Our readers know that we have long recommended a heavy asset allocation weighting to cash and near cash (CDs and high-quality, high-coupon bonds of less than two years maturity) for our most conservative investors.
[Editor's Note: 5 super-safe cash investments - beat stocks by 500%]
In addition, we have recommended consideration of a short-term diversification of these positions out of U.S. dollars, even with its inherent currency exchange risk, in favor of the euro.
In our July 2006 issue of Financial Intelligence Report, "Cash is King: Preserving Your Wealth in Turbulent Times", we gave investors five reasons why they should allocate a percentage of their portfolio to cash, and the five places to stash your cash.
Today, Bloomberg columnist Chet Currier ran a most interesting item on this very subject.
Some of our readers must have accepted our advice, for as Bloomberg reports, with little of the hype surrounding hedge funds and exchange traded funds, money market mutual funds have increased in size by some $600 billion, or 33 percent, in less than two years, to more than $2.4 trillion as of yesterday.
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As Bloomberg says, "Yields at the 100 largest money funds, with holdings due to mature in little more than a month, averaged 4.98 percent."
Money markets were hot in the 1970s, 80s, and 90s, but they have recently held little glamour, with returns considered modest when stacked up against those instruments with high risk.
However, vast sums of money have been tempted to invest in long bonds, despite our advice. The existence of a reverse yield curve and the prospect of rising inflation and a falling dollar may force our Fed, despite an uncertain domestic economy, to at least think of raising rates on May 9, in our opinion.
We, as our readers know, recommend against long bonds.
We have said this for four main reasons:
First, there is a risk that our Fed will raise rates to stem inflation.
Second, we feel that the emergence of the euro (even short-term) as an alternative reserve currency and the downward spiral of the U.S. dollar is now forcing our Treasury and our Fed to think, perhaps for the first time in recent history, of having to actively defend the U.S. dollar, by raising the Fed rate.
Third, the situation in the Middle East, the source of much of our vital oil supply, is far from secure.
Most worrying, security in the area now even brings into play the risk of a nuclear response. We feel that the first use of atomic/nuclear weapons since 1945 would create a massive world "stir" of concern with an upward pressure on interest rates and a major increase in risk premiums, at least in the short-term.
[Editor's Note: 4 Foreign Currency Plays to Beat the Falling Dollar.]
Finally, we feel that the average yield on the largest 100 money market funds of 4.98 percent, for one month, and of 4.65 percent, on the two-year Treasury, compares very favorably with longer bonds.
For instance, we believe that, unless you have good reason to be convinced of a fall in interest rates, the 4.69 percent yield on the 10-year Treasury, or 0.29 percent less than the yield on cash, is, we feel, not an adequate reward for the risk the investor is taking.
As Jeremy Grantham, chairman of Grantham, Mayo, Van Otterloo & Co, a Boston-based manager of $141 billion said in the same Bloomberg item, "The risk premium has reached a historic low everywhere…global credit is more extended and more complicated than ever before so that no one is sure where all the increased risk has ended up."
That last statement by Mr. Grantham should make some of our readers shiver, especially those who are heavily extended in high risk assets.
Talking about risk, some of our readers may wonder why we continue to urge the accumulating of gold when it has risen by some 50 percent over the past two years.
Well, for the many reasons we have given in past issues of MoneyNews and in our sister publication FIR, we believe that the economic/financial world is entering a very dangerous phase.
We feel we are not alone in our somber views because we note with great interest the failing appetite of major central banks to continue depressing the gold market by means of official IMF sales of their gold reserves.
We see gold on the verge of a major bull run, well into four digits. In addition, it is an excellent inflation hedge and is a fine store of wealth in case of the economic catastrophe that we feel now threatens, albeit remotely.
[Editor's Note: Four Digit Gold Prices a Reality - Find Out How]
We see gold as an insurance policy - an insurance policy that could pay you back handsomely, while you are still alive!
We therefore continue to recommend that our most conservative investors remain patient, in the face of nominal record stock market levels and retain a heavy asset allocation weighting to cash; high-quality, high-coupon short-term bonds and gold. Those who wish to own equities should diversify into the shares of major companies with an international earnings base that are listed on "mature" stock markets aboard.
Until our Fed decides to defend our falling dollar, shares denominated in major alternative currencies are likely to show currency appreciation in addition to any dividend income and market capital appreciation.
© NewsMax 2007. All rights reserved.
Editor's note:
5 super-safe cash investments - beat stocks by 500%
Four Digit Gold Prices a Reality - Find Out How
4 Foreign Currency Plays to Beat the Falling Dollar.
What Happens When Easy Money Disappears? 12 Ways to Profit.
Buffett, Soros, Templeton, Rogers: Learn Their Money-Making Secrets
