All America Bank 1.5%

Discussion of the Cash portion of the Permanent Portfolio

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dualstow
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Re: All America Bank 1.5%

Post by dualstow » Sat Jul 22, 2017 2:55 pm

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

https://en.wikipedia.org/wiki/Pyramid_Building_Society
...
Wow!
RIP R B G
in NE Syria, a Russian armored vehicle deliberately rammed an American military viehicle, leaving 7 US service members with concussions — the week
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Desert
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Re: All America Bank 1.5%

Post by Desert » Sat Jul 22, 2017 11:08 pm

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.
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Hal
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Re: All America Bank 1.5%

Post by Hal » Sun Jul 23, 2017 6:33 am

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.
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Re: All America Bank 1.5%

Post by pugchief » Sun Jul 23, 2017 2:14 pm

@Hoagie Sandwich,
I do not 'keep recommending' FDIC accounts instead of Tbills, and if that seems to be what I am saying, sorry for the confusion. Thanks Desert, for answering that for me:
Desert wrote: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.
I hold both Treasuries and FDIC online savings accounts. I agree with Desert that the risk is present, but minimal. I think that's a reasonable trade off with some of my cash. Also will again point out that a small business checking is not an 'investment account', but used for operating funds only.

@Hal, there is a big difference between chasing yields using obscure [or fake] investments paying 10X return and an FDIC insured account that pays a bit higher interest.
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Re: All America Bank 1.5%

Post by dualstow » Sun Jul 23, 2017 2:17 pm

I'm using Vanguard's Prime money market fund for *some* cash now.
Living on the edge. O0
RIP R B G
in NE Syria, a Russian armored vehicle deliberately rammed an American military viehicle, leaving 7 US service members with concussions — the week
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Re: All America Bank 1.5%

Post by Jeffreyalan » Sun Jul 23, 2017 2:27 pm

I use a small mutual savings bank in Mass. It gives me the illusion of safety!
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Re: All America Bank 1.5%

Post by Desert » Sun Jul 23, 2017 8:55 pm

dualstow wrote:I'm using Vanguard's Prime money market fund for *some* cash now.
Living on the edge. O0
Dude, that's insanity. I hate to do interventions, but I'm thinking about one now ... you are completely off the reservation. O0
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dualstow
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Re: All America Bank 1.5%

Post by dualstow » Sun Jul 23, 2017 9:14 pm

Desert wrote:
dualstow wrote:I'm using Vanguard's Prime money market fund for *some* cash now.
Living on the edge. O0
Dude, that's insanity. I hate to do interventions, but I'm thinking about one now ... you are completely off the reservation. O0
And I don't care who knows it. Whoo hoo I feel so free!
RIP R B G
in NE Syria, a Russian armored vehicle deliberately rammed an American military viehicle, leaving 7 US service members with concussions — the week
tennpaga
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Re: All America Bank 1.5%

Post by tennpaga » Mon Jul 24, 2017 6:37 am

dualstow wrote:
Desert wrote:
dualstow wrote:I'm using Vanguard's Prime money market fund for *some* cash now.
Living on the edge. O0
Dude, that's insanity. I hate to do interventions, but I'm thinking about one now ... you are completely off the reservation. O0
And I don't care who knows it. Whoo hoo I feel so free!
https://youtu.be/mRVUe2Ha6dg
* Gresham's Law: Bad behavior drives out good.
* Gresham's corollary: Avoid participating in systems where good behavior cannot win.

https://fs.blog/2009/12/mental-model-greshams-law/
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Re: All America Bank 1.5%

Post by jhogue » Mon Jul 24, 2017 7:16 am

Desert wrote: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?)
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: All America Bank 1.5%

Post by sophie » Mon Jul 24, 2017 8:02 am

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.
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Re: All America Bank 1.5%

Post by dualstow » Mon Jul 24, 2017 8:15 am

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.
RIP R B G
in NE Syria, a Russian armored vehicle deliberately rammed an American military viehicle, leaving 7 US service members with concussions — the week
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