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Paulson and Bernanke’s massive bailout for the banking industry is causing so many unintended side effects it must be making their heads spin.
Yes, banks have gotten some interest-rate relief and don’t have to pay through the nose for short-term funds like they did a few days ago.
But to fund the bailout, the government will have to borrow massive sums, and the mere expectation of that huge avalanche of borrowing is already driving long-term interest rates higher:
- The U.S. Treasury is now being forced to pay the highest rates since July …
- U.S. cities and states all across the U.S. are suddenly getting slammed with surging borrowing costs, and …
- The housing market, where this whole crisis began, is taking the biggest hit of all: The sharpest one-week surge in mortgage rates since April 1987!
These higher interest rates will torpedo an already-sinking real estate market, send the economy into an even steeper tailspin, force more consumers and businesses to default on their loans and, ultimately, burn an even deeper hole in bank balance sheets.
The government’s bailout funds will be exhausted much sooner than anyone dreamed possible and we’ll have a banking panic that makes the recent experience seem mild by comparison.
For you, this is no time for complacency. At best, the bailout is giving you a brief interlude before the next major round of debt blow-ups — a short time window to get your own financial house in order.
Where can you find refuge?
Unfortunately, when credit collapses and interest rates surge, virtually all investments can get slammed — not just real estate and stocks, but also bonds, commodities and even precious metals.
You’ve already seen how oil and silver markets have suffered severe setbacks. And as Larry Edelson has written, in a deflationary environment like this, even gold is vulnerable to panic selling, driving its price sharply lower.
This is why you should seriously consider reducing your risk and hedging your bets. Or if you use a money manager, make sure he has specific strategies for handling bear markets.
This is also why Mike Larson and I have dedicated an emergency webcast to answering your urgent questions. The entire, commercial-free, 1-hour video is still available by clicking here. Or read the first half of the transcript below …
Weiss Research Emergency Q&A, Part 1
Martin D. Weiss and Mike Larson
(Edited Transcript)
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Martin D. Weiss: This is a sad time for our entire country.
Mike and I, for one, are not the least bit pleased that our dire warnings about a mammoth financial crisis have come true.
Nor have we been sitting idly by as the crisis has unfolded.
With our free e-mails and reports, we have done everything in our power to help you keep your money safe.
And with our pro bono efforts in Washington, we have provided our nation’s leaders with the research and data we feel can make a difference.
We have made some strides and have had some small victories. But at this volatile stage, we have no pretense of influencing the course of events, and neither should you. Instead, you need to focus on what you must do now to protect yourself and your family from the financial firestorm that rages around you.
Two important things are changing:
First, at this juncture, inflationary pressures are receding. And in their places, powerful deflationary forces are now sweeping across the world economy. That’s an important change in the world around us — and in our outlook.
For now at least, it means that, instead of a falling dollar, we have a rising dollar. Instead of focusing on alternative investments that go up when the dollar falls — like commodities or foreign markets — it’s now more important to focus on building cash and putting it in the safest place you can.
There’s still a place for natural resources and global investing. But right now, to the degree that you own those alternative investments, make sure you have plenty of cash and some solid hedges against a broad market decline in all asset classes.
Second, this crisis is unfolding very quickly, and most government efforts to forestall it are bound to backfire. Events and changes that typically would happen in years are being compressed into months; and months, into days.
So we have very little time for macro-economic discussions. We have just 60 minutes to cover urgent questions that will give you what you need to act now.
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Mike Larson: The first question we have is the most fundamental question, and it comes from many readers in many forms. But let me get to the bottom of what they’re asking:
Q: “It seems nothing is safe any more. Not so-called ‘conservative stocks.’ Not big banks that were supposedly ‘strong.’ Not even some money market funds. So how do we find safety in this unsafe world?”
Martin: True safety has two elements. The first is capital conservation — no losses. But it’s the second element that most people miss: liquidity — the ability to get ahold of your money and actually use it whenever you want to. No waiting, no penalties, no bottlenecks or shutdowns standing in your way.
Absolute perfection should not be you goal. But on both of those aspects — capital conservation and liquidity — the single investment in the world that’s at the top of the charts is short-term U.S. Treasury securities (not long-term bonds). These enjoy the best, most direct, and most reliable guarantee of the U.S. government, over and above any other guarantees or promises they may have made in the past or will make in the future.
In the weeks ahead, many other supposedly “safe” investments will be called into question — most stocks, of course, but also bank CDs, annuities, high-rated bonds in companies that are supposedly too big to fail, even tax-exempt bonds issued by supposedly sound cities and states.
It will be a financial war zone. But despite the wealth destruction everywhere, U.S. Treasury bills will stand head and shoulders above every other investment, returning 100% of your money plus interest, with your money available when you need it.
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Eva Kaplan: This is Eva in Weiss Research’s customer service department. We are getting a lot of questions on the safety of Treasury bills, and this one is a perfect example:
Q: “Martin, you say Treasury bills are safe. But how do we know they will hold up in a future worst-case scenario?”
Martin: No one can predict the future with certainty. But we can look at past worst-case scenarios.
Go back to Rhode Island in 1991, when the governor declared a state bank holiday. All the state-chartered savings banks were closed down. Depositors were marching down the streets in protest. Every single citizen with money in one of those banks was locked out.
One of our Safe Money Report subscribers happened to have a checking account in a closed bank. Thankfully, he had almost all of his money at the Treasury Department in Treasury bills, so he was safe. But he called and asked:
Q: “My account at the Treasury is set up to wire the money straight into my bank account, which is frozen. Will my T-bill money get frozen too?”
Mike: Good question. What was your answer?
Martin: I told him to check his mailbox. Instead of wiring his funds, the Treasury had taken the extraordinary measure of cutting hard checks and mailing them out immediately. They want to make absolutely sure he got his money without any delay. The moral of this story is that even in a worst-case banking scenario, the Treasury makes sure you get your money.
Or go back to the early 1930s. A record 13 million Americans — 25% of the workforce — were unemployed. We had a head-spinning wave of bank failures. We had a complete shutdown of the banks. But owners of Treasury bills never lost a penny.
Or go back even further, to the Civil War. Investors financed 65% of the Union’s war costs by buying Treasury securities. But the war was far worse than those investors dreamed possible, leaving over half of the entire economy in shambles. So investors in Treasuries were very worried — and for good reason. But as it turned out, the U.S. government made the repayment of its debt the number one priority. Investors got back every single penny, and more.
My main point is this: The crisis ahead will not be nearly as severe as the war that tore our nation and our economy apart. If Treasury securities were safe then … they will certainly be safe now.
Eva: I have a question from a reader that seems to tie in nicely with what you just discussed:
Q: “What happens if we get another bank holiday like the 1930s? What happens if I want to cash in my Treasury bills? If the banks are closed, where am I going to get the cash?”
Martin: Just like in the Rhode Island bank holiday, the Treasury will take extraordinary measures to make sure you can cash in your Treasury bills. They’ll send you hard Treasury checks. They’ll designate special bank offices in every city in every state, and those banks will exchange your Treasury checks for hard cash. Ditto for checks written on Treasury-only money market funds.
Mike: Explain why you feel so strongly about this.
Martin: Because the Treasury Department is directly responsible for feeding money to the utmost, mission-critical operations of this country. Defense. Homeland Security. Emergency response. The Treasury will do whatever they have to in order to continue providing that funding, and that means making sure they never default on their maturing Treasury securities, that they never have any unhappy customers.
Eva: Here’s a question from one of Larry Edelson’s Real Wealth Report subscribers:
Q: “Throughout history, many governments have defaulted on their debts by devaluing their currency. Why are you recommending Treasury bills if you yourself have warned that one of the consequences of this disaster could be a devalued dollar?”
Martin: As I stressed at the outset, the trend right now is toward deflation and a stronger dollar. But even if that changes, the solution is not to abandon the safety and liquidity of Treasury bills. It’s to set some money aside and buy hedges against inflation, like gold.
Eva: Here’s another question:
Q: “I checked the latest yield on Treasury bills and it’s barely enough for a diet of stale bread and water. I need income. How can I get that with T-bills?”
Martin: We believe your T-bill yields will go up, and by staying short term, you’ll be able to roll over into the higher yielding T-bills as they become available. Plus, the Weiss companies have special investment solutions to grow your wealth in this crisis. But that’s not what we’re here for today. Today, our goal is to make sure you get to safety. And for the money you want to keep safe, do not expect high yield.
Mike: Cash, especially the safe, liquid cash we’ve been recommending, is very valuable right now. So if the price you have to pay for that cash is less yield or even no yield, it’s worth every single penny of it. If we’re right about deflation, your cash will buy more, not less. Cash will be king, and with the cash you save and protect now, you will be able to pick up amazing bargains — in real estate, in stocks, in virtually every asset out there.
Eva: This viewer is asking:
Q: “In your reports, you’ve recommended two ways to buy U.S. Treasury bills: Either via the Treasury Department or via a money market fund that buys exclusively short-term Treasury securities or equivalent. Which is better?”
Mike: I personally prefer the money market fund for a number of reasons. No matter who actually holds the Treasuries, they enjoy the same guarantee from the Treasury. Also, with a Treasury-only money fund, you have immediate access to your money all the time. You can have it wired to your local bank account. Or better, you can just whip out a checkbook that the money fund provides and write a regular check against it. (For more details, see our free report, “How to Buy Treasury Bills or Equivalent.”)
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Stan Pyatt: This is Stan. I also work here in Weiss Research’s customer service department. The question I have here is one that we get all the time:
Q: “My banker has tried to talk me out of money market funds. He says they can lose money and they’re not insured but my account at the bank is insured and now, to sweeten the deal, the FDIC has raised the insurance limit up to $250,000.”
Martin: As to losing money, he may be right about some ordinary money market funds. But I think he’s wrong about Treasury-only money market funds. My view is that you only need insurance to protect against the risk when there is a risk to protect against. But short-term Treasury securities are the highest quality investments in the world, stronger than any insurance company. So in my view, buying insurance for Treasuries is silly.
Mike, help me set the record straight here: Who backstops the FDIC if the FDIC runs out of money to pay off insured depositors?
Mike: The U.S. Treasury. The Treasury has promised to provide more funding to the FDIC as needed.
Martin: OK. So let’s say I have a Treasury bill or a Treasury-only money fund. And let’s say you have a CD in a weak bank. What have you got in terms of a guarantee?
Mike: I’ve got FDIC coverage up to $250,000, which, in turn, is backed by the Treasury.
Martin: Exactly. You have an indirect guarantee from the Treasury — with a sick banking industry between. Plus, your guarantee is capped at $250,000.
Mike: Correct. And what do you have with your T-bills?
Martin: Aha! I have a direct guarantee from the Treasury department without any cap. I could have a thousand dollars in T-bills. I could have a million or ten million in Treasury bills. There’s no limit to the guarantee whatsoever. The Treasury securities the money fund buys are all 100% guaranteed by the Treasury Department.
Editor’s note: Consider Capital Preservation Fund, Weiss Treasury Only Money Market Fund, or any fund dedicated to short-term Treasury securities or equivalent.
Eva: I have a question here from Nancy:
Q: “How can we bail out Wall Street and still owe billions to China? Where will these dollars come from and how long will we be paying for them?”
Mike: The government obviously can’t suddenly raise the money by jacking up taxes. And contrary to what a lot of people think, the government can’t just print the money endlessly, because that would kill the ability to continue borrowing from investors all over the world — not just in China, but in the United States, Europe, Japan and all over Asia. So they have only one choice. They’re going to have to borrow the money and that borrowing will put upward pressure on interest rates.
Stan: Bernard has e-mailed a series of good questions. His first question is:
Q: “Is a time coming when I should bail out of everything and try to hold cash only?”
He’s talking about cash in a safe or under his mattress.
Martin: Some cash for emergencies make sense, provided you take all the obvious precautions and provided you keep the amounts reasonable, say enough to cover a few weeks of expenses.
Mike: I agree. We can’t rule out the possibility of a bank holiday. Indeed, the New York Times has reported that this was actually an option the Fed Chairman and the Treasury Secretary were considering. But I have question too: Let’s say you have a couple of weeks of cash. Where would you put it?
Martin: You can put it in a safe at home. But you can also put your cash in a safety deposit box right at your bank. Even if a bank is shut down for withdrawals, it is not shut down for services like safety deposit boxes.
The same applies to bank custodial services. All the Treasury-only money funds use a bank as the custodian. But those Treasuries are totally separate from the bank’s assets. So even in the worst-case scenario, your money would not be affected.
Stan: I have a second question from Bernard:
Q: “Do you think I can get through this crisis safely without resorting to moving my money to another country?”
Martin: We recommend investing in foreign currencies at the appropriate time. And there’s nothing wrong with having accounts overseas, if that’s convenient for you. But I’ve lived overseas for many years — in safe places and not-so-safe places — and I can tell you flatly: There’s no compelling reason to rush overseas. This is a global crisis — not just a U.S. crisis. At this juncture, I think it’s just as easy to find a safe, quiet place for your money — and for your home — right here in the United States as it is overseas.
Eva: Mina asks:
Q: “Are you familiar with the Swiss annuities? The ones I’m looking at were designed for wealth preservation during a global depression using the safest banks and insurers in the world.”
Martin: We don’t have ratings on Swiss insurers. But as a rule, Swiss annuities are solid. The question is: How liquid are they? What kind of penalties will you pay for early cancellation? If you’re not comfortable with those, stick with short-term U.S. Treasuries.
Eva: Martin, Mike, we’re getting a raft of questions and comments from folks who saw your “X List” video in which you named big banks and brokers that could fail, and they are so thankful that you warned them ahead of time about some of the biggest failures. But they’re asking for an update. Plus, here’s a question, also from Mina, that you have not addressed:
Q: “I have a brokerage (but not bank) account with E*Trade, and notice that E*Trade Bank is on your list of banks likely to fail. Is it time to transfer to another broker?”
Martin: The bank and brokerage firms are separate. But if you have a choice of brokers, it’s probably better to use one that’s not affiliated with a weak bank. And yes, the report we’re going to send you will have an update on the weakest and strongest banks. Plus, we include insurers also.
Editor’s note: This free report, with updated lists on the nation’s strongest and weakest banks and insurers, is now available. Click here to download the entire report in .pdf format. Or click on the specific subjects of immediate interest to you, listed at the end of this transcript.
Eva: This subscriber is asking:
Q: “I have nearly all of my money in gold. Other than physically owning gold coins, what do you recommend?”
Martin: Nearly ALL of you money in gold? I think that’s way too much. Yes, gold is your insurance policy against politicians running amuck and letting the dollar fall. But it’s also a commodity, and commodities can fall in value. In this crisis, cash will be king — perhaps in the form of gold, but mostly in the form of cash assets like Treasury bills.
For a small portion of your money, say, up to a maximum of 5% of your total assets, some gold makes sense; and our favorite vehicles are bullion coins or gold ETFs like GLD. But not for a large portion of your money!
Stan: While you’re on the subject of gold, let me ask this question from Jeff:
Q: “Why do gold and silver drop when the market is going down? It makes no sense. As uncertainty increases, precious metals should rally, right?”
Martin: Actually, I think it does make sense. When markets are falling, investors often throw out the baby with the bath water — dumping good investments to help make up for the losses they’re suffering in bad investments. Silver is more vulnerable to this because it’s more of an industrial commodity. But gold can also be affected by this kind of selling, which is one reason why, at this juncture, we do not recommend it for more than 5% of your money.
For Part 2 of this transcript, click here. Plus, take full advantage of our free, step-by-step safety kit by clicking on the topics of your choice below:
1. How to Buy Treasury Bills or Equivalent
2. How to Use Your Treasury-Only Money Fund as a Bank
3. How to Set Up a Single, Safe Account for Nearly All Your Savings and Checking
5. How to Get Rid of Risky Stocks Despite What Your Broker May Say
6. What to Do About Your Not-So-Risky Stocks
7. More, Equally Urgent Information on Bear Markets
8. Want to Stick With Banks? Here Are the Risks
10. How Risky or Safe Is Your Insurance?
Plus, you can jump straight to our handy reference lists …
11. Treasury-Only Money Market Funds
12. Weakest Banks and Thrifts in the U.S.
13. Strongest Banks and Thrifts in the U.S.
14. Weakest Life & Health plus Property & Casualty Insurers in the U.S.
15. Strongest Life & Health plus Property & Casualty Insurers in the U.S.
16. Select U.S. Brokers With Their Capital Multiples
About Money and Markets
For more information and archived issues, visit http://legacy.weissinc.com
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.
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