Yesterday, proved the old adage remains true. Cash is King! There is nothing more valuable than good old fashion cash or cash equivalents. Most of us were raised to have a rainy day fund in the bank or in a money market fund in a brokerage account.  Now, is that rainy day ~ literally and figuratively. Our rainy day funds should cover 6 months to 1 years’ worth of basic living expenses.  Take solace in that!  There is no immediate need to do anything. #BeTheCalm

If your rainy day fund is a bit shy, talk to your financial advisor and tax accountant to see if there are any tweaks or rebalancing that makes sense for your total financial health. (I am not a CFA, CPA, or Tax Attorney so go to your professional.) In talking to our advisor, we sold a stock that was great for 4 out of the past 5 years. It was too expensive to sell before this nuttiness because of the capital gains taxes that would have been generated. Now, with an eye towards the eventual recovery, there are other companies that are better managed and that are at very attractive low prices that we’d love to buy when the time is right (not now!) In the meantime, I have more cash if I need it. Win, win, chicken dinner, as my hubby say!  

I’ll bet with all of us sheltering at home and cancelled spring break trips, you have more excess cash in your account for the next few months than normal!  Re-direct some of it to your rainy day fund.  (Tomorrow, I’ll get info on emergency funds and unemployment insurance for anyone who needs it or knows of someone in need of help.)

To add to what I’m grateful for list – The U.S. Banking System! While we all know it has had its’ issues and has been the whipping post for politicians for the past 10 years, it is still the most transparent and highly regulated banking system in the world. Our rainy day funds are backed by dollars and carry Federal Deposit Insurance Corporation (FDIC) insurance. The FDIC guarantees we can get our cash up to $250K per person no matter what! (Talk to your banker about how to safely & legally structure accounts if you have more than $250K in any one bank.) Basically, any bank doing business in the U.S. must pay a premium on its’ deposits into the insurance fund to provide us as consumers insurance.  For that I say, Thank you!

What does it mean when the talking heads refer to Flight-to-Safety?

Flight-to-Safety refers to when investors sell their stocks and long-term, high yield corporate bonds and buy U.S. Treasury bonds with 10 or 30 year maturities. These bonds pay a set interest rate every 6 months which is actually at a lower interest rate than most corporate bonds or other countries. Why would an investor choose to make less money? Investors agree to earn less money because their original investment plus interest is all but guaranteed to be returned to them. The U.S. Treasury has never failed to repay its’ debt (otherwise known as defaulting.) The chances of losing money is very, very, low.  Not every country can say that!

Why is cash king?

What we saw in the market yesterday was the need for liquidity in banks, other central banks, and in large institutional investors.  Why? Literally, there are a dozen valid reasons plus just plain old panic, too. For example, some investors needed their money back regardless of the loss, some institutions saw margin calls (when they have to either return the cash they borrowed or put up more collateral because the value of the collateral no longer equals the amount of the loan.) These institutions saw their own corporate bonds lose value over the last two weeks so they had to put up more collateral. (Think about after the housing crisis when our houses lost value but our mortgage loans stayed the same so we couldn’t refinance). In these short term institutional loans often called Repos or Swaps depending on the deal structure, the collateral is valued nightly where we were just stuck with a house that was “underwater!”

So what’s the so what of all of this?

The good news is that the Federal Reserve has been very proactive. (Totally off topic, I always tell my daughter, “You don’t want to be President of the U.S., you want to be the Chairman of the Federal Reserve! That’s the real power!”) And so it is!  The Fed is really rocking it in this crisis. Part of the ups & downs (or volatility) of the stock market has been because the Fed has moved so quickly (aka aggressively). They have twice moved to lower interest rates without any pre-socializing or requests from the market. That’s unheard of!  It tells all of us that they saw this health crisis coming and kicked their emergency plans into action! Thank you Mr. Chairman!  

In addition to dropping interest rates to make it easier for everyone (corporations, consumers, domestic & foreign banks) to get cash and stay liquid, they have actively pulled other levers to add liquidity into the markets.  The Fed added $500 Billion in Overnight Repos to help support the Commercial Paper Market. (Commercial Paper is unsecured, short term borrowing by banks and large corporations to cover outstanding receivables (outstanding client bills) and other immediate expenses they owe themselves.) The Fed also modified or extended over $90B in facilities to support foreign banks and provide them access to U.S. dollars in an attempt stabilize the international markets. Over the past 10 years, we’ve seen the international markets move out of U.S. dollars and into their own foreign currencies as part of the backlash from the Financial Crisis. This week you’ve seen all of those international transactions and positions move back into the safety and transparency of the U.S. dollar and Uncle Sam.    

What can we do?

Stay calm, be prudent about how you choose to spend your money right now, and take the long view on the market. More importantly, focus on helping those in need within your community, get everyone in the house outdoors to relieve some stress, and be your amazing selves!

We will lead our families, our communities, and our teams calmly through this event!  #BeTheCalm #Leadership!!!

If you have any questions or topics of interest, please send them in!

Stay Healthy!

Susie