The EU sovereign debt crisis has metastasized in two weeks from being a problem with Greece, to being a problem with Italy, Spain and France. Bond yield spreads for the debt of these much larger countries are widening away from German bunds. The dollar is once again dearly loved in the capital markets in spite of the Federal Reserve's persecution of positive returns on dollar denominated loans. The EU's much touted expansion of its bailout fund to over one trillion Euros is d.o.a. With the large Romance language speaking nations on the cart approaching the guillotine, a trillion or two just doesn't amount to jack, especially since this proposal was simply another paper shuffling shell game to flim flam creditors into believing that swapping new EU debt for old debt was somehow in their interest. The EU's overall ability to repay has been deteriorating. Why would new debt be attractive?
With all the turmoil, one would think that gold would be skyrocketing in value. But it hasn't. Since reaching its peak of $1923 per ounce this past summer, gold dropped below $1600 and has recently meandered around in the $1700s. As we discussed in September (see http://blogger.uncleleosden.com/2011/09/why-gold-isnt-safe-haven.html), gold is intimately linked to financial assets, and derives its value from financial market interactions. It's no safe haven.
Nor is anything else. Countries that are viewed as having sound currencies, like Switzerland, have been intervening in the currency markets to keep their exchange ratios down. Otherwise, capital will flood in, drive up the value of their currencies, and wreck their export businesses.
Weirdly, the U.S. dollar has by default remained the world's safe haven. If nothing else, investors know that, in the worst case, the U.S. Treasury will conspire with the Fed to print however much money it takes to pay America's debts. The Congressional Supercommittee tasked with reducing the federal deficit is on the verge of belly flopping. But the financial markets remain sanguine, evidently believing that capital has nowhere else to go.
Showing posts with label safe investments. Show all posts
Showing posts with label safe investments. Show all posts
Wednesday, November 16, 2011
Wednesday, August 3, 2011
Where Is Financial Safety?
The debt ceiling deal was, more than anything else, an agreement to disagree. It had commensurate impact on the financial markets (i.e., nada). Because the deal resolved very little, Congress will continue to convulse over budget deficit issues. The stock markets, which are driven by politics as much as economics, will convulse synchronously.
Meanwhile, across the pond, the Euro bloc sovereign debt crisis is all the rage again, with Italy getting smacked around by the bond vigilantes. The EU doesn't seem to understand that its strategy of solving debt problems with bailouts that, net net, increase the amount of its debt will only lead to more instability. Because the EU has, in effect, collectively assumed liability for all of the debts of all Euro bloc members and all of their banking sectors, the aggregate amount of continental debt is what matters. The EU's relentless expansion of its liabilities, with each bailout diminishing its capacity for further bailouts, guarantees that the bond bandits will have a never-ending stream of dominoes to knock over. The average citizen, working on a brown bag lunch in a cubicle, will opine that reducing debt is the way to get out of financial trouble. But the hoi polloi, lacking sophistication, just don't understand that these things are complicated.
So, we can look forward to more stock market volatility. Where is there financial safety?
Swiss bonds have risen in popularity. But they don't have the liquidity of U.S. Treasuries. If you buy Swiss bonds, you had better like them because they won't be that easy to exit.
Japanese debt has also gotten attention, even though Japan's sovereign debt is about 200% of GDP, well above American levels. With almost all of Japan's debt held by its own citizens, it isn't likely to face serious capital flight. Indeed, the Japanese government seems to prefer a little capital flight. With the popularity of the yen pushing up its price, Japan's export-based economy is at risk. Even as we write, the Japanese government is intervening in the currency markets to push down the yen. If you buy yen-denominated debt, understand that you'll earn almost no yield and be at risk of currency losses from Japanese government yen smackdowns.
So what's left? Well, oddly, U.S. Treasuries. At least until the current debt ceiling is reached, probably in early 2013, U.S. government debt is safe. You may face some moderate inflation risk. But the long term picture for U.S. Treasuries--which isn't pretty--won't emerge for the next year or two. So, if you're worried about the stock market swan diving into a correction or bear market, Treasuries may be a safe place to hit the mattresses, at least for a while. Money market funds invested solely in U.S. Treasury securities are comparably safe, albeit exceptionally low-yielding.
FDIC insured bank accounts are also safe. The European debt crisis, in the worst case, could hit the U.S. banking sector pretty hard (because of interbank lending, derivatives exposures, and other bank interconnectedness). But the FDIC, with the backing of the U.S. Treasury, will protect insured deposits come hell, high water, plagues, swarms of locusts, loathsome diseases, or anything else. One hard lesson the government learned from the thousands of bank closures leading up to and during the Great Depression is that the loss of bank deposits wallops consumer confidence more than anything else. People don't look to their stockholdings or the equity in the house to cover next month's expenses. But if you take away their bank deposits, you create immediate household crises on a wholesale level. Make sure your bank deposits stay within insured levels (for more detail, see http://blogger.uncleleosden.com/2011/07/fdic-insurance-coverage.html).
We also discuss safe investments at http://blogger.uncleleosden.com/2010/07/safe-investments.html.
Meanwhile, across the pond, the Euro bloc sovereign debt crisis is all the rage again, with Italy getting smacked around by the bond vigilantes. The EU doesn't seem to understand that its strategy of solving debt problems with bailouts that, net net, increase the amount of its debt will only lead to more instability. Because the EU has, in effect, collectively assumed liability for all of the debts of all Euro bloc members and all of their banking sectors, the aggregate amount of continental debt is what matters. The EU's relentless expansion of its liabilities, with each bailout diminishing its capacity for further bailouts, guarantees that the bond bandits will have a never-ending stream of dominoes to knock over. The average citizen, working on a brown bag lunch in a cubicle, will opine that reducing debt is the way to get out of financial trouble. But the hoi polloi, lacking sophistication, just don't understand that these things are complicated.
So, we can look forward to more stock market volatility. Where is there financial safety?
Swiss bonds have risen in popularity. But they don't have the liquidity of U.S. Treasuries. If you buy Swiss bonds, you had better like them because they won't be that easy to exit.
Japanese debt has also gotten attention, even though Japan's sovereign debt is about 200% of GDP, well above American levels. With almost all of Japan's debt held by its own citizens, it isn't likely to face serious capital flight. Indeed, the Japanese government seems to prefer a little capital flight. With the popularity of the yen pushing up its price, Japan's export-based economy is at risk. Even as we write, the Japanese government is intervening in the currency markets to push down the yen. If you buy yen-denominated debt, understand that you'll earn almost no yield and be at risk of currency losses from Japanese government yen smackdowns.
So what's left? Well, oddly, U.S. Treasuries. At least until the current debt ceiling is reached, probably in early 2013, U.S. government debt is safe. You may face some moderate inflation risk. But the long term picture for U.S. Treasuries--which isn't pretty--won't emerge for the next year or two. So, if you're worried about the stock market swan diving into a correction or bear market, Treasuries may be a safe place to hit the mattresses, at least for a while. Money market funds invested solely in U.S. Treasury securities are comparably safe, albeit exceptionally low-yielding.
FDIC insured bank accounts are also safe. The European debt crisis, in the worst case, could hit the U.S. banking sector pretty hard (because of interbank lending, derivatives exposures, and other bank interconnectedness). But the FDIC, with the backing of the U.S. Treasury, will protect insured deposits come hell, high water, plagues, swarms of locusts, loathsome diseases, or anything else. One hard lesson the government learned from the thousands of bank closures leading up to and during the Great Depression is that the loss of bank deposits wallops consumer confidence more than anything else. People don't look to their stockholdings or the equity in the house to cover next month's expenses. But if you take away their bank deposits, you create immediate household crises on a wholesale level. Make sure your bank deposits stay within insured levels (for more detail, see http://blogger.uncleleosden.com/2011/07/fdic-insurance-coverage.html).
We also discuss safe investments at http://blogger.uncleleosden.com/2010/07/safe-investments.html.
Wednesday, June 8, 2011
Batten Down the Hatches for the Dog Days
This could be a stormy summer. Like the mortgage debt crisis three years ago that blew up and froze the financial markets, there's a nontrivial chance the government debt crisis could do the same this summer. Government debt, normally the investment of last resort, is starting to look hinky. With respect to the federal debt ceiling, some Republicans in Congress seem intent on provoking a default in August. Biting the hands that feed us--i.e., stiffing investors in U.S. Treasury securities--hardly seems like a good idea for a debtor nation. But "smart politician" is virtually an oxymoron these days.
More than America, the Euro bloc lurches inexorably toward default. For the moment, Greece is the only nation that is likely to formally default. However, all Euro bloc members have pretty much assumed de facto responsibility for all the sovereign debt and bank debt of all member nations. So a default by Greece is, in effect, a default by the entire Euro bloc. Such a development would not be well-received in the financial markets. But Euro bloc leaders are divided about what to do, and progress toward true resolution is seen about as often as the ivory-billed woodpecker.
Although another financial crisis is a low probability event, the simultaneous dysfunction in Washington and Europe could make things go haywire in the dog days of this summer. After all, nothing has been done since the last credit crunch that would preclude another one this year. What to do?
Love cash. Have a cash lovefest. Build up your emergency fund and put it in a bank (making sure it's 100% covered by FDIC insurance). Avoid non-essential big purchases for the next few months to increase cash on hand.
Be cautious with money market funds. If U.S. Treasury securities actually default, money market funds might have to break the buck. A sudden spike in interest rates could reduce the value of their T-bills and impose losses on the funds. Although the extent of such losses is likely to be comparatively small, given the very short maturities that money market funds are supposed to hold, it's not impossible that a freeze-up in the Treasury securities market could result in money market losses and perhaps momentarily limit access to your account. This is a low probability event, and fund management companies would probably go to great lengths to avoid breaking the buck. But it happened once in 2008. If you are likely to need funds in a money market account in the near future, consider moving the necessary amount into a federally insured bank account in July if the debt ceiling mess remains unresolved.
Invest defensively. Now's not the best time to take a flier, except if you have mad money you can easily afford to lose. Note how the Nasdaq market has, in recent days, been falling proportionately faster than the Dow and the S&P 500. Many risk assets are falling, literally, out of favor. Be careful about diving into emerging markets. China's economy is slowing, and India's and Brazil's governmental yield curves are inverting (seen by some as a sign of impending recession).
Avoid unnecessary financial commitments. If you're thinking of making a major financial commitment, like buying an annuity or a whole life insurance policy, consider stepping back and waiting to see how things play out over the next few months. If, for example, you buy an annuity now, and Treasury yields rise sharply later this year because of a U.S. government default, you may effectively have lost money because you would have bought at today's low interest rates.
Line up credit lines now. Credit could evaporate if things go gonzo. While borrowing is to be avoided if at all possible during a financial crisis, there sometimes are pressing reasons to go into hock. Line up any loans you'll need. Since it's even possible a bank might terminate the unused portion of a line of credit if the sky falls, you may want to draw down on credit lines now if you are absolutely sure you'll need the money and have no other way to get it. Make damn sure you can repay what you draw down. And keep the loan funds in a bank account, not a money market fund.
All this may sound on par with suggestions to stock freeze dried food and bottled water, and to start a garden in your back yard. But we haven't had to rely on subsistence farming in more than a century. Just three years ago, credit was crunched and the financial system almost failed. As far as money goes, take nothing for granted.
More than America, the Euro bloc lurches inexorably toward default. For the moment, Greece is the only nation that is likely to formally default. However, all Euro bloc members have pretty much assumed de facto responsibility for all the sovereign debt and bank debt of all member nations. So a default by Greece is, in effect, a default by the entire Euro bloc. Such a development would not be well-received in the financial markets. But Euro bloc leaders are divided about what to do, and progress toward true resolution is seen about as often as the ivory-billed woodpecker.
Although another financial crisis is a low probability event, the simultaneous dysfunction in Washington and Europe could make things go haywire in the dog days of this summer. After all, nothing has been done since the last credit crunch that would preclude another one this year. What to do?
Love cash. Have a cash lovefest. Build up your emergency fund and put it in a bank (making sure it's 100% covered by FDIC insurance). Avoid non-essential big purchases for the next few months to increase cash on hand.
Be cautious with money market funds. If U.S. Treasury securities actually default, money market funds might have to break the buck. A sudden spike in interest rates could reduce the value of their T-bills and impose losses on the funds. Although the extent of such losses is likely to be comparatively small, given the very short maturities that money market funds are supposed to hold, it's not impossible that a freeze-up in the Treasury securities market could result in money market losses and perhaps momentarily limit access to your account. This is a low probability event, and fund management companies would probably go to great lengths to avoid breaking the buck. But it happened once in 2008. If you are likely to need funds in a money market account in the near future, consider moving the necessary amount into a federally insured bank account in July if the debt ceiling mess remains unresolved.
Invest defensively. Now's not the best time to take a flier, except if you have mad money you can easily afford to lose. Note how the Nasdaq market has, in recent days, been falling proportionately faster than the Dow and the S&P 500. Many risk assets are falling, literally, out of favor. Be careful about diving into emerging markets. China's economy is slowing, and India's and Brazil's governmental yield curves are inverting (seen by some as a sign of impending recession).
Avoid unnecessary financial commitments. If you're thinking of making a major financial commitment, like buying an annuity or a whole life insurance policy, consider stepping back and waiting to see how things play out over the next few months. If, for example, you buy an annuity now, and Treasury yields rise sharply later this year because of a U.S. government default, you may effectively have lost money because you would have bought at today's low interest rates.
Line up credit lines now. Credit could evaporate if things go gonzo. While borrowing is to be avoided if at all possible during a financial crisis, there sometimes are pressing reasons to go into hock. Line up any loans you'll need. Since it's even possible a bank might terminate the unused portion of a line of credit if the sky falls, you may want to draw down on credit lines now if you are absolutely sure you'll need the money and have no other way to get it. Make damn sure you can repay what you draw down. And keep the loan funds in a bank account, not a money market fund.
All this may sound on par with suggestions to stock freeze dried food and bottled water, and to start a garden in your back yard. But we haven't had to rely on subsistence farming in more than a century. Just three years ago, credit was crunched and the financial system almost failed. As far as money goes, take nothing for granted.
Wednesday, July 21, 2010
Safe Investments
[As updated July 11, 2011]
There are many reasons for wanting to keep money safe. You may be saving up a down payment for a house or car, bracing for next year's college tuition and board bills, putting together an emergency cash fund, seeking shelter from lunatic stock, real estate and other asset markets, or harboring plain old curmudgeonly mistrust of all the fast-talking salespeople ready to take your money. Even with all of today's uncertainties, there are a few safe places to put your money.
Bank Accounts. FDIC deposit insurance covers, at each member bank, $250,000 per customer (along with another $250,000 per co-owner for joint accounts and yet another $250,000 for retirement accounts like IRAs). All of your accounts of each type at that bank are combined when determining coverage. You don't have $250,000 of coverage per account. For example, if you have $240,000 in CDs in your name, $20,000 in your checking account, and $505,000 in a joint money market account with your spouse, $10,000 in your individual accounts is uninsured, and $5,000 in your joint account is uninsured. But $750,000 at that bank is insured. If you're approaching the FDIC limit at any one bank, move some money over to another bank to get additional deposit insurance coverage. For more information about FDIC insurance, go to http://blogger.uncleleosden.com/2011/07/fdic-insurance-coverage.html. There is a service called CDARS offered by certain banks which takes large deposits and splits them up among a number of participating banks such that your funds and the interest they earn are fully covered by FDIC insurance. For more information, go to www.cdars.com.
U.S. Treasury Securities. Direct obligations of the U.S. Treasury will be paid, even if the government has to print the money to pay you. So these investments are secure. You can buy traditional Treasury obligations, like 4 week, 3 and 6 months, and 52 week Treasury bills, 2, 3, 5, 7 and 10 year Treasury notes, and 30 year Treasury bonds. You can also buy TIPS, a type of Treasury security that offers inflation protection. There are good old U.S. Savings bonds, still alive and kicking, which come in traditional Series EE bonds, and also I-bonds offering inflation protection. One disadvantage of Savings Bonds is that you can buy only $10,000 of each type per year, $5,000 of which must be bought directly from a government service called Treasury Direct. So large amounts of savings can't be invested in Savings Bonds. For more information about buying directly from the government, go to www.treasurydirect.gov. U.S. Treasury securities can also be bought through brokerage firms (although you'll have to pay commissions and/or markups). U.S. Savings Bonds can be bought through banks as well as Treasury Direct.
There is no limit on how much you can invest in U.S. Treasury obligations (aside from the Savings Bonds limits). Every penny will be repaid by the government, so you get a greater amount of coverage than with FDIC insurance.
Money Market Funds Investing Solely in U.S. Treasury Securities. There are a few money market funds that invest solely in U.S. Treasury securities. For all practical purposes, they are as safe as U.S. Treasury obligations. Because they are money market funds, their returns are very, very, and let us emphasize, very low. But the money is safe. Not all such money market funds are open to new investors. But if you want the safety of U.S. Treasuries and the convenience of a money market fund, look for one that is.
If you crave safety, forget about gold. It's a speculation that booms and busts like stocks. Some foreign government bonds, such as those of Switzerland and Germany, may have very low credit risk. But they present currency risk, and that's not to be underestimated. In just the past few months, the Euro has fallen more than 10% against the U.S. dollar, making German government bonds losers (in dollar terms) for Americans who held them. If your native currency is the U.S. dollar, stick to the above-mentioned dollar-denominated investments for safety. They won't pay very high interest rates. But safety isn't free and the low interest rates are the cost of safety.
There are many reasons for wanting to keep money safe. You may be saving up a down payment for a house or car, bracing for next year's college tuition and board bills, putting together an emergency cash fund, seeking shelter from lunatic stock, real estate and other asset markets, or harboring plain old curmudgeonly mistrust of all the fast-talking salespeople ready to take your money. Even with all of today's uncertainties, there are a few safe places to put your money.
Bank Accounts. FDIC deposit insurance covers, at each member bank, $250,000 per customer (along with another $250,000 per co-owner for joint accounts and yet another $250,000 for retirement accounts like IRAs). All of your accounts of each type at that bank are combined when determining coverage. You don't have $250,000 of coverage per account. For example, if you have $240,000 in CDs in your name, $20,000 in your checking account, and $505,000 in a joint money market account with your spouse, $10,000 in your individual accounts is uninsured, and $5,000 in your joint account is uninsured. But $750,000 at that bank is insured. If you're approaching the FDIC limit at any one bank, move some money over to another bank to get additional deposit insurance coverage. For more information about FDIC insurance, go to http://blogger.uncleleosden.com/2011/07/fdic-insurance-coverage.html. There is a service called CDARS offered by certain banks which takes large deposits and splits them up among a number of participating banks such that your funds and the interest they earn are fully covered by FDIC insurance. For more information, go to www.cdars.com.
U.S. Treasury Securities. Direct obligations of the U.S. Treasury will be paid, even if the government has to print the money to pay you. So these investments are secure. You can buy traditional Treasury obligations, like 4 week, 3 and 6 months, and 52 week Treasury bills, 2, 3, 5, 7 and 10 year Treasury notes, and 30 year Treasury bonds. You can also buy TIPS, a type of Treasury security that offers inflation protection. There are good old U.S. Savings bonds, still alive and kicking, which come in traditional Series EE bonds, and also I-bonds offering inflation protection. One disadvantage of Savings Bonds is that you can buy only $10,000 of each type per year, $5,000 of which must be bought directly from a government service called Treasury Direct. So large amounts of savings can't be invested in Savings Bonds. For more information about buying directly from the government, go to www.treasurydirect.gov. U.S. Treasury securities can also be bought through brokerage firms (although you'll have to pay commissions and/or markups). U.S. Savings Bonds can be bought through banks as well as Treasury Direct.
There is no limit on how much you can invest in U.S. Treasury obligations (aside from the Savings Bonds limits). Every penny will be repaid by the government, so you get a greater amount of coverage than with FDIC insurance.
Money Market Funds Investing Solely in U.S. Treasury Securities. There are a few money market funds that invest solely in U.S. Treasury securities. For all practical purposes, they are as safe as U.S. Treasury obligations. Because they are money market funds, their returns are very, very, and let us emphasize, very low. But the money is safe. Not all such money market funds are open to new investors. But if you want the safety of U.S. Treasuries and the convenience of a money market fund, look for one that is.
If you crave safety, forget about gold. It's a speculation that booms and busts like stocks. Some foreign government bonds, such as those of Switzerland and Germany, may have very low credit risk. But they present currency risk, and that's not to be underestimated. In just the past few months, the Euro has fallen more than 10% against the U.S. dollar, making German government bonds losers (in dollar terms) for Americans who held them. If your native currency is the U.S. dollar, stick to the above-mentioned dollar-denominated investments for safety. They won't pay very high interest rates. But safety isn't free and the low interest rates are the cost of safety.
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