Way, way OT<<But I can't understand why having money in money markets is bad. Isn't that almost like having cash?>>
Don's reply on this was correct. Here's my take:
It's bad because money markets give only the ILLUSION of liquidity. Slowly but surely over the last 5 years or so, money markets have become the repository for a wide range of garbage that is totally inappropriate for its objective as being "a store of value". Paper that other entities don't want to hold because of various and sundry risks (ie, default risks). Examples are asset backed securities (credit card receivables, auto note receivables, to a lesser extent mortgage-backeds), and commercial paper from shaky entities that credit rating agencies have been too slow to downgrade (EIX, PCG, XRX, LU all come to mind....and there will be more to come).
In chasing the God of higher yield, many money market fund managers have overlooked their primary responsibility...preservation of principal. The reason this has happened is that the ultimate lender/bagholder (ie, money market fund holder) has become increasingly separated from the underwriting decision (ie, the decision to grant a particular person a mortgage, car loan or credit card). As the originator of these loans know they will simply "pass them down the line" (to you, the hapless MMF holder), they've become less and less diligent in enforcing their credit standards. In other words, they've been bookie/intermediaries instead of diligent loan officers. Thus, the phenomenon of dogs and 2 year olds receiving applications for credit (and indeed, receiving cards when said applications are submitted). Nonetheless, during times of overall credit expansion, problems in this area can be camoflaged by the steady inflow of funds from new borrowers. Once the pool of credit worthy borrowers has been fully tapped (as is now the case), though, look out! As soon as there is a slowdown and people start losing jobs, the default rates rise, no new borrowers come on board, and the rush to liquidity is on.
How will problems in this area be manifest? First you'll see declining MM yields gradually, perhaps 1-2 percent over the next 2 quarters or so. The "explanation" that will be given will be "its related to falling ST rates....when what will really be happening is that defaults will need to be accounted for in individual portfolios. When the individual shareholders finally realize that their "safe" funds are shaky, we may get a rush out to more secure instruments (T-bills or government money markets). If that occurs, a modern-era "run on the bank" in which panic selling of money market instruments would be the likely outcome...and these assets are "insured" by underfunded debt insurers (such as MBI or ABK) and by SIPC....and the latter has proved notoriously difficult to collect from (even in the "good" times just past).
For more background on the perils of relying on SIPC "coverage" to make you whole in the event of money market markdowns, see this:
Message 14452719
So what does one do? Stocks are crashing, bond yields have already fell through the floor, and now I'm saying the money markets aren't safe? The first priority is to deleverage ones OWN balance sheet. Pay off debt to the greatest extent possible. Get off margin. Then the logical alternatives are (from least risk to most) 1) Max out assets in an FDIC insured institution at 100K. This gives you guaranteed (more or less) access to cash and true liquidity 2) T-bills 3) Treasury bonds (even though yields are down, AG will likely have to cut rates more to keep the whole structure from imploding) 4) Governement money market funds (includes agency debt) 5) investment in overseas debt (Euro bond funds) 6 ) Investments in streams of resource or cash flow, including REIT's and oil-gas royalty trusts 7) Gold (bullion and precious metals)...only because they tend to retain their value and even increase during times of crisis....and if money markets implode, we'll have crisis in SPADES, as well as desparate attempts to resolve the debt crisis by hyperinflation.
We have heard again and again that "past performance is no guarantee of future returns"....and that applies to money market asset safety as well currently. Not a pretty picture, but no one ever said investing in a bear market was easy!
The above is entirely my humble opinion only. Do your own due diligence, make your own decisions, take your own risks and reap your own rewards.
Regards
Patron |
