Triple Crisis: Your First Defense

I’ve lived through four U.S. recessions, two bouts of surging inflation, and at least two close encounters with a Wall Street meltdown.

But this is the first time in my lifetime — and probably yours — that all three have converged in one time and place.

It’s an unprecedented Triple Crisis.

And despite repeated Wall Street attempts to deny it — including a new round of cheerleading Friday in response to stronger-than-expected retail sales numbers — the severity of the Triple Crisis is undeniable:

We have the worst food and energy price inflation since the early 1980s.
We’ve just seen the worst surge in unemployment in 22 years. And …
Financial institutions continue to book the biggest losses of all time, with more than double the losses yet to come, according to the International Money Fund.

These are not hidden facts I’ve dug up from obscure footnotes on financial statements or off-the-record interviews with industry insiders. They are irrefutable, blatantly obvious numbers reported by the authorities.

What is most remarkable, however, is the sheer speed of events — a fact that not only substantiates the reality of the Triple Crisis, but also implies the presence of at least three vicious cycles:

U.S. banks and lenders, recoiling from the massive numbers of mortgage foreclosures, are dramatically tightening lending standards — a move that makes it far more difficult for American homeowners to refinance their mortgages and triggers still more foreclosures.
U.S. consumers, fearing job insecurity and falling home values, are cutting back. This, in turn, is prompting employers to cut jobs, working hours or both — a move that can only cause consumers to slash their spending even further, but also may prompt many more to dump their homes onto the already-saturated housing market.
Surging commodity prices are driving up the cost of virtually every product and service in America. These rises, in turn, are driving investors from stock and bonds into commodities and tangibles, pushing prices up even further.

In this context, the strength in retail sales reported on Friday is an aberration — a one-time blip caused by consumers spending their rebate checks and by the higher prices on many items they had to buy.

It is not your signal to let up your guard or change your investment strategy!

As we’ve been showing you in our recent issues of Money and Markets, an important part of that strategy is to go on the offensive and pursue profit opportunities in commodities, foreign currencies and foreign markets.

But an equally important aspect is a solid defense, the primary topic I want to cover this morning …

Your First Defense: Cash (But Not in a Bank)

No matter what may be happening elsewhere, today’s uncertain environment mandates a healthy allocation to cash. But don’t blindly assume that cash must be stashed in a bank.

U.S. banks pay far-below-market rates on personal checking accounts. On business checking accounts, banks pay you no interest whatsoever.

You do get better interest with CDs. But there, your liquidity — the access to your funds — is severely restricted by early-withdrawal penalties.

Instead, I recommend a plan I call “Treasury-Only Savings and Checking,” giving you what I consider the very best combination of safety, yield, liquidity, and convenience available today.

Instead of using a bank, you use primarily a special kind of money market mutual fund — a Treasury-only money fund.

A Treasury-only money fund invests all of your money in short-term U.S. Treasury securities (plus other securities that are 100% backed by U.S. Treasuries). The fund uses a bank, but strictly as a custodian for the securities, and those accounts are completely segregated from the bank’s deposits or assets.

The Treasury-only money fund also provides you with check-writing privileges, so you can use it as your personal or business checking account. There are many advantages:

Advantage #1. Higher Yields. Treasury-only money funds have generally yielded substantially more than the yield offered on the average personal checking account in the U.S.

The yield differences fluctuate and may be different when you read this. However, let’s assume an average balance of $5,000. And let’s assume you boost your average yield from 2% to 4%. Your interest income, when compounded, could actually be more than two times greater: Assuming no change in these rates, over a 10-year period, you would boost your interest income from $1,095 to $2,401.

In your business checking account, if you assume an average balance of $50,000, your interest over that same time period would be $24,012. That’s a total 10-year return of nearly 48% on your money that you might not have earned otherwise.

Plus, in a business of fairly average activity, you would also be able to take better advantage of the “float” — the funds remaining in your account while checks written against them have not yet cleared.

With this float, your average daily balances can increase by 50% or more. Assuming an average daily bank balance of $75,000, your total yield on your $50,000 book balance jumps to $61,018 over 10 years. So we’re not talking about petty change. This could be a significant, untapped source of income.

Advantage #2. Low Fees. Most banks overcharge for checking, low balances, wire transfers into your account, bounced checks and a series of other services.

But when a bank quotes you yields — on any kind of account — it always quotes you the yields before deducting all its service fees. And with bank charges and fees currently at their highest level in modern history, it’s almost impossible for most bank customers to collect anything near the advertised yield.

In contrast, when a money fund quotes you its yield, it is invariably after deducting its fees and expenses. Of course, the past or current yield is no guarantee of future results. But the yield quoted is the net yield that investors in the fund are actually earning.

How much of a difference can this make? In most cases, a very large one. Indeed, we figure that, after deducting the myriad bank fees, most Americans today are getting a net yield of close to zero on their personal checking accounts, while many wind up losing money. Here are just two examples of outrageous fees:

It rarely costs banks more than $2 to process a bounced check. But most charge you close to $30.
It costs them nothing to receive a wire transfer from another bank. Yet most banks charge $10 or more.

Many banks charge you if you make too many transactions … and they charge you again if you have too few transactions. They get you on the way in when you make deposits — and on the way out, when you make withdrawals. They often charge a hefty fee if you use the automated teller machines; and with some accounts, they will charge you yet another fee if you use live tellers.

In contrast, most Treasury-only money funds charge you nothing or very little for each of these situations.

Advantage #3. One Account for Both Checking and Savings. At banks, most customers divide their money between (a) a checking account, where they give up most of their yield, and (b) a savings account or CD, where they give up immediate access and liquidity. No matter what, it’s almost impossible to get both optimal liquidity and solid yield in the same bank account.

In contrast, Treasury-only money funds let you keep nearly all of your cash assets — whether for savings or for checking — in one single account. This means that whether you’re investing $1,000 or $1 million …

You have complete access to all your funds at all times.
You can withdraw the entire amount, with no penalty whatsoever. Just write a check or request a wire transfer, and it’s done.
Your money consistently earns competitive, current market yields.
You never have to worry about leaving too much in your checking account at lower yields. The full amount is available for checking at all times, earning full interest.
You continue earning interest on your money up until the moment your check clears. The longer it takes for your payees to cash their checks, the more interest you earn.

In short, you get maximum liquidity and maximum yield on your entire balance. Plus, there’s no more shuttling back and forth between checking, passbook savings, money market accounts, CDs and other complex combinations.

Instead, you’ll be able to have one large account that meets nearly all your needs — checking, savings, and investment. (You may still need one more small account that I’ll tell you about in a moment.)

Advantage #4. No Limit to Your Account Size. When you use banks for your savings or checking, you have to go through a series of contortions to keep your money safe from failure:

In each CD, you would have to make sure your initial investment is actually under the $100,000 limit. Otherwise, the accumulation of accrued interest could put your balance over the limit, and that portion would not be covered by the FDIC.
You have to spread your CDs among various accounts. This means you would have to keep track of several accounts at the same time.
With large checking accounts, you would have to call your bank almost daily to make sure it’s not over the $100,000 FDIC limit. Reason: If there are several large checks outstanding, your bank balance could be over the limit; and if the bank fails at that time, any excess amount could be a lost.

With Treasury-only money funds, I believe that federal insurance is a moot point. Your funds are invested strictly in securities that are guaranteed directly by the full faith and credit of the U.S. Treasury Department. And there is no limit on the Treasury’s guarantee of its obligations — whether you’re a beginning saver with just a few thousand, or you’re a Bill Gates with billions.

Unlike bank accounts, there is no limit to your account size with a Treasury-only money fund — another reason for keeping nearly all your cash in one single, easy-to-manage account.

Remember, all the assets of Treasury-only money funds are invested in short-term U.S. Treasury securities (plus some securities that are fully backed by U.S. Treasuries). These are widely considered to be the safest securities in the world. So other than a decline in the value of the U.S. dollar itself (a subject I will cover shortly), U.S. Treasury securities are simply not at risk.

Indeed, most people in the financial industry — except perhaps for some bankers — would agree that the direct guarantee of the U.S. Treasury Department is actually stronger than the guarantee of the Federal Deposit Insurance Corporation. As a result, U.S. Treasury securities receive a higher credit rating than bank CDs.

The reason is obvious: There have been more than 3,000 bank and S&L failures in the last 30 years, causing savers and businesses serious inconveniences and even outright losses. In contrast, there has never been a default on U.S. Treasury securities … even when the government was temporarily shut down due to a budget dispute … even when the entire country was torn apart by the Civil War.

Advantage #5. Exempt From Local and State Taxes. The income you earn on both Treasury-only money funds and bank accounts is subject to federal income taxes. So there’s no difference between bank deposits and Treasury-only money funds in that regard.

However, when it comes to local and state income taxes, there is a significant difference: The dividends you earn on Treasury-only money funds are generally exempt from local and state income taxes. On the other hand, the income earned on bank accounts and CDs is not exempt.

And you should know that I did not account for the added benefit of this tax exemption when I compared the yields on bank deposits to those on Treasury-only money funds. Therefore, depending on your city’s or state’s tax laws, the after-tax yield advantage with a Treasury-only money fund could be even greater.

Advantage #6. Truly Free Checking. Nearly all banks charge you — one way or another — for your checking privileges. They may charge you a fee for each check you issue. They may charge you a flat monthly service fee. Or they may charge you a combination of both.

Sometimes banks say they’re giving you “free checking,” but require large minimum balances, paying little or no interest. One way or the other, you’re paying for checking — and probably too much.

Most Treasury-only money funds do not charge you any extra fees for check-writing privileges. You can write as many checks as you want, as often as you want. At most money funds, when they say “free checking privileges,” they really mean it.

This is not true for all Treasury-only money funds, however. And some do levy certain charges for special services — that’s to be expected. But those charges are almost always lower than the charges at banks. Moreover, if you shop carefully, you can reduce even these charges down to virtually zero.

Advantage #7. Immediate Liquidity. As with any financial institution, there will be a holding period for the out-of-town checks you deposit to your account. But your money goes to work for you right away, generating interest income immediately. And if you deposit your money via wire transfer, you can avoid the holding period; your funds will be available immediately.

In short, except for the holding period, all of the funds received by your Treasury-only money fund are available to you all of the time. There are four ways you can withdraw your money from your Treasury-only money fund:

You can write a check against the balance in your account — to yourself or to another payee.
You can call or send a fax to your money fund’s shareholder service department, giving them instructions to issue a wire transfer. (Before the fund can accept your wire instructions, however, you will need to have a signed authorization on file. This can be done when you open your account.)
You can request a check be sent to you directly from the fund. You can also authorize telephone instructions for redemption by check when you open your account.
You can establish a systematic program to automatically send a set amount to you monthly, quarterly, semi-annually or annually.

The disadvantages: As you can see, Treasury-only money funds offer you the opportunity to earn more. They can save you a great amount of money and time. They give you far more access to your money, opening up new investment opportunities, and potentially transforming the way you do business.

However, there are two disadvantages — one small and one not-so-small:

Most money funds impose a minimum amount for each check, usually $100. So you may need a small checking account for checks under $100. If you shop around, though, you should be able to find a Treasury-only fund that will let you write checks for as little as $50.
More importantly, never forget that a Treasury-only money market fund is denominated exclusively in U.S. dollars. Therefore, if the U.S. dollar goes down in value against other major currencies or other measures of value such as gold bullion, then the value of your dollar-denominated assets (including the safest of them all) also goes down.

However, if you are a U.S. resident or do business in the U.S., you will still probably need to keep most of your funds in U.S. dollars. Therefore, the solution is not to simply avoid holding dollars — that would be both impractical and potentially riskier.

Rather, we believe the more prudent approach is to follow the plan I propose here for most of your keep-safe funds … while, as a hedge, separately allocating some funds to investments that rise when the dollar declines. For example, you can now buy exchange-traded funds (ETFs) offered by Rydex Funds, devoted exclusively to investing in major world currencies.

Some Treasury-only money funds to consider:

American Century Capital Preservation Fund I, (800) 345-2021,
www.americancentury.com
Dreyfus 100% US Treasury MMF, (888) 782-6620,
www.dreyfus.com
Fidelity US Treasury MMF, (800) 343-3548,
www.fidelity.com
Reserve Fund/US Treasury Fund, (800) 637-1700,
www.reservefunds.com
Schwab US Treasury Money Fund, (866) 232-9890,
www.schwab.com
T. Rowe Price US Treasury Money Fund, (800) 541-6066,
www.troweprice.com
US Treasury Securities Cash Fund, (800) 873-8637,
www.usfunds.com
Vanguard Treasury MMF, (800) 662-7447,
www.vanguard.com
Weiss Treasury Only MMF, (800) 242-8092,
www.tommf.com

Good luck and God bless!

Martin

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