All America Bank 1.5%

[jhogue]

The current I bond rate is 1.96%. Max. $10,000 per SSN.

Yield of I bond currently beats money market funds, 4 year CD, and 5 year Treasury.

Less principal risk than FDIC - insured CDs or bank accounts.

Yes, but you must hold I-bonds for 5 years minimum or face a penalty. So a more realistic comparison would be to a 5-year CD.

In any case, if short term interest rates rise, 1.9% will not seem like a good deal 2 years from now.

No Pugsley,

As you can clearly see from the red text, you said nothing about a penalty (in red), and brazenly stated that you must hold I-bonds for 5 years in any case.

dualstow,

To be fair to MangoMan, I recognize that my comparison of the current I bond yield (1.96%) to the OP’s money market fund “great rate” (1.50%) was inexact. It had to be because I bonds are unique and don’t compare-- apples-to-apples-- to any other financial instrument. I wanted to demonstrate that you don’t need to abandon the safety of Treasury-backed securities just to stay competitive with yields for cash in the PP.

Short term rates have been crushed so low for so long that investors have grown schizophrenic about their cash. On the one hand, prudence has been displaced by yield chasing of the sort exhibited by the OP: Who cares about arcane stuff like credit risk, when I can get my hot little hands on an additional 0.22% by locking up my $35,000 for the next 12 months (net a whopping $77/year!!!) [compared to a 1 year Treasury bill @ 1.28% (7/9/17)].

On the other hand, legions of savers and investors have gone without meaningful returns for so long that they have simply thrown in the towel, thrown out their monthly statements, and let their TBTF mega-banks pretend that they did not hear that Janet Yellen has been raising interest rates. The article you cited on the front page of Thursday’s Wall Street Journal (“Bank Deposits Don’t Pay,” 7/13/17) is eye-opening evidence of just how extensively that despair has penetrated into our financial culture.

[dualstow]

Absolutely agree. I should have added that I really appreciate your posts in this thread. I do.
I hope that 6-month treasury bills and, say, Vanguard's prime money market will catch up with inflation, which is what- 1.6-2% ?
Not a lot of hope for banks.

[jhogue]

Absolutely agree. I should have added that I really appreciate your posts in this thread. I do.
I hope that 6-month treasury bills and, say, Vanguard's prime money market will catch up with inflation, which is what- 1.6-2% ?
Not a lot of hope for banks.

Thanks, dualstow. I guess I am using this forum to vent about the perils of neglecting cash, the busiest asset in the PP.

I trust that the TBTF mega-banks will not ask what is good for savers and investors—any more than my grandmother would think of asking the chickens on her farm if they would like to come to dinner on Sunday afternoon.

Your concern about the threat of inflation to cash reminds me of when I got my very first money market account way back in 1981. Federal Reserve chairman Paul Volcker had just declared war on inflation and jacked up short term rates to unprecedented levels. I think the rate of my brand-new Dreyfus MMA topped out at a still-astounding 20%! (very temporary, of course) My conventional bank savings account never came close to catching up and eventually—I can’t even remember when-- I stopped using a bank savings account altogether.

Financial innovations like money market accounts, index funds, brokerage accounts offering free trades of Treasury bonds, ETFs, and, yes, I bonds, have given the small saver and investor many more financial tools to deal with the fluctuations in economic cycles. Maybe the most valuable innovation of all is the creation of forums like this one that encourage the growth of the free exchange of ideas.

Tyler’s recent research in another thread also provides good evidence and gives me hope that that cash can keep up—if we pay attention.

[dualstow]

Of course the chickens are invited to Sunday dinner!
Fine print: they'll be seated on a plate, not a chair.

Your concern about the threat of inflation to cash reminds me of when I got my very first money market account way back in 1981...

I'm just watching; not overly concerned. We had a regular poster here, MachineGhost (a.k.a. MG) who, between very bombastic and entertaining posts about other things, had info like "treasury bills have kept up with inflation except for such and such period, when they trailed by a mere 1%." I looked it up, and he was right. That along with the cash article at portfoliocharts dot com, made me feel a whole lot better about the cash portion.

In general, I'm fine with low yield and low inflation. I'll let the Fed worry about what % inflation is good for us.

[jhogue]

dualstow,

What happened to Machine Ghost? For a while he was a prolific poster on this forum, and lately seems to have vanished – like a ghost?

I enjoyed his posts, but also sometimes found them a bit cryptic, as though I needed an explanatory preamble before diving into his more technical missals.

He also seemed to exhibit an obsessive compulsive disorder at times, especially when it came to the subject of Maximum Drawdowns in back testing the PP. Personally, I thought I had pretty much found out everything I need to know about maximum drawdowns by living through the 2008 crash and watching my 90/10 portfolio drop by 41%.

[dualstow]

dualstow,

What happened to Machine Ghost?

I think TennPaGa said he's active on another forum. Where is he, Tenn?

[dualstow]

Yes, read my explanation above, between Sophie's and Kriegspiel's posts.

[dualstow]

Yes, read my explanation above, between Sophie's and Kriegspiel's posts.

Ah, yes, I zoned thru that post apparently.

Funny, when I wrote the red font post, I thought, no one is going to not know that I'm joking!

[LC475]

All America Bank Savings (Mega Money Market) acct is at 1.5%, max. $35,000.

Thanks for posting, Allen!

I am always skeptical of these high rates, though. Since free lunches are few and far between in this world of ours, something about giving me a higher-than-average rate makes a bank seem higher-than-average risky. The "too good to be true" factor, I suppose.

However, I have no issues keeping the cash portion of my PP in online FDIC insured savings accounts that pay way better rates. Amigo, either you trust the US govt to keep its promises, or you don't.

Not all promises are equal. Not all promises have identical consequences to the promisor if broken.

It's nice to be promised something by the US Government. The question we should be asking ourselves whenever this occurs, however, is something like "Do I look, to the Government, like a drunken minor Indian Chief?" I.e.: expendable.

It would be harmful to their long-term credibility if the gov't decided to not back up their FDIC "guarantees."

It would be fatal to their ability to borrow money at reasonable rates if the gov't decided to default on Treasury Notes.

Two promises. Miles apart.

[drumminj]

It would be fatal to their ability to borrow money at reasonable rates if the gov't decided to default on Treasury Notes.

Would it really, though? How much of the purchases of gov't debt is from our central bank, or foreign central banks (with printed dollars) vs those who can't conjure money out of thin air?

In the past, I agree with you. In this day and age, I'm not sure that's quite as true...

[jhogue]

Sorry Desert, but I will have to disagree. The differences between the powers of the FDIC and the US Treasury can and do matter in practice, even short of an end-of-the world-as-we-know-it scenario.

Pugchief himself provided a personal example of this back in 2013 on this forum, when he described what happened to his small business account at a banking subsidiary of Washington Mutual (WaMu) in 2008, which just so happens to have been the largest bank failure ever handled by the FDIC.

On the one hand, you could say that the FDIC did its job—preventing a bank run and ensuring banking liquidity-- and did it reasonably well. Pugchief’s WaMu account, insured by the FDIC, was taken over by JP Morgan Chase and I gather from his telling that he did not lose so much as a nickel in the transaction. Bankers at Chase even promised to grandfather his account features.

On the other hand, what ensued illuminates the limitations of the FDIC, and the powers of the Treasury. About a year after Chase took over his failed WaMu account, Pugchief got a letter from his new bankers announcing that his account was being “converted,” and they thoughtfully included a new fee structure that bore little resemblance to the account that Pugchief had with WaMu. It seems that his new FDIC-insured TBTF mega bank had up and decided to milk Pugchief like he was one of my grandfather’s Holsteins! Rightly indignant, Pugchief promptly moved his account to yet another bank.

As I suggested, the FDIC did its job, but it came at a price, both to Pugchief and the American economy. Time is money. The time that Pugchief spent juggling three different banks in a year was time better spent tending to his dental practice or getting a good night’s sleep. Those sorts of costs get swallowed up in the larger economic picture, but they are real nonetheless—especially to Pugchief. The larger costs are still being sorted out to this day. The WaMu bank failure was so large compared to the FDIC’s insurance fund that the agency decided to conduct a secret auction of its banking assets, which JP Morgan Chase won. Lawyers for WaMu later contested the terms of the buyout, arguing that the FDIC had conducted an unnecessary fire sale of its assets. (The case is still in litigation nine years later). Following the WaMu episode, the U.S. Treasury effectively bailed out the FDIC by granting it a new $100 billion line of credit to make sure it could handle bigger bank failures in the future.

Morals of my story?

1. If Pugchief had a Treasury money market fund instead of an FDIC-insured account with solid institutions like WaMu and Chase, he would not have had to change banks three times in a year and waste his time listening to some slick Chase banker explain why getting milked like Grandpa’s cow was actually a feel-good kind of experience for everybody involved.

2. Harry Browne was right. For your PP cash, nothing beats U.S. Treasurys

[dualstow]

jhogue, that was a great post. I will ponder that. I also will work to get the image of your grandfather's Holsteins out of my mind.
...

fodder for future conversation.

[LC475]

It would be fatal to their ability to borrow money at reasonable rates if the gov't decided to default on Treasury Notes.

Would it really, though? How much of the purchases of gov't debt is from our central bank, or foreign central banks (with printed dollars) vs those who can't conjure money out of thin air?

In the past, I agree with you. In this day and age, I'm not sure that's quite as true...

Well, "fatal" was an exaggeration, and you are right to call me out on it. A more precise way to phrase my point: defaulting on Treasury Notes would be catastrophic for them. It would cause meaningful changes in the US Government's finances.

[LC475]

You may be right, or you may be wrong. When it comes to end-of-republic promises, I won't put much value in FDIC or treasury promises. The most likely scenario would be inflating away the obligations, in which case both would suffer more or less equally.

OK, let's break this down. There is a scenario in which everything denominated in the dollar collapses, because the dollar is being destroyed. That is the scenario you are focusing on in the above post. And you're right, of course: in that scenario both dollar accounts in banks and dollar-denominated Treasury Notes would be wiped out. As a side note, that would be OK and hunky-dory, of course, for us as Permanent Portfolians, because our gold would do well.

But there are other scenarios.

Many of them.

I can envision a scenario wherein there's some bad banking problems, or a crisis or war, and in the end the decision is made that account holders will get 80 cents on the dollar. We've got to pull together as a nation and share the load, doncha know. Everybody's hurting, and it's only fair to share the pain.

Were this to happen, it would not cause any big long-term ramifications for the government. (At least not inevitably, in and of itself I mean -- it could make people mad and trigger a revolution or something, but anything could trigger a revolution). Things would go on; no big deal.

Defaulting on Treasury Notes would be a much more serious decision, with much more serious consequences. The aftermath of a Treasury default would see major changes in the government's finances. Anyone looking at the government's current finances can see that issuing Treasury Notes is a major, crucially important part of how they are funded and are able to operate. This is in contrast to the FDIC, which is a relatively small, minor cabinet agency that does not play a direct critical role in the government's financial structure.

Issuing notes and bonds is an essential tool for the gov't. Getting rid of that tool would be akin to, oh, let's say repealing the income tax. It could be done, things could be rearranged to accommodate it (for example maybe just conjure more money more quickly, as you suggest), in theory it's possible, but it would be a massively consequential decision.

So that's the logic of it. If there were a Venn Diagram called Government Crises, the circle labeled "Wherein the Gov't Defaults on its Own Treasury Notes" is a small one, entirely subsumed in the much larger circle labeled "Scenarios In Which the FDIC Fails to Bail Out Banks, Either in Whole or In Part." It's very small, and up in the far extreme corner of the bigger circle. Things would have to get awfully dire for the government to choose to default. It would be a desperate act, like cutting off one's leg to try to save one's life while in a disease-infected jungle far from any sterilization.

More solidly, I guess I feel that I am more likely to be able to see a default scenario coming than a bank failure/seizure/something-less-than-perfect-wherein-depositors-lose-money scenario. So, with Treasuries I will be able to get out in time and save my wealth, whereas with banks the bank can quite suddenly just lock its doors, shut down its website, and thus lock me out and, well, what could I do? As you say, I could be right, or I could be wrong.

[jhogue]

dear pugnacious,

I understand that you were one of the injured parties in the 2008 comedy of errors. That is why I found your story so compelling.

What I don’t understand is why you keep recommending FDIC-insured bank accounts for PP cash on this forum. Are you some kind of financial masochist? You of all people should be poster boy, spokesman, and evangelist for Treasury-backed securities!

Just because you have to keep a finite portion of operating cash for business convenience’s sake in a local bank doesn’t mean you have to have to declare unconditional surrender and get fitted for a financial milking machine by Jamie Dimon and his gang of thieves at TBTF (but FDIC-insured) JP Morgan Chase. People like you who lived through the 2008 FDIC bailouts not only have a story to tell, they have been forewarned and ought to be planning a different future for their cash. Be creative! There are real alternatives. Let me suggest a few and perhaps others on the forum will chime in.

1. First of all, start thinking of the conversion of your cash from FDIC-backed to Treasury-backed as a longer term project, not a single event. About a year after I converted my investments to the Permanent Portfolio, I started a simple one page spreadsheet for PP cash showing all of my accounts, what types of cash funds they have, and what percentage of the entire portfolio is Treasury-backed. Now I watch that percentage rise over time while the percentage of FDIC-backed cash falls. I should also add that when I did this it began to dawn on me that I had not really been treating cash as an investment—partly because it has paid so little interest since the Fed decided to artificially crush interest rates.

2. Tax-deferred accounts (IRAs, Roth IRAs, SEP-IRAs, etc.) are prime candidates for rapidly increasing Treasury-backed securities in the form of ETFs like BIL and SHY that you can buy for under $1,000. If you have over $1,000 you can buy your own short term Treasury bills through most brokerage houses for the lovely expense ratio of 0%! These may provide the most immediate shift in your cash portfolio composition, especially if you are keeping a good chunk of cash in them for PP rebalancing.

3. For longer term holdings, I recommend beginning an I bond ladder, or what Medium Tex described as “deep cash” for cash in the PP that you don’t need in the next year. I bonds expand the tax deferred space outside retirement accounts described above. Laddering means that in ten years’ time you could have a stash of over $100,00 in Treasury Direct that is 90% liquid and 100% tax deferred. I bonds also offer a unique kind of institutional diversification because you can buy them both in electronic form from Treasury Direct and also in paper form with your annual tax return refund.

4. Because their tax deferral lasts for 30 years and they have a tangible form, paper I bonds represent a unique opportunity to co-own US savings bonds with your children, grandchildren, nieces, nephews, etc. As gifts, they become a teachable moment to pass on valuable stories of saving and investing—like how Grandpa Pugchief survived the FDIC-sponsored bailouts way back in 2008 and saved his dental practice by refusing to hand over his hard-earned money to the bad old wolf, a.k.a. JP Morgan Chase.

[Hal]

[align=][/align]Another cautionary tale on why to hold treasuries and not to chase returns....

https://en.wikipedia.org/wiki/Pyramid_Building_Society

Many friends were financially ruined because of this.

PS. Check out the interest rates on the flyer. Sounds too good not to invest!

[dualstow]

[align=][/align]Another cautionary tale on why to hold treasuries and not to chase returns....

https://en.wikipedia.org/wiki/Pyramid_Building_Society
...

Wow!

[Hal]

However, you may wish to check how your particular country's insurance scheme is funded.....

Have a look at Table 1 on page 52 of the link. https://www.rba.gov.au/publications/bul ... 1211-5.pdf

For example, no funds have been put aside in Australia to fund the scheme.

[dualstow]

I'm using Vanguard's Prime money market fund for *some* cash now.
Living on the edge.

[Jeffreyalan]

I use a small mutual savings bank in Mass. It gives me the illusion of safety!

[dualstow]

I'm using Vanguard's Prime money market fund for *some* cash now.
Living on the edge.

Dude, that's insanity. I hate to do interventions, but I'm thinking about one now ... you are completely off the reservation.

And I don't care who knows it. Whoo hoo I feel so free!

[jhogue]

Only on this forum would FDIC-insured accounts be thought of as high risk. I think it's being overplayed just a tiny bit. I feel like I'm reading about private REITs and junk bonds here. Yes, there is a liquidity risk with CD's and savings accounts. If the bank fails, you may not get the money the next day. And that's a serious consideration for some people, for some of their funds. But bonds also have interest rate risk, and CD's have the clear advantage here. In the event of rapidly rising rates, you can't exit a medium or long term treasury with only a loss of 6 months of interest. Also the risk of lower yields and the erosion of inflation are greater with treasuries, when compared with the best CD's. There's a place for both. I don't hold the PP any longer, so I look at all fixed income as a single allocation that I'd like to at least keep up with inflation, while the smaller slice of higher risk equities provide the growth. The best risk-adjusted fixed income returns I can find are CD's. The CD market is less efficient than the treasury market, so it comes with higher liquidity risk and greater return. I don't want to talk anyone into using FDIC insured products, but to paint them as anything but very low risk just isn't accurate.

dear Desert,
Thanks for reading my post and responding.

1. Just to be clear, I did not say and do not think that FDIC-insured accounts are “high risk.” I stated that Treasury-backed I bonds have “less principal risk than FDIC-insured CDs or bank accounts.” In reciting the perils of Pugchief’s adventure with WaMu and the milking crew at FDIC-insured JP Morgan Chase, I thought I advanced an empirical case for preferring Treasury-issued over FDIC-insured debt, even under less than catastrophic conditions. But 2008 DID happen in our living memory, not in some far off past or imagined future. Perhaps that case was not particularly compelling. Or, perhaps you believe Janet Yellen’s pronouncements last week before Congress on the state of the banking system. Or, perhaps people are exhibiting crowd behavior, chasing yield, and covering it up with a collective case of cognitive dissonance. Or, I dunno… Which do you think it is?

2. I take very seriously the concern you expressed about inflation’s effect on Treasurys. We will all be crossing our fingers that stocks and gold in the PP will once again take up the slack when LTTs are getting crushed in the next turn of the cycle.

But for the cash or STT portion of fixed income accounts, I regard the creation of Treasury-backed I bonds as a significant financial innovation that deserves more attention from savers and investors, whether they hold a PP or not. Consider this: which has more inflation protection, a 5 year CD, or an I bond held for 5 years? During that 5 year period, an I bond is guaranteed to reset 10 times (tax deferred) according to changes in the CPI-U. I am not aware of any CD that does that. With CDs, I guess you would have to keep selling and buying when rates change, paying taxes on the income each time you decide to sell. Not only that, if you are really worried about long term inflation, you can buy and hold an I bond for 30 years, tax deferred. During that period of time, your I bond gets reset for inflation 60 times but is guaranteed to never drop below zero. Is the risk-adjusted return of a 30 year CD better than that?

(Last time I checked at Fidelity, you can’t even buy a 30 year CD. Ever wonder why?)

[sophie]

Desert's right in that most people don't think of FDIC-backed savings accounts as "high risk". But I agree with jhogue: they are highER risk than Treasuries, and a few recent events (2008 and Cyprus come to mind) proved that point nicely. The problem is that such a crisis is exactly when you're most likely to want access to your cash.

It depends what the goal of your cash is. Cash in the Permanent Portfolio can include your emergency fund, but it performs several functions: 1) a source of investment income, 2) "dry powder" for rebalancing into assets that have dropped sharply in value, like stocks do on occasion, and 3) a safe and absolutely reliable parking place for funds. Savings bonds don't work for dry powder but they are ideal for #3. Treasury bills work for all three functions. I don't consider CDs to be an ideal vehicle for job #3, nor for job #2 because when the stock market & economy crashes, the bank isn't going to be happy when you ask to liquidate a CD. The fine print says they don't have to honor your request, nor is there a set amount of time for them to do so.

I don't have a set proportion for those different tasks and it will certainly be different for everybody, but I figure about 1/3 my cash allocation for dry powder and another 1/3 in the absolute safety category.

[dualstow]

fine print says they don't have to honor your request, nor is there a set amount of time for them to do so.

Good to know! I was weakening, thinking about joining my friends who buy CDs. (they're non-pp people). I'll stick to bills and notes for the majority, and Prime mm & i-Bonds for the icing.

[dualstow]

You guys crack me up. What makes you think Vanguard Prime is safer than a CD?

I don't. I wouldn't put 80% of my pp cash in CDs, and I wouldn't put it in Prime. Now, is it more probable that the bank would cause trouble than Vanguard would if I tried to redeem a CD/ transfer out of Prime during a crisis? I have no idea. When it comes to safety, I think of them both as simply inferior to Treasuries and "pretty safe." Beyond that, I don't know and I don't care, because 20% or less is in them.

I do find the money market convenient. Easy to transfer funds. Don't need to keep repurchasing new instruments.