IN THE NEWS

💰 Facebook’s Parent Company Meta Fined $1.3 Billion (WSJ)

Facebook’s owner, Meta, (META), was fined $1.3 billion by European Union regulators for sending user information to the U.S. It’s a record privacy penalty for the bloc.

• Meta’s top privacy regulator in the EU said Facebook has for years illegally stored data about European users on U.S. servers. The worry is that American spy agencies could access the information without sufficient means for users to appeal.
• The 1.2-billion-euro fine surpasses the previous record of $806 million against Amazon in 2021 for privacy violations related to its advertising business. The company has appealed that decision.

Why it matters:

Large international companies rely on a relatively free flow of data across the Atlantic, and the steep fine for Meta highlights the regulatory challenges that have mounted since a previous data-transfer deal was overturned by European courts in 2020.

• Meta, plus many other U.S.-based tech companies, move data from Europe to the U.S., where the company operates its main data centers to offer its services.

• Meta could try to re-engineer its systems to keep Europeans’ personal information in Europe, but that would be complex, said people close to the company.

Meta has said that if ordered to suspend transfers, it may have to stop offering services in the EU, which has more than 255 million Facebook users and earns nearly a quarter of its revenue.

• Meta stock has jumped 100% year-to-date after a disastrous 2022 in which its share price fell by about 70%.

🏙️.Cities Sinking Bodes Poorly for Commercial Real Estate (Yahoo)

Research has found that the iconic skyline that defines New York City is also the lead force in what’s sinking the city, worsening the flooding threat posed to the area. The water around the city has risen about nine inches since 1950.

• Major flooding events from storms could be up to four times more frequent than now by the end of the century due to the combination of sea level rise and hurricanes strengthened by climate change.
• “A deeply concentrated population of 8.4 million people faces varying degrees of hazard from inundation in New York City,” researchers wrote in the new study.

NYC is just one of many growing coastal cities worldwide that are observed to be subsiding – which means there’s a “shared global challenge of mitigation against a growing inundation hazard (flooding).”

Why it matters:

Globally, around 800 million people are expected to live in coastal cities where sea levels will rise by more than a foot, according to a report by the C40 group of major cities taking action on climate change.

• The report notes that the cost of these impacts, including rising seas and inland flooding, could reach up to $1 trillion.

The potential sea level rise damage to global cities along coasts could drive city planners and developers to forgo more skyscrapers. It could impact the economies around cities, and the authors noted the risks faced by NYC will be shared by many other coastal cities around the world as the climate crisis deepens.

• The already-weakening commercial real estate sector could be in for more trouble in coming decades, at least in large coastal cities. Impacted by the increase in remote work, commercial real estate companies may continue to look elsewhere if coastal cities are a potential liability for flooding and major storms.

MORE HEADLINES

🏦 Janet Yellen reaffirms June 1 as the hard deadline to raise the debt ceiling

🚗 Ford lays out its plan to ramp up EV production and boost profits

👀 JPMorgan’s CEO says be prepared for higher rates

CHART OF THE DAY

CASH IS(N’T) TRASH

Cash is king

A popular pandemic-era expression among investors was “cash is trash.”

It’s time to retire that phrase. If you ranked all mutual funds by March inflows, the top 28 would be only money market funds, claiming 73 of the top 100 spots.

That amounts to well over half a trillion dollars in the first quarter moving into these cash-like assets. And that’s because, for the first time in years, these funds offer reasonable returns.

Many such funds offer compelling rates around 4.7-4.8% while essentially garnering little more risk than a bank deposit since they’re often invested in ultra short-term Treasury bills guaranteed by the full faith and credit of the U.S. government, similar to the governmental assurances made on insured deposits at banks (all funds in your bank account up to $250,000).

Bad for banks

Ironically, many banks haven’t come close to catching up to money market funds — according to Business Insider, the average savings account in the U.S. yields just under 0.4% annually.

Banks are typically slow to raise deposit rates after market interest rates rise, but as more and more money flows away from them and into money market accounts, they’ll be forced to adjust.

Erich Balchunas, a Senior ETF Analyst at Bloomberg, calls this spread “the story of the year.” Why keep extra savings in a bank account that earns a fraction of a comparable money market fund?

Cash is king right now. Everyone wants in on these safe, relatively high-yield returns.

Shifting financial flows

This is, naturally, pulling cash away from the stock market, too. Yet, the market averages are up firmly on the year so far, but as Balchunas adds, “equities now have to work much harder to get your money.”

Thanks to the Federal Reserve’s interest rate hiking campaign over the last year, we can now earn attractive returns simply with cash. Not in most bank accounts, but certainly in high-yield savings accounts and, as mentioned, money market funds.

And this is, to some extent, exactly how the Fed hopes to enact monetary policy. Saving money is now much more appealing than before when rates were essentially zero, and the opportunity cost of spending is greater.

In aggregate, that slowly reduces consumption in the economy, helping to balance supply and demand and, hopefully, reduce inflation rates.

What are money market funds?

• Money market funds are a type of mutual fund invested in high-quality, short-term securities, usually from the Treasury Department directly or U.S. government agencies like Fannie Mae, Freddie Mac, and Federal Home Loan Banks, along with other similar assets.
• As their primary goal, these funds seek to preserve your principal. In other words, under normal circumstances, the value of your investment in money market funds shouldn’t fluctuate, equaling $1 per share while paying an attractive interest yield.

Very safe — most of the time

We say “under normal circumstances” due to a brief incident in 2008 when a prominent money market fund “broke the buck,” as its net asset value fell below $1 per share due to its holdings of Lehman Brothers’ short-term loans.

Its assets were worth only 97 cents on the dollar in total, risking a modest loss to investors. Fear spread into similar funds until the U.S. Treasury Department stepped in to guarantee the value of money market funds up to a limit while the Fed set up emergency lending facilities.

Put differently, short of financial calamity, money market funds are as good as cash. In an event like the Great Financial Crisis, if history is any guide, government officials have effectively stepped in to mitigate potential losses.

Final thoughts

Interestingly, compared to the recent past, money isn’t necessarily flowing into money market funds as a temporary safe haven. Rather, folks are hunting for income-based returns in these conservative assets.

So long as the Fed doesn’t dramatically cut interest rates soon, which some expect in response to a possible recession, money market funds will probably continue soaking up cash from other parts of the financial system.

Dive deeper

Listen to this Bloomberg podcast on money market funds for more.

See you next time!

That’s it for today on We Study Markets!

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