When you say you are "weighted in FDIC- insured cash equivalent securities", aren't you saying your in money market funds that hold short term US treasuries? If yes, wouldnt those funds experience a short term liquidity problem in the event of a default? If yes, how is that better than holding one month treasuries directly?
Good point, Mark. I am also concerned that the protection offered by FDIC insurance is way below that offered by the us treasury obligation. We all know the FDIC is waayy under capitalized. And, even with a haircut, UST'S are still marketable, to take advantage of some blood in the streets situation that might occur.
Thanks Dr. Doug. That is exactly how I think about things. Also, since I'm thinking a treasury default (even if it occurred) would be short lived. Since I'm an investor not a trader, I feel like there would still be enough blood in the streets within a months time to take advantage. It might even provide some external restraint not to act too soon. Since 1 month Tbills are at the top of the monetary pyramid, if they default for any great length of time I think we have far greater things to worry about. Grab your guns, amo and canned beans!
You both make excellent points. The specific funds that I have my cash in are heavily weighted in inter-bank repos and inter-gov't agency strips. Either could *potentially* be affected if we have a total treasury market meltdown (not just a technical default), of course, as pretty much every single asset but actual dollars would be affected. I am watching carefully to determine if I should move into pure USD without any exposure in the coming weeks, and will keep you aware of my personal thoughts there.
Any default will be technical and remedied pretty quickly, IMO. But a drawdown would be swift in that case, and the Treasury would quickly announce that it is making everyone whole ASAP.
Noted. Well, it’s difficult to withdraw much cash from the bank for mattress storage. Gold is a good alternative 😉. But I’m talking FDIC- backed cash for opportunistic allocations.
You stated “....the market is saying there is a high chance that the 3-month USTs will default.” Is this because market participants are selling off 3 month T-bills, thus interest rates rise?
And if so, who are selling the 3 month T-bills?...the US?...other nation states?...fund managers?
AOTA, but basically the market is saying that it is willing to pay a premium for 1mo, because those are in the clear, but 3mo are not. If the UST defaults, the 3mo will likely default, even if just technically, until remedied, leaving investors with no liquidity from those investments until paid back in a few days or weeks--depending on the level of DC drama. So the 1mo premium demonstrates risk premium and opportunity cost.
Hi James great article as always . Can you provide some names of the Gold backed ETFs you’d recommend for me to research further . I’m already in Real Estate and BTC since 2016.
James,
When you say you are "weighted in FDIC- insured cash equivalent securities", aren't you saying your in money market funds that hold short term US treasuries? If yes, wouldnt those funds experience a short term liquidity problem in the event of a default? If yes, how is that better than holding one month treasuries directly?
Good point, Mark. I am also concerned that the protection offered by FDIC insurance is way below that offered by the us treasury obligation. We all know the FDIC is waayy under capitalized. And, even with a haircut, UST'S are still marketable, to take advantage of some blood in the streets situation that might occur.
Thanks Dr. Doug. That is exactly how I think about things. Also, since I'm thinking a treasury default (even if it occurred) would be short lived. Since I'm an investor not a trader, I feel like there would still be enough blood in the streets within a months time to take advantage. It might even provide some external restraint not to act too soon. Since 1 month Tbills are at the top of the monetary pyramid, if they default for any great length of time I think we have far greater things to worry about. Grab your guns, amo and canned beans!
You both make excellent points. The specific funds that I have my cash in are heavily weighted in inter-bank repos and inter-gov't agency strips. Either could *potentially* be affected if we have a total treasury market meltdown (not just a technical default), of course, as pretty much every single asset but actual dollars would be affected. I am watching carefully to determine if I should move into pure USD without any exposure in the coming weeks, and will keep you aware of my personal thoughts there.
Any default will be technical and remedied pretty quickly, IMO. But a drawdown would be swift in that case, and the Treasury would quickly announce that it is making everyone whole ASAP.
Thanks James-
I think I'd be needing a newslwtter topic on these instruments (interbank repos, and intergov't agency strips) you describe.
Meantime, if you did go to just cash, the bank is still risky, so are we talking IN THE MATTRESS?
Noted. Well, it’s difficult to withdraw much cash from the bank for mattress storage. Gold is a good alternative 😉. But I’m talking FDIC- backed cash for opportunistic allocations.
Nothing is safe. Let’s just hope the commercial banks don’t default or more bank runs don’t occur. Could get 1930s nasty
Yes, this whole CRE situation could heat up and melt a few banks down quickly. Stay tuned.
Thanks James, as always!
You stated “....the market is saying there is a high chance that the 3-month USTs will default.” Is this because market participants are selling off 3 month T-bills, thus interest rates rise?
And if so, who are selling the 3 month T-bills?...the US?...other nation states?...fund managers?
AOTA, but basically the market is saying that it is willing to pay a premium for 1mo, because those are in the clear, but 3mo are not. If the UST defaults, the 3mo will likely default, even if just technically, until remedied, leaving investors with no liquidity from those investments until paid back in a few days or weeks--depending on the level of DC drama. So the 1mo premium demonstrates risk premium and opportunity cost.
Thanks James, great explainer..
Thank you Julian!
Hi James great article as always . Can you provide some names of the Gold backed ETFs you’d recommend for me to research further . I’m already in Real Estate and BTC since 2016.