Some Eerie Reading

“Bank failures are caused by depositors who don’t deposit enough money to cover losses due to mismanagement” – Dan Quayle (Maybe he was misquoted...?)

Before we begin this week’s post I wanted to remind you that I’m open for your questions about bank safety, the security of your deposits, and so forth. We’ll touch on these topics below but know you can always ask questions.

Beyond that, I have to say it was eerie to read about another hasty merger over the weekend to keep a bank from failing. This time it was Swiss regulators arranging a marriage of the failed investment bank, Credit Suisse (CS), to UBS, the largest of that country’s banking institutions.

Back in September ’08 it was weekend news that BofA was buying Merrill Lynch, the world’s largest retail brokerage at the time amid nasty and worsening market and economic conditions. Both Merrill and CS failures resulted from years of bad risk management but, in the case of CS, also the bad luck of showing the last of a lengthy string of big losses while investors are in the mood to punish.

It’s natural for news like this and of recent bank failures to seem like the opening act of another Global Financial Crisis. There’s lots of uncertainty, investors are skittish, and the trust we give to these institutions can seem misplaced. But is this another 2008? While predicting something like that is far beyond my ability (or anyone’s, quite frankly), this latest news is different and it’s too simplistic to lump the failure of CS in with the seizure of Silicon Valley Bank, Signature Bank, and what may be the final throes of First Republic Bank.

Here are some points on this from my research partners at Bespoke Investment Group (italicized below) that I’m cobbling together. Unitalicized notes are from me.

A good and simple explanation…

During the pandemic, enormous fiscal transfers and Federal Reserve QE of government bonds meant an enormous buildup of deposits in the banking system. Those deposits were created by either issuance of government bonds or by purchases of those bonds, financed by bank reserves which match with deposits. Banks faced with those massive inflows of deposits generally bought government bonds. Unable to invest in riskier securities or grow loans rapidly thanks to macroprudential regulation (ironically, largely a regulatory response to banks being too risky leading up to the Global Financial Crisis), banks were forced to buy low credit-risk government bonds.

While those bonds don’t have a credit risk, they do have duration risk. As long as banks aren’t forced to sell them thanks to ample deposits, they do not have to recognize a mark-to-market loss on those holdings (the “held to maturity securities” reference in the chart below). But for banks that are under deposit pressure, things can get out of hand quickly. Concentrated crypto deposits (like at Silvergate or Synchrony) or exposure to specific demographics (like at Silicon Valley Bank or to a lesser extent First Republic) that fled quickly led to stress and ultimately a need to wipe out equity, though for now the total losses remain unclear.

(An interesting side note to this whole thing is how focusing on liquidity, whether for your household or the bank you might manage, is foundational to your financial success; mess with it at your peril.)

On to CS – much less a function of the charts above and more from bad timing and fed-up investors…

In the press conference on Sunday discussing the shotgun ‘merger’ between Credit Suisse and UBS, regulators and officials of the banks cited the turmoil in the US banking sector as the reason for Credit Suisse’s demise. There’s always a need for a scapegoat, but to blame regional US banks for Credit Suisse’s downfall is a stretch. For now, let’s put aside the fact that just last week Credit Suisse announced an $8 billion loss in its delayed annual report.  The bank noted that “the group’s internal control over financial reporting was not effective,” and its auditor PriceWaterhouse Coopers gave the bank an ‘adverse opinion’ with respect to the accuracy of its financial statements. Well before the SVB failure, Credit Suisse was already a dirty shirt.

Just look at the stock price. From its peak of over $77 per ADR in 2007, Credit Suisse (CS) has been in a long downtrend. After bottoming at just under $19 in early 209, the share price quickly tripled over the last six to seven months, but the bounce was short-lived. By 2012, the share price was back below its Financial Crisis lows and in the ensuing years, any rally attempt quickly ended with a lower high followed by a lower low. The collapse of SVB and stresses on other US banks may very well have been the straw that broke Credit Suisse’s back, but if the bank had proper internal controls in the first place maybe it would have noticed the pile of hay on its back in the first place.

So, the problems of CS seem only loosely connected to the regional bank news we’ve been seeing here at home. But news of bank failures comes on the back of inflation and rising interest rates, volatile markets, and an economy that one day seems strong only to show weakness another.

Crises never play out the same way twice, of course. There are more banks flush with deposits and sitting on bond market losses they’d rather not be forced to realize. As I write, First Republic Bank’s stock price is down to about $12 after trading at nearly $150 a month ago and the bank is in emergency talks with JPMorgan and others. Maybe First Republic gets through this, but the damage is done.

The Fed has come to the rescue and big banks are getting bigger. A narrative of the system protecting itself (or eating its young) seems to mollify investors. Broad market indexes were higher yesterday amid all this news and, at least as of this writing pre-market Tuesday, prices are set to rise again. That’s good to see in the short-term but risks remain. We’re still likely heading into a recession of uncertain severity that, in a sense, seems like a natural result of the wild swings our economy has been through in recent years. But I’m going to cross my fingers and knock on wood while walking out on the limb to say that the wheels aren’t coming off of the global financial system anytime soon.

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Thinking About Yield

Some years ago I did a short series of posts defining some key finance and investing terms. Looking back I don’t see that we discussed a critical concept, especially these days with rising interest rates: yield.

Yield is one of the words in the English language that has multiple meanings depending on the context. We yield to oncoming traffic when driving our car or, if we’re a farmer, our lands yield crops. While the fundamental meanings of yield probably seem obvious, the term can get muddy pretty quick in my realm. Let’s get into the details of how we think about yield in an investment context.

The yield of a stock investment is pretty straightforward. Say XYZ Corp offers a dividend to shareholders each calendar quarter of $1 per share and you paid $100 to buy one share. After receiving your first dividend you could say that your yield is 1% but hold the share for a year (four quarters) and your yield is now 4% and should be expected to remain so until XYZ Corp changes its dividend policy, or you sell your share.

That math is pretty simple. Where it starts getting interesting is when the value of XYZ Corp shares moves around with the markets and you keep buying. Maybe you bought more shares at $90. Your $1 dividend on the new purchase is now a 1.11% yield per quarter, or 4.44% per year. This gets blended with your original $100 purchase to equal 1.05% quarterly and 4.2% per year. Then this gets complicated further if you reinvest your dividend, perhaps buying fractions of a share at whatever the current price happens to be.

Fortunately we have software to keep track of all this stuff, but one takeaway should be that your yield is a function of the cash you’re receiving while holding shares and what you paid to buy the shares. It’s not your investment return when we talk about stocks because, at least in theory, the growth potential is limitless.

So that’s stocks, but let’s look at bonds because that’s where yield is most important. Rates have moved around a ton in the past year and the dynamics of yield in the bond market can be confusing. Let me explain.

In our example above XYZ Corp has announced a dividend that’s not reflective of the company’s share price, just what management is giving back to shareholders and there’s no legal requirement for them to do so.

But this is different with most bonds. Bonds, as you’re likely aware, are debt obligations that come with strict requirements to pay a set rate of interest for a set timeframe before paying off the debt at maturity.

Take Treasury bills, notes, or bonds (all hereafter referred to generally as “bonds”) as an example because it’s simplest.

The US Treasury borrows money by issuing bonds across a range of maturity periods. Let’s assume you bought 10yr bonds brand new on that pay 3.5% interest each year until maturity. Assuming you spent the interest your yield would be the same as your interest rate, or 3.5%. This would also be your investment return each year you hold the bond. Pretty simple.

Just as with stocks, however, there is an active secondary market for many bonds, especially US Treasury securities. According to SIFMA, an industry organization, as of January the daily average trading volume for Treasuries was at least $615 billion. Among other things, this means you can see your bond’s value change in real time and can readily sell if needed.

Since we’re usually buying bonds in the secondary market understanding our yield becomes more important than the interest rate that bonds pay. The reason is that we’re almost never buying bonds at the original issued value of $1,000. Instead, we buy or sell at a premium or discount that’s constantly changing due to market conditions.

Here’s what this looks like in practice. This screenshot is from the system I use to find and buy individual bonds and looks at a Treasury Note maturing in about a year.

You’ll see that the interest rate is only 1.5% but the Yield to Maturity is about 5.2%. The higher yield, as mentioned above, is a function of the bond’s interest rate and the price you paid to buy it, in this case $965 instead of the original $1,000. While holding the bond you’d receive the 1.5% per year, paid every six months. But then at maturity you’d get $1,000, not the $965 you originally paid. That’s the discount coming back to you and is what bumps up your yield.

We’ve been discussing individual bonds so far and most of you own bond funds instead. Funds have lots of benefits over owning the individual bonds and are best thought of as everything we’ve already discussed but spread across hundreds or thousands of bonds in a portfolio. Instead of a defined maturity date, bond funds are perpetual and are often grouped together by different maturity periods (short-term, medium-term, and so forth) and issuer type (US Treasury, publicly traded corporations, etc).

I could go on, but I try to keep these posts on the shorter side. In any case, the main point is that, as investors, our yield is the cash flow we’re getting from our investments adjusted up or down based on what we paid to buy the investment and is a critical factor when thinking about bonds.

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What About the Debt Ceiling?

There’s been lots of talk recently about the debt ceiling, whether it will be raised again or whether Congress, in its infinite wisdom, will make the US government start passing bad checks. We’ve been dealing with this for years. The Treasury department projects when it’s debt limit will be reached, advises Congress, and asks that the cap on debt issuance be raised. Seemingly by default Congress then proceeds to wait until the last minute to do anything while raising the political temperature and creating anxiety for global markets. But then they end up raising the debt limit anyway as they have nearly 100 times in the little over 100 years since the debt ceiling was put into place.

Congress continues to raise the US’s borrowing limit because the limit is arbitrary. My understanding is that Congress created the limit back in 1917 as part of giving the Treasury more leeway when issuing bonds; more authority to borrow but with constraints. That was long ago and much has changed. In fact, lots of academics, economists, and others suggest that the debt ceiling concept is based on an antiquated view of how the global financial system works and is no longer necessary. These folks remind us that our government, for better or worse, has the only true blank check out there and can borrow so long as its creditors (you, me, and the rest of the world) are willing to lend. And at last check there was no shortage of people, even other governments, lining up to buy our debt. Final judgement on the rightness of all this is beyond me, but I’m likely not the only one who thinks it’s a little silly and frustrating to go 15 rounds on the debt ceiling time and again only to raise it anyway.

So is it different this time? So-called extraordinary measures to keep government payments flowing are expected to be exhausted by this summer. Will hardliners on both sides of the political spectrum finally get their wish of breaking up the financial system so they can rebuild it into (presumably) something better? Or will this be yet another foray into a political game of faux chicken where the result is known but we have to go through the drama anyway? Unfortunately it’s probably the latter. To be clear, an actual technical default by the US is highly unlikely but the continued high level of partisanship and acrimony in Congress means we have to at least consider the possibility.

In this vein I wanted to share some recent work by my research partners at Bespoke Investment Group. Bespoke addresses some of the practical market implications should the US actually be allowed to default. In short, none of it’s good but it may not be as bad as some predict.

From Bespoke but edited for brevity…

Unlike all other developed countries, the United States operates under a statutory debt cap. After Congress authorizes spending, Treasury cannot issue debt in order to make payments that Congress has instructed it to make via the appropriations process. Instead, the Treasury can only issue debt up to a dollar cap (currently slightly more than $38.3 trillion). The dollar cap is entirely arbitrary and independent of the spending authorized by Congress, which can create situations whereby Congress gives conflicting instructions to the Treasury. In addition to raising the dollar amount of the debt cap, Congress occasionally elects to temporarily suspend the debt ceiling. The debt ceiling is not an explicit constitutional requirement but entirely a product of legislation.

Once the debt limit has been hit (as is currently the case), Treasury has some operational flexibility to change the timing of payments and source of transaction funding to keep payments functioning. As of this writing (2/7/23), we are currently in that mode. The primary “extraordinary measure” involves spending down cash balances in the Treasury General Account (TGA). The TGA is a transaction account at the Federal Reserve that is an asset of the federal government and a liability of the Federal Reserve…

Once extraordinary measures are exhausted, what is left for the Treasury to do? There are three broad categories of choices it can make about how to continue managing payments.

  1. The Treasury could undertake prioritization, making some payments but not others.
  2. A general default would mean no payments made by the Treasury…
  3. There are a series of technical work-arounds that might allow the Treasury to continue issuing debt.
  4. By far most dramatic solution would be for the executive branch to ignore Congress and unilaterally declare the debt ceiling unconstitutional.

There are two major technical work-arounds that might allow the Treasury to continue making payments after hitting the debt ceiling.

  1. The Treasury could issue a platinum coin for deposit in the TGA. This solution has been discussed by other outlets for years… The idea is that US statute permits Treasury to issue platinum coins in arbitrary denominations. Those coins are not subject to the debt ceiling and could therefore allow spending to continue without more debt issuance. It’s not clear whether this plan would pass legal muster…
  2. The Treasury could issue very high coupon bonds. For instance, a bond that was otherwise the same as the current 30 year Treasury bond but paying a 100% rather than 4% coupon would trade at a price greater than $1800 per $100 of principal, allowing the Treasury to reap huge amounts of new borrowing with no change to outstanding principal debt. Obviously a 100% coupon bond is an ad absurdum example of this concept, but it serves to illustrate how the basic approach of high premium bond issuance would work. We aren’t lawyers but doubt this program would face significant legal pushback.

The final option for Treasury to declare the debt ceiling unconstitutional under Section IV of the 14th Amendment of the US Constitution. That language follows:

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.

While the rest of the 14th Amendment has been litigated in exhaustive detail, this section has only been briefly discussed by courts.

But under a maximalist reading, “the validity of the public debt...shall not be questioned” seems to create a clear constitutional obligation to pay existing debt.

Again taking a maximalist reading, “debt” is previously committed-to (appropriated) spending as well as coupon or principal payments on bonds. Under that thesis, any debt limit would be unconstitutional, because it bars Treasury from conducting its Constitutionally-mandated job of ensuring the “validity” of public debt.

Now, this is obviously an aggressive interpretation of the 14th Amendment. But it’s plausible that the Biden Administration (or any other Administration in the future), if faced with a choice between general default with financial market chaos and an aggressive legal argument, would elect to continue issuing debt under the auspices of the 14th Amendment. At that point, the federal courts would have to step in. How that would go is anyone’s guess, but if the consequences of a decision declaring the debt ceiling constitutional were a general default, it’s hard to envision that the courts would willingly play the bad guy and force a Treasury default.

Partisan politics created and have reinforced the debt ceiling as a bargaining chip over time, despite its redundancy and absurdity. Responses to the debt ceiling are inherently political as well. Prioritization of payments means political actors picking winners and losers who have equal claims. How are decisions like choosing between bondholders or social security beneficiaries as to who gets paid on time to be made? On the other hand, an effort to invalidate the debt ceiling on constitutional grounds would create a political fight in the courts. The political questions are nearly never-ending, but there are also practical considerations. In a general default or any outcome where payments of coupon or principal for Treasuries are missed, expect significant selling pressure for impacted securities: bills maturing during the period in question as well as notes and bonds with coupon payments due during the period. The secondary impact of these missed payments would undoubtedly lead to selling of other securities as well…

The list of possible what-ifs in a default is endless, but at the margin, any actions or events that make the prospects for timely payment less likely, diminishes some of the safety imbedded in US Treasuries. When S&P downgraded the long-term debt rating of the United States from AAA to AA+ in 2011, the debt ceiling debate was cited as a primary reason when the Chair of the firm’s sovereign ratings committee commented that “The first thing it could have done is raise the debt ceiling in a timely manner so the debate would have been avoided to begin with”.

The short-term relative value implications of a US default are perhaps less relevant than the longer-term implications of a US default. For domestic investors, even a full US default wouldn’t drive a major shift away from Treasuries… A US bank or insurance company would find it difficult to shift to another major currency’s government debt not just from a logistical perspective but because they would now be faced with foreign exchange risk.

For overseas investors, foreign exchange risk is already being taken, so the considerations are different. To be sure, foreign investors are still a large part of the US Treasury market, holding more than 20% of Treasury’s public debt outstanding and more than 30% of marketable Treasury debt.

While still a large share, keep in mind that foreign investors are a steadily declining share of Treasury debt. From the 1980s through the mid-2000s, foreign held share of marketable Treasury debt more than doubled from less than 20% to more than 56%. But despite very large federal deficits and a rising debt-to-GDP ratio over the course of the global financial crisis and COVID pandemic, foreign Treasury holdings are down to 30.9% of marketable Treasury debt. Domestic owners of the US Debt are, therefore, far more important, and while a foreign owners’ strike on buying Treasury debt would be extraordinarily disruptive, it may be manageable.

If foreign buyers did decide to drop Treasuries, what would they buy instead? No other high quality asset market is close to the size required to absorb $7.3trn in foreign Treasury holders’ assets. The costs of realized prices during the volatile post-default period, liquidity challenges in alternative markets, and their higher volatility relative to Treasuries may lead a huge swath of Treasury investors to shrug and swallow missed payments instead of dealing with the headache of reworking their entire portfolio at once. In other words, it wouldn’t be surprising to see little change in the global benchmark role for Treasuries even in the event of a US default over the debt ceiling.

Here's Bespoke’s website if you’re interested.

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Managing Your Cash

By now you’ve probably heard about the failure/seizure of Silicon Valley Bank. The surprise announcement came last Friday and coincided with two other bank failures closely tied to the tech sector. This, of course, roiled markets late last week and led to a frantic weekend for policymakers and regulators deciding how to calm things down. News has been evolving rapidly but, as of this writing, the government is again backstopping deposits that go beyond its insurance limit.

Lots has been written about this in recent days and I don’t want to simply repeat it here. Instead, let’s consider what this latest fiasco teaches us about a fundamental aspect of personal finance: how to think about liquidity and structuring your cash.

Personal liquidity, or the ease at which you can access your cash, is critically important to your financial health. Covering regular bills and emergency expenses is obvious, but less so are the psychological benefits of having ample cash.

But how much cash is enough? How do you keep it safe? Should you put your cash to work so it’s not just sitting there feeling like it’s doing nothing?

Questions like these are a constant issue for everyone, including corporations. SVB and the other two failed banks had to address these questions, chose the riskier paths, and are now paying the price. SVB grew quickly in recent years and invested excess deposits in longer-term bonds when rates were low. They didn’t diversify very well and got caught by rising rates and falling bond prices like everyone else last year. Then good ‘ol Mr. Murphy showed up with a cash emergency (an old-fashioned bank run fueled by technology) and the losses in SVB’s bond portfolio were deep enough that the bank couldn’t meet the rush of withdrawal requests coming in from depositors.

Definitely a cautionary tale on taking risk with the wrong money… but thinking about structuring cash I’ve found that a three-tier system works best. You could call these tiers, buckets, levels, or whatever you want. The point is having clear differentiation while focusing on safety.

Tier 1 – Immediate needs and a slush fund

This should be your ready cash at the bank or credit union. A few months’ worth of regular spending is usually fine. This money needs to be truly liquid, and interest earned on this balance is secondary to immediate availability. But is it safe?

As you’re likely aware, the federal government insures deposits up to $250,000 per person, per institution. So a couple owning a checking account together at a typical bank would have up to $500,000 of their deposits covered against risks like a bank failure. FDIC covers banks and credit unions have the NCUA. The details of stacking insurance coverage higher than that get complicated and are beyond the scope of this post. Google the relevant organization and each has an insurance calculator on it’s website.

Evolving news about the government backstopping all deposits at SVB notwithstanding, federal deposit insurance literally only gets you so far. Should your balances move north of the limits at one bank you’ll need to find a second one. This leads us to our next tier in your cash management structure.

Tier 2 – Your primary short-term holding tank – this money should earn more than what your bank pays on deposits.

While you can have multiple banking relationships to maximize federal insurance, I think a better option is to move excess cash to a brokerage account.

What’s excess? Some folks simply prefer to have lots of cash at the bank, but you should have a specific amount in mind so you’ll know how much you can get more creative with (again, clear differentiation). This tier is your excess emergency fund plus money earmarked for near-term (the next year or so) larger expenses like buying a car, the downpayment for a house, and so forth. The job for Tier 2 is all about maximizing yield while staying safe, so creativity shouldn’t equal market risk.

Options for this money are:

Money market funds – You buy these in your brokerage account without a transaction fee and are considered cash equivalents. The funds are usually priced at $1 price per share and fund managers typically buy CDs, bonds, and so forth, maturing in something like 30 days or less. The catch is that you usually need to wait a business day or two before accessing your cash.

CDs – Certificates of deposit are federally insured bank deposits that pay a set rate for a set time and usually don’t allow for penalty-free early withdrawals. You can stagger, or ladder, the maturity dates to meet your specific needs. Obviously this complicates your liquidity and is why you should always keep some money truly liquid.

US Treasury securities – These are short term government bonds that, similar to CDs, have defined rates of return and specific maturity dates.

I’m a firm believer in not going beyond these three options for short-term money. You can mix and match them depending on rates at the time and personal preference, all within one brokerage account. Just no trust deeds, crypto, or even medium-term bonds. SVB apparently put shorter-term money into longer-term bonds in a reach for yield. Maybe it was a calculated risk, but it sure came back to bite them. We don’t want to get into trouble with this money so keep it simple.

Tier 3 –

Once you have Tiers 1 and 2 dialed, your humble financial planner suggests that you probably have enough short-term money. Beyond that, in Tier 3, you can get into medium-term money. Maybe it’s for a big expense a few years away. Or maybe you just like some extra insulation from a risky world. Whatever your reason, options here are broader and include:

Longer-term CDs. This should be self-explanatory.

High-quality bond funds and individual bonds of medium-term. The main bond benchmark has a duration of around six years, so stick to no more than that. Money in bond funds is gettable in a day or two but comes with market risk. Bonds like these lost around 10% in value last year, which was far from typical, but still paid regular interest. This money needs to sit awhile and that makes it inappropriate for short-term spending needs. It should earn more than Tiers 1 and 2, however, while taking less risk than longer-term investments like stocks.

There are lots of other investments out there vying for your money, but I’ve specifically left them out. Remember, we’re talking about short- and medium-term cash management. We want ease of use, high quality and liquidity, not long-term appreciation. That’s the realm of your growth-oriented investments likely held in your retirement accounts. Again, focus on locating your money and risk in the appropriate places and your financial life will be a lot healthier. Doing so should also allow you to brush off news of bank seizures and venture capitalists crying for a bailout.

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M*A*S*H and Cash

This morning I’d like to share two loosely related things with you. First, it’s a little TV history with some interesting market context. Second, it’s a look at how to think about cash these days.

This first note and two charts came via a morning email from my research partners at Bespoke Investment Group. I also heard about this anniversary on the radio while driving my son to school and he asked, “Mash, what’s that?” I again reminded myself that so much of what’s important to our culture at the time can end up having zero relevance for future generations. Or perhaps the optimistic view is that aspects of our culture can take on renewed relevance as a new generation rediscovers it…

Anyway, I have fond memories of M*A*S*H, although mostly from watching late-night reruns, and couldn’t pass up sharing this with you.

From Bespoke…

40 years ago, tonight, nearly half of all Americans and three-quarters of all TVs in the United States were tuned into the same channel. Never had such a large number of Americans watched the same event at the same time. What were they watching? It wasn’t the Super Bowl. The Redskins had already beaten the Dolphins a month earlier after the strike-shortened season. No, on this Monday night, they were watching Hawkeye Pierce leave the 4077th Mobile Army Surgical Hospital for the last time on the series finale of M.A.S.H. Outside of its first season in 1972, when the show was almost canceled, M.A.S.H. was one of the top-rated shows on TV in every other season of its eleven-year run. M.A.S.H. fans watched the series finale and were sad to see it go, but subconsciously many of them were probably saying good riddance.  

M.A.S.H. coincided with a dark period in the American economy, and its end can be looked back on as being symbolic of throwing some of the last vestiges of the 1970s behind us. The fact that the most popular comedy of the 1970s and early 1980s was set on a hospital base in a war zone where the plot of nearly every episode was interrupted by an incoming influx of war casualties says all you need to know about the psyche of Americans in the 1970s. 

The chart below shows the performance of the S&P 500 from the first episode of M.A.S.H in September 1972 to the series finale in February 1983. Less than four months after the show first aired, the S&P 500 peaked and went on to lose nearly half of its value over the next 18 months before bottoming out and slowly reclaiming the declines of the bear market over the next several years. In fact, it took three-quarters of a decade before stocks finally made new highs again, and the real breakout of the 1980s bull market wasn’t for another two years after that in August 1982, six months before the show ended.

The performance of the S&P 500 during M.A.S.H. was bad enough in nominal terms, but when you factor in the crushing inflation of that period into the equation, performance was even weaker. After deflating the S&P 500 by headline CPI during the 1970s and early 1980s (gray line), you can see why M.A.S.H was a period of American history many were happy to forget. Is it any surprise that after a decade of high inflation, war, and general economic malaise, that as M.A.S.H. was getting ready to sign off, Americans were now turning the channel to a washed-up baseball player running a bar in Boston? Americans were ready for a drink. Cheers!

How to think about cash…

As you’re no doubt aware, recent months have seen a dramatic change in the interest rate environment. This is in large part due to how the Fed is fighting inflation and blowback in the markets has been negative, sometimes severe. But a positive has been that cash (a catchall term for bank accounts, CDs, money market funds, and very short-term bonds) now yields more than it has in years. Bank CDs offer from 4-5%, and so does the Treasury market. A year or so ago they all yielded 1% or less.

Following a year of volatility, investors are understandably a bit exhausted. In that context, higher yields on cash presents interesting questions like –

If I can get 5% on a CD, shouldn’t I put all of my money there and sit on the sidelines for a year?

If I’m retired, can I rely on cash investments for income?

Is cash an investment? If not, how should I think about cash?

These questions have been percolating and today I see this note from JPMorgan that does a good job of addressing them. I’m presenting it here with a chart at the bottom and will italicize any notes from me.

The bottom line, I think, is that cash does a specific job well but it’s at the bottom of the risk/reward pyramid for a reason – growth comes from risk and cash, by design, doesn’t have any.

From JPMorgan –

For the better part of the last 15 years, cash has decidedly not been “king.” More recently, however, the relative attractiveness of cash instruments has increased. The Federal Reserve (Fed), working to fight persistent high inflation, has raised rates at the most aggressive pace in decades and to the highest level since the Great Financial Crisis. This, in turn, has lifted cash yields, and the average 6-month Certificate of Deposit (CD) in the U.S. now has an annualized yield of 1.86%, with some 12-month CDs offering yields of nearly 5%. (As of this writing shows an 11-month CD from Capital One at 5%. is a great resource to quickly check where the online banks are with CD rates – a good way to keep your local bank honest.) As a result, for the first time in a long time, cash is no longer just a parking lot for “dry powder”; instead, some may believe that it can further income goals, too.

However, despite the rapid rise in yields, investors must consider if CDs and other cash instruments are the best place to allocate capital. In other words, they must ask: should CDs be a part of portfolio construction?

As with many things in today’s investment universe, the answer to this question is not black or white, but rather gray. Investors may therefore be best served by thinking about asset allocation in terms of both liquidity and income needs and also opportunity cost.

All investors have liquidity and income needs. These needs are amplified or diminished by a number of factors, including risk tolerance, age and wealth. To address these needs, a simple framework would be a good place to begin the asset allocation discussion:

​Identify typical liquidity or income needs (e.g., average annual expenditures).

Identify atypical liquidity needs that may arise (e.g., medical expenses) or are expected (e.g., purchasing a second home).

Determine how many years of risk-free liquidity or income is required, based on risk tolerance.

Build up a cash reserve based on the aforementioned criteria. These cash reserves can be constructed using CDs (which have the added benefit of FDIC insurance) or Money Market Funds (MMFs), which lack insurance but are still ultra-high quality, have no lock-up period, and in some instances have a superior yield and have seen significant inflows in recent months.

Once liquidity needs are addressed, investors should consider opportunity cost and allocate every extra dollar to risk assets. (You may have heard me talk about putting cash in “buckets” – one short-term that should always be cash at the bank, one for medium-term expenses, or just for personal comfort, that can be made up of short-term bonds, while bucket three is money that should be invested or you risk paying too high an opportunity cost over time.)

Some considerations include:

​Significant negative performance in 2022 has set the stage for a powerful rebound in the stock market. For example, the S&P 500 is still 15% off its January 2022 peak of 4,797 despite a recent run higher. Even annualized over a multi-year recovery period, this figure is more impressive than the typical cash yield.

Many high quality fixed income instruments have yields that are comparable to cash. In addition, these yields can be captured for longer provided the instrument has sufficient duration (high CD yields are likely fleeting, especially if the Fed lowers interest rates in 2024).

Within the fixed income universe, duration has the added benefit of providing a buffer against volatility in a portfolio, especially in the case of a recession. For example, a 1% parallel shift lower in the Treasury yield curve will result in a return of 11% from the Bloomberg U.S. Aggregate index. 

Ultimately, the conversation around cash and traditional long-term assets should not be framed as “either/or”, but rather as “both, for different reasons.” It is impossible to dismiss that cash remains a safe-haven asset and has become a viable income generator; but it is similarly impossible to dismiss the notion that there are not better places to park excess capital. For this reason, investors would be wise to take a holistic approach to asset allocation and continue to embrace risk in portfolio construction.

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A Trip Down ChatGPT Lane

ChatGPT and what to make of it… As I mentioned briefly at the end of my post last week, this technology is rapidly gaining popularity and pronouncements about its potential impact range from the mundane (helping kids to cheat in school) to the profound (like fundamentally altering our relationship with the Internet, even with each other).

But when people I respect suggest that ChatGPT is to consumer tech what the Beatles were to music, I want to at least establish a general understanding of what they’re talking about. And this isn’t just some fringe techie stuff, by the way. Recent announcements from Google and Microsoft, among others, about building similar tech into their search engines solidify the trend.

So this week, if you’ll indulge me, I wanted to see for myself what ChatGPT could offer in my realm. I created a free “research” account on the Open AI website and within minutes was watching the software generate content after entering this prompt:

“Write a 900 word blog post on personal finance using a conversational style”.

My first try left out the part about style and the writing seemed a bit boring, which is perhaps harsh since it’s being written by a computer. ChatGPT works best when we narrow down what we’re asking for. So I was curious if the software was capable of incorporating different writing styles. The output is below, unchanged by me. I then took this a little further and have included some of that interaction and other notes below.

I thought about cutting off part of ChatGPT’s response for brevity, but I think it’s more interesting in full, to get some sense of the software’s capabilities. And it’s not bad information either. I’m italicizing ChatGPT’s work to clearly differentiate it from my own. In short, I’m very impressed and a little unsettled, although it’s hard to explain why.

Personal finance is a critical aspect of our lives that many people struggle with. Whether you’re just starting out, trying to save for a big purchase, or simply looking for ways to be more financially savvy, there is a lot to consider when it comes to managing your money.

In this blog post, we’re going to talk about the basics of personal finance and share some tips and tricks for getting your finances in order. So, grab a cup of coffee and let’s dive in!

First, let’s start with the basics. What exactly is personal finance and why is it so important? Personal finance is the process of managing your money, including how you earn, spend, and save it. It’s a critical aspect of our lives because it directly impacts our ability to achieve our financial goals and live a comfortable life. Whether you’re trying to save for a home, a car, a vacation, or simply trying to build an emergency fund, your personal finance habits will play a big role in determining your success.

So, how do you get started with personal finance? The first step is to take a close look at your current financial situation. This means creating a budget, tracking your expenses, and understanding where your money is going each month. You can use tools like personal finance software, apps, or even a simple spreadsheet to keep track of your spending and see where you can make cuts or adjust your spending habits.

Next, it’s important to set financial goals. This could be anything from paying off debt, building an emergency fund, saving for a down payment on a home, or simply trying to save more money each month. Having clear goals in mind will give you a roadmap for your financial journey and help you stay focused and motivated.

One of the biggest challenges when it comes to personal finance is managing debt. If you have credit card debt, student loans, or other types of debt, it can feel overwhelming and like there’s no way out. But, with a little bit of planning and discipline, you can get your debt under control and start working towards a debt-free future.

One strategy for managing debt is to create a debt repayment plan. This means figuring out how much you owe, how much you can afford to pay each month, and what steps you can take to pay off your debt as quickly as possible. You can use the snowball method, where you focus on paying off the debt with the smallest balance first, or the avalanche method, where you focus on paying off the debt with the highest interest rate first.

Another important aspect of personal finance is saving and investing. Whether you’re saving for a big purchase, trying to build an emergency fund, or simply trying to grow your wealth, it’s important to have a solid savings and investing plan in place.

When it comes to savings, it’s a good idea to have a mix of short-term and long-term savings goals. This could mean having a savings account for unexpected expenses, a separate account for your emergency fund, and a longer-term savings plan for big purchases or retirement.

Investing can also play a big role in building wealth over time. There are a variety of investment options available, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs). It’s important to do your research and understand the risks and rewards of each type of investment before making a decision. You can also consider working with a financial advisor to help you make informed investment decisions.

Finally, it’s important to protect your financial future by having adequate insurance coverage. This could include health insurance, life insurance

You’ll notice the piece got cutoff at life insurance, although I’m not sure why. So I asked…

What about life insurance?

Yes, life insurance is an important aspect of personal finance and helps protect your loved ones financially in the event of your death. There are two main types of life insurance: term life insurance and whole life insurance.

Term life insurance provides coverage for a specified term, usually ranging from 10 to 30 years. It’s typically the most affordable option and is ideal for people who need coverage for a specific period of time, such as when they have dependents or a mortgage.

Whole life insurance, also known as permanent life insurance, provides coverage for the duration of your life and usually includes an investment component. This type of insurance is more expensive than term life insurance but can provide a source of savings or cash value that you can access while you’re still alive.

When choosing a life insurance policy, it’s important to consider your coverage needs, your budget, and your long-term financial goals. You can work with a financial advisor or insurance agent to help you find the right coverage for your needs.

In conclusion, personal finance is an important aspect of our lives that requires attention, planning, and discipline. By taking the time to understand your finances, set financial goals, manage debt, save and invest, and protect your financial future with insurance, you can take control of your money and achieve your financial goals.

Remember, everyone’s financial journey is different and what works for one person may not work for another. The key is to find what works for you, stay disciplined, and stay the course. With a little bit of effort, you can achieve financial freedom and peace of mind.

And because I’m polite I said…


You're welcome! If there's anything else you need help with, feel free to ask. I'm here to help!

What about how to find a financial planner?

Finding a financial planner can be an important step in taking control of your finances and achieving your financial goals. A financial planner can help you create a financial plan, manage your investments, and provide guidance and support as you work towards your financial goals.

Here are some steps to help you find the right financial planner for you:

Determine your needs: Before you start looking for a financial planner, it's important to understand what you need help with. Do you need help creating a budget, reducing debt, or planning for retirement? Knowing your specific needs will help you find a financial planner who specializes in the areas you need the most help with.

Ask for recommendations: Word of mouth can be a powerful tool when it comes to finding a financial planner. Ask friends, family members, or coworkers if they have a financial planner they would recommend. You can also ask your banker, lawyer, or accountant for recommendations.

Research your options: Once you have a list of potential financial planners, do some research to learn more about each one. Check their websites, read reviews, and look for any disciplinary actions or customer complaints.

Schedule consultations: Once you have a short list of potential financial planners, schedule consultations with each one. This will give you the opportunity to meet with the planner in person, ask questions, and get a sense of their communication style and expertise.

Consider credentials: When choosing a financial planner, it's important to consider their credentials. Look for a planner who is a certified financial planner (CFP), has a professional designation from a reputable organization, or is registered with the Securities and Exchange Commission (SEC).

Check for fees: Finally, make sure you understand the financial planner's fee structure. Some financial planners charge an hourly rate, while others charge a percentage of assets under management. Make sure you understand the fees and that they are within your budget.

By following these steps, you can find a financial planner who is right for you and who can help you take control of your finances and achieve your financial goals. Keep in mind that finding the right financial planner is an important decision, so take your time and choose wisely.

And because I was curious how it would respond, I asked…

Aren't financial planners all old white men?

It's a common misconception that financial planners are all old white men, but that is not the case. The financial planning industry is diverse and includes individuals of different ages, genders, races, and cultural backgrounds. In recent years, there has been a growing number of women and individuals from underrepresented communities entering the financial planning field, bringing a diversity of perspectives and experiences to the industry.

Additionally, many organizations and initiatives have been established to support diversity and inclusion in the financial planning industry. These organizations aim to increase representation and provide resources and support for underrepresented groups, including women, people of color, and the LGBTQ+ community.

So, while it's true that the financial planning industry has historically been dominated by older white men, that is changing. As more diverse individuals enter the field and bring their unique perspectives and experiences to the table, the financial planning industry is becoming more diverse and inclusive.

I then asked questions about how to find a financial planner, what sort of accrediting bodies and membership organizations exist, and so forth. I found the information provided by ChatGPT to be thorough, current, and accurate, which was surprising. It also seemed a little generic, which is understandable. I asked a more detailed question about how we should consider Monte Carlo analysis in the context of financial planning and was impressed by the thoughtfulness (if that’s an appropriate term in this context) of its answer. Yes, I could have found the answers via a traditional keyword Google search, but it would have taken much longer and obviously Google can’t toss out a blog post for me.

My understanding is that ChatGPT isn’t yet connected to the Internet but lives off of a trove of data that’s regularly updated while it’s learning from how we use it. We ask it questions and it responds contextually, which is fundamentally different from the relatively blunt tool of keyword searches. Once fully online and learning ramps up exponentially, well, flashes of that 2013 movie Her with Joaquin Phoenix and Scarlett Johannsen come to mind, but that’s probably a little much, right?

Again, this whole thing is quite impressive and a little unsettling, and it’s hard to tell what the investment/workplace/societal implications are at this point. But there are some, that much is certain.

Here’s a link to the OpenAI website to look into this further. The regular website has a quick tool to use but it’s been down each time I’ve looked. That’s why I created the free account. If you do so, just be careful what you ask and what information you share as there should be no expectation of privacy.

Have questions? Ask us. We can help.

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