In a sea of liquidity and inflation, some hold their breath and park their money at the Federal Reserve. $1 trillion dollars worth.
I've seen some interesting technical explanations for why this doesn't matter, but I can't help but wonder. $1 trillion is a lot of dough. Maybe:
1. Stocks investments are unattractive.
2. Bond investments are unattractive.
3. The banking system may not provide liquidity in a pinch as in October 2019. Besides, the banks don't want the cash either.
What do you think?
The amazing part about this is the extreme negative real yield these investors are incurring implies 0.45% value erosion per month (at the current 5.4% inflation rate). There is a line of market thinking that for every seller there is a buyer, therefore cash on the sidelines doesn't matter. I think this is naive; on a macro basis the sources and used of cash are much more complex. A discussion for another day, perhaps.
Robert Lloyd, CFA®
Chief Investment Officer
Lloyds Intrepid Wealth Management
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