Over the years I have learned that the real news begins in the back pages of every newspaper, especially The Wall Street Journal. Therefore, I was not surprised to find on page C8 of the February 6, 2015 Wall Street Journal an article about how changes in money market mutual funds will be bad for Banks (Click here for link).
The SEC is changing the landscape of the mutual fund industry through powers granted under Dodd Frank to “reduce systemic risk”. Fidelity Investments has announced that they will accept the new regime (Click here for link) by splitting their offering into retail and institutional money market funds.
The retail fund will be available to individuals and will offer the current suite of choices including government, non-government and municipal portfolios and their NAV will be fixed at $1.00. The institutional fund, however, that buys non-government or municipal assets will have a floating NAV and, in some circumstances, its liquidity will be subject to redemption fees and gates (limitations on redemption’s to sustain orderly markets). The rest of the article talks about why this is bad for banks because it takes away a funding source. Evidently, short term bank paper is an important money market investment class.
This Will Be Great For Private Equity
What the article is not saying, however, is what is likely to happen to savers and retirees who have accumulated enough wealth to be in the “institutional” pool. Either they get in the government pool or they get penalized by owning a private pool with scary attributes like a floating NAV that can drop below dollar parity (break the buck) and redemption fees and gates that allow the mutual fund to charge for and/or delay redemption’s.
Now don’t think for a minute that this isn’t good for Fidelity because its biggest fear is liquidity. Also absorbing losses by honoring a $1.00 NAV when it has to meet redemption’s in a choppy or turbulent market is not good business. And, of course, it is good for the government securities market because it assures funds flow into short term government instruments and agencies like Fannie and Freddie. So a grand bargain has been struck and the only losers are people who want to sit on an “institutional pile” of cash in non-governmental or municipal money market funds and, possibly banks, corporations and municipalities who may see their cost of short term funding rise as the pools of capital migrate to the government funds.
There are very few institutions who will want their cash value to float below zero or be subject to limitations on when they can get their cash so they will do exactly what the Fed wants – they may stop concentrating savings in money markets and put the money into other assets classes like real estate, venture capital and private equity.
Shaking Up The Savers – Deflation Fighter
It also may be an intentional move to avoid Japanese style persistent deflation by shaking up the savers and causing the money to get back to work in the economy? This shake up has apparently worked already by inflating financial assets like the stock market, real estate and private equity. The Fed’s policy target of 2% annual inflation has not been met for a long time and debtor nations like the U.S. need inflation to make their business model work. The interesting question for all of us is where does this influence and manipulation end? It seems like almost every asset class is influenced by a central bank or governmental plan or policy. For my money I want to own a business that manufactures an important product or provides an essential service and, in both cases provides employment.
The new money market rules could drive even more cash into private equity.
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