my assets and my ass. I feel sorry for the sheep. the wolf of wall street licking his chops.

Tue, 08/05/2014 - 10:41 | 5048724 Bossman1967
Bossman1967's picture

what and who do these people think they are? precious metals suck but in the end I have my assets and my ass. I feel sorry for the sheep. the wolf of wall street licking his chops.

Tue, 08/05/2014 - 10:41 | 5048725 Bossman1967
Bossman1967's picture

what and who do these people think they are? precious metals suck but in the end I have my assets and my ass. I feel sorry for the sheep. the wolf of wall street licking his chops.

Tue, 08/05/2014 - 09:44 | 5048409 ToNYC
ToNYC's picture

The fruit of the ignorant tree is found ripe only when it speaks or falls on the ground.

Tue, 08/05/2014 - 11:50 | 5049139 besnook
besnook's picture

why are so many italian americans named tony? immigrant parents tagged their children's clothes with "to ny" in case they got seperated.

Tue, 08/05/2014 - 09:44 | 5048414 Colonel Klink
Colonel Klink's picture

If they're rushing into PMs the price certainly doesn't show it.

Tue, 08/05/2014 - 10:01 | 5048504 NidStyles
NidStyles's picture

Emerging markets?

Tue, 08/05/2014 - 09:45 | 5048424 pashley1411
pashley1411's picture

Not sure herding money into government treasuries isn't the plan.

Restrictions on withdraws - go into treasuries; stocks to moon-shot levels = treasuries, tax the hell out of income = treasuries.   

The objective is to turn all instruments of society into mere supporting props of the imperium (what was the "f" word again?).  

Seems like things are proceeding right on track.

Tue, 08/05/2014 - 09:54 | 5048467 Tyler Durden
Tyler Durden's picture

It isn't the plan, at least not yet: "Fed Prepares to Gate Bond Funds"

The Fed is hoping it can push the 10Y to 3.5% to "validate" a growth narrative, without spooking stocks too much.

Tue, 08/05/2014 - 10:02 | 5048503 ekm1
ekm1's picture

Fed can make 10y yield at 3.5%  and Dow at 50k in 4 weeks if they are told to.

Just mark up the numbers on computer gradually.

No trading needed.


The fact is nobody cares about the Fed. 

All what insolvent oligarchs care about is $1.4 quadrillion swaps and trying to expropriate energy and commodity assets from solvent oligarchs around the world

Tue, 08/05/2014 - 10:12 | 5048547 LawsofPhysics
LawsofPhysics's picture

Sorry tylers, but I think this is the real issue.  The Fed, the U.S. government, and the NYSE seem to be fighting for their very credibility at this point.  The very relevance and sphere of influence (although still great) seems to be decreasing at an exponential rate.

The only thing I know well is my profession, farming.  We are are actually selling more to foreign  markets right now.  That's right, I am exporting more soybeans, sorghum, nuts, and now fruits (apples and pears) then I am selling in the states.  Good luck to all those SNAP babies in the cities, our cities will soon be just like all the other cities around the planet.  These fuckers in the states don't know how good they have it.

I never in my lifetime thought that I would be holding foreign reserves, but here the fuck I am, and today I am buying more physical silver with them today.

Tue, 08/05/2014 - 10:14 | 5048560 ekm1
ekm1's picture

If you are in farming, you know everything.

We should ask you for feedback, advises and opinions


By the way, I'm buying only US and Canadian food here in Toronto.

Tue, 08/05/2014 - 10:18 | 5048567 LawsofPhysics
LawsofPhysics's picture

"poor" people in America need to be sent to south america so they can see what "poor" really means.

Tue, 08/05/2014 - 10:19 | 5048604 ekm1
ekm1's picture

10000% concur

Tue, 08/05/2014 - 10:31 | 5048658 IronShield
IronShield's picture

That's why we're exceptional.

Tue, 08/05/2014 - 11:29 | 5048989 Redneck Hippy
Redneck Hippy's picture

Poor people is South America need to be sent to Africa so they can see what "poor" really means.

Tue, 08/05/2014 - 11:43 | 5049092 besnook
besnook's picture

why travel so far when both can see the working definition of poverty in haiti.....and it is warm in the winter.

Tue, 08/05/2014 - 15:03 | 5050424 LawsofPhysics
LawsofPhysics's picture

The "poor" in Africa are quickly becoming the poor and dead.  Big difference.

Tue, 08/05/2014 - 10:54 | 5048788 oudinot
oudinot's picture

Most American produce is GMO: I would strongly advise you not to eat the crap.

Tue, 08/05/2014 - 11:16 | 5048913 LawsofPhysics
LawsofPhysics's picture

"Most of the earth's produce consumed by humans is GMO" - fixed it for you.  Everyone (all 7+ billion) are certainly free to try and grow 100% of the food they consumed, but the math and biological cycles required to do that are what they are...

Please, wake the fuck up, humanity isn't just another unsustainable ponzi, it's the unsustainable ponzi.

Tue, 08/05/2014 - 10:16 | 5048573 NoDebt
NoDebt's picture

I'm not sure this change will affect the 10-year much.  That's too long if you're looking for the next closest thing to a Money Market fund.  1 year Treasuries or less, exactly like is already starting to happen seems like where most/all of the effect would be concentrated.

So, I think the Fed can still play different games to get the 10-year to their 3+% target while this is happening on the short end.

And then Larry Kudlow can make a return appearance on CNBC and gush about the virtues of an "upward sloping yield curve" and how great all this is.

Tue, 08/05/2014 - 10:24 | 5048617 Thought Processor
Thought Processor's picture


It isn't the plan, at least not yet: "Fed Prepares to Gate Bond Funds"

The Fed is hoping it can push the 10Y to 3.5% to "validate" a growth narrative, without spooking stocks too much.



Though my guess is that they herd everyone in stocks and then after that drop the hammer on the USD (via some event perhaps).  Then a 'solution' will be offered up to make it all better whereby they will allow a swap into treasuries at some pretermined 'valuation' of former equity holdings.  Market operations would have to be suspended for this to work though (reason for said event above).   It would be a defacto USD devaluation, market re-valuation, and treasury bail in all in one fell swoop.  It would be the Trifecta of resets.

Call it my conspiracy theory for events that have not happened yet (pre-conspiracy theory?!).


Potential 'events' are lining up though, just take your pick- war, ebola hitting the financial centers, and we can't forget the ever present 'terrist' threat / event.  

Something will be used to kick it all off.  And they are getting near the end of their rope.

Tue, 08/05/2014 - 09:47 | 5048429 CheapBastard
CheapBastard's picture

So everything is Bullish, right?

Tue, 08/05/2014 - 09:49 | 5048439 dbTX
dbTX's picture

Stack them high, silver is on sale today.

Tue, 08/05/2014 - 09:50 | 5048445 Dr. Engali
Dr. Engali's picture

"With demand set to surge, supply of high quality collateral, aka Treasurys, continues to declin:


The solution is simple..... bigger deficits.

Tue, 08/05/2014 - 09:50 | 5048447 GFORCE
GFORCE's picture

Money funds will buy the dips. So yes, the CBs will win.

Tue, 08/05/2014 - 09:51 | 5048451 mastersnark
mastersnark's picture

The Fed just needs to start printing S&P 500 stock. No one cares if the stock was actually issued by the company; that's as outdated as "fundamentals."

Tue, 08/05/2014 - 09:52 | 5048454 Sudden Debt
Sudden Debt's picture

yep... we've finally reached PEAK STUPIDITY!

Tue, 08/05/2014 - 09:55 | 5048468 Grande Tetons
Grande Tetons's picture

Are you suggesting that intelligence is on the horizon? 

Tue, 08/05/2014 - 09:55 | 5048475 Bill of Rights
Bill of Rights's picture
Thomas Piketty Cut to Shreds By a Direct Student of Ludwig von Mises


Tue, 08/05/2014 - 10:28 | 5048642 NotApplicable
NotApplicable's picture

One of these days I might continue reading Reisman's book, but so far, I've never been able to get past my aggravation at his flawed outlook of "necessary statism." Which really sucks, given he's the highest profile student of Mises alive today. When he starts preaching about the duty of "good citizens" it sickens me.

Maybe if I drink more first.

I agree though, this is an excellent article clearly demonstrating Piketty's ignorance in all things economic. Of course, it won't matter to the even more ignorant intelligentsia that follow him, as their world-view centers on the emotional underpinnings of Marxism, rather than the rational ideas of how humans act and why (as well as the ramifications of these actions).

Reisman could talk until he's blue in the face, and he'll never get a single acknowledgement from these idiots because they refuse to allow themselves to think outside of their emotional box. Instead, they will listen for keywords in order to turn the conversation into a debate.

Fucking sophists!

Tue, 08/05/2014 - 14:20 | 5050119 KnuckleDragger-X
KnuckleDragger-X's picture

Kind of depends on how you define "good citizen". I define it  as paranoid, pessimistic and heavily armed.

Tue, 08/05/2014 - 09:59 | 5048492 youngman
youngman's picture

The Fed will pull many things out of their toolbox when they see the end is near....and it will not be free will lock thing up and quick I bet...from ATMs to selling of stocks and bonds....short sellers rules...etc..they will cheat big time...the rules of the game today..will not be the same tomorrow

Tue, 08/05/2014 - 10:05 | 5048518 junction
junction's picture

Maybe the next thing the Fed will pull out of its toolbox will be a gun, telling you to hand over 10% of fund assets, to be put in the Fed lockbox.  Refer to the Cyprus situation. 

Tue, 08/05/2014 - 10:09 | 5048544 TabakLover
TabakLover's picture

If PM demand is up.....why are the prices down?

Tue, 08/05/2014 - 10:17 | 5048586 1stepcloser
1stepcloser's picture

Supply of paper PM is increasing faster

Tue, 08/05/2014 - 10:19 | 5048594 hairball48
hairball48's picture

Can you say "naked short selling"?

Tue, 08/05/2014 - 12:15 | 5049285 syntaxterror
syntaxterror's picture

Germany demanded all of its gold from Barackistan. But all Barackistan could produce is more paper.

Tue, 08/05/2014 - 10:24 | 5048628 I am a Man I am...
I am a Man I am Forty's picture

Nobody would go from a money markert fund into stocks if they were looking for safety to begin with.

Tue, 08/05/2014 - 10:33 | 5048663 NotApplicable
NotApplicable's picture

Several years ago, I converted my 401 entirely into MM fund once I started understanding ponzi finance (as it was the "lesser of two evils"). Last fall, it was replaced with a "comparable" "risk-free" bond fund.

Yay me.

If I'm lucky, it will ensure I can afford the best tasting dog-food that "money" can buy.

Tue, 08/05/2014 - 12:16 | 5049291 syntaxterror
syntaxterror's picture

What's more safe than AMZN? 

Tue, 08/05/2014 - 10:27 | 5048636 starman
starman's picture

We have growth allright its called inventory!  

Tue, 08/05/2014 - 10:37 | 5048681 khakuda
khakuda's picture

The continuing meme of pushing people into assets more risky than their risk tolerance dictates is an incredibly dangerous game.  Since few hold gold and those who do usually don't own very much, relatively safe bonds and cash (nominally, anyway) have a very important role in investing.  To destroy their investibility will prove the pinnacle of stupidity over time.  It means that that unsure/temporary holders of risk assets will flee once the momentum turns negative, it means that confidence in the U.S. and dollar reserve currency status will continue to erode.

Having part of your portfolio which provides a little income and is viewed as safe allows one to take risk.  Destroy that and it makes it harder to be anything more than a short term holder of risk.

Tue, 08/05/2014 - 11:57 | 5049201 besnook
besnook's picture

why would a run on bonds be anticipated? because jellen will raise rates any second now? and they expect the market to do what? the market usually goes up when  yields go up. this is the one case where it is different this time. if bonds tank the market will also unless it becomes an inflation proxy like zimbabwe.

Tue, 08/05/2014 - 12:06 | 5049252 I Write Code
I Write Code's picture

So the Fed is trying to undo the 1980 invention of money-market funds?

But they have provided a huge pool of liquidity for banks, which has arguably served them even better than the same money did as deposits.

If the remaining "funds" are actually just short-ish bond funds then the Fed has to play the short-term liquidity role, or banks must reorganize to live without short-term liquidity.  I guess that last is the real concept here, no short-term liquidity no volatility risk, and once-a-month Fed meetings can manage all problems, and the Fed governors can stay drunk 29 days out of 30.

Tue, 08/05/2014 - 12:35 | 5049365 Catullus
Catullus's picture

Would have been easier to just require these funds to be 100% backed by cash. But then again, we can't open the Pandora's box of having money safely kept in a bank.

Tue, 08/05/2014 - 12:54 | 5049505 besnook
besnook's picture

interest rates cannot rise without inflation and/or a hot realestate market. so inflation it is.

Tue, 08/05/2014 - 15:21 | 5050560 The Econ Ideal
The Econ Ideal's picture

Most MMFs were invested in short-term Treasuries before the SEC herding edict. The ruling essentially turns institutional MMFs into short-term bond funds with a floating NAV (and principal risk). Retail investors will pay a negative interest rate on the MMFs that retain the $1 per share NAV, so they continue to take an increasing hit for parking cash and in general, for saving to invest in the future. 

Despite what Bill Gross claimed recently about the short end of the Treasury curve, there is no safe haven. There also are no free markets - financial repression from the SEC, Fed, Treasury continues.

Fight the good fight against financial repression. 


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