What If Money Markets Crashed?
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- Опубліковано 12 вер 2024
- This is a dire warning to investors... beware of these huge risks with your cash investments before it is too late. The signs of a significant global liquidity problem are present, and action must be taken.
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Will the market crash next year? It is an ever present question, but the liquidity issues faced by money market funds do give serious cause for concern. Money market funds are supposed to offer a safe alternative to bank deposits, with immediate access to your capital whenever you need it. The Bank of England and other senior figures however, like US Secretary of the Treasury Janet Yellen, have voiced their concerns about the state of money market funds and the risks they pose. The runs and fire sales they are vulnerable to have created problems before, such as in the Global Financial Crisis of 2008. Governments stepped in then to stabilise the financial system, but that was before they were laden with the huge burden of debt they have today. The question is, what will happen next time money market funds break the buck?
If society continually creates money (bank loans, corporate bonds, government treasuries) then why are we surprised about stock/property/asset inflation?
Great video Chris. I definitely didn’t appreciate the risks with MM funds, but this certainly gives me food for thought, I never realised the liquidity issue was so real with relation to such funds.
Great work 👍
Thank you. I’m glad it’s useful - the biggest risks are often the unseen ones.
Hmm, I do have about 40% of my portfolio in CSH2 which I believe has stocks as collateral for the fund. Not sure that it would make it immune from the issues you describe but I might think about moving some of it to an FSCS bank with decent interest.
It wouldn't be immune all be it the CSH2 won't get gated the swap instrument does allow compensation in assets of the swap providers choice and you don't necessarily get compensated 1:1 so you could get gold or Japanese smaller companies it's not your choice and the price you receive these at could be significantly lower. 40% is imo is very high.
I had quite a lot in csh2 also ... until last week when I moved it all to a short dated UK gilt etf. Not sure now though how much safer my move is ! My investments are held in a SIPP drawdown tax wrapper so bonds and equities are the only option for me
Not really, start looking into holding single short dated gilts the price fluctuations are irrelevant if held to redemption a bond fund would still suffer. CSH2 is fine I hold a portion of my emergency fund in it but it shouldn't be used for significant amounts
@@khiburgess5848 How/where do you buy the UK Gilts? I believe there is a dedicated UK GOV website for this? Is there a minimum investment for a UK Gilt?
@@khiburgess5848 Japanese smaller companies? No investment I've ever had have lost me more money than Japanese smaller companies (I split my investment 'between' three of the most respected funds to spread my risk to no avail). They might have their day in the sun at some point - but don't go around advising people to invest in stocks that currently seem only to go down.
I agree with you Chris, that the Bubble will burst, but when? who knows!
After the Truss and Covid debacle I now want to get out of the "game" I have 100k in my pension pot and a home with the value of 250k Aged 63 single with no dependants! I have a part time job that enables me to live comfortably. However I feel that I should just start using the capitol I have to enjoy the life I have left, now! Before the SHTF! Thank you for the very informative uploads
I know you can’t give financial advice, I’m a new investor, so far I’ve been purchasing various etfs from vanguard. I said I’d always invest through the highs and lows but with the prices at all time highs should I just wait for a crash?
What are your thoughts on this now Chris, 3 months on? No crash yet, but share prices are flatlining at a peak.
Broadly the same. There hasn’t been any kind of catalyst that would proliferate a money market run, and hopefully that remains the case! The risks around liquidity still remain though I think.
Good vid thanks. Problem is that most SIPPs / ISAs only pay around 2% on cash v 5% you can get in a savings rate
There are cash deposit accounts that can be accessed through SIPPs that will pay you more, if they are indeed proper SIPPs and not just D2C wrappers with limited prescribed funds lists. Banks like Cater Allen and Investec offer fixed term deposits that can be held in SIPPs. If you want instant access though you may have to accept lower rates, or just beware of the risks.
@@chrisbourne-retirementplanner ah thx for reply / that info, i didnt think of / realise that. Will look into it .ta
Thanks Chris, does this apply to CSH2?
Yes it does except it's a synth and comes with asset swap, what the assets you would receive are at what value is up to the swap provider.
Yes there are parts of that fund that could be affected by what I describe in this video.
Thanks @@chrisbourne-retirementplanner
Thanks Chris. strangely I only received notification of this video today (mid Jan 24). Worth the watch. Glad I haven't gone for money markets but was tempted.
Sorry - looks like I missed this. Glad you found it useful. Drop me an email about your Voyant issue with DB projections - I want to see if I can help you.
Where to put £500k cash holding in II pension to keep cash safe for next 2 years. No risk. At minute they just pay me interest on the cash and avoided these money market funds for exact reasons you mention, but my concern is over solvency of Abrdn / II in the event of a run.
No such thing as no risk. There are also different types of risk not just capital risk.
There isn’t a zero risk environment, but there are FSCS protected fixed term pension deposit accounts available in SIPPs with private banks like Cater Allen and Investec.
@@chrisbourne-retirementplanner they tell me to apply through my SIPP provider, assuming that is still Interactive investor? Does this still give me 85k protection with all three separate amounts of 85k? Total 255k FSCS protected?
@@khiburgess5848 yes I know I will ride out the short term inflation risk for next few years.
Great video. Diversification is key. All asset classes have risk of some type.
Thank you Todd. True indeed.
Amazing video, best vid on money I’ve seen in a while. I’ve been concerned about money market funds for years, I’m glad I’m not the only one.
Thank you I’m pleased you enjoyed it. Everything has its risks, and sometimes the things we believe are the safest can carry the greatest lurking dangers.
Hello Chris, another great video. How safe are vanguard vuag and vwrp held on vanguard platform, and the their emerging market fund? Any issues to worry about with my pension and isa all in on them. Many thanks Dan
Hi Dan. They are stock market trackers, so they have higher expected volatility, but the types of risks specifically discussed in this video don’t really apply to those ETFs as they are not money market funds.
Interesting video Chris. I seem to recall isolated issues in the past where money market funds have surprisingly gone down in value, but I can’t remember any significant losses or worse still any of these type of funds failing. You’ve given me food for thought though. I sincerely hope global markets and economies manage to get through this current cycle as as you mentioned in your video,it’s difficult to imagine how countries can afford more bale outs.
Yeah I don't think this is quite accurate money market funds don't really fail they do get gated and the certainly were not the reason for 2008.
It is accurate. Funds were only gated after they suffered huge redemptions, and the US Treasury had to provide a guarantee that money market funds would remain at $1 per share after multiple had broken the buck. It was called the Temporary Guarantee Program. Feel free to look it up. This was in the aftermath of the onset of the GFC, not necessarily the initial cause of it. The point is, would the US Treasury be in a position to step up again now that money market funds are probably three times the size they were in 08, with an already crippling debt pile. My guess is no.
@@chrisbourne-retirementplanner Yeah I understand that it is accurate in so much as they had to provide a guarantee as there were redemptions via pension funds and 401ks but this was a reaction to a systemic failure that was not caused by the money market funds remember at that time commercial property funds also got gated for similar reasons but again we're not the reason. You are certainly accurate describing the symptoms but the symptoms were not the disease.
The old adage if the USA sneezes then the rest of the world catches a cold.
I've been following your channel long enough to know this is not click bait and a genuine concern. Thank you Chris.
Really helpful as I’ve been considering how to diversify. Cheers
Glad it’s helpful Suzy. Thanks for watching.
How does breaking the buck equate to losing "all their investment"? It just means they lost a bit of capital, like a percent or so, right?
Honestly I'm not sure this video actually is reflective of the past events money market fund issues are usually fall out from an event not the cause of because a run on a money market usually occurs when equities tank people panic and pull money out like I did in 2008 pull money out and invest it into the stock market to benefit from the lower prices etc.
Khi I think you need to revisit this period because either your memory is failing you, or you’re confusing your events. The failure of Reserve Primary is well documented, as was the Treasury response at that time. In answer to the original question, if people have been allowed to redeem their shares for $1 each but the underlying value has fallen below that, and everybody wants to pull their money out, eventually there won’t be enough money to meet the redemptions. The faster people want to pull money, the more the asset values will fall because they are being sold at a loss.
I agree, I do remember it well what I'm suggesting however that is a symptom not a cause per haps I'm wrong but cursory glance on Wikipedia suggests catalyst not cause. Either way it's a useful video and again I think there are issues around money management around redemptions. But honestly although this video is useful and I agree there is an issue I do think this video is somewhat fear mongering as you know if we got 3 bank runs even the FSCS would fail.
@@chrisbourne-retirementplanner understood, b ut can you give an example in recent history of a large, liquid and well diversified money market fund trading below par by a large margin? Even assuming a run on the fund, the assets are typically so liquid that investors get back pretty much all their money. Only in very obscure circumstances (like Icelandic bank money market ISK funds swapped into dollars or Euros investing mostly in their own paper) is it any more than a blip. You spoke of "losing all their money" in mmkt funds. Can you give an example of where that has even remotely happened, even in a run scenario?
I was just about to move my cash to a money market fund - thanks for saving me Chris!
No worries Tim. Just being aware of the security and true liquidity of the underlying assets is the most important thing.
Interesting, but its often the things we don't expect, like $700t Derivatives market failed delivery or Commercial Property or you may have called it! Be prepared, have something outside the financial system.
Absolutely. It’s best to have eyes wide open to real risks. You can’t avoid all of them, but you can balance them.
Brilliant video Chris, on a topic that I can’t see anyone else talk about. This is what differentiates you.
Thanks for posting
Thanks Chris! I do try to bring a fresh perspective wherever possible.
Are you referring here to "money market" or "short term money market" funds or both? e.g. does the Royal London short term money market fund come into this category in your view? According to morningstar this fund is almost entirely "cash", but you are saying it's not really cash?
If it is entirely cash deposits as opposed to cash alternatives like short term commercial paper, then there shouldn’t be too much cause for concern.
@@chrisbourne-retirementplanner I had this very same question. According to their key investor information, they hold 80% in cash or cash equivalents. They then go on to explain what this actually means, which leaves me none the wiser as to whether they could suffer from what you describe. They do refer to commercial paper, so I guess they are not in the clear.
Does this affect 'Sterling Short-Term Money Market Fund' on Vanguard?
It can in the scenario being described.
There is potential for such funds to be affected by the risks described. Anything that holds cash alternatives could be affected, to varying degrees, depending on the type of assets.
I have a question around cashback on bank switches is this taxable income or might it be treated as a side hustle or do the banks pay the tax on it? I am going to be doing my self assessment tax return in next couple months, I just switched investments and cashback on SIPP and isa is tax free but they are paying the tax on it and have advised me where to put it on my tax return but it begged the question on bank switch cashback, sorry if that’s long winded
Thanks. Very very useful summary. Im probably over exposed as 90% of my SIPP i moved 6 months ago to take advantage of UK interest rates. I will have a look at derisking my portfolio.
Hi Paul. Glad this has been helpful!
Would small investor be exposed money markets?
A lot of warnings and scary comments but very little remedy and counteract bar the last 5 seconds
Hi Chris, my largest asset is my pension which I transferred into a cash fund when Russia invaded Ukraine. Where is that cash likely to be held?
Doh! I thought my money market fund was quasi cash but as you point out, if everyone wants their cash at the same time then it won't work. Are there any actual cash interest bearing investments products that can be used to within a SIPP for my 2 year cash requirement that have the benefit of the FSA protection?
Yes, companies like Cater Allen and Investec offer 1 and 2 year fixed term deposits with FSCS protection and good interest rates.
Many thanks Chris, like so many I was not aware of the risks in what I thought were (almost) risk free investments.
Thanks John. If I can highlight potential problems before people are affected by them then hopefully I’ve done my job!
So would bonds be affected in this way? Or would bonds be safer?
Depends on how the bond is held if you hold it in a fund then yes likely to get gated if the paper instruments are forced to be redeemed. However if you old a bond singularly hold it to duration and any price movements up to redemption are irrelevant.
@@khiburgess5848 thank you for replying 👍
Hi there. A bond is ultimately as safe as its issuer. High quality bonds held to maturity are very secure as Khi has said above, but we can never be 100% certain of anything if the level of government intervention into a crisis is unprecedented. Are we at that point? Only time will tell.
Food for thought. Maybe worth a switch to bonds?
Certainly anything that is government backed and longer term is more secure by nature. Still wise to ensure it is diversified though.
Hi Chris. Would the same risk apply to ultrashort bond funds, e.g. ERNS?
Well it certainly wouldn’t be immune to the risks. It depends on the liquidity of the positions.
Great video! Another good reason not to hold much of your investment portfolio in cash...
100%
Cash isn’t part of anyone’s investment portfolio. Cash isn’t an investment, it represents a safety net. Or should do.
@@ksherratt6657 Strictly speaking that's not in recent times accurate as given how longer duration fixed income took a beating a 2 fund portfolio got battered the inclusion of a money market fund or commodity fund in particular would have countered much of this volatility. But as with everything hindsight is always 2020. What drives returns is asset allocation with 30years at least before I revisit my portfolio I don't see a reason to include anything but equity and almost exclusively global at that.
I have some CSH2, based on SONIA, would you include this as one to worry about ?
There would be parts of the fund that could be exposed to the risks described in this video.
So in summary, steer clear of money market funds and invest in diversified assets…I think is the take away.
Hi Steve. Definitely diversify. Use mm funds sparingly but pay attention to what they hold in them.
Thanks Chris!
You’re welcome. Glad it’s helpful.
I follow Warren Buffets advice, buy the S&P and keep buying, especially during a downturn, which statistically is likely in the coming years. My investment horizon is well over 15 years.
You’ll tie yourself in knots trying to anticipate the market and it’s just not worth it.
Thanks Chris. While all forms of investment carry some risk I was not aware just how much in the case of MMF's!!
Yes I think it’s important to highlight the risks on things you’re told have little to no risk. Thanks for watching.
I don't understand how half of Asia and all of the eu are unable to compete, are unsecure in terms of security, have reversing globalism and massive debt to gdp ratios but their markets are still up!!!
It may simply be that valuations are just down to sentiment and what people are willing to pay - not necessarily logic and what they are worth.
@@chrisbourne-retirementplanner It's the old WB quote about markets staying crazy longer than you can remain solvent. I'm risk off for a while.
Thank you
You’re welcome
Hello Chris, I am 100pc in cash in my HL SIPP. I read it was safe while earning 4.2pc interest because diversified across banks...would you agree? Thanks
Hi Nick. If it’s diversified across banks that qualify for FSCS protection then there wouldn’t be too much cause for concern. It’s the cash alternatives you find in money market funds that present the greater risk.
@chrisbourne-taxfreeinvesti9688 thanks Chris, I cashed out of all investments a year ago, so sat in cash waiting to be invested in the SIPP. I have to trust HL that they have spread the money over FSCS accounts.
@@nickseccombe1357The information you are after is provided on the HL website with how they split % cash across several banks. I think that they provide an example of the maximum amount of "protected" cash that can be held on account.
Very interesting, thanks
You’re welcome Paul.
You’re welcome Paul.
Oh, not another crash. I've been hearing this since 2020, but still nothing . Oh, maybe next year😅 👍
The history lesson here is not quite accurate tbh. The funds got gated for withdrawals but the positions failed due to the leverage built up in the system the paper being used were largely tranches of CDOs which the synths melted the system
I think you’re describing the onset of the GFC, whereas the events described in this video happened in the aftermath of that. There were hundreds of billions of dollars of redemptions, which led to the US Treasury establishing the Temporary Guarantee Program.
Yes I am and I know all you described did indeed happen but the impression I got was you were suggesting the cause and effect were reversed.
@@khiburgess5848 No, just recounting the events surrounding the failure of Reserve Primary as stated.
@@chrisbourne-retirementplanner Ah ok well that's my failing then, right now however it might be worth a video for balance to look into the possibility of a melt up which all the indicators suggest we may be in line for no guarantees ofcourse
@@chrisbourne-retirementplanner It might also be wort telling people before the gating of reserve primary that over 50% of the underlying assets were in commercial paper in this case MBS which were inturn leveraged with synthetics. Needless to say none of the current money market funds have that type of volume of exposure. Today's MM funds do not mirror what was happening in reserve primary.
Assuming we want to hold "cash" within a pension for tax reasons, are the only "safe" options either uninvested cash on the platform, or HTM Gilts (in the UK)?
Why would you want to hold cash? You are right to put the word safe in quotations you need to unpack that first before a stab at an answer can be achieved.
@@khiburgess5848 to spend it in drawdown. If I need £100k over the next 24 months I don't want it all invested, when the inevitable crash comes.
Hi Alistair. Cash that is protected by FSCS limits is as secure as it can be, and gilts have always been seen as a safe haven. To date, there haven’t been any defaults since the first gilt was issued in the 1700s.
Thanks @@chrisbourne-retirementplanner. So would that be your suggestion - either uninvested cash or single gilts. Or maybe an ultra-short-dated gilt fund, if one exists?
Funny thing is when you look at the key investor information on a money fund it’s got the lowest risk of investments 🤷♂️
Lowest risk yes which for the most part they are but they are not risk free.
Lol title of this video is most fear mongering clickbait i have ever seen😂
Thanks for clicking.
Hi Chris, if you think money markets are a bad idea, I’m curious as to what event you think is going to happen next year to make money markets crash, which won’t affect the rest of the market as badly?
That’s an unknown, and it’s also impossible to say whether mm fund dangers becoming a reality would be isolated, or part of wider structural problems, as was the case in 2008. What seems clear though is that central governments don’t have the latitude to assist in the way they did last time.
Ok. Thanks. So there is no event per se on the horizon, but if we had a major issue where everyone went for the exits in the money markets at the same time, the funds might not be able to return all of the money back (making them act more like shares/bonds). That right?
Ok. Thanks. So there is no event per se on the horizon, but if we had a major issue where everyone went for the exits in the money markets at the same time, the funds might not be able to return all of the money back (making them act more like shares/bonds). That right?
Sounds like a case for upping gold and bitcoin allocations
That was quite a horror story Chris people need to be aware of the risks when they're investing for their pensions fantastic video
Thank you Sean! We need to learn our lessons from the past.
Is the cash fund part safe in Aviva where my pension fund is held?
It depends on how it is structured. If it's a money market fund then in this scenario the answer is no. If it is held on deposit as in cash on a platform then it should benefit from the FSCS. Nothing is 100% safe it's impossible to remove all risk all of the time and it depends on the type of risk as there is not only capital risk etc.
The Aviva pension cash fund should just be cash and should have FSCS protection. It is worth checking what you actually hold though as mentioned above.
Thanks for your prompt advice. I will try to find out more about the Aviva cash fund - the problem is the "fact" sheets are very cryptic.@@khiburgess5848
Hi Chris, thanks also for your prompt advice. Its really scary how money is pushed around these days. The Aviva fund fact sheet states "Yes" next to "Cash/Money Market Funds", but the actual proportion is not given! I have little control - Aviva offers 79 funds, two of which are called cash, "Sterling liquidity" and "Cash" - both talk about money market, so I must assume the worst 100% exposure to MMF!!!: - such a lovely feeling being with Aviva !?? ( What to do ? I am stuck in my company's Aviva Stakeholder pension - cannot move without triggering crystallisation and the 4k£ a year limit, but I still want to pay in 2K£ a month....)
I wouldn't panic that is for sure how much of the fund is exposed to money market funds? From there you can determine exposure. If you are still concerned seek advice.
Gold Gold Gold!
I have 5% gold etf in my SIPP….that might go up now !
Gold is not a good investment but I would view it more as insurance holding Gold via an etf I think is pointless because your holding a paper instrument not the physical asset. Even though the etf says it's backed physically doesn't mean you hold physical gold.
@@khiburgess5848 My gold etf is currently the best performing of all my funds, granted only over a short time span. Comparing performance alongside S&P 500 and FTSE 100 it is definitely outperformed by equities over longer period of 5+ years, but less than that and it’s not so clear cut.
I thought the whole point of a money market fund was supposed to be a highly liquid cash alternative. Whereas it sounds like a illiquid alternative to cash which is not protected by the tax payer.
Yes. Always be wary of something that calls itself a ‘cash alternative’.
Having done a lot more research since this video was released all the evidence does not rhyme with some of the claims being made here and imo seems to be very hyperbolic and designed to scare people.
Okay, well there’s plenty of articles that suggest the opposite, but nobody can see what the future holds. Most of the time, people only realise the risks after the event. If you think differently though, why not create a video to put forth another pov?
Though I consider myself a sophisticated UK-based investor (I have taken a course on the subject), there is a lot of what you said that I simply do not understand as my knowledge of how the financial system operates is limited. What I think you concluded was that the ‘action’ we should take is to make sure we have no more than £85000 (the FSCS protection limit) in any one bank. This is relatively straightforward for cash accounts, ISAs and GIAs but not feasible for pensions. (PS I don’t directly invest in MMFs but from what you say i may be unknowingly investing indirectly in them)
Hi there. As long as the assets are diversified, you tend to get multi layered protection investing into index funds and etfs held in pension wrappers… The holdings are ring fenced from the both the pension provider and the fund provider’s own assets, unlike cash in a bank, which sits on the bank’s own balance sheet and would therefore be at risk if the bank went under.
Gold.
At what point is it legitimate and fair to blame the system? If the same issues come round time and time again is it justified/reasonable to blame individuals or the ‘smaller’ investors for what appears (to (an EXTREMELY) uneducated person to be a systemic issue?
This entire banking system appears to be set up so those at the top can skim a fraction off the top of billions of transactions every single day and make themselves obscenely rich in the process.
PS - this isn’t intended to be an impertinent post. Genuine questions. I know almost nothing about money and investing and i have very little money. I put £100/month in to a Vanguard Life Strategy and i don’t want to access it for another 3 decades or so. I hope to increase that a fair bit as well as pension contributions when i have more than zero spare money.
Which Van LS do you use?
@@khiburgess584880/20, Bonds heavy, I changed to this in March 20 thinking I was smart, and then bonds collapsed. Still in the fund about 10% down still....
@@khiburgess5848 The 100% shares as it's going to be decades before i want access or stability.
I try to keep things simple, but I'm also lucky as have a teacher DB pension. I put my money in passive global index tracker with Vanguard (SIPP and ISA) and in NS&I bonds which is of course government. Nothing in totally safe but hopefully this is as close as possible
Pretty much the same as me I think generally speaking dependent on risk tolerance your investment horizon this is a pretty good strategy.
Greed. People won't learn
fire-sale
Better to just invest in uk guilts surely?
I certainly prefer gilts to cash alternatives.
Nice clickbait
Jellen is a total incompetent.
moral of the story... when you put your money in assets you´re unsure about... place a stop loss!
Not always the cleverest of ideas. Many investors have little idea as to how they work. Suggesting they do without explanation is extremely misleading.
What's the US got to do with the UK. Muddle of a presentation. No wonder people end up making bad decisions with poor quality financial journalism. A sure way of creating a stampede across social media
What’s the US got to do with the UK? Is that a serious question?
You have to be joking surely
You do understand the US retail banking sector?
@@charliebrowns9999 Intimately