In the recent past we have mentioned that money market funds do not invest, as their name implies, exclusively in money markets.
Our readers may remember that we urged caution and to avoid equating money market funds as having the same security as the 90-day Treasury bills that we have recommended as a relatively secure haven for cash holdings.
We have played cool on this for fear of encouraging unnecessary panic.
However, the October issue of Bloomberg Markets contains a most illuminating and important article entitled, "Unsafe Havens".
Most importantly, Bloomberg points out that, "Unlike bank accounts, money market funds aren't insured by the federal government. They almost never fail."
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But the article goes on to say that, "U.S. money market funds have invested $11 billion in subprime debt, much of it managed by Bear Stearns."
Indeed, the article points out that, "… according to the March report by Moody's Investor Service, U.S. money market funds run by Bank of America; Credit Suisse Group; Fidelity Investments and Morgan Stanley held more than $6 billion of CDO with subprime debt in June,…"
This news may shock those who have not read our recent "Comment" e-mails.
[Editor's Note:Big Government Lies Exposed. Go Here Now.]
We do not recommend a panic sale of money market funds, but we do feel that our readers should be aware of the situation and calmly evaluate their cash holdings in money market funds.
Now, as we all begin not merely to re-price, but also to count the cost of the massive liquidity boom of recent years, our readers should be forewarned of very difficult economic and financial times ahead.
We remind our readers that we are not alone in saying this.
As we reported some weeks ago, The Bank of International Settlements (BIS—the central banker's central bank, in Switzerland) warned that recent years of loose monetary policy have fueled a dangerous credit bubble, leaving the global economy more vulnerable to another 1930's style slump than is generally understood.
Well, if the ultra-conservative and restrained BIS says that, our readers should pay close attention and begin calmly to take avoiding action.
We have long said that our most conservative readers should increase their holding in cash and that cash would first prove to be a king, as it is now, and then, an emperor.
We feel these days are almost upon us.
We reiterate that our readers should pay close attention to the financial standing of their bank. (In our view, FDIC insurance is not enough, in the event of a whole series of problems. We prefer banks with underlying financial security on their own account.)
As for a vehicle in which to hold cash most securely, we feel that short dated (90-day) Treasuries fit the bill.
In addition, the short-dated government paper of other nations, that have never defaulted (like the U.K), offers opportunities for currency diversification.
If our readers feel, as do the stock markets, that our Fed will in fact lower its key target rate in the near future, they should also prepare for further dollar weakness and should think in terms of accumulating gold and other sound currencies.
[Editor's Note:Will the Liquidity Crisis Sink Your Stocks? 12 Ways to Profit.]
Today, there is much speculation as to a cut in the Fed target rate, currently at 5.25 percent. We point out that the "free market" inter-bank rate (at which banks are borrowing and lending to each other) was only 4.86 percent on September 7.
This says to us that the banks have plenty of money and have no need to borrow at the Fed window. In other words, we view expectations of a Fed cut as speculative, in economic terms.
But then, there are "political" pressures that may "force" the Fed to cut the target rate.
We feel a Fed rate cut will do very little good and could do a lot of harm, by destabilizing our dollar and heralding inflation, to be followed by stagflation.
In summary, as we read the current headlines, we feel that the time for personal financial contingency planning and action now dawns.
Make sure that any cash you have is placed in secure and reputable hands.
Editor's note:
Big Government Lies Exposed. Go Here Now.
Bernanke Reveals `Fiscal Crisis` Ahead
Will the Liquidity Crisis Sink Your Stocks? 12 Ways to Profit.
