Heads They Win, Tails You Lose

QUESTION: Sir,

You mentioned in your blog post that money market funds now have to be in government bonds as per SEC ruling. You have said we are going through a sovereign debt crisis which means government bonds are at risk. If I’m trading and my money is now parked as “cash” before I make another trade in a money market fund, does this mean outside of a trade, my money is now at risk when government bonds crash?

Thanks for all you are doing

DK

ANSWER: No; the SEC did not mandate they must be in government paper. What they said was if you are not, then the value of the fund must be marked-to-market or float so there can be no guarantee you get back ALL your money. Funds only investing in government paper are now PRESUMED 100% safe so there is no marked-to-market. Consequently, there are two primary types of funds. One is marked-to-market, so there will be no guarantee you get back 100%. The other will be fully invested in government bonds they claim is risk-less but historically no AA+ corporation fails (non-bank) where government default and you get nothing. There, you will be told you lost nothing, but in reality, you may not be able to sell. When the crisis comes, the only buyer will be the central banks and if they stop buying, look out below. Only the “stupid” money will be going into government paper money market funds and they deserve what they will get. Their losses will help to create the coming Phase Transition where everyone starts to panic out of government paper globally as in 1931.

Personally, if I were in the business I would create a corporate bond fund only that prohibits all government paper. That may not be “politically correct” but neither are politicians.