PP newbie question regarding cash

Discussion of the Cash portion of the Permanent Portfolio

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sk55
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PP newbie question regarding cash

Post by sk55 » Fri Jun 28, 2013 11:28 am

guys,

can you explain how cash hedges the PP portfolio.  I know if i buy shy, i can see the price  move  up and down throughout the year.

but how about if you keep it in a bank account? 


thanks
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Re: PP newbie question regarding cash

Post by AdamA » Fri Jun 28, 2013 11:48 am

sk55 wrote:
I know if i buy shy, i can see the price  move  up and down throughout the year.
SHY holds 1-3 year US Treasury notes, so there is still some interest rate risk with it.

Try SHV.  Holds shorter term Treasury bills. 
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Re: PP newbie question regarding cash

Post by dualstow » Fri Jun 28, 2013 11:50 am

Cash is usually not beloved or exciting, but it serves its purpose.

A few notes -

* We're in a period of extremely low interest rates. Sometimes, cash yields as much as 5% in a bank account. That probably didn't seem exciting at the time, but it sure looks great now. (And of course, the yield right now seems especially unpleasant, a few cents a year for me in most accounts).
* You don't buy SHY or SHV or t-bills for the volatility. Just the opposite.
* While cash is subject to inflation, it's good to have some dry powder to exchange into stocks and other assets when the prices of those assets drop. Often you will be selling an asset to buy another, but when you "sell" cash it's usually a tax-free or virtually tax free transaction.

Sometimes, there *is* volatility in cash, but it's unwanted. http://onion.com/14TyK9h  ;-)


(Grammar edits)
Last edited by dualstow on Fri Jun 28, 2013 11:54 am, edited 1 time in total.
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Re: PP newbie question regarding cash

Post by KevinW » Fri Jun 28, 2013 11:58 am

Actually, so far in 2013 cash had the second-highest return of any PP asset.

Stock (VTI): +14.46%
Cash (BIL): -0.02%
Bond (TLT): -8.48%
Gold (IAU): -28.44%

4x25 PP: -5.6%

People have been saying for a while that holding cash at near-0% interest rates is dumb. Well, right now I'm glad to be holding that big 25% chunk of nonvolatile cash.

For comparisons sake, a 3x33 PP with no cash is -7.5% YTD.

(All figures are YTD from etfreplay.com)
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Re: PP newbie question regarding cash

Post by Mdraf » Wed Sep 04, 2013 2:11 pm

What's the advantage of owning BIL or SHV right now compared to cash in a bank account? I think that was the original question.  You get no interest and you still have a little volatility and etf expenses to contend with?
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Re: PP newbie question regarding cash

Post by Pointedstick » Wed Sep 04, 2013 2:16 pm

The theoretical advantage is that those funds only hold government paper, while a bank account is backed by a mix of government and commercial paper, and in a financial crisis in which the government remains standing, commercial paper can go bad quickly and leave you without access to your money for weeks or months, or force you to even take a "haircut" on it.
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Re: PP newbie question regarding cash

Post by Mdraf » Wed Sep 04, 2013 2:43 pm

Pointedstick wrote: The theoretical advantage is that those funds only hold government paper, while a bank account is backed by a mix of government and commercial paper, and in a financial crisis in which the government remains standing, commercial paper can go bad quickly and leave you without access to your money for weeks or months, or force you to even take a "haircut" on it.
Are you talking about a money market account ? If so yes, you are right.  But a straight cash checking or savings account is not backed by paper and
each account is insured by the government up to $250K. What am I missing here?
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Re: PP newbie question regarding cash

Post by Austen Heller » Wed Sep 04, 2013 3:45 pm

Mdraf wrote: ...a straight cash checking or savings account...is insured by the government up to $250K. What am I missing here?
I think folks 'round here believe that when there are multiple big banking failures, the government will not be forced to make good on its FDIC promises, but they will continue to make the payments on treasury debt obligations.  Plus there are other considerations.....what if calamity comes and the government decides to turn all the deposits over some arbitrary limit into bank shares, a la Cypress?.....what if you are trying to minimize state taxation? (treasuries are state-tax exempt, bank accounts are not).

Short-term treasury rates have been near zero for several years, but this is rare and won't last forever.  It is natural to seek out SOME yield from things like FDIC-insured savings accounts, but you would be taking on new risks in doing so.  In my mind, I am comfortable holding treasuries if the comparable term bank product only has a higher rate of 1% or less.  For example, if a liquid bank savings account is at 3%, and I can get 2% in very short term treasuries, that is OK with me.  I am forgoing 1% in interest, but that is the price I am willing to pay for not taking on any FDIC risk.  Right now, I see that online savings accounts are paying 0.8-1%, while short term treasuries are paying < 0.1%.  Therefore, I am OK with holding the treasuries for short term liquid cash.  Plus, I live in a high-tax state, so I would lose around 10% of the extra bank interest as well.

Just type 'FDIC' into the forum search box and you'll find plenty of threads in which people discuss why they do not trust the FDIC guarantee.
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Re: PP newbie question regarding cash

Post by Mdraf » Wed Sep 04, 2013 4:37 pm

Thanks for the explanation. I'm comfortable staying in cash. The main banks now have official "too big to fail" status which they didn't when HB was around. FDIC and Treasuries are essentially both backed by the printing press. Cyprus doesn't have it's own printing press.  I am more worried about  my IAU than I am about a bank account!  Plus having large balances give me extra perks at my bank (free wire transfers, free safety boxes, etc) to make it worthwhile. 
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Re: PP newbie question regarding cash

Post by AdamA » Wed Sep 04, 2013 4:48 pm

Mdraf wrote: Thanks for the explanation. I'm comfortable staying in cash. The main banks now have official "too big to fail" status which they didn't when HB was around. FDIC and Treasuries are essentially both backed by the printing press. Cyprus doesn't have it's own printing press.  I am more worried about  my IAU than I am about a bank account!  Plus having large balances give me extra perks at my bank (free wire transfers, free safety boxes, etc) to make it worthwhile.
One other thing to keep in mind is that during a banking crisis, your funds may become inaccessible to you for a "bank holiday" or something.  The FDIC may eventually hook you up, but it could take time which would be a problem if you needed the cash.  There is, in theory, less risk that Treasury bills would be inaccessible to you during a banking crisis.
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Re: PP newbie question regarding cash

Post by Mdraf » Wed Sep 04, 2013 5:03 pm

AdamA wrote: There is, in theory, less risk that Treasury bills would be inaccessible to you during a banking crisis.
How would you convert the T-bills you hold into cash to buy stuff?
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Re: PP newbie question regarding cash

Post by AdamA » Wed Sep 04, 2013 8:13 pm

Mdraf wrote:
AdamA wrote: There is, in theory, less risk that Treasury bills would be inaccessible to you during a banking crisis.
How would you convert the T-bills you hold into cash to buy stuff?
I guess it depends. 

If it was a crisis that just involved your bank, I think you could get the Treasury to mail you a check and cash it elsewhere.

If it's a systemic crisis, I'm not sure.  I've heard theories that the Treasury would go out of its way to find a way to cash the T-bills in order to maintain it's credibility but I don't really know.
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Re: PP newbie question regarding cash

Post by Ad Orientem » Thu Sep 05, 2013 1:52 pm

Paper (or electronic) securities should not be counted on in a really major crisis. That's why we hold gold in physical form to the extent practicable.
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Re: PP newbie question regarding cash

Post by Ad Orientem » Fri Sep 06, 2013 9:32 pm

Desert wrote:
Ad Orientem wrote: Paper (or electronic) securities should not be counted on in a really major crisis. That's why we hold gold in physical form to the extent practicable.
And unfortunately, gold in a safe deposit box should not be counted on either.
A crisis that would shut down banks is unlikely to occur so suddenly that you would have no warning. I would hope that anyone with common sense would take steps to remove gold from their bank safe deposit box if they sensed that the wheels were coming off. But excepting when the world is in full blown self destruct mode, a bank safe deposit box is far safer than any other form of storage that I can think of.
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Re: PP newbie question regarding cash

Post by Mdraf » Fri Sep 06, 2013 11:05 pm

Ad Orientem wrote:
Desert wrote:
Ad Orientem wrote: Paper (or electronic) securities should not be counted on in a really major crisis. That's why we hold gold in physical form to the extent practicable.
And unfortunately, gold in a safe deposit box should not be counted on either.
A crisis that would shut down banks is unlikely to occur so suddenly that you would have no warning. I would hope that anyone with common sense would take steps to remove gold from their bank safe deposit box if they sensed that the wheels were coming off. But excepting when the world is in full blown self destruct mode, a bank safe deposit box is far safer than any other form of storage that I can think of.
A run on banks can be quite sudden in which case you can't get to your safe.  But I also think it is the safest place for gold.
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Re: PP newbie question regarding cash

Post by frommi » Sat Sep 07, 2013 5:33 am

Ad Orientem wrote: A crisis that would shut down banks is unlikely to occur so suddenly that you would have no warning. I would hope that anyone with common sense would take steps to remove gold from their bank safe deposit box if they sensed that the wheels were coming off. But excepting when the world is in full blown self destruct mode, a bank safe deposit box is far safer than any other form of storage that I can think of.
Except for the part where the safe of the bank is robbed, like it happened in Berlin this year. This robbery was like in a hollywood movie with a long tunnel drilled into the bank, but it happened!
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Re: PP newbie question regarding cash

Post by Ad Orientem » Sat Sep 07, 2013 10:19 am

Mdraf wrote:
Ad Orientem wrote:
Desert wrote: And unfortunately, gold in a safe deposit box should not be counted on either.
A crisis that would shut down banks is unlikely to occur so suddenly that you would have no warning. I would hope that anyone with common sense would take steps to remove gold from their bank safe deposit box if they sensed that the wheels were coming off. But excepting when the world is in full blown self destruct mode, a bank safe deposit box is far safer than any other form of storage that I can think of.
A run on banks can be quite sudden in which case you can't get to your safe.  But I also think it is the safest place for gold.
A run on your bank should have no effect on the valuables stored in your SD box.
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Re: PP newbie question regarding cash

Post by Ad Orientem » Sat Sep 07, 2013 10:26 am

frommi wrote:
Ad Orientem wrote: A crisis that would shut down banks is unlikely to occur so suddenly that you would have no warning. I would hope that anyone with common sense would take steps to remove gold from their bank safe deposit box if they sensed that the wheels were coming off. But excepting when the world is in full blown self destruct mode, a bank safe deposit box is far safer than any other form of storage that I can think of.
Except for the part where the safe of the bank is robbed, like it happened in Berlin this year. This robbery was like in a hollywood movie with a long tunnel drilled into the bank, but it happened!
Bank robbery is a rare crime. Bank robberies aimed at the safe deposit vault are all but unknown. You point to a Hollywood style heist in Berlin which made headlines, in part because such things are like shark attacks. Everyone fears them but the odds are so low they don't register on a scale of statistical probability. On the other hand I can't go through a week in any major newspaper without references to house burglaries  or home invasions.

Conceding that there is no 100% safe form of storage, I still think a bank safe deposit box is the safest for anything other than really huge sums of gold.
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Re: PP newbie question regarding cash

Post by Mdraf » Sat Sep 07, 2013 11:11 am

Ad Orientem wrote:
Mdraf wrote:
Ad Orientem wrote: A crisis that would shut down banks is unlikely to occur so suddenly that you would have no warning. I would hope that anyone with common sense would take steps to remove gold from their bank safe deposit box if they sensed that the wheels were coming off. But excepting when the world is in full blown self destruct mode, a bank safe deposit box is far safer than any other form of storage that I can think of.
A run on banks can be quite sudden in which case you can't get to your safe.  But I also think it is the safest place for gold.
A run on your bank should have no effect on the valuables stored in your SD box.
When the bank is closed and there are armed guards at the door how are you going to get to your SD box?
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Re: PP newbie question regarding cash

Post by Ad Orientem » Sat Sep 07, 2013 11:26 am

Mdraf wrote: When the bank is closed and there are armed guards at the door how are you going to get to your SD box?
Banks don't just close without warning. A run on a bank and subsequent closing is not like throwing an on/off switch. If you perceive that there may be a problem, common sense would dictate removing your valuables to another location. That said, I have also never heard of a bank being closed where provisions were not quickly made for those with SD boxes to gain access to them.

Out of curiosity, what form of storage do you consider to be safer than a bank safe deposit box?
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Re: PP newbie question regarding cash

Post by Mdraf » Sat Sep 07, 2013 11:30 am

Ad Orientem wrote:
Mdraf wrote: Out of curiosity, what form of storage do you consider to be safer than a bank safe deposit box?
If you had read my post you would know.

As for bank closing due to a run I've experienced one (in another country). The government decides overnight that banks will not open the next day.
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Re: PP newbie question regarding cash

Post by mortalpawn » Sat Sep 07, 2013 12:11 pm

This thread seems to be morphing way off its original topic but...

I would agree that in countries where crisis have happened (Cyprus, Argentina, etc...) they often close the banks without warning.  Also given my experience with hurricanes in Florida I can tell you that cash, gasoline and food are all suddenly in short supply when people realize something bad is coming.  There is a run on all of them, and yes the banks do close.  So you may not always be able to get to that safe deposit box - at least for a few days.

I recommend keeping a small amount of emergency cash, some gasoline and some emergency food/water at home at all times.  If its a local crises (like a hurricane or local riot) the gas will at least get you to somewhere safe.  If its a broader crisis the cash, gas and food will carry you over until you can get to a safe deposit box or come up with a new plan.  Even if inflation hits the cash will be good for a while, though some people keep a bit of silver as added insurance.
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Re: PP newbie question regarding cash

Post by Mdraf » Sat Sep 07, 2013 12:25 pm

mortalpawn wrote: This thread seems to be morphing way off its original topic but...
Happens a lot around here  :D

I recommend keeping a small amount of emergency cash, some gasoline and some emergency food/water at home at all times.  If its a local crises (like a hurricane or local riot) the gas will at least get you to somewhere safe.  If its a broader crisis the cash, gas and food will carry you over until you can get to a safe deposit box or come up with a new plan.  Even if inflation hits the cash will be good for a while, though some people keep a bit of silver as added insurance.
Absolutely. In my experience rather than hoard people share more. And if you know your local grocer, butcher, produce seller etc they will extend credit until the crisis is over.
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Re: PP newbie question regarding cash

Post by AgAuMoney » Sat Sep 07, 2013 6:03 pm

Ad Orientem wrote: A crisis that would shut down banks is unlikely to occur so suddenly that you would have no warning.
Probably so.  But would you really recognize the warning?  People tend not to...
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