Sometimes we have to get back to the basics.
As investors, we must step back and look at what's obvious and simple -- even elementary -- to avoid error and pain. Here we'll do that, by looking at how to reallocate cash.
Just as corporations are suddenly being asked lots of questions about their cash portfolios, we also need to think about ours. Bank deposits skyrocketed during Covid and zero-interest rate policies, rising $5 trillion in just two years (the usual pace is more like $500 billion a year).
This occurred while rates in alternative low risk (low credit risk and low duration risk) were also yielding next to nothing.
Effectively, you got the benefits of being in a bank (check clearing, and so on) for minimal cost (the differential between alternative yields and the deposit rate). That rate differential is extreme, and I expect many of you have taken the following steps (I did over a year ago, but am refining my thinking).
Here are some points I'm considering now:
I am not worried about losses on savings accounts. I am nearly certain that depositors, even those above Federal Deposit Insurance Corporation limits will be protected, but there are other reasons to rethink cash.
But for now, I want to keep the minimum in bank accounts that I need to function every month (without any risk of slipping below minimums and incurring fees). Not because I'm worried about losses, but because I can earn much more on my money elsewhere.
I am thinking about Securities Investor Protection Corporation protection. I haven't really worried about the $500,000 limit, because I viewed the money as "custodial" and that even if something went wrong at my brokerage account, the companies are generally asset- and liability light, so I'd expect full recovery. But I am now considering this issue.
Be careful about where you invest your money. The "obvious" choice of money market funds, might not be so obvious. Many money market funds are invested heavily in bank debt. I'm almost certain depositors will be protected, and I'm not really worried about senior unsecured bank debt exposure, but Silicon Valley Bank bonds were trading in the $60 area last week, so there is at least some more risk. I wouldn't completely avoid money market funds with big concentrations in bank bonds, but I'd make sure I own some that specialize in:
Treasury debt, agency debt (like Fannie Mae), and some money market funds that specialize in municipal debt.
Buy some T-bills. You can buy muni's or corporate bonds on most brokerage platforms, but I'd stick to funds for that (though maybe I'm being stubborn given the short dated nature of the bonds I'd be thinking about buying as cash replacement).
Also, make sure you can wire money easily between your brokerage account and bank account. If I have a large bill to pay, to ensure that I make the payments, have no late fees, and don't trigger the minimums. All are "small" fees in the grand scheme of things, but no need to trigger them.
Finally, I am exploring TreasuryDirect this week, and I encourage readers to do the same. Treasury Direct lets you buy and redeem U.S. savings bonds and other securities directly from the U.S. Treasury.
In sum, I am cautious on risk, as you might have guessed from what you've read so far.
Deposits could continue to shrink at all banks, if there really is excess money that is earning an inefficient return.
That would put pressure on the cost of funds and make people question their assets more. In any case, it is an environment where banks are likely to be cautious in their lending, which is why I want to be cautious on risk, for now (while I refine how I manage my "cash and cash equivalents").