A Flight to Safety, But What's Safe Now?

by: Mike Steinhardt September 18, 2008    

Mike Steinhardt

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Most people say “flight to safety.”  I just don’t think Treasuries are the definition of “safety.”  Some people say “flight to quality.”  I just don’t think Treasuries are the definition of “quality” when they represent the financial condition of this country with its deteriorating tax base, its overleveraged consumer, its increasingly unemployed workforce working in lower quality jobs, its devaluing real estate, its trade deficits, its budget deficits, its excessive government spending, its expanding and underfunded social programs,  its expanding list of failed banks, its underfunded FDIC, its underfunded and reckless PBGC, its deteriorating Federal Reserve balance sheet, its nationalized financial system, its pathetically weak fiat currency…

But if you want to suggest that piling all your money into short term Treasuries is a “safer” bet than equities, I have to agree with you, for now.

However, when you look at the 3-month T-bill and see a whopping 0.02% yield today you have to be very careful.  That’s the lowest level since WWII - not a good time if I remember my history.  Whenever a trade gets this overcrowded, it doesn’t usually end well.

The “breaking of the buck” at the Reserve Money Market Mutual Fund is very troubling.  I really respect Bruce Bent and not just because he started the Money Market Mutual Fund industry.   If this can happen to him due to Lehman’s demise, you bet it can and will happen to others who do not have his ethics or experience.  In fact, it has happened several times, but the sponsors were there to cover the losses (please reread Propping Up Money Market Mutual Funds from November 2007). 

I suspect that some of these banks will not be able to keep that up forever and we will likely see some more buck breaking.  A year ago, I shared my personal story about concerns over the quality of assets held in a money market mutual fund.  Note that the ABCP and SIVs of last year and other risky assets held in some Money Market Mutual Funds are as crappy now as they were then.  You can assess whether Treasuries with no yield are “crappy.”

If you have a MMMF with a yield in excess of 1.5% over the past days, weeks, and months, you really need to evaluate what is in there and decide whether a few extra basis points are worth the risk.

Furthermore, it’s going to be a big problem when the yield in MMMFs that hold almost 100% Treasuries (all that flight to safer stuff) have yields that are less than the expense ratio, even if the expense ratio is really low, like 0.50%.  Check this Fidelity fund out as an example.   A prolonged period of rates like we have now in the Treasuries will lead to some serious challenges, especially if the stock market keeps losing and being so volatile.

A week ago, I mentioned my declining bearishness in commodities and my recent UP signals in the two gold ETFs I cover (IAU and GLD).  However, I never would have expected the massive move in gold Wednesday.  Obviously, for those people that don’t like the “Flight to Safer” trade in Treasuries, gold was more appealing.  Hopefully everyone realizes that gold is not safe.  Just look at the recent decline and you’ll know that.

The slope of the massive move in gold and Treasuries is not sustainable, but only you can decide what is safe enough.

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This article has 15 comments:

  •  
    Sep 18 02:36 AM
    The yield on US Treasuries is almost zero. Gold, is a lot safer than what else is on offer.

    Gold is going to go a lot higher and so are other commodities. Why? Simple, because something tangible is a darn site better than fiat currencies. Benanke has just increased the availability of debt provision in the USA to an unlimited number (see FT). Why? He is running out of money after bailing out Fannie, Freddie, AIG etc. He and Paulson know that the USA needs a lot more money. The Dollar will tank eventually along with the markets.

    I am not a gold bug, I am a realist who wants to protect his money and this is where it is at.
    Reply | Link to Comment
  •  
    Sep 18 02:43 AM
    i agree with all your points ->
    I just don’t think Treasuries are the definition of “quality” when they represent the financial condition of this country with its deteriorating tax base, its overleveraged consumer, its increasingly unemployed workforce working in lower quality jobs, its devaluing real estate, its trade deficits, its budget deficits, its excessive government spending, its expanding and underfunded social programs

    Before we didn't have a trigger that made us worry about all the above. Is the financial credit crisis a the trigger? If it triggered foreign entities not buying our debt leading a prolonged devaluation of USD, this will be a big problem. Ofcourse, we all can see that US is not heading the right direction w/ the amount that we spent. USD solely based on the faith of the US Government. Nothing to back up. But for so long, we didn't have a trigger point that made people scare. Are we at that point now? You won't be able to imagine what can happen when an import dependent country encounter a prolong devaluation of its currency.
    Reply | Link to Comment
  •  
    Sep 18 03:59 AM
    Hey...

    Ask any Zimbabwean what it's like to be a trillionaire.
    Reply | Link to Comment
  •  
    Sep 18 04:35 AM
    A return to gold standard possible??
    Reply | Link to Comment
  •  
    Sep 18 09:08 AM
    unless you have a recipe for gold soup or gold pot pie its not going to help as most all have some gold.tuna fish will be the new gold.my grandfather was there. he lived in germany prior to ww1 & he threw a 50 lb.sack of gold into the main river as he feared he might be killed for it.you better have some good armaments to protect your gold until people find out you cant eat it.then you can throw it away.
    Reply | Link to Comment
  •  
    Sep 18 09:19 AM
    Even for those silly investors who count their assets in dollars rather than purchasing power, gold is safe in ways that no other asset can ever be. Specifically, it does not depend on anyone's ability to perform; 100% of the value in the metal was put there in the past when it was dug out of the ground and refined. Listen to what the market is telling you: there are two assets with zero yield that are both in high demand: T-bills and gold. Without any advance notice or good reason, another $40b worth of one of them sprang into existence from nothing yesterday. Small wonder the market found the other asset more comforting.
    Reply | Link to Comment
  •  
    Sep 18 10:59 AM
    "unless you have a recipe for gold soup or gold pot pie its not going to help as most all have some gold.tuna fish will be the new gold.my grandfather was there. he lived in germany prior to ww1 & he threw a 50 lb.sack of gold into the main river as he feared he might be killed for it.you better have some good armaments to protect your gold until people find out you cant eat it.then you can throw it away."

    Plug in the word dollar for everytime you used the word gold...makes the same sense..... Has anybody ever ate a dollar?
    Reply | Link to Comment
  •  
    Sep 18 11:15 AM
    I thinks its time to buy a lot of canned food and a shotgun..............p... yourself
    Reply | Link to Comment
  •  
    Sep 18 12:49 PM
    Gold will always be a safe bet based purely on its physical attractiveness. Like DRumsfeld said, it is a tangible product, one that the world will continue to desire. It may not be as big as a payoff as other options, but it certainly won't be as big of a bust either.
    Reply | Link to Comment
  •  
    Sep 18 12:56 PM
    A safe, classical 3% yield over inflation has not been possible in America a long time.

    We've been forced to gamble in real estate, the stock markets of the world, currencies, commodities, etc. ....

    It's been Las Vegas or the mattress and little in between.

    But now Las Vegas appears to be in flames and the mattress is infested with paper eating inflation bugs.
    Reply | Link to Comment
  •  
    Sep 18 02:53 PM
    Anyone read Cormac McCarthy's "The Road"? Doomsday all around, fighting for food, weapons, and medicine - not money, not gold, not commodities. Are we there yet?
    Reply | Link to Comment
  •  
    Sep 18 05:11 PM
    One thing I find odd is just how risk averse people are when risk shows up. Conservative estimates put the long-term standard deviation of annual return on S&P500 at 15% and then say 8% nominal expected return. 2-standard deviation events happen--and that would be an annual return of -22% (8%-2*15%). Why do people assume the entire system is going donw the tubes? I do not believe that this is a black swan--though I may yet be proved wrong.
    Reply | Link to Comment
  •  
    Sep 18 07:11 PM
    I hear people talk about surviving a crisis all the time, and yet I watched hurricane after hurricane take the poor people bordering the GOM, completely by surprise.

    Let's make this simple. Buy dehydrated food that lasts decades!
    www.nitro-pak.com/

    Buy a Sun Oven to supplement your propane supplies
    www.sunoven.com/usa.as...

    Sure, some gold is nice to have around but think about what you're going to use it for, and stock up on that now. No matter where you live, you've got weather events that leave you without power, with spoiled food, etc.
    Reply | Link to Comment
  •  
    Sep 19 10:34 AM

    Comments on preparing for the "End of the world as we know it"

    Solar oven looks interesting.

    Rice and beans are much cheaper than dehydrated food and last just as long if stored properly. It might get boring, but you won't starve.

    Don't forget to stock up on ammunition too. Guns aren't much use without it.

    Bleach is also handy for purifying water. Tincture of Iodine too, if you can find any.

    Aluminum foil is nearly indespensible.

    Flint, steel, and steel wool will come in handy when your lighter/matches run out.

    Just my thoughts for what they're worth. ;-)
    Reply | Link to Comment
  •  
    Sep 21 01:30 AM
    Bernanke's Big Rock Candy Mountains

    (to the melody of Big Rock Candy Mountain)
    Lyrics By WilliamBanzai7


    One evening as the DOW went down and the ABX was burning
    Down the track came a banker hiking and he said boys I'm not turning
    I'm headin for a land that's far away beside the crystal towers
    So come with me we'll go and see the Bernanke's Big Rock Candy Mountains

    In Bernanke's Big Rock Candy Mountains there's a land that's fair and bright
    Where the handouts grow from the Bushes and you sleep sound every night
    Where the ABS books are all empty and the sun shines every day
    On the birds and the bees and the bonus trees
    Where the perrier springs where the squawk box sings
    In the Bernanke's Big Rock Candy Mountains

    In Bernanke's Big Rock Candy Mountains all the regulators have wooden legs
    And the shorts all have rubber teeth and the investors lay golden eggs
    The traders books are full of fruit and the bankers play all day
    Oh, I'm bound to go where there ain't no snow
    Where the rain don't fall and the wind don't blow
    In Bernanke's Big Rock Candy Mountains

    In Bernanke's Big Rock Candy Mountains you never sell your stocks
    And the little streams of Interest come a-trickling down the rocks
    The enforcers have to tip their hats and the bears and shorts are banned
    There's a lake of stew and of champagne too
    You can sail all around 'em in your custom yachts
    In Bernankies Big Rock Candy Mountains

    In the Bernanke's Rock Candy Mountains white collar jails are made of tin
    And you can walk right out again as soon as you are in
    There ain't no short handled shovels, no axes saws or picks
    I'm a goin to stay where you sleep all day
    Where they hung that jerk from Berkshire Hathaway
    In Bernanke's Big Rock Candy Mountains

    I'll see you all this coming fall in Bernanke's Big Rock Candy Mountains
    Reply | Link to Comment
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