Money market funds and their proxies --- economic loss for investors
This is not news.
For that portion of the U.S. population that has monetary assets to invest, financial planners and market pundits will often suggest that a cushion of reliably liquid and relatively stable investments be part of the picture. They will suggest varying amounts of these types of assets to cover anywhere from one to five years of current lifestyle maintenance. The choices of how to maintain such a portfolio may be varied but they are all uniformly unattractive.
The safest from a numerical value point of view are Treasury bills and relatively short term(3-5 year) Treasury bonds. From an economic point of view they are all money losers as they will not likely offset the even the expected low level of inflation. If inflation picks up the bonds will lose principal value as well. With all of that said, they will be liquid and they will be backed by the Federal government. Something will be there.
Bank CD's and bank deposits are guaranteed by the Federal government up to $250,000 but compared to two years ago their yield is miniscule. At Wells Fargo, two years ago the yield on a $60,000 savings account was 50 basis points. Today it is 5 basis points, enough of a return to maybe buy a medium Slurpee at 7-11 each month. Raise the savings account up to $100,000 and that monthly treat at 7-11 may be a Big Gulp, an in your face to former Mayor Bloomberg.
Bank CD's are not much better. Currently the range of yields available in the 3 month to 3 year range are from 20 basis points to 65 basis points, depending on the bank and the maturity. Again this is more or less a guaranteed economic loss based on the current outlook. With the slightest hint of a more upward sloping yield curve, however modest, it will be high heaven for banks. That is now beginning to be reflected in their stock prices.
The other choice for probable reliable liquidity is money market funds from brokerage firms. They in general pay one basis point and with that they are cross subsidizing their sizable credit platforms to maintain the service while providing for less than their published expense ratios. They are an inevitable part of having a brokerage account in which one buys and sells investments. Money market funds at these brokers and investment banks are the needed clearing accounts and something that facilitates trading. Something more or less must be there. It is easy to be complacent about the amounts there because of the impotence of the of the options just discussed.
The reminder here is that money market funds run by brokers or by mutual funds are pure credit risk to the firms running the funds. There is no back up. They are full of government bonds and bank deposits, as well as triple A corporate bonds. Therefore the risk should be low but there could always be a renegade firm trying to squeeze greater returns out the money market product, or one with a concentration(see Lehman and the Reserve Fund) that has the possibility of becoming illiquid if too many eggs are in one basket.
All of these unattractive investments are the detritus of the 2008-2009 market collapse, that looked containable at first and then consumed all except those few who foresaw this calamity or those few who even knew about credit default swaps and their destructive power.
For that reason, from this perspective the continuing existence of "too big to fail" is a good thing. No one in government would endorse it or even publicly admit that it exists, but pragmatically it does.
Today the quickly disappearing small time active retail investors(once known as the middle class but now are the in-between class) and those that live on fixed incomes have already been scared enough. They have been penalized in a huge way by the low yields to benefit the big banks and big investors. They saved as they were always told and their money has no return. To suggest that much of their portfolio could be vulnerable to having no value would be unthinkable.
Well, this has been a relatively boring post, for me and you no doubt, but here it was more of a writing exercise to revive this blog. Maybe there is something of value to some here. I hope so.
For that portion of the U.S. population that has monetary assets to invest, financial planners and market pundits will often suggest that a cushion of reliably liquid and relatively stable investments be part of the picture. They will suggest varying amounts of these types of assets to cover anywhere from one to five years of current lifestyle maintenance. The choices of how to maintain such a portfolio may be varied but they are all uniformly unattractive.
The safest from a numerical value point of view are Treasury bills and relatively short term(3-5 year) Treasury bonds. From an economic point of view they are all money losers as they will not likely offset the even the expected low level of inflation. If inflation picks up the bonds will lose principal value as well. With all of that said, they will be liquid and they will be backed by the Federal government. Something will be there.
Bank CD's and bank deposits are guaranteed by the Federal government up to $250,000 but compared to two years ago their yield is miniscule. At Wells Fargo, two years ago the yield on a $60,000 savings account was 50 basis points. Today it is 5 basis points, enough of a return to maybe buy a medium Slurpee at 7-11 each month. Raise the savings account up to $100,000 and that monthly treat at 7-11 may be a Big Gulp, an in your face to former Mayor Bloomberg.
Bank CD's are not much better. Currently the range of yields available in the 3 month to 3 year range are from 20 basis points to 65 basis points, depending on the bank and the maturity. Again this is more or less a guaranteed economic loss based on the current outlook. With the slightest hint of a more upward sloping yield curve, however modest, it will be high heaven for banks. That is now beginning to be reflected in their stock prices.
The other choice for probable reliable liquidity is money market funds from brokerage firms. They in general pay one basis point and with that they are cross subsidizing their sizable credit platforms to maintain the service while providing for less than their published expense ratios. They are an inevitable part of having a brokerage account in which one buys and sells investments. Money market funds at these brokers and investment banks are the needed clearing accounts and something that facilitates trading. Something more or less must be there. It is easy to be complacent about the amounts there because of the impotence of the of the options just discussed.
The reminder here is that money market funds run by brokers or by mutual funds are pure credit risk to the firms running the funds. There is no back up. They are full of government bonds and bank deposits, as well as triple A corporate bonds. Therefore the risk should be low but there could always be a renegade firm trying to squeeze greater returns out the money market product, or one with a concentration(see Lehman and the Reserve Fund) that has the possibility of becoming illiquid if too many eggs are in one basket.
All of these unattractive investments are the detritus of the 2008-2009 market collapse, that looked containable at first and then consumed all except those few who foresaw this calamity or those few who even knew about credit default swaps and their destructive power.
For that reason, from this perspective the continuing existence of "too big to fail" is a good thing. No one in government would endorse it or even publicly admit that it exists, but pragmatically it does.
Today the quickly disappearing small time active retail investors(once known as the middle class but now are the in-between class) and those that live on fixed incomes have already been scared enough. They have been penalized in a huge way by the low yields to benefit the big banks and big investors. They saved as they were always told and their money has no return. To suggest that much of their portfolio could be vulnerable to having no value would be unthinkable.
Well, this has been a relatively boring post, for me and you no doubt, but here it was more of a writing exercise to revive this blog. Maybe there is something of value to some here. I hope so.
posted by John Borden at 5:33 PM
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