Late last month, we described a fascinating trend that is developing: the dash for cash ahead of the next market crash.
Here is what we said:
"The Bank for International Settlements (BIS) warned over the weekend about an imminent financial crisis, while it was reported on Monday that billionaire hedge fund manager Paul Singer is building cash to take advantage of opportunities after the next crisis. On Tuesday morning, we noted how 200 institutions that manage a combined $4.1 trillion in assets, are becoming increasingly bearish ahead of 2020. Now Bloomberg is reporting that family offices around the world are stockpiling cash ahead of a market meltdown."
To confirm the continuation of this trend, Lipper Alpha Insight's fund asset groups, including mutual funds and ETFs, show 3Q net inflows of money market funds increased by $221.5 billion, and for the year, rose to $349.7 billion.
Senior research analyst at Lipper Pat Keon CFA said, "money market funds have not seen this level of net inflows since the global financial crisis."
"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.
And despite equity bulls on mainstream media telling their audience that stocks are cheap and the next bull market is about to start. Lipper shows a rather alarming trend in 3Q equity fund flows, one where net outflows were seen in stock funds by -$72.8 billion, and year to date net outflows of around -$125.6 billion.
The dash for cash or at least plowing funds into low-risk investments, perhaps we can call this a defensive rotation, is that caution and fear are developing with recession threats surging ahead of the 2020 presidential election.
Market participants are beginning to figure out about the inflation, industrial, and employment downturn in the economy. They will also soon understand that the Federal Reserve was ten months too late in their cut cycle. This means President Trump was right, and the Fed should have started cutting in Sept./Oct. 2018 when inflation turned lower. But any delay in cutting from when inflation turns lower -- usually results in policy error.
We also learned last week of abysmal global PMIs (and US manufacturing's collapse to a standstill), along with disappointing service sector PMI in the US, indicating that the consumer might not save the day.
On the surface, everything seems fine, President Trump is promoting jobs, and keep in mind jobs are laggard, but underneath it all, the economy is experiencing a rapid deceleration. Manufacturing is at 10-year lows, and services plunged to the weakest in 3 years.
Globally, Composite PMIs are all trending down towards contraction.
And it should become increasingly evident why cash is becoming king -- or at least why market participants are flooding into money markets. It's that they are becoming defensive ahead of the next downturn.