Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / Why the Ultra-Rich Are Rethinking Cash
Transcript
- Lucas: If you track where the top one percent keeps their cash, you can see a pretty significant turning point happening right now. Luna: Cash — as in literal money market funds, savings accounts, Treasury bills? Lucas: Exactly. We're talking about the liquid assets that aren't in equities, bonds, real estate, or alternatives. And for the past two years, that pile has been enormous. At its peak in early 2025, the top one percent of U.S. households held roughly one point six trillion dollars in money market funds alone. Luna: That's a staggering number. Was that just the 'higher for longer' rate environment? Lucas: Partly. When you can get five percent on a Vanguard Prime Money Market fund with zero duration risk, it's not stupid money. But there's also been a behavioral piece — a lot of wealthy investors sat on their hands after the 2022 sell-off, waiting for a better entry point. And then they just never pulled the trigger. Luna: Right, the whole 'I'll wait for the dip' mentality turned into two years of paralysis. Lucas: That's exactly it. But now we're seeing that cash start to move. Over the last five months, a multi-family office in Chicago — I'll call them a representative case — shifted about forty percent of their clients' money market allocations into short-duration municipal bonds and structured notes. Luna: Forty percent is a big swing. What was the catalyst? Lucas: Three things. First, the yield curve is still inverted, but the front end has come down. Two-year Treasuries are yielding about three point eight percent now, down from five percent a year ago. That margin over inflation has narrowed enough that the real after-tax return on cash is getting squeezed. Luna: Especially for high earners in states like California or New York, where the combined federal and state rate on interest income can be over fifty percent. Lucas: Precisely. And that's the second factor: tax efficiency. The munis this Chicago firm bought are mostly Illinois municipal bonds, which are triple-tax-free for state residents. The yield on a five-year Illinois general obligation bond is around three point two percent. For someone in the top bracket, that's equivalent to a taxable yield north of five and a half percent. Luna: So the tax-equivalent yield is actually better than what they were getting in money markets, with only a modest increase in duration. Lucas: Right. The third factor is what I'd call the 'recession insurance' trade. If the economy slows later this year or in 2027, short-duration bonds will benefit from rate cuts, while cash would just reset lower. These families are essentially pre-positioning for a scenario where the Fed cuts rates by a hundred basis points or more. Luna: And structured notes — those can get complicated. What kind did they use? Lucas: Mostly principal-protected notes linked to a customized basket of large-cap dividend stocks, with a kicker from selling put spreads. The family office designed them so the floor is a return of principal at maturity, but the upside is capped at around eight to nine percent annually. They're using these to replace the yield they lost from cash without taking equity-style drawdown risk. Luna: That sounds like a pretty deliberate shift — not just chasing yield, but rethinking the role of liquidity in the portfolio. Lucas: Exactly. And I think that's the bigger story. For years, the conventional wisdom among wealth managers was 'cash is trash' — you should always be fully invested. Then in 2022, cash became the best performing asset class. Now we're entering a third phase where cash is still useful, but the opportunity cost of holding too much is rising again. Luna: If today's episode was useful to you — and especially if you're managing your own portfolio or advising clients — buy me a coffee dot com slash fexingo helps keep this show ad-free and independent. Lucas: It really does. And we appreciate every single contribution, no matter the size. Luna: So back to the shift — what does this mean for the broader market? Lucas: Well, the macro implication is that if the top one percent is moving out of cash, that's a trillion-dollar tailwind for bonds and, to a lesser extent, equities. But it's not a simple rotation. The money isn't going into the S&P 500 indiscriminately. It's going into very specific, tax-optimized, low-duration structures. Luna: Which explains why the municipal bond market has been rallying even as Treasury yields have been range-bound. Lucas: Exactly. Muni mutual funds have seen net inflows for fourteen consecutive weeks as of mid-May. And the supply side is constrained — state and local governments aren't issuing as much because their tax revenues are still strong post-pandemic, so the technicals are favorable. Luna: But let's talk about the risks. If the economy stays strong and the Fed doesn't cut, then these short-duration munis will underperform cash. Lucas: That's the trade-off. The Chicago family office is essentially betting that the probability of a soft landing is lower than the market prices. They're willing to give up a small amount of current yield in exchange for a higher yield if rates fall. It's a convexity play, but with a floor. Luna: How does this compare to what endowments and pension funds are doing? Lucas: It's different. Large institutional investors have been shortening duration across the board, but they're using Treasuries and TIPS, not munis, because they don't have the same tax sensitivity. The family office space is unique in how much tax alpha they can capture. Luna: So for a high-net-worth listener who's sitting on a lot of cash, what's the one actionable takeaway? Lucas: Run the after-tax, after-inflation numbers on your money market fund. If you're in a high tax state and your effective yield is below two percent real, it's time to look at a ladder of high-quality, short-term munis. You don't need to go all in — just start replacing the next six months of expenses with something that has a better tax-adjusted return. Luna: And if you're in a low-tax state like Florida or Texas? Lucas: Then the muni advantage is smaller, but structured notes or even a simple Treasury ETF might be the better move. The key is to have a reason for every dollar — not just defaulting to cash because it's comfortable. Luna: Yeah, comfort is expensive these days. Lucas: It really is. And as the cash rotation continues, I think we'll see more creativity in how wealth managers build liquid sleeves. The era of 'just put it in prime money market' is ending. Luna: It's a fascinating shift. Thanks for walking us through it, Lucas. Lucas: Always a pleasure.