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US MM Funds - The dumbest money of all
The 'crap out' in stocks may scare us to death but it will be a freeze up in short term liquidity that will kill us. We’re getting closer by the day.
The liquidity issues that are emanating out of Europe are extending around the world very quickly. One area that I continue to think is vulnerable is the US money market funds. There is a good reason to worry about these funds. After all, this is the dumbest place on earth to put a dime. Consider the numbers.
The average cash MMF is yielding an 1/8th percent per year. There’s tax on that too. The net comes to about 10 basis points. For every $100 you have in a cash fund you have income of ten-cents. For this lousy dime you are taking risks. There is this assumption that a money fund can never be worth less than 100. There is no truth to that. It happened three years ago.
What if a money fund “broke the buck” and all of a sudden it was worth only 99%? The loss would only be $1. But that $1 is also equal to ten years worth of interest. From a gamblers perspective you are betting 100 dollars to win only 7.
How much risk should one be willing to take when the return is only 10 basis points? Easy answer. Zero.
You might think that there is no chance for a money fund to trade at 99. If so, consider the words of Boston Federal Reserve President, Eric Rosengren, in a July, 25 2011 interview with Reuters:
A "combination" of solutions will be needed to reduce the risks faced by the short-term funds and their investors -- including one resisted by many fund marketers that would no longer fix the net asset value (NAV) of a fund share at $1.
"We still need to make further progress in reducing the risk that money-market funds could be a source of instability resulting from an unanticipated credit shock."
In a speech at Stanford University on June 3, Rosengren said money funds could be affected by European debt woes.
The 4+% drop in stocks today was a sideshow for what is happening in the funding markets. The important news came from BNY Mellon. (Zero Hedge link for details). BONY is now charging to take deposits! We also have Tbills with negative yields. The only conclusion? Money has a negative value. If that is the case then money funds will break the buck. I think we’re pretty close to the edge with this.
If you accept the premise that Zero Return must also equal Zero Risk then what is the solution to the current crisis in the funding markets? Simple. Charge more for money. If the return is raised, the appetite for risk will rise from zero. Problem solved.
The one thing that is absolutely not going to happen is an increase in basic interest rates. For there to be a balance that attracts short term funding and stabilizes things in the capital markets I believe the Fed Funds rate would have to be about 1.5%.
Not only is that not going to happen we might even get the reverse. The Fed could easily attempt to buy some market peace by issuing a statement that the policy of zero interest rates would be extended for a minimum period of one year. I consider this to be a “high probability" to happen in the next 30 days.
My conclusion is that the Fed is going to do exactly the opposite of what is needed. Their action will precipitate a new round of instability. Funding sources that are now under stress are only short date financing. One week to one month is where the problems lie today. But the Fed’s action could very well push out the instability to impact longer maturities like 3 and 6 months. Should that happen, the lights will go off pretty quickly.
Bernanke’s no dope. He must see what is happening in front of his eyes. He must understand that ZIRP is at the heart of the problem. But he is pregnant with ZIRP and his "baby" is going to term.
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serious question.....if i knew someone who had $100,000 in a checking account , should i suggest they take it all out and put in tin cans around the farm....and if so, is getting $100,000 in hand on friday , going to be a problem with the bank, IRS, etc...?
or is just easier and safer to just wire to silver exchange , for all silver in hand ......
The answer is that $100k in a bank is as safe as holding a US Treasury bill. Keep you tin cans for holding worms or nails. That is not the place for cash money.
you're making that assumption based on FDIC insurance? not every bank is created the same either, (just in case you aren't sure that FDIC insurance is going to be there?). Bob Prechter is a reliable source on this information, your generalizations about the subject are doing more harm than good
It used to be any withdrawl for $ 10,000 or more at one time was automatically flagged to the Feds ... but I believe the number has since been lowered.
Unless the account has several multiples of $ 100k in it and is with a very large bank in a very large city, getting $ 100k out of a bank in one day ... most likely impossible. If it was possible, a kindly FBI agent would probably want to talk to you about why you need so much cash so quickly (ransom, drugs, etc) before they would let you even see your money.
Wire transfers are wonderful things and are also tracked by the Feds, it would go through - but you would not receive it over night ... or maybe not in two weeks depending on the selling firm. FYI, all sales of over $ 10k in precious metals are also reported to the Feds.
barliman
this thing you mention is the anti terrorist and money laundering law, (exact name? you can find a copy of it somewhere on the internet, if your broker is dually vetted he can tell you)
the limit was 5K, a man paid off his CC bill, a bit over 5K, and the government put a hold on the payment until they could approve it. banks are a bit less nervous about cash, but you can sure that records are kept. my guess is they are way too busy right now to chase down every 5K payment, but they can keep records.
I think that amount now is 5 thousand. The last time I tried to move one thousand dollars in cash withdrawl from a FDIC bank emptied thier cash on hand early one friday afternoon. The best they could do was 600.
I had them wire the entire contents of that account to a credit union down the road which had no trouble getting the thousand a few days later.
Recently one of our CU's issued a statement that all deposits into savings 2500 or greater will be held 10 business days and only 200 will be permitted immediately.
What I am trying to do is "Seed" a number of banks around the area with small checking accounts So that instead of one big fat withdrawl, I spend about 100 dollars (20 dollar wire fee) and make 5 wires. Then go to each of the banks (5 total) by day's end.
I am not concerned with Uncle Sam. Most of the time the funds wired can be traced to a specific source. Converting to cash, however is becoming more and more of a challenge.
Buy silver (gold has some recent additional paperwork for sums over I think $100) and stack it at home. When you want money sell a bit. Protects you from inflation and no Feds asking why you want so much cash. And you don't pay lots of wire fees for each small transfer.
As for keeping $100k in your account, that's madness. Your money is at risk whilst it's not earning you anything.
Yes money fees pay a handful of basis points, a fraction of the amount the management fees used to be.
So presumably brokers are losing money on them. Yet they bully retail brokers into sweeping cash into money funds.
Is it because there is stuff that noone will buy but needs to be bought by someone and money markets are the holder of last resort?
Oh yeah, t-bills are so much better, and the option to get them is so available to the regular guy. Just looked up what a regular guy gets for t-bills, wow, 0.0%, and if I buy a 6 month, I get just under 7$ at maturity for that "AAA" peace o mind, whoo hoo hoo hoo!!!
bruce,
could be reg q, pays better than sweep/ecr and less hassle, some began their programs on aug 1...
you didn't differentiate between general money funds and treasury money market funds. for treasury mm to fail would require a complete failure of the system. also the evidence is that the FED is parking money in M2, isn't that going to protect your $1 NAV? the two major problems, speculative MM funds, and the big banks, have been shored up, this time around look for something else to go wrong, (like consumer discretionary, and gold, which is highly margined) my thought is UST based MM funds are the best 0% interest return out there, but so be it. at my age i ain't buying into emerging market debt, or wineries in transylvania (sorry Leo). if need be i go to cash, which in the first great depression was the best investment of all.
The Reserve froze ALL their funds (including their Treasury MMF) due to "deep seated problems." Most of the funds were later opened and redemptions honored but the result was weeks of worry and wondering if you would get ANY of your principal back let alone a penny of the interest!
http://www.marketwatch.com/story/money-market-fund-breaks-the-buck-freez...
As the article states, maybe stick with one of the very "big" funds backed by a major like Vanguard or Fidelity. But everyone should do their homework and research and don't assume your fund is "safe."
JMHO
repeat, the a UST MM fund should never default, and with the Fed parking money in those funds, doubly so, (why do you think they did it?)Bruce is fearmongering, without the facts.
When Bruce first discussed this issue, I was very concerned and started doing my homework. My old MMMF had a crazy mix of stuff, so I presumed the same to be true with my current employer. Thankfully, it turns out I have a 100% Treasury MMMF at present, at least as of the last quarter I checked (Q1Y11). Since my employer matches, my return is not ten cents, its 100 percent and ten cents. I want a match with zero risk and I am completely happy. Now, eventually this will all fold and I won't see a dime, but at least for now I don't feel I am being screwed. I am thinking of going back into risk with QE3 this time, at least for a while, since my investment options are equities, bonds, or govvies.
It is all worthless in the long run, but I can pretend to play along.
Now, if I was retired, I would be all over Bruces advice and going elsewhere (metals). Just my two cents, er, ten cents.
Regards,
Cooter
I have ONE question.
If we will have to pay to have cash in a Bank, it seems to me that the logic answer is to withdraw the money and to put it under a "mattress"..Is that will not cause a run on the Banks ?
the Federal Reserve has planned for these eventualities, including printing money with a time-date stamped inside, use it or lose it. read Bob Prechter on this subject.
the defaulting issuer can also make payment in kind. lets say your fund buys E European bean fields, and they go broke. they issue you the worthless shares in their investment. bon apetit! and not finally the law is written in such a way that the government considers the deposit in your bank SAVINGS account a loan, to them. if there isn't money to pay you, the bank is treated as a bankrupt borrower, and you wait in line at bankruptcy court for the scraps.
the solution (and you should read Conquer the Crash) is to find a safe bank. One would think that the US is a safe haven in such an instance, and that money market funds, where the Fed is parking money, would be the safest of that, but Bruce has other ideas, like maybe shares of AAPL.
the reference is in one of Prechters books. i loaned out my copy of Conquer, and it never came back. the myth of the internet as a open source of all written and published material will be addressed at a later date
I searched a bit and didn't find this tome on time-stamped money expiration. Could you post a URL?
I don't but I can refer you to www.bankregdata.com for free FDIC data if you want to shop for a local bank. Do note the little grey number in the top left is the number of free pageviews you have left. The count by IP I think. Anyway, print to a local file often if you want future reference material, or borrow your friends/families PC.
I shopped for my safe deposit bank using this site and I was very happy with the results (nice folks, local, good balance sheet, and an old school vault).
Regards,
Cooter
As the founder of BankRegData.com I always like to see folks referencing the site. The litte grey number in the upper left is the number of users currently on the site. The upper right is the server "page create" time in seconds.
As the poster states, the first 100 hits are free and then users are asked to sign up for a 30 day Free Trial. It's our desire to make it open to as many people as possible up front. We also like the search engines to be able to index our material.
That said, I'd much appreciate it if people stuck to the spirit of openness and tried not to circumvent our generosity by advising how to use workarounds. Use your free 100 hits, sign up for a free trial and then make a decision to subscribe. Please note that we are notoriously lazy salesmen (thus the free hits everywhere capability) and will not call you. Enjoy.
Holy Shitz Batman- What are we to do. No hiding anywhere.Is there?
Alot of MMF are invested in many of the Euro banks, also for that fed guy to say what he did they must have been talking about this in order to calm the markets in the future. By allowing them to break the buck, then they can tell there clients that you took a loss but it will be made up. Instead of freezing them out instantly and/or automatic redemtions via contract.
It's worse than that, as of last year:
Amended Rule 22e-3 permits a money market fund to suspend redemptions if (1) the fund's board determines that the deviation between the fund's amortized cost price per share and the market-based net asset value per share may result in material dilution or other unfair results; (2) the board irrevocably approves liquidation; and (3) the fund notifies the SEC of its decision via email prior to liquidating. The SEC may rescind or modify the suspension, after appropriate notice and hearing, if the fund has not devised or is not properly executing its plan of liquidation. A money market fund need not actually break the buck or reprice its securities before it suspends redemptions pursuant to this rule. The SEC intended this amendment to reduce the vulnerability of investors to the harmful effects of a run on the fund and minimize the potential for disruption to the securities markets.
So, not only are you getting ~1/8% minus taxes, you may not be able to lay your hands on your principal (or what's left of it) if your bank/broker is in trouble or if the SEC decides your redemption will just further destabilize markets. Most "cash" positions in retail brokerage accounts are actually MM funds and oftentimes a real cash position simply isn't an option.
http://www.icdfunds.com/downloads/Federated_Summary_of_Money_fund_reform...
so this means if we put in a redemption request and it is denied, it is only because the entire fund is being liquidated to keep early redeemers from leaving late redeemers with less than $1/share value right? all investors in the fund would take the same hit?
Yeah, so there's that to take confort in I suppose...
It sounds like the SEC has some discretion here so maybe they could limit the size of redemptions and depending on the how big your MM position is - maybe one person gets to pull his entire amount out and you don't.
But the possibility that your "cash" position - the one part of your portfolio you thought you thought you could count on in a crisis - might be off limits to you or actually decline in value and be off limits to you, is probably not widely understood, especially by people with MM positions in bank accounts who don't consider themselves to be "in the market".
This is the first time I've been really, really worried - where my stomach is actually churning - in over a year. I have just gotten back on my feet with a decent job and income and now it appears the rug is being jerked out from under all of us at the same time.
Meanwhile, Congress is on vacation while Rome burns. Probably just as well ... they don't know what to do and even if they did they would probably do it wrong.
Your advice should be heeded Bruce. It's worth infinitely more than people are paying.
To anyone with an IRA, understand the type of "cash" account you have. Being in the herd will simply not work if TSHTF.
Having some physical FRN's isn't the craziest idea in the world.
IC thank you for this reminder re IRAs
So, what about money trapped in my current employers IRA? I still foresee more than a 1% decline in stocks and the closest to cash I think I can get is a MMMF. Since my motivation is not yeild, but sidestepping a downdraft in equities, and Im using it as an alternative to cash, would this "make sense"? I thought about this a lot and realized I didnt know and thought this was my only option for no nominal risk.
And if there is a appreciable collapse in treasuries, my little new 401k is hedged with tinfoil hat gear, so i wont be too upset, just curious if there is any logic in my thinking.
The caveat here, at least my non-professional gut feeling, is that not all MMMF are the same. Some MMMF are 100% govvies (very short term US Treasury instruments). This is zero risk (until the whole system implodes). Other MMMF do crazy stuff which is much riskier, but they pretend it isn't. I think this is what Bruce is pointing out.
As always, do your own homework and know where your dollars are parked. As I said above, my old MMMF had a bunch of crazy shit going on, but my current one isn't. Counted my blessings at added one.
The only other thing I can suggest is borrowing the money and buying metals (I did) and paying back over five years or changing jobs (if its an option) so you can roll the balance into your control.
Regards,
Cooter
I wish I had thought of this this morning. It is too late to get money out of my IRA and into my hands now and I think the only form it would be safe is cash. Even if I could wire it to my bank (and I probably could) I'm not sure cash is safe there as we could start seeing money flying to mattresses tomorrow.
What's the rule about IRAs? You can borrow it for up to 60 days and put it back with no penalty?
Oops I meant 401k.
Yeah I dodged a bullet, my account auto allocated or something and I pulled it into bonds and mmmfs 2 weeks ago. More bullets to come I am sure, and not too many places to hide in my 7 stock and 3 fixed income options.
BONY is charging up to 13 BP on deposits over $50,000,000 because they have to pay FDIC insurance on them.
Without charge they are losing money because before they would put it in 30day treasury or less but now they are flat or even negative.
Just wondering what they're making on those deposits? What are they doing with that money? Certaintly not nothing.
Not yet Wang, PM Silver is taking off atm in Hongkong.
The other metals are gaining steam.
Thanks Mr. K
you gave us a heads up yesterday and while many are distracted by the magician's able assistant you are helping us to stay focused on the real issue
as El Erian mused back in 2008 on CNBC, is it time to go to the ATM?
Yes, yes and very much yes. If it freezes up there's no guarantee that electrons will buy you anything. Take out enough to get you by.
Bruce, you forgot to mention the fund expense fee that is charged as well, which is likely higher than the interest meaning you lose money even if you dont break the buck.
Tyler/Bruce/Anybody, what happened today to general collateral rates?
That's a complex question. Are you referring to Treasury securities? Fannie or Freddie? Ginnies? Something a bit sexier like mortgage pools, Remics or even Munis? Or were you thinking of corporate bonds (if so which one). Or are you thinking of things like auto loans and credit card receivables? Dip financing? Whole loans? Syndicated loans? Domestic or international? (geography a key) Inventory financing? Floor plan financing? Leasing receivables? Letters of credit? (I could on for a bit)
My point is that the financing market that I'm worried about is not the repo rate for treasuries. That's negative. What I'm worried about is all the other stuff on the list.
Sorry, should've been more clear. I meant the GC overnight repo rate. Yesterday it was at 0.35%, if I recall correctly; just wondering what the damage was today.
I agree with your concerns about the MMMFs, etc.
Where can one check collateral rates on some of the stuff at the end of your list, if there is a place? Like you said, the treasury general collateral rate doesn't tell much right now.
This trades "on the curb". Meaning there are no posted prices. It's normally a friendly place, with a degree of competition. Financing decent collateral (off the run) is bread and butter business under normal circumstances.
We ain't got no normal circumstances.
Sorry, Bruce, must be my age showing but it's "kerb" trading --- originated in UK but has always been applicable in the US.
And all these years I thought it was two guys standing on the "Curb" outside of the NYSE.
I learn every day. Tks.
Not age, just the King's English vs American English I think. Curb and Kerb both wiki as equivalents. Curious though, learned something new today!
That said, your anecdote can still be 100% on the money as well.
Regards,
Cooter