A Bag Full Of Benjamins

One million dollars in $100 bills will weigh around 22 pounds and fit inside a medium-sized duffel bag. In fact, SDR Traveller makes a heavy duty “1M Hauly” duffel bag sized and designed just for this – the transport of $1,000,000 in cool, green Benjamins. If you see me carrying this bag, know that I am buying the first round…

SDR Traveller
Photo from SDR Traveller website linked above

While I’m not advocating walking around the desert like this guy, with your nest egg in an expensive duffel bag, where to put your cash offers a very real dilemma to many people these days. Depending on who you talk to lately, cash is either king or cash is trash, offering either real investing opportunity or a drag on your investment returns.

What happened to interest rates…

When the stock market tanked throughout ’08 – ’09, the Federal Reserve declared an all-out and undeniable war on cash as part of a recovery strategy. Interest rates were lowered to near zero in an effort to force money back into the stock market by investors desperate for yield and/or a return on capital. As a result, the stock market took off – and it is still going today. Great for those with money to invest in the stock market but a real drag for those with nothing more than a small savings account to work from. Let the 1% rejoice!

interest-graph

Several Fed members have said they would have gone to -1% or -2% on short term interest rates had they not feared a run on the banks by Americans refusing to be forced into paying a bank to hold their cash. I honestly think most folks would’ve gone to their bank, withdrawn their money, brought it home, stuffed it in a mattress, and loaded the shotgun rather than pay Sun Trust 1% per year to park their hard earned cash. Good move.

Not the Queen…

QE stands for Quantitative Easing, which oddly enough is also the name of Willie Nelson’s strain of marijuana. It’s a fancy way of saying the Federal Reserve is using electronic cash created out of thin air to buy up bonds from banks in an effort to push inflation. This decreases bond yields because bond yields move opposite their price and this phony demand has driven up the price. The idea is that the banks will then use this capital to make new loans at the low interest rates created by the Fed, and they’ll also use this new capital to buy new assets as they replace the ones they have sold to the Central Bank in exchange for their fake money. The end result is an attempt to drive the economy by keeping the money moving and changing hands. It’s a shell game, a Ponzi Scheme, and something to keep a keen eye on – but more on that in future blogs…

Meanwhile, this is what it has done to the 20yr bond yield (the orange line) in relation to the yield of the S&P500 (the blue line). 20-year bond yields have tanked, and for the first time in a long time equal S&P500 yield, but at a MUCH lower rate. Ugh…
yield

So what to do…

Gone are the days where you’d be pleasantly surprised at a few hundred bucks worth of interest showing up on your 1099-INT at the end of the year. Now days you’ll be lucky to file a few bucks worth interest for the tax man – but he’s gonna happily hit it anyway, adding insult to injury. Interest rates on savings accounts at a Bank of America or a Sun Trust are around 0.01% and a “high yield” savings account will joyously advertise a hilarious 0.14% as if you’ve joined a special club or something. As inflation hovers near 2.1% as measured at the end of Dec. 2016, it means as we save cash near term,  we lose money long term.

Defense…

In my total retirement portfolio I hold about 5% in cash. With yields under 1%, why bother?  Two reasons – 1. Cash is defensive and acts to smooth out volatility.  I’m fine to give up opportunity costs on 5% of my portfolio in exchange for a defensive security with little correlation (movement) in terms of market volatility because… 2. Cash is also a “call option” with no expiration date. A “call option” gives the buyer of that option the right to buy a security at a pre-determined price, offering the buyer a theoretically unlimited upside while the downside is limited to the premium paid for the option should it expire.  Cash does not expire, so I can hold cash for as long as I want while I wait for my price. If the market tanks, not only does a cash allocation buffer my downturn, it also puts me in the position to capitalize on market fear at the bottom by buying securities at bargain-basement prices in order to juice my returns on the inevitable upswing. Wow, this is getting technical…

Ok, time for some relief – a sculpture made out of $11,000 worth of laser-cut $1 bills:

 

Safety…

Outside of my retirement portfolios, I like to keep 6 months of living expenses in cash. I do feel being prepared for the unexpected at home is important, so I keep a bit of “stand-by” cash in a safe, but the vast majority is at a bank 1.2 miles away. After funding all of my Roths, 401ks, and college savings accounts, I am currently re-investing any cash above that 6 month reserve into my home by way of repairs, upgrades, and renovations. There I see a capitalization rate close to 8 or 9% in today’s home market in Middle Tennessee.

You can shop around and find some online banking offers of around 1% APY on cash with minimums in the $5,000 range, which is an interest rate that is 10 times higher than what you’ll find at most mainstream banks, but you do give up a little convenience factor. I like my cash nearby, so I just keep it in as high-yield of a local bank savings account as I can find. I’m liquid to the extent of banking hours and ATM limits, and though there are doomsdayers out there fearful of great systemic risk in the financial industry, I see very little chance I can’t get to the bank and get my money out at will.

On the flip side, storing money at home does offer 100% liquidity and independence of the banking system. However, hiding cash under your bed or in a closet does open you up to other risks such as theft, fire, or possibly a tornado wiping out your cash savings and re-distributing your wealth to those downwind. I’ll trade those risks for a minute banking risk until I see forces at play otherwise…

What’s next..

Thanks for reading – drop me a note or leave a comment. Stay tuned for my next blog, “Investing With Two Middle Fingers”. I’m not sure what that means yet, but I’m trying to crank up the irreverence. The way its written right now I may piss off a billionaire and get myself sued – Stay with me…

Cheers,

Todd

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