Ep 81: Why Your Interest Rate on Cash Will Stay Low & What You Can Do about it?

So I got inspired to talk about this topic today because I was seeing a lot of discussion online where people were posting like, hey, are there safe places to put my money? Because these days the interest rates are so low with all the banks and the cash management platforms. I was like, yeah, yeah, it’s going to stay like that for a while, man.

 And there’s a reason why, and I thought like, yeah, maybe we should talk a little bit about it so that everybody gets a clearer idea as to why it is interest rates will stay like that for a while. And, you know, kind of set the reality and see how to move forward from here la. If you’re expecting like oh, suddenly in the next one year or so, interest rate is going to come up, you know, you’re going to get more money bang for your buck with all these like different robo-advisory or different bank accounts, probably very unlikely. So that’s why we are here today. 

And yes, while I do get the appeal of these kind of cash platforms and trying to milk more interests out of it, I do think that in the longer term, if you really want to make your money work hard for you, you cannot run from the equity markets, right?

So while I’m not advising you or giving you any kind of like, oh, buy this or do that, I think realistically we’ve covered a lot about, you know, the long-term potential of being in a stock market. And, you know, it’s just, I know a lot of people are very concerned, like I don’t want lose my money, I don’t want to go bankrupt.

Okay. Go and listen to some of the episodes we talk about why people go bankrupt in the stock market. And I think a lot of these are actually like kind of passed down from our parents because our parents went through a period of like Asian financial crisis and 2008 financial crisis. So there are a lot of battle scars and, you know, that’s why a lot of people are very afraid of the stock market, but I do get the idea because a lot of these guys, they’re just gambling. They don’t really understand what is going on in the stock market, right. 

So today we’re not going to focus on that, but I just want to tell you about this because I do think too many people are trying to, you know ” play it safe” you know, and in my view it’s like sometimes when you play too safe, you’re actually just outright losing.

So don’t need to be too into this whole, oh, I’m going to get more interest rates and whatnot. And I’m also going to just kind of take this opportunity to share with you why, you know, this is going to be the new reality la, and hopefully give you a better understanding as to yeah, maybe you could kind of move your money elsewhere for this period of time. 

So I’m going to break down some of the reasons why they’re going to stay so low, but before that, I’m going to just kind of give you an idea what are these cash apps trying to do. I’m just going to classify all of them as cash apps.

It’s very hard to just keep, you know, talking about them, like robo, banks, all those, whatever. So they’re all just cash apps trying to take your cash and give you some sort of interest. And in simple terms, when these apps gather your money in the form of cash, meaning you did not buy any investment or you did not buy any products. So you just put your money there and you’re subscribe to whatever they call it, auto sweep, or is it cash plus or cash so you subscribed to this product, which is cash. However it is framed within their app, what actually do they do? They cannot take your money to go and buy investments or kind of invest in different things.

The best that it can do is to take your money and put it to what we call money market funds. Or short-term bond fund which are they’re all kind of talking about the same thing, slightly different, but essentially very, very short term money market funds with high quality loans, government bonds, and all those kinds of things.

So essentially very very cheap and, you know, low risk kind of things. And why are short term funds very, very low risk? Because if you understand how debt works, the longer the runway, the longer the debt term, you know, the riskier it is, right? Which is why you get paid a premium for like 5 years, 10 years, 30 year bonds, right?

The further up it goes, the risk of defaulting, the risk of things happening becomes higher. So you’re paid higher, right? So that’s what we call the bond curve. And I know bonds are extremely under-discussed and yeah… but actually the bond market is bigger than equity market la. That’s a discussion for another day. And if you have not checked our episode with Chuin Ting from Money Owl, you can definitely check it out in the earlier Chills with TFC episode. 

But money market funds essentially buy bonds from like statutory boards or governments, or like super, super big companies. They’re like, triple A credit or like just super, super safe. And for short period of time, usually within a few months, right. That’s their bond length. And when you look at it from that viewpoint, why people call it money market? Because it’s like as good as money, right? Because it’s like, like almost they will pay it back regardless. Does not mean they’re risk-free, it’s just a common way of putting it and saying it as like super, super high quality debt and over short period, very short period of time. 

So, yeah, that’s that’s kind of how people see money market funds. Of course, there are a lot of intricacies involved and I will not go deeper into those stuff, but just need to understand that whenever you buy into this cash apps, you put money with them, they actually take your money to put into money market funds and these money market funds buy all these kinds of bonds out there that are very, very high quality.  And when we say that a bond is very high quality, it means that they will pay you back, which is also why the interest return is very, very low. Okay. You get the idea. 

So now I’m going to share with you why these interest rates will stay low for an extended period of time. And the first reason is the Federal Reserve. The US Central Bank is keeping their fed’s funds rate at 0 to 0.25% . So the central banks actually have a very complicated relationship with the financial ecosystem and even to your retail banks.

So they are the things that we call primary dealer, secondary dealers, you know, and funds rates. All these are highly, highly complex, I will not going to them, but if you are gig and you want to check it out, hey, check it out at Macro Voices. I love that podcast, I think they take a lot of time to kind of share with you what’s going on. And also check out this other thing called Euro Dollar University. I think you can learn a lot from those guys there. 

But one thing I feel that you need to know is that the Federal Reserve is the leading central bank in the whole world. Meaning if they reduce the interest rates, everybody kind of joins in, right? So they set the tone, they set the benchmark and actually the Federal Reserve does not have the ability to directly influence the ultimate transaction rates. So things like your LIBOR or your SIBOR. So those are the real interest rates that end up occurring on the ground. That means based on what you… you get your mortgage loans or the bonds issuers, you know, they ultimately have to decide their final rate on their own. The fed don’t actually get to influence it.

But the fed acts as this referee in the game, they set the tone. So if they decide that the tone is going to be 0 to 0.25%, everybody is going to bring it down. Or most people are going to bring it down. So all the other central banks will bring down the interest rates. And then, you know, all these other bond issuers will bring down their interest rate.

So it’s like a ripple effect. Generally, this is what is going to happen. So do not confuse it as a linear relationship, thinking that oh, fed bring the rate now means everybody brings the rate down. It does not work that way. There are a lot of, you know, different mechanics in between, of bond issuance, of market pricing and what not.

But understand that the fed acts as a referee, they set the tone. And if they decide to bring their interest rates down, which is what they did, it will send ripples through all the bond markets. All the debt-based instruments will come down in terms of their interest returns. 

So same thing happened in Singapore. Same thing happened to the Singapore bond markets, all the new coupons, all the new bonds being released are priced lower, cheaper, lower coupon value. So the idea is because the money market funds do not have, you know, very high interest, you know, short-term bonds, very high quality to buy, so they make less money and then your cash apps make less money la.

So then ultimately when it reaches you as a retail guy, your interest also comes down. So it sets the new tone. Everybody gets priced down. Of course I’m recognizing that the bond market is a lot more complicated than this. I’m not trying to tell you this is exactly how bonds work, but to understand why cash apps are paying less interest returns. This is one of the main reason. 

And the next reason why I believe that these cash apps will continue to pay you at around these rates is because I am expecting global interest rates to stay low for the next year. Three to five years. This is a little bit of a macro stuff. 

So to understand why interest rates came down to begin with, you need to understand what the central banks are trying to do. When the economy is not doing so well, the central banks usually do two things. One, they reduce interest rates so that they can spur borrowing. More people borrow, you know, you see your LIBOR rate, your SIBOR rate, they all  come down,it means it becomes cheaper to refinance your house, it becomes cheaper to get a mortgage, it becomes cheaper to spend. So in that sense, they are trying to stir the economy and just kinda promote people to spend money and, you know, spur the economy back together.

So that’s one way to do it from the central bank strategy, which is to reduce interest rates. The other way is to increase money supply, it’s to let more money move within the ecosystem. And, you know, there are many ways to do that, whether it’s to reduce the bank reserves or whether it’s to buy government debt within the ecosystem. But we’ll not talk about that part. 

Essentially you need to understand what the central banks are trying to do. Because the global economy is in a little bit of a frenzy. And because I think this COVID pandemic is going to last for quite a while longer, right. I’m pretty sure nobody expected it to last this long, but one thing led to another thing led to another thing and you know, we are in this current situation of a global mess. So very highly likely it will last at least till the end of this year. And then next year we’ll only be settling on the situation. And then you’ll start to see people start to invest more and invest in the real economy. Not speculating in the stock market. It’s very different, yeah. 

Investing in the real economy is like, buying houses or, you know, setting up factories, hiring people. That is investing in the real economy. Investing in the stock market is just buying a counter and thinking that this business will do very well over time, or you can speculate the price movement.

So what we want to see, you know,  what most central banks and most government want to see is they want to see the money going into the real economy and that will create jobs. That will spur spending. That will allow the whole economy to come back stronger and better and not just the stock market going up.

So because that is the goal of the central banks and because of the mess that we are in today, on top of pandemic, on top of, you know, job loss losses on top of the changing market, everything, I’m expecting interest rates to stay very low for the next three to five years. One more year for this whole thing, you know, the pandemic to kind of settle in a bit more. Second year for the capitals to start to see, okay, where do I invest? Because once it’s more settled, people can start to invest. And third year to continue to promote, you know, more and more investments into different, different aspects to hire people, to start factories and whatnot.

So in the next three to five years, interest rates will stay low because we are trying to promote the economy through this kind of stimulus strategy. And that is something that will ultimately then lead to low interest rates across the board. So if you are buying mortgages, yeah, low interest rate is good, but if you are, you know, using all these kinds of cash apps, then you are expecting lower returns also, because that is what is the market going forward. 

Which brings me to point number three. And that is these cash apps are actually market sensitive. They are competing with each other. They actually are comparing, you know. They don’t work in a silo. Okay, so for the longest time ever, all these banks and financial institutions, they have been using your money to do all these kinds of stuff.

So they have been making the 2%, 3% without you knowing, but then today, because of all these robo-advisory or banks trying to go direct, they’re trying to attract you, right? So they’re trying to attract you. And one of the ways that they have decided, the market have decided is to provide you this kind of cash management interface, cash management tools and apps, right.

And that’s kind of where it came about, right? Because before this people don’t really talk about these stuff. And one of the reasons why they’re doing this is because they want to build trust with you. You need to understand: for you to put money into a platform, to put money into a bank, or put money with an app it’s quite crazy, you know. 

Like 10, 20 years ago, nobody will not have thought of it. You just tie your My Info, tie your bank and then straightaway wire money into a platform. It’s pretty crazy, right? So one of the ways for them to get to do that is to build trust with you. So how do they build the trust with you? They give you a little bit more incentive on cash, and it seems like you’re not taking out any risks, but then you put your money with them. So over time you build this trust. 

So your inkling, right. Just from a psychological standpoint, your inkling is that you will very likely use their investment service, use their insurance service, use their banking service because you have already used their cash management platform. So this is a lot of a marketing strategy, a lot of trust-building strategy from the robo companies or from the banks to you.

So all of these cash apps are very much a marketing strategy and they don’t really make a lot of money from giving you this kind of returns. That does not mean they don’t make money, but relative to other services, they don’t actually make a lot of money. So when you look at it from this angle, you start to realize that if there is no big boy in the game increasing the interest rates, it’s very hard for everyone else to increase, because why bother?

As long as you’re a little bit higher, market mechanism, right, as long as you’re a little bit higher, people will come to you. So now there’s no real interest raise, even if global interest rates come up. So it will be a lagging thing. So after economy comes back up, central banks will adjust their interest rates.

And then after they adjust interest rates, reference rates come up, then all these kinds of cash apps will slowly adjust their interest rates to come back up to attract your money. But from now to then it’s very unlikely because they are all looking at each other. If no big boy in the game is increasing and giving you more interest, then why do I bother giving you more? 

If I give you 0.25 more, 0.5 more, you know, I’m already like paying you a lot. So generally the guys that are giving the highest interest, they are marketing like crazy. I don’t want to name names, but you can see it, they’re disturbing you on Facebook, on YouTube. And that’s good enough. If generally nobody’s going to increase it, then this will stay like that for a long, long period of time, because they don’t actually make money from this. They’re just trying to use it as a marketing tool and they’re trying to use it to build trust with you to get you to come to their platform. 

 So that is kind of why I believe that interest rates will stay very low until some big boy decide that okay, we’re going to raise it up. And then the whole market will kind of move along with it because they are competing with each other for your money and your trust and your faith with them.

Okay, so to sum it up today, essentially, these are the three reasons why I believe a lot of these interest rates from the cash apps will stay very low for three to five years. And number one is because the central banks are putting rates near 0, right? So the US central bank, the Federal Reserves set near 0, which will affect all other debt-based instruments across the world.

Number two is the low interest rate environment will stay for three to five years because these central banks are trying very hard to stimulate the economy by keeping interest rates low, so that you borrow more, you spend more, so they are trying to do it. And in no time, you know, they won’t raise it within a short period of time because the world is still in a mess. So three to five years. 

The third point is these cash apps are actually using this as a strategy to compete with each other. They’re trying to build trust, they’re trying to, you know, get you on their platform. They don’t actually make a lot of money. So they will price themselves very competitively. 

Unless some big boys in the game are changing it, you will see cash interest rates stay very low. So I hope you learned something useful today. See ya.