Should I Put Everything In A 5% Money Market?

DANO WEIR: Money markets are paying 5% or something like that. I'm going to put all my money in them, right, Chris? That's the question.

CHRIS SIPES CFP®: Something like that.

DANO WEIR: Welcome to It's All Money, the show about teaching you how your life intersects with money. We like to say you get financial confidence for your hip pocket. One thing to learn today. To feel like you can carry around with you and know a little bit more about what's happening either in the market, in your budget. And I'm joined today by one of the co-founders of Sonoma Wealth Advisors, Chris Sipes.

CHRIS SIPES CFP®: Thanks for having me, Dan.

DANO WEIR: We are in the Sonoma Wealth Advisors conference room in Sonoma, just off the Sonoma Square. Chris is a CFP, a certified financial planner. He is an AIF, an accredited investment fiduciary. He's also BA. Which stands for badass. That's off the grid kind of certification, but it's true.

CHRIS SIPES CFP®: Yeah. Well, thank you.

CHRIS SIPES CFP®: Tell me more about me.

DANO WEIR: Trying to make him uncomfortable. Yes. So working. Chris, when I knew you were going to join the show, I had a couple of things I wanted to talk to you about. One of them is I'm hearing that I'm knowing that money markets or short-term treasuries.

DANO WEIR: Instruments of that nature are paying 5% is what I'm hearing from people. So a very common question is, should I just put everything there? So I wanted to have a discussion today and find out why they're paying that and if that's a good idea for someone.

CHRIS SIPES CFP®: Yeah, sounds great. Let's get started. I mean, it's been a while since you could talk about any interest rate on cash or cash like instruments. And so it's nice to be able to discuss. Some sort of return, right?

DANO WEIR: Yeah. I mean, they were up, they're down there. And I'm coming at this from, I'm the host of the show and I'm sort of like the real feel.

DANO WEIR: So the idea with the show is that you have the certified financial professional, and then you've got just the guy on the street who, I don't know, for a while, my savings account was paying this in 2008 and then it was paying me nothing. So let's at least get into what are the conditions that have led to money markets with this higher interest rate?

CHRIS SIPES CFP®: Well, There's been a few things.

CHRIS SIPES CFP®: One is that there's been higher than expected inflation coming out of COVID. So COVID was, as we all know, hopefully a once in a lifetime, unprecedented times. When it comes to money and finances, there were a lot of things that happened or were still living through that were a result of COVID.

CHRIS SIPES CFP®: And the... Kind of the inputs that went into the response to COVID on a financial basis, right? So a lot of things came together to create higher than expected inflation. The Fed started raising interest rates in 2020. Ish. They did so very quickly, one of the fastest rate rising cycles in history.

CHRIS SIPES CFP®: And part of that is it's led to higher rates on savings instruments or instruments that people typically use for savings like money market. Okay. So this is from the Federal Reserve. They have a great website that provides all kinds of data.

DANO WEIR: Hold on a second. The federal government has a great website.

CHRIS SIPES CFP®: Well, this is the Federal Reserve. Technically is not part of the federal government. This is part of the central bank.

DANO WEIR: Right. Okay. Yeah, you're right. Okay. Okay.

CHRIS SIPES CFP®: Way different. Way different.

CHRIS SIPES CFP®: So they keep track of all kinds of data. And this is one of the things they track, which is total.

DANO WEIR: Assets in money markets now this is nominal meaning it's not been adjusted for inflation so it's a little deceptive in that way because you know it not to get too wonky so but i know i know what you're saying you're you're saying that if we're looking at this line and we're looking at a graph right now for our audio audience of that's going up basically right starting in about 1980 but what you're saying is that In, let's say, 1998 on the graph, there's about a million dollars total financial assets and money market funds.

DANO WEIR: Is that a million or millions of millions? So is that.

CHRIS SIPES CFP®: I believe that would be a billion.

DANO WEIR: There's a billion dollars in money markets in 1998, but a billion dollars in money markets in 1998 adjusted for inflation today is much more than that is what you're saying.

CHRIS SIPES CFP®: Exactly. Same concept of, you know. When your grandfather was a kid, they could get a burger for five cents and now it's. 15, $20 or whatever it is, depending on where you go.

DANO WEIR: Yeah. Right. So this, this graph not adjusted for inflation. This is just the straight numbers.

CHRIS SIPES CFP®: Correct. But you can see the numbers were starting to trend up going into 2020. And they really have taken off almost off this chart since then when interest rates have gone, gone up. And so the Federal Reserve, they set short-term interest rates as one of the tools that they have in their toolbox, I guess, to say to.

CHRIS SIPES CFP®: To try to accomplish their goals, which is maximum employment and price stability. Price stability, meaning that they don't want too much inflation. They don't want deflation, which is when the prices of things are going down, just almost equally as bad, maybe even worse than inflation.

DANO WEIR: Okay. So just so I can understand the system, because I'm an idiot, Chris.

CHRIS SIPES CFP®: No.

DANO WEIR: So you've got the, I'm Joe Jill consumer, right? Yeah. And you've got the Federal Reserve, and you're saying the Federal Reserve's mandates are to control inflation and maximum employment. Correct. And they do that. One of the ways that they do that is they control the interest rates. The interest rates to what?

CHRIS SIPES CFP®: One portion of it, or they set the interest rate called the overnight rate.

DANO WEIR: The overnight rate.

CHRIS SIPES CFP®: And that's the rate that banks lend to each other overnight or that they can borrow from the Fed overnight, which... The average person is like, why does that matter? Well, there's a lot of money moving around the system all the time to cover different obligations.

CHRIS SIPES CFP®: You know, banks and the global financial system, you can kind of think of it as like the lubricant for the global financial system. And the Fed, along with other central banks around the world, they kind of control how quickly or slowly that lubricant goes through the system.

DANO WEIR: Okay, so you've got the Fed. Is an overnight rate of, let's just say at the time of this recording on June 10th, 2024, 7% overnight rate between themselves and a bank. And then when you, as me, Joe Jill consumer, go to that bank to get a mortgage, they charge me 7.5 and that bank makes the 0.5, right? Is that the macro, macro, macro?

CHRIS SIPES CFP®: Yes. Numbers are off, but directly correct. Yes.

DANO WEIR: Probably a lot higher.

CHRIS SIPES CFP®: Well, it would be more like their overnight rate might be like 4% and they're charging you seven.

DANO WEIR: Right. Okay.

DANO WEIR: Right. Okay. I cut them a much better deal than actually the case. Yeah, exactly.

CHRIS SIPES CFP®: So for, for most of recent history, and I'm talking about really since the great financial crisis in 2008, that rate was zero to a quarter percent. So it was extremely low. It was basically zero. That's why if you had your money in the bank or even a money market, you weren't making much because there wasn't much of a spread there to be had.

CHRIS SIPES CFP®: Now that rate is, I believe it's like five to five and a quarter now. And so when they move the rate up, and I could be wrong on that exact amount, but when they move that rate up, then the rates on everything goes up. Mortgages, car loans, but also savings rates. So that is kind of the hurdle rate in the economy now.

DANO WEIR: So the Fed is keeping that rate high. They're basically saying to other banks, hey, you can still have the money, but we're going to charge you a lot more for it because they're trying to slow down the money going into the system because they're trying to slow down the inflation, which got way out of control because of COVID.

CHRIS SIPES CFP®: Exactly.

DANO WEIR: Okay.

CHRIS SIPES CFP®: Yes. So this is kind of.

CHRIS SIPES CFP®: Like with anything, there's different theories on how this is actually playing out in the system. And one of the things that's been a question is, well, why hasn't this generated a recession yet? Why hasn't this had a bigger impact on inflation? Because the economy has actually been responding way better than was expected.

DANO WEIR: That's been the mystery.

CHRIS SIPES CFP®: Yes. Now, there's all kinds of theories. One of them is, I think, this, which is there's... Actually a lot of income being produced from that money now. So we all know there's a lot of, I guess, concentration in where the wealth is held. So if you think about it, if it's held by a certain generation or, you know, percentage of people, right?

CHRIS SIPES CFP®: And they hold a majority of the wealth. They have their money in at least a portion of it in money markets. They're earning a lot more income. They're able to spend more. Right. Because they're they're generating more income now than they were five years ago.

DANO WEIR: Ok, so.

CHRIS SIPES CFP®: It's, it's almost had, it's not had the effect that they wanted it to, because that lubricant, instead of slowing things down, that lubricant is almost like sped things up because people are able to spend more. The people that have money have more money to spend.

DANO WEIR: I'm going to take you a step back because I want to take it to the money market aspect of it. Yeah. So we, we, I ran that little scenario with the mortgage, the Fed loans, the money to the bank, the banks, the bank then is saying. Hey, come and deposit your money here with us.

DANO WEIR: Why are they setting such a high rate right now as a result of their own, as a result of the Fed rate, why is the money market rate high? Because it seems like the Fed rate would only affect debt, not savings.

CHRIS SIPES CFP®: Well, because the banks are earning more on their reserves with the Fed. Therefore, they can and have to also pay a higher rate to retain. Those deposits.

DANO WEIR: So the Fed has, the banks have money with the Fed?

CHRIS SIPES CFP®: Yes.

DANO WEIR: This is, this is.

CHRIS SIPES CFP®: It's a web. It's a web, right? Okay. And don't get me too far in the weeds because you're on the edge of my understanding of how a central bank works.

DANO WEIR: Okay.

CHRIS SIPES CFP®: But loosely, they're receiving money.

DANO WEIR: For educational purposes only.

CHRIS SIPES CFP®: Now, it's a, it's a competitive market. Dan, you have money and one. One institution's offering you zero and another institution's offering you five. What are you going to do? Right. Most likely you're going to move your money. So it's a competitive market. So they can't just say, we're going to leave you at zero and hope that you stay with us.

CHRIS SIPES CFP®: They have to be competitive with the rest of the, not only the U. S. Market, but the global market. People have options with their money. So that's where you saw a lot of the stress, I don't know, a year, year and a half ago.

CHRIS SIPES CFP®: When you saw a few banks fail, people were pulling their money out of the banks very quickly to go into higher paying instruments that they felt were a better option for them. It drained money out of the banks to the point where people were getting concerned about it. That snowballed on itself.

CHRIS SIPES CFP®: So it's a competitive market. So that's why they have to pay a higher rate. If they're receiving more, it's... It's like any other commodity. Money is just a commodity, right? And so if your wholesaler is making more, you're going to expect, you know, to be making more as well, right?

DANO WEIR: The reason why I went to that is that because you're talking about the amount of interest being generated by the money market funds themselves.

DANO WEIR: It sounds like the Fed is trying to control, trying to cut the money supply by raising the interest rate. But it also sounds like then the banks are responding by saying, fine, we're going to have high interest rates. And they're almost saying we don't need you.

DANO WEIR: Am I wrong there? Because you've got, it's like they're creating their own little system instead. That was fine. We've got our people in this money. And they're generating money this way instead of borrowing it from the Fed. Is that wrong?

CHRIS SIPES CFP®: Well.

DANO WEIR: It feels like they're insulating themselves from needing to be reliant on that interest, that overnight.

CHRIS SIPES CFP®: Yeah. I mean, they're still trying to make money from other. Avenues, whether it's loans or fees or anything else. But, but also when you have interest rates higher, like mortgages, for example, what's more attractive is 7% mortgage or a 3% mortgage, you know? Right.

CHRIS SIPES CFP®: So they can't, they can't lend out as much at 7% as they could at three. There's just not as much demand for it. The price is so much higher. So, so there's a, there's a pull push and pull there. And also they have to lend to people that they feel they can get the money back from.

CHRIS SIPES CFP®: So it kind of limits how much they can go that route.

DANO WEIR: Interesting. So the graph we're looking at right now, this is estimates of interest income generated by money market funds. Right. In 2007, looks like about in between $100 and $200 billion. And then as we move into the 2010s, it's zeros.

DANO WEIR: And this is barely registering. The source for this is Crane Data.

CHRIS SIPES CFP®: Yeah, and this was Adeta Cushi, I think is how you pronounce her name. And so that's where this chart was sourced from. But yes, you know, after, so the opposite of what's happening now is that the central banks lower rates to try to goose the economy, like we saw in the great financial crisis. That's why you saw all those years of next to no. Returns in things like money markets.

CHRIS SIPES CFP®: Because if you think of building a house and you've got to put in a foundation, the interest rates that the Fed and other central banks around the world set, that's the base rate for everything. So if they raise that, then the price of money is going up. If they lower it, the price of money is going down. And if they're trying to lower it, it's because they're trying to induce more spending, borrowing, everything.

CHRIS SIPES CFP®: A concept that's really great to grasp and it's difficult to grasp is that credit is actually a huge part of the overall money supply. So when people borrow money for things like mortgages or...

CHRIS SIPES CFP®: Investing in their businesses whatever that's a huge amount of money that's pushed into the system actually much more than the the physical money that you and i spend on credit cards and such or debit cards i should say so so the amount of money that's created by credit more credit is created when they lower interest rates the price of money is coming down interesting okay.

DANO WEIR: Because i remember this you Chase.

CHRIS SIPES CFP®: Yeah.

DANO WEIR: So we, 4%. Yeah. And then I remember it went down to 0.001, 0, 0, 0, 0, whatever it was and just thought, Oh, well that'll never, that's probably why that bank went under. Right. Right. And then here we are again, you know, 13, 18 years later, 17 years later.

DANO WEIR: Yeah. And we're back up, back up. And so this number here, is that 24? Is that that last year? One, two, three. So in 2024, by this graph, nearly $300 billion income generated just by money sitting there in 5%-ish money market funds. Right, exactly.

CHRIS SIPES CFP®: So it's a lot more income being generated.

CHRIS SIPES CFP®: And so.

CHRIS SIPES CFP®: You know, it's had the effect of slowing down things like mortgages and business investment because it's a lot more expensive to do so.

DANO WEIR: Right.

CHRIS SIPES CFP®: But it's also had the effect of speeding up spending on items through people that have money. Well, if you think about, let's just take the profile of the person that's either got no mortgage.

CHRIS SIPES CFP®: Or has had a mortgage for since when interest rates were low. Right. So, so they've got, they've got good equity in their home or, or maybe no payments at all. Now their savings that they had, is also earning, you know, that, that foundation has been raised up from zero to five ish. Right. So, and then all the other assets that, that you are buying, you would expect to pay you more than that base.

CHRIS SIPES CFP®: Level over time or else why would you take risk? Right. So if you can get a really good rate on something that's very low risk, you can't say money markets are no risk. That's not true. Okay. But very low risk. Why would you take your money out of that nice comfy bed and go try to earn more? Right. There's gotta be some, the enticements gotta be there for investors to do that. Right. So this is.

CHRIS SIPES CFP®: What we're looking at here is the two-year treasury rate in purple versus the...

DANO WEIR: And that's that overnight rate you're talking about or is that different?

CHRIS SIPES CFP®: This is the two-year treasury rate you can kind of think of as the market's expectation for short-term interest rates. U. S. Treasuries are probably the most liquid, most traded market in the world.

CHRIS SIPES CFP®: And you can kind of think of it as setting interest rates in a way, because this is millions of investors around the globe, maybe billions of people buying and selling treasuries, setting the price of interest rates in the short term. So you can kind of think of the purple line as like the market's expectation of short term interest rates.

DANO WEIR: Ok, OK.

CHRIS SIPES CFP®: Then the orange line is what the Fed's target rate is. Ok. That is the one that we're talking about where they're setting the short-term rate. And that's why you probably hear Fed meeting coming up.

CHRIS SIPES CFP®: There's always percentages. Are they going to raise? Are they going to lower? Are they going to keep the same?

CHRIS SIPES CFP®: It's like a whole market on just trying to figure out what they're going to do. Right. Right. So, and you can see it goes in cycles.

CHRIS SIPES CFP®: All markets tend to go in cycles, or most markets, I should say.

CHRIS SIPES CFP®: And the same with the price of money. It goes up and down, but over a long period of time, really since the 80s, rates have been coming down, has been the overall trend. So a little over 40 years.

CHRIS SIPES CFP®: We may be breaking through that now. I don't know, but you can see we're at another short-term high point in the rates.

DANO WEIR: So this difference right here between the orange and the purple line is... The difference between what the Fed is saying and what the market expects.

CHRIS SIPES CFP®: Correct.

DANO WEIR: Is the difference between what they're charging and then what the market is probably making.

CHRIS SIPES CFP®: Yes. There are some people that say that the Fed shouldn't even set interest rates. They should just use the two-year treasury.

DANO WEIR: Wow.

CHRIS SIPES CFP®: Okay. Because right now.

DANO WEIR: You'll notice that- The market will police itself.

CHRIS SIPES CFP®: Well, not so much police itself, but price itself. Yeah. The price will be discovered in the market, not by a small group of people setting this is going to be the price of money. Because right now, it looks like according to the market, the Fed is too tight. They have the price of money too high.

CHRIS SIPES CFP®: And you'll notice that it looks like the gray bars, I forgot to put the gray bars on here for recessions, which would have been ultra helpful for this slide.

DANO WEIR: What's the next slide?

CHRIS SIPES CFP®: So maybe it's on the next one.

CHRIS SIPES CFP®: Yeah. So this is the price index, the CPI, but go back to the other chart real quick for one second, because these peaks tend to happen before recessions. And that's because typically you'll see, so in 2000, yes, that's 2008, which we all know it was a great financial crisis. 2000 was the.com bubble right there.

CHRIS SIPES CFP®: The early nineties also had a recession. So Usually that's the Fed trying to slow things down because inflation is getting too high or the economy they feel like is getting out of whack in some way. So they're tightening up rates.

CHRIS SIPES CFP®: And usually the actual market is setting that price higher because they're starting to be more risk.

CHRIS SIPES CFP®: You know, investors are going, you're getting in the taxi in 2008 and the person's buying five homes off of no income type of thing. And investors are going, you know what? I need a little more money to lend right now. I need something to compensate me for this risk.

CHRIS SIPES CFP®: And so that rate starts to lead. Now, the rates get higher. Money gets more expensive. It tends to slow things down. You start to see a recession. And then, boom, it tails off because the Fed and the market starts to lower interest rates in response to that.

DANO WEIR: And so then the next slide is what?

CHRIS SIPES CFP®: So the next slide is CPI, which is the Consumer Price Index, which has a big effect on short-term interest rates and long-term interest rates.

DANO WEIR: What is the Consumer Price Index?

CHRIS SIPES CFP®: So Consumer Price Index tries to track the change in prices of a basket of goods over time. So loosely, it is tracking inflation and deflation in the economy. Okay. Okay.

CHRIS SIPES CFP®: So the reason why that's important is because if you're lending your money out, if you're, if you're a fixed income investor or a bond investor, you're lending your money out, your chief, one of your chief concerns is losing purchasing power. So you're in an era where a burger costs 5 cents. You're concerned about the era where a burger is $15, right?

DANO WEIR: So now, right?

CHRIS SIPES CFP®: Because if you're going to, let's take a 30 year bond, you're going to, you're going to lend your money out for 30 years. You're going to hope to get money back and you're going to hope to at least get enough money back that you're keeping pace with the cost of living. Right. Right. Because a dollar now is worth more than a dollar in the future.

DANO WEIR: Okay. Right. So this graph shows that right now the CPI is at 3.36 as of the recording of this. Yeah.

CHRIS SIPES CFP®: Yeah.

CHRIS SIPES CFP®: So the rates that we had a spike coming out of COVID, that was due to supply chains. Breaking down. So the old supply and demand rule, you get very little supply, a lot of demand. We all had money from money raining down on all of us, right?

CHRIS SIPES CFP®: Not going on trips, whatever. So we had a whole lot of demand, not much supply, drove the price up of everything, right? So we're coming off of that now and interest rates are starting to normalize, they say, which is basically stop moving so much.

CHRIS SIPES CFP®: And so this is a big determinant of, you know, people say, well, can I just leave my money in money markets forever? I don't know. Probably not a great idea because, those rates can change daily. And if interest rates start coming down, you're not gonna, you're not gonna get that high rate.

CHRIS SIPES CFP®: And, and also you need to be able to keep pace with inflation over time.

DANO WEIR: I think that's my question. And that's the question of this episode. Is, you know, should you do that? Should you, I mean, it seems to make all the sense in the world. You just put it in something that's 5%. That's a decent return.

DANO WEIR: And then when it starts slowing, I'll just get out of it. It'd be so easy, right? But what would be the harm in doing something like that? What are you missing by not being in the market right now or not being somewhere else?

CHRIS SIPES CFP®: Well, I forget who said this, but I thought it was a great saying, is that you want to date money markets. Cds, treasuries that you want to date like low risk, right? There's still risk there. And the risk is a hidden one. And that is that you lose your purchasing power over time.

CHRIS SIPES CFP®: So I mean, I think we can all conceptualize that, you know, if, if your ancestor back in 1900 had just left their money in a savings account versus investing in risk assets, which Now that you're inheriting it, which are you better off, right? Especially if it's sat that whole time. So, so there's hidden risks to it, right?

CHRIS SIPES CFP®: And it's, it can be a good decision for a type of money. Like if you need it for emergencies, you know, it's liquid, it's liquid, it's, it's liquid. It's considered to be pretty safe, you know, but it's not what you want to do with your long-term money. If you. Want to try to keep pace with growth and inflation over time.

DANO WEIR: And as we saw in one of the earlier charts, I mean, it goes away, evaporates like that. I mean, we didn't see bars of 5% for years and years. It's there and then it's gone.

CHRIS SIPES CFP®: Yeah. And I think in general, it's good to take a balanced approach to investing your finances.

CHRIS SIPES CFP®: Should you have some here? Probably. Yeah. But you should also have some elsewhere. And having a good balance is going to help reduce your risk. Anytime you get all your money in one area, you're in a very risky position, even if it isn't something that is low risk.

DANO WEIR: Is it? I mean, you've said that a couple times. Low risk, no risk. It's not no risk.

CHRIS SIPES CFP®: Right, right.

DANO WEIR: What is the risk? If I've got it sitting in one of the big banks, what is the risk?

CHRIS SIPES CFP®: Well, I... I would say most people seem to equate risk with losing money. Right. And, and, and the reason why it's low risk is because you usually don't see that money losing, you know, off the principle. Right. But what you don't see is the money losing purchasing power. You don't see the fact that you missed out on growth that you might've had on being invested.

DANO WEIR: So if it's 1990 and I have $100 and I leave in a checking account for 20 years, that $100, which could have bought 100 McDonald's burgers in 1990, can now only buy five. Yes. And I could have put it in Apple and made whatever. Right. Is that kind of what you're doing?

CHRIS SIPES CFP®: Yes. Yes. That's what I'm saying.

DANO WEIR: McDonald's is going to get all up in my business. This is the second episode I've written. It's such a good example, though. Yes.

CHRIS SIPES CFP®: Yes. Yeah.

DANO WEIR: All right. I got it. I think I understand. Okay.

CHRIS SIPES CFP®: Tracking.

DANO WEIR: Did I miss anything? Did I miss it? Was there a question I missed?

CHRIS SIPES CFP®: You know, I think, let's see. I think we got everything.

DANO WEIR: So to sum it up, what you're saying is date the money market, you know, consider and engage yourself with longer-term thinking.

CHRIS SIPES CFP®: Date and or have it tagged for certain goals for your money, right? If it's a very short-term goal, you can't take any risk in losing it or much risk in losing it because, again, they're not considered, you know, no risk. Right. But. If you need to take very little risk with money, then that makes sense.

CHRIS SIPES CFP®: But if it's money you're not planning to use for a long time, you can take some risk with it. It's probably not the greatest place for it, no matter how much it's paying. Because again, that base is a base for everything. It's a base for borrowing. It's a base for saving. It's also a base for expected returns on risk assets.

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