You Won’t Believe What the Feds Are Doing to Cash Now

Posted On Aug 9, 2016 By Dave Gonigam

  • Cash is a good thing… if you hold it in the right form
  • Your choices for “good” cash are narrowing… and you have two months to act
  • The “meh” view of small-business owners
  • Fond memories of the epic “extraction” rant… and a future of “decentralization”
  • In pursuit of accuracy… success stories of 401(k) rollovers… the next big thing in gold… and more!

The “safest” asset class out there is about to become a lot more dicey. You’ve had nearly four years to take protective steps… and now time’s running out.

We’re talking about cash. Staid, boring old cash.

But cash is one of the five asset classes Jim Rickards recommends at the end of his 2014 book The Death of Money – along with gold, land, fine art and “alternative” investments like hedge funds and private equity.

“Cash has a place,” he wrote, “because it is an excellent deflation hedge and has embedded optionality, which gives the holder an ability to pivot into other investments on a moment’s notice… Cash may not be the best investment after a calamity, but it can serve the investor well until the calamity emerges.”

But it all depends on what form your cash comes in. If it’s in a money market fund… beware.

“Money market funds were invented in the 1970s by Merrill Lynch as a way to compete with bank deposits,” Jim explained to readers of Rickards’ Strategic Intelligence yesterday.

“With a bank deposit, you always got your money back with a little interest. To compete with banks, the money market fund promised never to ‘break the buck.’ This meant that the net asset value of a $1.00 share would never go below $1.00. In other words, you would always get your money back, just like a bank. The money market industry is now a $600 billion juggernaut.”

Yes, there’ve been bumps along the way – especially during the Panic of 2008, when the Reserve Primary Fund “broke the buck.” The fund held securities issued by the doomed Lehman Bros. Investors got back 99.1 cents on the dollar… but some didn’t collect until as late as December 2014.

As usual, federal regulators sought a way to fix the problem… and created new ones in the process.

Here at Agora Financial, we’ve been warning readers ever since the feds began their discussions in earnest in 2012. We issued another warning here in The 5 when the Securities and Exchange Commission signed off on the final regulations in July 2014. And we’re sounding the final warning now… as the rules are set to come into effect on Oct. 14.

The key change is that many money market funds will no longer have that fixed $1.00 net asset value. It will float instead. It might be more than $1.00. It might well be less. So much for the certainty that came with money market funds.

That’s bad. This is worse: “Another change that did not receive as much notice,” says Jim, “is that money market funds are now allowed to ‘suspend’ redemptions… Not only can they pay back less than you invested, they don’t have to pay at all – until they decide to. They can keep your money and get back to you later when conditions ‘normalize.’ Whenever that is.”

The rules have an important loophole – one you’d do well to seize on. But if you do, you still have to play it right.

A select class of money market funds will still have that fixed $1.00 net asset value – those that invest in U.S. Treasury debt and/or debt issued by government-controlled entities like Fannie Mae or Freddie Mac.

So we return to the guidance we offered when the feds finalized the rules two years ago: Avoid money market funds that hold “mystery meat” corporate paper, or foreign government debt.

And we’ll go a step further. Avoid money market funds that hold Fannie Mae or Freddie Mac paper – remember the trouble Fannie and Freddie got into in 2008? Usually the giveaway is that they have the term “U.S. Government” in the name.

You want a money market fund that holds nothing but U.S. Treasury bills. It might require a bit of homework, though not much; if they have “Treasury Only” in the name, that’s a good sign. But look at the fund’s top holdings at Morningstar or a similar website just to be sure. If there’s anything other than Treasury notes, bills or bonds, move on.

If you don’t need the check-writing privileges that come with a money market fund, you can opt for a Treasury-only ETF like the iShares Short Treasury Bond (SHV).

Jim Rickards’ bottom line: “Short-term Treasury bills are a safer alternative. The Treasury still gives you your money back.”

[Ed. note: If you have some idle cash you’d like to put to work, Jim Rickards and Byron King will issue their latest junior gold stock recommendation on Thursday.

Here’s a summarized track record since we launched Jim Rickards’ Gold Speculator With Byron King three months ago…

  1. Five closed positions with an average gain of 27%
  2. Sixteen open positions (only two in the red) with an average gain of 62%.

So there’s proven potential to double your money in as little as 53 days – starting on Thursday. Jim shows you the way at this link.]

To the markets… which are again treading water as Wall Street’s “pros” are hanging in the Hamptons and the help is in charge.

The Dow industrials and the S&P 500 are both up about a quarter percent. The yield on a 10-year Treasury stands at 1.57%. Gold is up barely at $1,339. Crude is flat after yesterday’s big gain, at $43.05.

The big economic number today was second-quarter productivity – down 0.5%, when the “expert consensus” was counting on a 0.5% increase. Experts argue over the relevance of this figure… but for whatever, it’s worth, it’s registered three straight quarters of decline – unprecedented in nearly 70 years.

Small-business owners are biding their time this summer, judging by the latest Optimism Index from the National Federation of Independent Business.

The number inched up in July to 94.6. It’s been lower than this many times since the “Great Recession”… but it was generally much higher than this over the number’s history going back to 1978.

“Uncertainty is high, expectations for better business conditions are low and future business investments look weak,” says NFIB chief economist Bill Dunkelberg. “Our data indicates that there is little hope for a surge in the small-business sector anytime soon.”

Because no one else probably will, we pause today to mark the five-year anniversary of an epic televised meltdown.

“We’ve got a real problem!” shouted MSNBC host Dylan Ratigan – during a rant duly noted here in The 5 the next day. “This is a mathematical fact! Tens of trillions of dollars are being extracted from the United States of America… An entire integrated system – financial system, trading system, taxing system – that was created by both parties over a period of two decades is at work on our entire country right now.”

But the transcript doesn’t do it justice. You have to watch, and watch attentively – down to the worried faces on the support staff in the background…

We weren’t altogether sure what he meant, but we were vaguely sympathetic. “Extraction” is a terrific word that can describe everything from Wall Street bailout culture to the health care cartel.

Mr. Ratigan left the cable news grind less than a year after what he described as his “primal yell.” By 2013, he’d taken up a hydroponic farming venture that aimed to employ veterans of the Afghanistan and Iraq wars. The project has now expanded to include water purification and solar power.

Judging from the video blog he still keeps, he’s also onto an important societal shift. What digital technology “represents is a decentralization of every aspect of our lives,” he said a few days ago.

“Whether it’s content, consumption and production – you watch your YouTube videos, I watch my YouTube videos – or whether it’s electricity production or whether it’s actually the banking system, any aspect of our lives is now in the process of decentralization, which is incredibly empowering for us as we enter this era of adaptability and experimentation.

“But it’s remarkably threatening to the legacy infrastructure, at least as threatening as the industrial transition was to the horse and buggy guys. And that is why you are seeing such a desperate political culture in America right now. As they cling to their ideology of centralized power in the face of sand slipping through their fingers as we transition to a decentralized world.”

Sounds a lot like our colleague Chris Campbell at Laissez Faire Today

“I think you do your letter a disservice by writing in this fashion,” reads a thoughtful email we got from a reader after our description last week of the dollar’s two-stage death spiral that Jim Rickards says will get underway in earnest on Sept. 4.

Jim described being present for a meeting at the White House in early 1974 for discussions about a potential U.S. invasion of Saudi Arabia.

“I would guess at that time he would be somewhere in his early to mid-20s,” our reader writes. “He was at school when this meeting took place, and unless he was an absolute prodigy then, if he was at this meeting, he was not there for his advice but was probably there as a companion of Professor Robert Tucker (as he graduated from John Hopkins, where Tucker was a professor) to take notes, and not to be an active participant whose council would be valued.

“The likelihood of him, at that age, being an honored guest who was ‘ushered in’ is absolutely unfathomable. This was a matter of utmost secrecy with national security implications, so how did he get security clearance, and how is he able to tell this story now when he and everyone in the room must have been sworn to secrecy? Conspiring to invade a foreign nation and now ally should be a major embarrassment to the government of the United States, which they would not want anyone to know about.

“I really like The 5, but sometimes I think you go over the edge of believability, which makes other material in the publication somewhat suspect.”

The 5: We didn’t characterize Jim as an active participant in the discussions. He was indeed there accompanying Professor Tucker and other foreign-policy mavens of the day, as we said. Heckuva fly-on-the-wall experience at a young age, don’t you think?

And contrary to your assertion, the notion of invading Saudi Arabia was not “a major embarrassment to the government of the United States.” When it looked as if the Saudi regime might go back on the petrodollar arrangement in late 1974, Professor Tucker penned a piece for Commentary magazine explicitly raising the prospect.

Within days, major newspapers suggested Tucker was delivering an implicit threat to the Saudis on behalf of Secretary of State Henry Kissinger…

How serious is the Kissinger threat?

We had to leave out that part of the story to stay within our 5 Mins. (There’s a lot we leave on the proverbial cutting-room floor many days.) Readers of Rickards’ Strategic Intelligence saw the whole thing.

When it comes to accuracy, rest assured that your editor brings a journalist’s sensibilities to The 5… and in this case, I mean that in a good way, heh…

“Thanks to you and the reader who wrote about feeling trapped by the limitations of their 401(k) choices,” a reader writes.

“I have also been mainly ‘cash,’ as the choices just weren’t right. It’s been sickening, as my quarterly statement showed the 0.45% gain. That’s not even keeping up with the government’s inflation figure.

“I’m calling HR and my CPA first thing tomorrow so I can roll these funds over into something that I can invest in along with the ideas presented in my Agora publications that I read.”

“I too am almost 62 years old,” writes another, “and in March of this year rolled over my 401(k) into a Schwab IRA – Fidelity is just as good, though.

“I have gained 25% in just four months and learned a whole lot along the way. I strongly advise you go that route if possible. It’s been a lot of fun, and lucrative, too. The only limits I’ve noticed are on certain kinds of option trading in an IRA. I can do covered calls and cash-covered puts.”

“Maybe,” muses our final correspondent after yesterday’s episode, “the Zika virus is a bold plot by the colder states to improve their share of tourism and replace the snow bird seniors with young pregnant women, due before the snow melts.

“In addition to reducing these states’ medical burdens, it could rebalance their Ponzi pension plans. Investment advice is to quickly buy up stock in birth centers with higher northern exposure, vacation home exchanges and diamonds (April’s birthstone) before they quickly pop to obscene valuations not seen since the last northern migration during the Civil War ;-)”

The 5: Wow, there’s someone with an even more perverse sense of humor than we have…

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. “What I’m seeing in today’s gold market could produce huge triple-digit gains time after time,” says Byron King.

Within two months of his initial recommendations last spring, informed readers could have seen gains of 100%… 109%… 120%… and counting. “It doesn’t take long,” says Byron, “to realize that gains like these can pile up fast – with the potential to double your money each time… or more!”

Don’t feel as if you’ve missed out. Byron’s next recommendation is due in less than 48 hours. Here’s where you can make sure you receive it.


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