The Most Hated Money in America

Happy Sunday.

A retired airline pilot spent this week as the villain of the financial press.

Don Ross keeps a few years of living expenses in a money market fund and 85 percent of his portfolio in stocks. He studied bear markets, saw they rarely run much past three years, and built a bucket he can live on so he never has to sell a share into one. Every planner he has met in the decade since he retired has wanted the cash invested. He points at the total bond market’s ten year record, about 1 percent a year, and declines. One adviser floated private credit. He asked her to stick to the estate planning.

Multiply Ross by a few million households and you get the number the wealth management industry cannot stop writing about.

Retail money market funds hold a record $3.1 trillion. Count institutions and the total is $7.9 trillion, an all-time high, and it kept climbing all year even as the Fed cut. The average money fund pays about 3.47 percent. CPI is running 3.4. For the first time in most investors’ adult lives, waiting is free, and a record pile of American money has decided to wait.

Everyone has a name for the pile. Bears call it fear. Bulls call it dry powder. Advisers call it a problem, which should make you curious, because it is the only large position in America that pays nobody a fee. Which makes it the only large position in America with no defenders.

Last Sunday’s question was who buys the houses. This Sunday’s is who buys the bottom.

The youngest investors in the country have organized their financial lives around a single lesson, the market always comes back, and almost none of them have asked what it comes back on. The answer is sitting in Don Ross’s money market fund, earning 3.47 percent, getting yelled at.

The money with no marketing department

Search “too much cash” and the first page is a wall of warnings written by the people who sell the alternatives. Corporate bond ladders. Municipal funds. Private credit. Buffer ETFs that cap your upside in exchange for downside protection, at fees near 0.85 percent.

A reporter who covers the industry said the honest part out loud this week. A wealth manager’s product is advice, and telling a client to sit in a money fund does not feel like advice anyone should pay for.

That is the tell. Nobody earns a commission when a client sits still. Every alternative being pitched at the pile has a fee stapled to it somewhere. The pile is the fee that got away.

Here is what makes it funnier. Ross, the poster child for the cash problem, runs 85 percent equities in his seventies. That is a more aggressive allocation than most forty year olds get from their target date fund. The industry’s complaint cannot really be caution. The complaint is that he built a machine that never needs another product.

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The winning religion

Now the other pulpit, because it is winning and it deserves a fair hearing.

Since 1989, money invested on days the market sat at an all-time high beat money invested on a random day. Up about 13.6 percent versus 12 over the following year. Up 46 versus 40 over three years. Up 82 versus 74 over five. The scariest possible entry point outperformed the average one, for thirty-seven years running.

The retail version is simpler. A hundred thousand dollars in an S&P 500 fund five years ago has roughly doubled. The same money in cash lost about a fifth of its purchasing power. Peter Lynch made the point decades ago, that investors lose more money bracing for corrections than corrections ever take from them.

The scoreboard agrees. This bull market is 3.8 years old and up about 118 percent. The S&P closed above 7,800 for the first time this week. Every dip since October 2022 has been a gift.

Every number in that section is true. Hold it. Now look at what the cash people actually replaced.

The forty got fired

The pile did not come from cowardice. It came from a job opening.

For seventy years the safe half of the American portfolio was the bond. Stocks fall, Treasuries rise, the 60/40 breathes. Then 2022 broke the mechanism. Stocks and bonds fell together, and the bond half never fully got back up. The long Treasury fund $TLT has lost roughly 28 percent over five years, including every coupon. An entire generation of savers watched the safe asset do the one thing it existed never to do.

The house was the other middle asset, and I wrote a couple weeks back about the generation that fired it.

So households rebuilt the portfolio as a barbell. Index on one end. Overnight paper on the other. Nothing in the middle. Cash took the bond’s old job, and for the first time in two decades the job pays about the inflation rate instead of two points under it. In 2019, waiting cost real money every year. Today waiting is roughly free. When waiting gets cheaper, more people wait.

Ask ten holders of the pile what they are waiting for and you get ten answers. Ross is waiting for a bear he can outlast without selling a share. Other people are waiting on down payments, tuition, retirement math. But there is one honest answer underneath all of them. They are waiting to be the person who does not have to do anything.

The market became the raise

Wage growth is running 3.2 percent. Inflation is running 3.4. Prices have been eating paychecks for four straight months. Payrolls fell by 23,000 in July against an estimate of plus 85,000. Retail sales fell 0.6 percent, though a chunk of that was Prime Day moving to June. Card balances are back to $1.26 trillion, near the record, and the New York Fed’s own researchers describe what they see as a K-shaped economy where a lot of households live paycheck to paycheck. The savings rate is 2.7 percent.

Every column on that board is soft except one. Second quarter profits were up 50 percent, the best quarter since 2021. Net margins hit a record.

Look at where that came from, though. Strip out Alphabet and Amazon and earnings growth falls to 32 percent, still enormous. Alphabet’s quarter included a $98 billion gain on equity securities it holds. Amazon’s included $53.4 billion, mostly its stake in Anthropic. Energy sector earnings were up 147 percent because oil averaged about $92 in the quarter, 45 percent above last year, on the war with Iran.

So the one strong number on the board is part war premium, part semiconductor cycle, part mark-to-market on private AI stakes. That is not a knock on the earnings. It is a description of what the market has become.

Household net worth is more concentrated in equities than at any point on record, roughly a quarter of it. Consumption at the top floats on portfolio highs. Capital gains receipts hold up government budgets. Retirement dates move with the tape. When the paycheck stalls, asset prices are the only raise.

A machine like that cannot be allowed to fall. Everyone knows it cannot be allowed to fall. That shared knowledge is part of why it does not.

The young investor formed inside this machine is not naive. They are empirical. The chart above is their scripture, and it has been right since before they were born.

Bottoms are made of cash

But go one layer under it always comes back. Comes back on what?

Recoveries are purchased. The bid that ends a bear market comes from balance sheets that do not have to sell and can afford to show up while everything feels broken. The average investor capitulates somewhere near the average bear’s lows. What stops the slide is money that was never at risk of being shaken out, arriving to take the other side.

Every rebound in that thirty-seven year chart was bought with somebody’s boring, scolded, fee-free cash.

Now look at who owns the boring cash, and who does not.

The pile belongs disproportionately to the Ross generation. Three year buckets, paid-off houses, pensions. The generation that believes hardest in the comeback owns the least of what comebacks are made of.

About one in three adults under 35 lives with a parent, a record 25 million people. Northwestern Mutual’s latest study found 72 percent of Gen Z and 53 percent of millennials still financially dependent on their parents.

Here is the number that should stop you. So is 33 percent of Gen X.

Those are people between 45 and 61. They are not the kids. They are the heirs. Roughly one in five adults in that study said they do not expect to ever be financially independent.

Their version of the pile is a social media movement called moneymaxxing, rounding up coffee change into high yield savings. It is real and it is admirable, and it is pennies against a trillion dollar structure.

So the cushion under the engine is owned by people in their seventies who fully intend to spend it, and I wrote a month ago about where the rest goes when they are done. The heirs arrive in their fifties with thin savings, full card balances, and a lifetime of evidence that dips exist to be bought.

When the ownership of the cushion changes, the behavior of the cushion changes. Nobody has priced that, because it does not happen on a date.

Both doors run through the pile

The case against the pile is strong, so here it is with no sugar on top.

Cash drag is real, and the purchasing power loss never shows up on a statement, which is exactly why it does so much damage. The pile’s yield is also a policy variable, not a contract. Money fund rates follow the Fed down whenever cuts come, while the bond ladder crowd locks theirs in for a decade. The people refusing duration are making a rate bet whether they admit it or not.

Bull markets also do not die of age. Most that clear year three keep going. This one is getting cheaper as it rises, with the forward multiple down from 22 at the end of last year to 20 now while profits grow. And sideline cash at records has historically marked accumulation, not fear. If even a modest slice of $7.9 trillion migrates when yields fall, that flow is the next leg up.

The sharpest critique is the timing trap. A pile built to wait needs a re-entry rule, and most of the $3.1 trillion does not have one. Ross has a written rule. Three years of expenses, refill on strength. Most holders have a feeling. A feeling is not a system.

What actually kills bulls that clear year three is not birthdays. It is a Fed tightening into a slowing economy.

Which brings us to the strangest board I have seen in a while. Headline PCE is 3.7 percent, core 3.3, both well above target and both stuck there largely on energy from the Iran conflict. Three Fed officials dissented in favor of a hike at the July meeting, the first time in a decade three have dissented in the same direction. Kevin Warsh held anyway. Then payrolls went negative, and September hike odds fell from near-certain at the end of July to roughly 40 percent after Wednesday’s CPI.

So the Fed is holding a hawkish minority, an inflation rate above target, and a labor market that just cracked. That leaves two doors, and the pile stands behind both.

Door one, they hike. Cash’s yield rises further above inflation, patience gets a raise, and the marginal buyer steps back at the exact moment the economy underneath the engine is softening.

Door two, they cut into 3.4 percent inflation. The pile’s yield sinks below CPI, waiting costs real money again, and trillions in safety-minded savings get pushed up the risk curve into the most concentrated index on record. The cushion becomes the bet, at the top, on schedule.

Either way, the next chapter gets written by the money everyone keeps calling lazy. The lazy money is the live money.

So what

Three observations.

The pile is mostly defense being scored as offense. A lot of it is bucketed tuition, down payments, and three year expense floors, money that was never going to chase a dip. Counting all of it as fuel for the next leg up is double counting somebody’s grocery money.

The barbell everyone built holds together only if two strangers cooperate. The Fed has to keep the short end paying near inflation, and a handful of chip and platform companies have to keep the long end compounding. Both halves of the country’s portfolio run on somebody else’s decisions.

And Ross asked the only question that matters this year. When somebody tells him to put the cash to work, he first asks what the telling pays. Every voice aimed at the pile this week, the adviser, the fund company, the strategist, the guy on LinkedIn, earns more on the day the cash moves. The pile earns nobody anything. That is why it has no defenders, and it might be why it is the cleanest signal on the board.

The kids are right that it always comes back. Thirty-seven years of data says so. The chart just never shows what it comes back on.

The engine is the market now. The reserve tank is the pile. And the pile is aging out of the hands that built it.

The comeback everyone is so certain of has an owner. Worth knowing the owner is in his seventies, spending it down, and getting yelled at for keeping it.

Stay curious 😎

- John

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