Capital Constipation: Investors are cautious. The latest Global Fund Manager Survey revealed that investors are taking the lowest degree of risk since the survey began, covering the 2000 tech wreck, the 2008 financial crisis, the 2016 global recession, and the pandemic. What do you do when risk appetite is low? Hoard cash. And that’s exactly what investors are doing with cash exposure, the highest since October 2001. Investors are being rewarded for hoarding cash, so the behavior isn’t unusual. It is all driven by the substantial rise in real interest rates. Ten-year traded real rates have surged to their highest since 2018. Short-term real interest rates are even higher, with a steep inversion of the real-yield curve. One-year real yields are trading 1.34% versus less than 1% for 5y5y forward rates. Cash demand is evident across speculative traders too, where long US dollar exposure is approaching record highs and weighing heavily on digital asset valuations. The market is now trained to look through inflation surprises – it just means that more monetary tightening will be required to reign it in at the expense of the growth cycle. Yet again, the Atlanta Fed nowcast is approaching a contraction for Q3 GDP in the US. Hoarding cash and US dollar strength most often reverse when markets force the outcome – an equity crash, a credit fracture, a bank run, an EM debt crisis. Trouble is, most of those are unlikely to repeat as lessons were learned from past mistakes. For instance, large EM countries built a war chest of US dollars to ensure credit markets would be immune to rapid increases in US dollar rates. So, we wait. And while macro fundamentals have yet to bottom, our Digital Pulse shows encouraging signs of improvement, rising to 56.2 in the past week (50 neutral). Hoarding cash leads to capital constipation – bad for growth and bad for risk assets. Those periods are notable for their ferocity and brevity.