After CNN MONEY published a report entitled “Cash Is King. It’s Better Than Stocks Or Bonds In 2015,” this observer believes there is an unreported rush to withdraw funds from the markets. [CNN Money]
Mebane Faber of Cambria Investments advises investors to get out of the markets completely. He says the last time market indicators pointed in this direction was during the financial collapse of 2008. [Marketwatch]
If investors are pulling their money out of the markets, banks would report record increases in deposits. But 3rd Quarter data on bank Money and Power: How G... Best Price: $4.62 Buy New $7.76 (as of 10:10 EST - Details) reserves will not be reported for some time, so we have no confirmation of this at the present time. An article at Forbes.com says the deposit base of all US commercial banks is currently at a record high of $10.9 trillion. (2ndQuarter 2015 data), but that is only 2nd Quarter 2015 data. [Forbes.com]
The Wall Street Journal blog says investors moved their money out of the stock market and into cash in the month of August. [Wall Street Journal]
Wait for long-term gains. But what if you are 70 years old?
When events like this occur Wall Street predictably advises investors to stay in the markets for long-term gains. However, many private investors haven’t time to wait for long-term returns, they are Baby Boomers who use dividends and stock profits for their retirement. They can’t afford to start all over again should a collapse in the markets occur.
So we read news headlines like this:
“Oracle Stock: Don’t Panic! ORCL Is A Good Long-Term Buy.” [InvestorPlace.com]
“Stocks to buy and hold for the next 20 years” [Motley Fool]
News headlines like these are a tacit concession the markets are headed downward.
An article at USA TODAY says: Tower of Basel: The Sh... Best Price: $8.49 Buy New $6.00 (as of 08:35 EST - Details)
“No doubt you’re in a panic. That’s what you do, especially when the stock market just had its worst quarter in four years. If you had an investment advisor, you’d be calling him or her, asking when you should bail out of the market. That adviser would talk you off the ledge…….. over the long-term they’ve (stocks) risen about 10% per year since the Depression.” [USA TODAY]
Avoid banks with derivatives
Just to be safe, avoid placement of your money in banks with derivatives (forwards, futures, options, swaps) or banks with non-performing home loans. Business banks and credit unions generally do not offer home loans. A list of banks and their derivatives can be found online. [US Bank Locations]
If you are having trouble extricating your investment portfolio from tax deferred 401k or IRA accounts that will provoke financial penalties, you can convert your investment account to cash equivalents in precious metals or money market funds.
Banks and those nasty reserve requirements
What are banks doing with your cash money? Well, they are supposed to use it as reserves in the event of a bank run. But God knows what banks do with the people’s money these days. Banks are allowed to invest excess reserves but not necessarily your money in the markets. According to an article in Financial Times, US banks are trying to “eke out profits by shifting excess cash into …… (you guessed it)…… longer-term assets.” [Financial Times] Flash Boys Best Price: $1.27 Buy New $6.00 (as of 08:20 EST - Details)
Just last year I wrote that due to inflation and low interest rates on saved money, savers lost up to 70% of the purchasing power of their money during the period 2008-2013. [LewRockwell.com]
But now for a darker disaster ………. deflation. [Seeking Alpha]
Economist John Williams charts a deflationary trend over the past two + years with a severe decline in 2015. [ShadowStats.com]
Even if there is argument over whether the US is in a deflationary period, China is dropping prices on goods and essentially the US is importing China’s deflation. [NY Post] Fortunately, that would drive up unemployment in China, not in the U.S.
Gary Schilling, noted investment guru, says we are headed towards a deflationary period, which is good for shoppers but bad for employment. [Bloomberg.com]
Companies drop prices attempting to hang onto market share but have to trim the size of their work force in deflationary periods. For example, ConAgra is now laying -off 30% of its office-based workforce. [MarketWatch.com]
However, American consumers have plowed some of that money into savings and the rest apparently into paying down their credit card debt rather than spending more on consumer goods. That is not what the largely consumer-dependent US economy expected or needed. Dark Pools: The Rise o... Best Price: $6.79 Buy New $10.60 (as of 02:10 EST - Details) An anticipated shot in the arm of the consumer economy has not materialized. [Palm Beach Post]
Bank reserves rise just at the right time
The decline in gas prices and the downward direction of the stock market that is pushing investors to turn their nest eggs into cash will buoy up bank reserves just at the precise time global bankers are being called on to shore up reserves in order to withstand a crisis. [South China Morning Post]
The rush to shift funds from markets to banks comes just at a time when the eight largest banks in the country are being required to maintain an additional layer of capital to protect against losses. Even with efforts to buoy up reserves, J.P. Morgan is $12.5 billion short of the FEDS required goal. [Wall Street Journal]
Are hidden forces intentionally scaring investors out of the stock markets and into cash to reach the FED’s requires capital requirements?
But as a contrarian article by Matt Phillips at QUARTZ.com says: banks (or at least the big banks) have more reserves than they need to lend to less flush banks on an overnight basis. The Federal Reserve Bank actually needs to “slurp bank reserves out of the system” so it can raise short-term interest rates. It is having a difficult time doing that now. The FED can sell its bond portfolio but this could “tank the market,” says Phillips, and undo many of the beneficial effects low interest rates have achieved over the last decade.
The FED can raise interest rates on banks but there are other institutions such as the Federal Home Loan Bank system that often charges Broken Markets: How Hi... Best Price: $6.98 Buy New $35.00 (as of 09:15 EST - Details) less than the FED’s rate on excess reserves. So even if the FED raises rates it may not achieve its intended impact.
So Phillips says the FED will use another tool, called overnight reverse repurchase agreements, to try to drag interest rates skyward.
What if the FED’s effort to raise interest rates effectively fizzles? Then we may realize the FED is powerless to spare savers from their existing plight, less than 1% interest on their saved money. If realized by those parties who have $13 trillion in long-term savings accounts, a bank run of sorts could ensue. The all-powerful FED could be revealed as an emperor with no clothes. [QZ.com] With all the efforts to END THE FED, in an unexpected irony, the FED could drive the final nail into its own coffin.